Glossary
absolute reference An instruction that tells a spreadsheet program not to change the column letter and/or row number when you copy a formula.
account balance The amount being carried on your books as an asset, liability, equity, revenue, or expense. Account balances that affect your income statement are reset to 0 at the start of each year.
accounting A system of recording financial transactions that can be thought of as a way of keeping score within your business.
accounting ledger A traditional paper accounting book with at least four columns: date, description, and two amount columns.
accounting method The method of revenue and expense recognition for a business.
accounts An accounting system category that stores the value of things a business owns or owes as well as monies earned or spent.
accrual basis accounting An accounting method in which a business reports revenue as soon as it’s earned and expenses as soon as they’re incurred.
accumulated amortization The amount of an intangible asset such as goodwill or intellectual property that’s been expensed. See also book value.
accumulated depreciation The amount of an asset’s cost that has been expensed over time. See also book value.
adjusting journal entry A correction process whereby account balances in your books are changed, or adjusted, so they reflect the correct amounts as of a given point in time.
amortization The process of decreasing a balance over a period of time.
amortization schedule A calendar that details how each loan payment you make is allocated between principle and interest, as well as reflecting the timetable over which the loan will be repaid and the loan balance at the end of each month during the loan.
Assets The section of a balance sheet that contains the book balances of accounts that reflect what your business owns, or is owed, as well as physical and intangible items your business owns.
audit A financial examination of a business’s books and records that may be carried out by a governmental agency to test the veracity of a tax return or by a certified public accounting firm to verify the business’s financial statement integrity.
Audit Trail report A feature within most accounting software that records the date, time, username, and details of all new and changed transactions in the books for later review purposes.
automated clearing house (ACH) An electronic network most banks participate in and use to perform electronic transactions called ACH withdrawals or deposits.
available balance The amount in a bank account that’s available for immediate withdrawal.
balance sheet A financial statement that reflects what a business owns and is owed, owes to others, and the owners’ net equity as of a point in time, typically the end of a month or year.
beginning account balance Within your General Ledger, the balance for this account as of the end of the previous accounting period. See also account balance.
benefits Compensation given to employees in addition to their agreed upon pay, which may include health insurance, life insurance, paid time off, and other motivational offerings.
book balance The amount paid for an asset less accumulated depreciation.
book value A theoretical figure within the financial statements that shows what the owners would get if the company was liquidated or an asset was sold as of the financial statement date. Often an appraisal is required to establish the fair market value of a company or asset. Book value is also the net amount of an asset less any accumulated depreciation or amortization.
books Accountant’s jargon for a set of accounting records.
bootstrap To use one’s own financial resources to start a business instead of borrowing.
business day In the context of payroll tax deposits and reports, this typically means Monday through Friday, with the exception of state or federal holidays. If a tax deadline falls on a Saturday, Sunday, or holiday, the deadline is extended to the next business day.
business plan A document that states a businesses’ financial (and other) expectations and goals.
business structure The legal structure or organization for a business. Some entail more complexity and expense to establish than others.
C corporation A business structure that’s taxed separately from its owners. Owners of the corporation are referred to as shareholders, and profits are distributed in the form of dividends that are subject to tax again on personal tax returns as capital gains.
cash basis accounting An accounting method in which a business only reports revenue when deposited in the bank and expenses that have been paid by cash or check.
cash flow The net amount of money a business takes in after covering expenses and liabilities.
chart of accounts A list of all the accounts a business has. It’s used for categorizing the money-related aspects of a business.
check transaction A document (for a transaction) that records a payment made by checking account check.
cleared transaction A transaction marked to indicate it matches both on the bank statement and in the books. See also reconciliation.
cloud-based software Software housed on remote servers so users can access it online.
collateral Business or personal assets pledged as security as repayment for a loan.
collected balance Deposits to an account that have fully cleared the banking system.
compound interest Interest charged on unpaid interest amounts as well as the principle due. See also simple interest.
contra-asset account An account that offsets a corresponding asset account. Both Accumulated Depreciation and Accumulated Amortization are contra-asset accounts. See also book value.
cost of goods sold (COGS) The accumulated price of inventory items that have been sold to customers. See also costing method.
costing method A technique used in accounting software to determine the amount that should be recorded as an expense when a business sells an inventory item it keeps on hand for sale.
credit card transaction A transaction that records a sale paid for by credit card or a purchase your business has paid for via credit card.
credits Amounts recorded in the right amount column for a transaction in an account; depending on the context, may increase or decrease the value of an account.
Current Assets The section of a balance sheet that represents liquid assets including cash as well as items that can be turned into cash quickly, such as accounts receivable and inventory.
current balance In the context of a reconciliation, the amount the bank reports as your current cash on hand you should reconcile your books to.
