Brush up on your financial terminology before talking to your bookkeeper, tax accountant, or CFO with this helpful list of common words you are likely to hear. While your financial professional is happy to explain them, a quick reference tool really helps.
Terms Related to Balance Sheets
Balance Sheets are a fundamental financial statement developed by your business accountant. The following terms describe basic accounting terms that relate to them.
Accounts Payable (AP)
When your business incurs an expense but has not yet paid it, it is recorded as a liability or debt on the Balance Sheet.
Accounts Receivable (AR)
If your company provides a product or service but has not collected payment yet, it is recorded on the Balance Sheet as an asset that will convert to cash.
An incurred expense that hasn’t been paid yet is reported under Accounts Payable but described as an Accrued Expense.
Everything your company owns with cash value is listed on the Balance Sheet in order, from cash (immediate liquidity) to land (long-term liquidity).
Balance Sheet (BS)
A common financial statement that reports all of your business’s assets, liabilities, and equity is called a Balance Sheet. Often referred to as the statement of financial position, it quickly shows what a company is worth and when it is in financial trouble.
Book Value (BV)
Book Value describes an asset that has depreciated over time. It starts with the original value of an Asset and subtracts accumulated depreciation each year.
When your accountant takes business assets and subtracts any liabilities, what is left over is your equity. This is what your company owns (or its investors).
If your company purchases assets to sell, anything that hasn’t sold yet is considered inventory. The numbers adjust as inventory is purchased and sold.
Liabilities are debts your company has not paid yet, such as Loans, Accounts Payable, and Payroll.
Terms Related to Income Statements
The Income Statement is more commonly known as a Profit and Loss Statement, another fundamental report generated by your accountant. The following terms describe basic accounting terms that relate to it.
Cost of Goods Sold (COGS)
This is what your business spends to create a product or service, such as materials, tools, and labor.
Depreciation accounts for the loss of value in an asset over time. These are usually assets with a substantial value, such as vehicles and large equipment. It is reported on the Income Statement as an expense and categorized as “Non-Cash” that won’t directly affect your company’s cash flow.
Costs for items and services used by your business are Expenses.
Gross Margin (GM)
By taking your Gross Profit and dividing it by Revenue in the same period, accountants get a percentage that represents profit after taking into account the cost of delivering your goods or service.
Gross Profit (GP)
The amount your business makes in dollars before subtracting overhead expenses is your Gross Profit. Your accountant subtracts the Cost of Goods Sold from Revenue in the same period.
Income Statement (Profit and Loss) (IS or P&L)
The Income Statement is commonly called a Profit and Loss (P&L). It describes your company’s revenues, expenses, and profits over a specific period. The report begins with Revenue earned and subtracts various costs (expenses). What is left over is called Net Income.
Net Income (NI)
Net Income is strictly profits. Your accountant takes Revenue and subtracts Expenses, including Overhead, COGS, Depreciation, and Taxes, within a specific period.
When you want to compare your business profits in relation to Revenue, your accountant takes Net Income and divides it by Revenue in a given period.
Revenue (Sales) (Rev)
This includes any money earned by your business.
These basic accounting terms don’t relate to any particular financial statement.
An Accounting Period describes the time frame reported on any Financial Statements (Balance Sheet, Income Statement, or Cash Flow).
When your business assigns funds to different accounts or periods, costs can be Allocated over many monthly payments or across multiple departments and divisions.
Business (or Legal) Entity
Your Legal Business Entity is how your company is formed in structure or type of business, including S-Corp and C-Corp, Limited Liability Corp, Partnership, Limited Liability Corp, and Sole Proprietor. Different entities have specific legal and tax requirements.
Cash Flow (CF)
Your business receives a certain inflow and outflow of cash over periods of time. By taking your Cash Balance at the beginning of a stated period and subtracting the Cash Balance at the end of the period, you determine if you have a positive or negative cash flow period.
Certified Public Accountant (CPA)
A CPA is a certified professional accountant who fulfills state requirements for education and experience.
When your business increases liability or equity or decreases assets or expenses, it is expressed on financial statements as a credit.
If your company increases assets or expenses or decreases liability or equity, it is described as a debit.
Diversification reduces risk by allocating capital across many assets so that a single asset doesn’t dictate the performance of your total assets.
Enrolled Agent (EA)
An Enrolled Agent is a professional who successfully passed tests for expertise in business and personal taxes. They complete business tax filings according to IRS requirements.
Fixed Cost (FC)
Costs that don’t change along with sales volume are fixed, such as rent and salaries.
General Ledger (GL)
A complete record of all your business’s financial transactions that are used to prepare all Financial Statements is your General Ledger.
Generally Accepted Accounting Principles (GAAP)
These are the rules established by the US Securities and Exchange Commission so that it is easier to compare a business’s financial reports.
When taking out a loan or line of credit, the repayment exceeds the principal balance. The extra cost is called interest.
Journal Entry (JE)
Changes to financial statements are Journal Entries. Each entry has a unique identifier such as a date, a debit/credit, an amount, and an account code to determine which account is affected.
How quickly assets can be converted into cash refers to liquidity. For example, stocks can be sold faster than a house. That makes a stock easier to turn into cash (liquidate) than real estate.
If information influences financial decisions, it is considered material. For example, a business with a million-dollar revenue would not deem an expense of 50 cents as material. Material considerations used in reports and calculations must be disclosed according to GAAP requirements.
On Credit/On Account
An On Credit or On Account purchase is enjoyed by the buyer now but will be paid later.
Business Expenses or costs related to running the business but not involved in the making or delivering of a product service are called Overhead. It includes things like rent and salaries.
Your business has a separate account that tracks employee wages, salaries, deductions, and bonuses. These Expenses may appear on the Balance Sheet as a liability if the company owes accrued vacation pay or unpaid wages.
Present Value (PV)
The assets in your business have a Present Value as of today. This value will change at different points in time. Cash today usually has more value than cash tomorrow due to inflation.
Every business produces receipts for its product or service, and it receives receipts for purchases from other businesses to record payment. Accountants explain why you need to save your purchase Receipts to prove your incurred expenses are accurate.
Return on Investment (ROI)
This term refers to your business profit, divided by your Investments. It is also used to describe profit on different projects or objectives. For example, hiring a Fractional CFO to go over some bookkeeping reports might cost you, but the savings from improved processes go beyond the service’s cost to achieve ROI.
Trial Balance (TB)
Your business should have a list of all account balances (debit or credit) in a General Ledger. The debit totals must equal the credit totals to balance them.
Variable Cost (VC)
Business costs that are affected by your sales volume vary. They are the opposite of Fixed Costs. Variable costs increase with sales because they are incurred produce and deliver the sale, such as raw materials.