Accounting Glossary
Clear, plain-English definitions of the accounting and financial terms every business owner should know. Bookmark this page for quick reference.
A
Accounts Payable (AP)
Money a business owes to its suppliers or vendors for goods and services received but not yet paid for. Accounts payable appears as a current liability on the balance sheet.
Accounts Receivable (AR)
Money owed to a business by its customers for goods or services delivered but not yet paid for. Accounts receivable is recorded as a current asset on the balance sheet.
Accrual Accounting
An accounting method that records revenue and expenses when they are earned or incurred, regardless of when cash is actually received or paid. This method provides a more accurate picture of a company's financial health.
Amortization
The gradual reduction of an intangible asset's value over its useful life, or the process of spreading loan payments over time. Similar to depreciation, but applied to intangible assets such as patents, trademarks, or goodwill.
B
Balance Sheet
A financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time. The fundamental equation is Assets = Liabilities + Equity.
C
Cash Flow
The net amount of cash moving in and out of a business during a given period. Positive cash flow means more money is coming in than going out, which is essential for meeting obligations and funding growth.
Cash Flow Statement
A financial statement that shows the inflows and outflows of cash over a period, categorized into operating activities, investing activities, and financing activities.
Cost of Goods Sold (COGS)
The direct costs attributable to producing the goods or services a company sells, including raw materials, direct labor, and manufacturing overhead. COGS is subtracted from revenue to calculate gross profit.
D
Depreciation
The systematic allocation of a tangible asset's cost over its useful life. Depreciation recognizes that physical assets like equipment, vehicles, and buildings lose value over time due to wear and use.
E
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of a company's overall financial performance and profitability that strips out non-operating expenses to focus on core business earnings.
Equity
The owner's residual interest in the assets of a business after deducting all liabilities. In a corporation, equity represents the shareholders' ownership stake and includes retained earnings and contributed capital.
F
Fiscal Year
A 12-month period used for accounting and financial reporting purposes. A fiscal year does not have to align with the calendar year — for example, a company might use a fiscal year running from July 1 to June 30.
G
General Ledger
The master set of accounts that records all financial transactions of a business. Every debit and credit entry flows through the general ledger, which serves as the foundation for all financial statements.
Gross Profit
Revenue minus the cost of goods sold (COGS). Gross profit measures how efficiently a business produces its goods or services before accounting for overhead, taxes, and other operating expenses.
I
Income Statement
Also called a profit and loss statement (P&L), this financial report summarizes a company's revenues, expenses, and net income over a specific period. It shows whether a business is profitable.
L
Liability
A financial obligation or debt that a company owes to an outside party. Liabilities are classified as current (due within one year) or long-term (due after one year) on the balance sheet.
N
Net Income
The total profit of a business after all expenses, taxes, and costs have been subtracted from total revenue. Also called the bottom line, net income is a key indicator of a company's profitability.
O
Overhead
The ongoing costs of running a business that are not directly tied to producing a specific product or service. Examples include rent, utilities, insurance, and administrative salaries.
R
Retained Earnings
The cumulative net income a company has earned since inception, minus any dividends paid to shareholders. Retained earnings appear on the balance sheet and represent profits reinvested in the business.
Revenue
The total income generated from the sale of goods or services related to a company's primary operations. Also called the top line, revenue is the starting point for calculating profitability.
T
Tax Deduction
An expense that can be subtracted from gross income to reduce the amount of income subject to taxation. Common business deductions include office rent, employee wages, and business travel expenses.
Tax Credit
A dollar-for-dollar reduction in the actual amount of tax owed. Unlike deductions, which reduce taxable income, credits directly reduce your tax bill and are generally more valuable.
Trial Balance
A report that lists the balances of all general ledger accounts at a specific point in time. The total debits should equal total credits; if they do not, there is an error in the bookkeeping records.
W
Working Capital
The difference between a company's current assets and current liabilities. Working capital measures a business's short-term financial health and its ability to cover day-to-day operational expenses.
Have questions about your financials?
Our CPAs can explain the numbers behind your business in language you actually understand. Schedule a free consultation.