Accounts Receivable
Amounts owed by customers, not yet paid.
Account Reconciliation
Comparing the individual, detailed components of an account to the balance shown on the balance sheet. When differences are identified, they are investigated and understood. These differences are potential errors or fraud, and understanding the nature of those transactions and why they cause a difference is arguably the most important step in the process.
Some examples: The Accounts Receivable balance on the balance sheet is compared to the individual balances by customer. Accounts Payable is compared to the individual vendor balances. The Inventory balance is compared to inventory values for each product. The Prepaid Expenses balance is compared to a schedule of amortized individual prepayments. Fixed Assets is compared to the values of individual assets. Cash balances on the balance sheet are compared to the bank balance.
Accrual
Recording a future revenue or expense in the current period, even if money hasn’t been paid or received yet.
Accrual Accounting
Revenues and expenses are recognized when they are earned or incurred, rather than when paid.
Accumulated Depreciation
The amount of depreciation expense recorded on an asset since it was put into use.
Adjusting Entries
Creating entries to correct errors or otherwise reflect accurate balances. Some examples include recording payroll entries processed by a payroll service, record depreciation on assets, or record accrued revenues or expenses.
Allowance for Bad Debts
The accumulated estimated losses (Bad Debt Expenses) recorded to account for portions of customer balances due that will not be paid. An allowance for doubtful accounts is considered a “Contra Asset,” as it works to reduce the amount of its related asset, Accounts Receivable.
Amortization
Gradually recording portions of a balance over time. For example, recording the current month’s portion of a year’s worth of expenses prepaid upfront.
Assets
A resource or anyting of value that has the potential to be transformed into cash.
Average Cost
Method of valuing inventory based on the weighted average cost of materials purchased over time.
Bad Debt Expense
The expense recorded for non-collectible customer balances.
Balance Sheet
The financial statement that shows a business’s assets, liabilities, and equity at a point in time.
Book Balance
The general ledger balance for an account at a certain date.
Cash Basis Accounting
Revenues and expenses are recognized when the payment is made, rather than when work is performed.
Chart of Accounts
A list of all the accounts and sub-accounts that form the basis of the financial statements.
Closing the books
A.ka. the Month End Close, this is the process of recording any adjusting entries needed, reconciling bank and balance sheet accounts to check for errors, and reviewing results and comparisons with prior months to search for errors. When the accounts are complete and accurate, the month is ‘closed’ in the system, meaning it is locked down such that no more transactions can be recorded to the impact that month’s results, and financial statements generated.
Common Stock
The capital investment of the business wherein investment is received in exchange for shares of stock.
Conflict of Interest
When a person’s individual interests raise a question about their ability to act or make decisions or judgments objectively.
Contra Asset
An asset with a ‘negative’ balance that offsets a positive asset balance to reflect its net value. For example, Accounts receivable can be shown in total, or gross, or can be combined with the Allowance for Bad Debts to show the net balance expected to be collected.
Cost of Goods Sold
A.k.a., COGS or Cost of Sales, is the total cost of the products sold during the period, including materials costs, costs of manufacturing, overheads and incoming shipping and handling. The portion of these costs attributed to products not yet sold at the end of the reporting period are included in Inventory.
Debits
An increase in assets or expenses or a decrease in liabilities, owner’s equity, or revenue.
Deferral
An entry to record a current payment or expense at a later period when the money has been earned or the cost incurred.
Deferred Revenue
A.k.a., Unearned Revenue, is paid to the business for work not yet performed. This is recorded in books as liability.
Depreciation
Spreading out the cost of an item over the expected life of the item.
Depreciation expense
The cost of an asset that has been recorded in the reporting period. If a $1,000 asset is depreciated over 10 years, the depreciation expense is $100 per year, or $8.33 per month.
Dividend
Dividends are what a business pays out to shareholders from business earnings.
Double Entry Accounting
A method of bookkeeping that uses at least 2 entries, a debit and a credit, for every transaction.
Draw
Owner withdrawing funds from their business.
Credit Memo
A document issued by a seller that reduces the amount a customer owes for a sales invoice.