Current Liabilities The section of a balance sheet that represents amounts a business must pay within the next 12 months. Also referred to as short-term liabilities.
debits Amounts recorded in the left amount column for a transaction in an account; depending on the context, may increase or decrease the value of an account.
debt service Relates to repayment of a loan over time. Payments may include interest, principle, or both.
distribution Profit from a business that’s shared with owners above and beyond paychecks. Typically, distributions are not subject to self-employment taxes.
double-entry accounting system An accounting system that requires that the sum of all debits and the sum of all credits balance within a given transaction.
employee A person who works for wages or salary. Depending on the business structure, owners might need to be classified as employees.
employer ID number (EIN) Also referred to as a federal ID number; this unique number identifies an individual tax-paying business, which is required when the business has employees.
ending account balance Within your General Ledger, the ending balance of an account as of an accounting period. The ending balance is the beginning balance plus or minus any activity for a given period. See also account balance; beginning account balance.
Equity The section of a balance sheet that theoretically reflects what would be distributed to stakeholders of a business should the business close, the assets be liquidated, and all liabilities paid off. See also book value; fair market value.
estimate A document (or a transaction) similar to an invoice that might reference accounts. It provides a potential price for a product or service and doesn’t increase or decrease any accounts in the books. Sometimes referred to as a quote; a proposal or bid for a job wherein you set out how much you think work will cost based on particular circumstances.
exempt employee A salaried worker who isn’t eligible for overtime pay; typically managers or directors within a company.
expenses Costs incurred in operating the business; often referred to as overhead.
fair market value The amount an unrelated third party would willingly pay to purchase an asset or a business as a whole. See also book value.
FICA Another name for the collective Social Security and Medicare tax withheld from employee paychecks. Often referred to as the FICA tax, this acronym stands for Federal Insurance Contributions Act, the legislation that authorized the tax.
fiduciary An individual or entity entrusted with a legal or financial responsibility on another’s behalf.
formula A means of performing a calculation in a spreadsheet.
full-time employee Typically a salaried employee; can also be hourly employees who work 40 hours per week. In certain contexts, part-time workers who work 30 or more hours per week are also considered full-time.
FUTA Federal Unemployment Tax; a tax all employers must pay on behalf of every employee.
General Ledger A comprehensive report that records every transaction affecting a company’s accounting records.
general partner Within a partnership, a partner who is fully authorized to make decisions on behalf of other partners. General partners typically oversee the operations of a partnership and bear full liability for its actions.
gross profit The revenue from a business less the cost of goods sold; also referred to as the gross margin or gross income.
impute To replace missing values with a sometimes arbitrary replacement value.
income Total sales from the income statement, less cost of goods sold. See also net income.
income statement A summary of revenues and expenses for a specific time period; also called P & L or Profit and Loss.
independent contractor A person who provides goods or services to others based on written or verbal agreements. Independent contractors who work for a single entity run the risk of being classified as employees by the Internal Revenue Service, which can result in penalties to the entities paying the independent contractor.
insolvency When a person or business is unable to pay its financial obligations. A temporary situation during which a business needs more time to raise cash is referred to as technical insolvency. Permanent insolvency is resolved by filing for bankruptcy.
intangible asset An asset that can’t be seen or felt but has value to a business. Examples include patents, trademarks, franchises, and goodwill.
interest The portion of loan payment that compensates the lender for their risk and the use of their money.
internal control Procedures and precautions implemented to secure your accounting records, the assets of your business, and any fiduciary responsibilities to your employees and customers.
inventory Physical goods a business keeps on hand for sale to its customers. In the context of an accounting program, inventory has a broader meaning that includes all products and services offered by a business, which may or may not be physical goods kept on hand.
invoice A document (for a transaction) that records a sale for which the customer will make payment in the future.
leverage With regard to finance, the ratio of the company’s debt to the value of its equity. The higher the leverage, the more it appears the business is using debt to finance its operations.