Credit Sales
Transactions where the customer pays for the goods or services in the future.
Credits
A decrease in assets or expenses or an increase in liabilities, owner’s equity, or revenue.
Current Assets
Assets that are normally converted into cash within a year.
Current Liabilities
Debt obligations that come due within one year.
Bookkeeper
Someone who documents transactions and manages account balances.
Budget
A forecast of revenue and expenses for a future period of time.
C Corp
A business structure that is owned by one or more shareholders, but they do not carry any personal liability.
Capital Contributions
The cash or assets given to the business by the owner or partners.
Cash
Assets that exist in cash form or can be immediately converted into cash.
Equity
The owners’ stake in the business, including capital investement and accumulated profits.
Exempt Employee
An employee who isn’t subject to overtime pay benefits once they’ve worked over 40 hours per week. Typically, a salaried employee.
Financial Analysis
Reviewing and comparing a business’s financial results over time and understanding the trends and anomolies.
Financial Statements
Reports that show how the business financial results and position. Standard Financial Statements include the balance sheet, income statement (a.k.a. P&L), and cash flow statement.
Financing Activities
Section of the statement of cash flows that includes owner investment and draws and loans received by the business.
Finished Goods
Completed products readily available for sale to customers.
First In, First Out (FIFO)
A method of assigning cost to inventory. As costs rise or decrease, different methods result in different values for ending inventory. FIFO assumes that the first units purchased (First In) are the first to be sold (First Out), so the ending inventory is the cost of the last items purchased.
Fixed assets
Tangible assets owned by a business and used in its operations, expected to be held for more than a year.
General Ledger
A record of each transaction.
Gross Pay (Gross Wages)
The total amount earned by an employee for a pay period before any deductions.
Gross Profit
Total revenue minus cost of goods sold, but not considering operating expenses.
Gross Profit Margin
The percentage of gross profit earned. For example, an item that costs $4 to make and sells for $10 has a $6 (60%) profit margin.
Last In, First Out (LIFO)
A method of assigning cost to inventory. LIFO assumes the most recently acquired items (Last In) are the first units sold (First Out).
Lease
An agreement to pay rent for a specific period of time for the right to use an asset.
Liability
What the business owes to others.
Limited Liability Company (LLC)
A business structure that is owned by one or more persons, but limits personal liability to the business assets.
Liquidity
A business’s capacity to pay down its short-term liabilities. A generic terms, it can be expressed as the amount of cash a business holds or as a variety of liquidity ratios and percentages.
Lockbox
A bank-operated mailing address for customers to send payments. The bank receives funds directly into the business bank account and provides payment information to the business bookkeeper.
Long-Term Liabilities
Debt obligations coming due in more than one vear.
Matching Principle
Revenues and their associated expenses are recognized in the same reporting period, regardless of when paid for.
Merchandise
Finished goods a business buys from a supplier for future resale.
Mortgage
A special type of long-term loan for the purchase of a property or structure.
Natural Balance
Either Debit or Credit, the expected balance for an account given its nature. Assets and Expenses have a natural Debit balance, whereas Liabilities, Contra Assets and Equity have a natural Credit balance.
Net Assets
The amount of value that remains for the owners or shareholders of the business once all debts and obligations are accounted for.
Insolvency
When a business is unable to pay their debts when they become due.
Interest Rate
The percentage of the existing principal loan balance you must pay to the lender for borrowing money.
Inventory
A.k.a., Stock (not to be confused with Common Stock as a component of Equity), is the Raw Materials, Finished Goods, and Work In Progress a business owns at a point in time.
Investing Activities
The section of the Statement of Cash Flows that includes all cash inflow and outflows related to purchasing fixed assets or investing in another business or venture.
Inventory Valuation
The process used to assign cost to the inventory on the balance sheet.
Invoice
A.k.a., Bill, is an itemized list of goods sold, or services provided and the amount owed.
Historical Cost
The original cost of an asset when acquired.
Income Statement
A.k.a.., the profit and loss (P&L) statement, shows the business‘s revenues and expenses during a period of time.
Independent Contractor
A person who is self-employed and contracted to provide services as a non-employee, therefore must pay taxes independently and are not eligible for benefits like regular employees.
Net Pay
The amount an employee takes home. This is the total amount their paycheck is worth or is deposited for that pay period.
Net Profit/Income
The total of subtracting all Expenses (including Taxes) from Revenue.
Net Sales
Total, or Gross, Sales minus any returns or discounts.
Non-Sufficient Funds (NSF)
A.k.a., Insufficient Funds, are checks have bounced, meaning not paid by the bank because there is not enough cash in the account. Also called a “rubber check”.
Non-Exempt
An employee classification indicating they are entitled to overtime pay benefits once they have worked over 40 hours per week. Typically, an hourly employee.
Notes Payable
Money owed to a lender and recorded as a Liability.
Notes Receivable
Money owed to the business and recorded as an Asset.
Objectivity
Being free from influence or personal bias.
Operating Activities
The section of the Statement of Cash Flows showing cash inflows and outflows related to the daily operations of the business.
Operating Expenses
Costs incurred as the business generates revenue from their core business activities.
Operating Profit
The profitability of a business’s core operations before interest, taxes, and non-operating expenses are deducted, calculated by subtracting the total operating expenses from the gross profit.
Paid Time Off (PTO)
A.k.a., Vacation, is an employee benefit entitling the employee to paid wages while not working.
Partnership
A business structure that is owned by two or more partners who take on unlimited personal liability.
Periodic Inventory
The practice of valuing inventory at specific points in time based on counting and valuing the proiducts.
Perpetual Inventory
The inventory account is continuously or perpetually updated as products are bought and sold. Counting the inventory is not needed, except to verify that the records are being updated accurately.
Petty Cash
A small sum of money kept on hand by a business to meet unexpected small expenses.
Plant, Property & Equipment (PP&E)
Another term for Fixed Assets.
Profitability
The amount of Revenue retained after expenses.
Promissory Note
A signed document containing a written promise to pay a stated sum to a specified person or the bearer at a specified date or on demand.
Purchase Order
A document that specifies the details of an order for goods or services.
Raw Materials
The materials used by a business to create products.
Register
A detailed complete transaction history and current of an account. All the account registers make up the chart of accounts.
Retained Earnings
A part of the Equity section of the Balance Sheet, this is accumulated net income from previous years minus any dividends paid to shareholders.
Revenue
Income earned through business.
Revenue Recognition
Policies and procedures that determine whether a sale has been completed, meaning the seller’s duties have been completely fulfilled.
S Corp
A business structure that meets certain criteria, allowing a company to operate as corporation, but pass earnings through to the owners without corporate taxation.
Sales Order
The seller’s equivalent of a Purchase Order, documenting the items and prices of good or services to be sold.
Shareholder Equity
The dollar amount that would be returned to shareholders if the business were liquidated and all outstanding debts were paid.
Shareholders
Individuals or entities that own the business and who hold shares of the company.
Short-Term (Current) Assets
Assets that can be converted into cash within a year.
Sole Proprietorship
A business structure that is owned solely by one person who takes on unlimited personal liability.
Solvency
This measures a business’s ability to pay their debts. Similar to Liquidity, but Liquidity tends to focus on short term obligations.
Statement of Cash Flows
The financial report that shows the sources and uses of cash.
T-Account
A chart in which debits are on the left and credits are reported on the right, with the net being either a debit or credit representing the account balance.
Term
The period of time specified for a loan to be repaid or lease to expire.
Year to Date (YTD)
The total results from the beginning of the current fiscal year up to the current date.
Unrealized Gains
The profit that a business would receive if an investment were sold at current market prices.
Vendor
An entity that the business purchases products or services from, sometimes for resell or for companies
use, also known as a supplier.
Wage Garnishment
A legal procedure in which a person’s earnings are required by court order to be withheld by an employer for the payment of a debt like child support.
Work in Progress (WIP)
Raw materials in the process of being transformed into a finished product.
Working Capital
The financial monies the business uses for operations and growth, such as cash, debt, or equity.