Liabilities The section of a balance sheet that reflects what your business owes to others. When used in singular form, an amount your business owes to others.
limited liability company (LLC) A business structure that’s a hybrid of a partnership and a corporation that can protect the owners’ personal assets. The LLC files a tax return each year to report its operations, with income or loss usually passing through to owners, known as members, for reporting on their personal income tax returns. However, LLCs can also elect to file and pay taxes like a C corporation.
limited partner Within a partnership, a partner who has less or no authority to make decisions on behalf of other partners; sometimes referred to as a silent partner. Limited partners primarily provide investment capital to the partnership without taking an active role and have liability to the extent of their capital contributions.
liquidity A measurement of the amount of cash on hand, as well as assets that are easily converted to cash. Liquid assets include the balance in a business bank account, near-term accounts receivable, stock and bond investments, certificates of deposit, and in certain cases, inventory.
loan guarantee A promise to repay a loan should a borrower fail to do so. Guarantees can cover all or a portion of a loan. Sometimes called co-signing. See also loan guarantor.
loan guarantor A person or entity who agrees to repay all or part of a loan should a borrower fail to do so. Often referred to as a co-signer. See also loan guarantee.
markup The difference between a product’s selling price and its cost. Also called gross profit.
matching principle An accounting principle that says a business should strive to match revenues and expenses in the same accounting period when possible.
net income The profit or loss from a business after all expenses have been accounted for in a given period; often referred to as the bottom line of an income statement.
nonposting transaction A transaction that doesn’t post in the General Ledger. Estimates, sales orders, and purchase orders are nonposting transactions.
North American Industry Classification System (NAICS) A numbered list of business activities governmental departments can use to track and compare economic activity.
officer A high-ranking employee authorized to transact business and make decisions on behalf of a company. Officers often, but not always, have an ownership stake in a firm.
partnership A business structure that’s a relationship between two or more individuals. Each person contributes money, assets, or talent to the venture and shares in the income or loss.
payroll tax A tax owed to federal, state, and local governments that’s borne by employees and employers. Employers withhold the employees’ share from paychecks and remit and report the collective taxes to the corresponding governmental agencies. See also withholding.
principle The portion of a loan payment that reduces the remaining balance of a loan.
prior year adjustment A journal entry to correct an error, such as an error in depreciation recorded, from the prior accounting year.
reconciliation A process that ensures your books agree with what your bank or financial institution shows as your current balance.
remit To send money, usually payroll tax money, to the appropriate governmental agency.
restore To replace accounting data from a backup, typically to recover from an error of some sort or computer failure.
Retained Earnings The section of a balance sheet that reflects the accumulated net income a business has generated from inception to date, less any dividends or distributions that have been paid out to owners or shareholders.
retirement plan A plan that helps an individual save for retirement years after employment. Retirement plans can be a formal benefit offered by an employer, or individuals can establish their own independent retirement accounts.
risk management A discipline that focuses on identifying risks and mitigating their potential impact on an organization.
S corporation One of the simplest business structures for an incorporated business; it protects the owners from legal liability relating to the business and offers them tax benefits. S corporations pay no income tax; income or loss is reported on the owners’ personal income tax returns.
sales order Similar to an estimate, a sales order represents a confirmed customer purchase your business will eventually deliver.
sales receipt A document that records a sale a customer has paid for on the spot.
short term From an accounting perspective, refers to 12 months or fewer.
shrinkage Events that reduce inventory for sale, such as breakage, theft, and so on.
simple interest Interest charged only on the original amount due. See also compound interest.
social engineering Takes many forms, but commonly hackers or others intent on ill will toward your company pose as someone reputable to gather passwords or information they can use to determine passwords or access to protected spaces or data.
sole proprietorship A business structure in which the owner is the business and is personally and legally liable for every obligation of the business and for any damage caused by the business. The business can have employees, but the owner doesn’t have partners or co-owners.
statement of cash flows A financial statement that reports cash inflows and outflows for a month or year by type.
succession planning The process of grooming existing employees for future promotions to leadership and other key positions, as well as using insurance and other tools to minimize the financial ramifications of an unexpected change in succession.
supporting schedule A report that provides supporting detail to amounts reflected on a company’s financial statements.
SUTA State Unemployment Tax; all employers must pay this tax on behalf of every employee in all 50 states.
T account A device you can use for visualizing how to record an accounting transaction, with debits on the left and credits on the right.
tax ID number A business’s EIN, or an owner’s Social Security Number for a sole proprietorship. See also employer ID number (EIN).
tax year The period of time that represents a company’s annual accounting period. It’s most often the calendar year, but businesses can request an alternate tax year.
tax-exempt organization Often referred to as a nonprofit; a business structure in which the money a business earns generally isn’t subject to income tax. The most common form is 501(c)(3), but the IRS can approve many other specialized types.
transaction An entry in an accounting system or books reflecting financial activity.
Trial Balance report A report that provides a concise listing of every account balance on your books as of a given point in time.
usury Interest rates that are generally exorbitant or excessive.
withholding A mechanism by which employers may have to set aside a prescribed amount of each employee’s check for federal income tax withholding. See also payroll tax.
withholding allowance A withholding option that gives an employee a measure of control over the amount of state and federal income taxes withheld from each paycheck.
workers’ compensation A form of insurance that provides a safety net for workers who are injured on the job.