Glossary
TABLE OF CONTENTS
A
Accounts Payable (AP)
Definition:
Accounts Payable represents money a business owes to vendors for goods or services it has already received but not yet paid for. It is recorded as a short-term liability and is essential for tracking outstanding obligations. AP helps businesses manage cash flow by allowing expenses to be paid at a later date.
Use Case: A business orders $4,000 in marketing materials from a vendor and receives the invoice with Net 30 terms. The bookkeeper records the invoice in Accounts Payable and schedules the payment for the following month to preserve current cash flow. This ensures the vendor is paid on time while allowing the company to prioritize more urgent expenses.
Use Case: A business orders $4,000 in marketing materials from a vendor and receives the invoice with Net 30 terms. The bookkeeper records the invoice in Accounts Payable and schedules the payment for the following month to preserve current cash flow. This ensures the vendor is paid on time while allowing the company to prioritize more urgent expenses.
Accounts Receivable (AR)
Definition:
Accounts Receivable represents money owed to a business by customers who purchased goods or services on credit. AR is considered an asset because it is expected future income. Proper AR management ensures consistent cash inflows.
Use Case: A consulting firm issues a $6,500 invoice to a client with 15-day payment terms. The AR entry allows the business to track when the payment is due and follow up if it becomes overdue. This helps the firm avoid cash shortages and maintain steady operations.
Use Case: A consulting firm issues a $6,500 invoice to a client with 15-day payment terms. The AR entry allows the business to track when the payment is due and follow up if it becomes overdue. This helps the firm avoid cash shortages and maintain steady operations.
Accrual Accounting
Definition:
Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid. This method provides a more accurate picture of financial performance over time. It is required for many larger businesses.
Use Case: A company completes a $10,000 project in December but gets paid in January. Under accrual accounting, the revenue is recorded in December to reflect when the work was actually performed. This gives owners and investors a clearer view of year-end profitability.
Use Case: A company completes a $10,000 project in December but gets paid in January. Under accrual accounting, the revenue is recorded in December to reflect when the work was actually performed. This gives owners and investors a clearer view of year-end profitability.
Asset
Definition:
Assets are resources owned by a business that have measurable value and contribute to revenue generation. They include cash, inventory, equipment, vehicles, and buildings. Assets can be short-term or long-term depending on their expected use.
Use Case: A business purchases new computer equipment worth $8,000 to support its operations. The equipment is recorded as an asset and depreciated over several years to reflect its gradual loss of value. This allows the business to spread the cost and improve financial reporting accuracy.
Use Case: A business purchases new computer equipment worth $8,000 to support its operations. The equipment is recorded as an asset and depreciated over several years to reflect its gradual loss of value. This allows the business to spread the cost and improve financial reporting accuracy.
Amortization
Definition:
Amortization is the process of gradually writing off the cost of an intangible asset over time. Examples include trademarks, patents, and loans. It helps businesses allocate costs evenly across periods.
Use Case: A business purchases a $15,000 software license valid for five years. The cost is amortized annually to reflect usage over time. This approach ensures the expense aligns with the asset’s actual benefit.
Use Case: A business purchases a $15,000 software license valid for five years. The cost is amortized annually to reflect usage over time. This approach ensures the expense aligns with the asset’s actual benefit.
Audit
Definition:
An audit is a formal examination of financial records conducted internally or by an external agency like the IRS. Its purpose is to verify accuracy and compliance. Audits provide transparency and accountability.
Use Case: A company undergoes an annual external audit required by investors. During the process, auditors review invoices, bank statements, and financial procedures. This ensures accurate reporting and strengthens investor trust.
Use Case: A company undergoes an annual external audit required by investors. During the process, auditors review invoices, bank statements, and financial procedures. This ensures accurate reporting and strengthens investor trust.
Audit Trail
Definition:
An audit trail is a chronological record that tracks the history of transactions and changes across accounts. It ensures transparency and supports verification during audits. Audit trails are essential for preventing fraud.
Use Case: A business uses accounting software that logs every transaction edit. During a compliance review, auditors examine the audit trail to confirm accuracy and identify potential errors. This strengthens the company’s internal controls.
Use Case: A business uses accounting software that logs every transaction edit. During a compliance review, auditors examine the audit trail to confirm accuracy and identify potential errors. This strengthens the company’s internal controls.
Audit Risk
Definition:
Audit risk refers to the likelihood that the IRS or another authority will examine a taxpayer’s financial records. Businesses with complex transactions or high deductions may face higher audit risk. Minimizing errors reduces audit exposure.
Use Case: A business with inconsistent income reports receives an IRS notice due to elevated audit risk. The accountant organizes documentation and reconciles discrepancies before responding. This preparation helps resolve the issue quickly and professionally.
Use Case: A business with inconsistent income reports receives an IRS notice due to elevated audit risk. The accountant organizes documentation and reconciles discrepancies before responding. This preparation helps resolve the issue quickly and professionally.
B
Balance Sheet
Definition:
The balance sheet is a financial statement that shows a company’s assets, liabilities, and equity at a specific point in time. It provides a snapshot of financial health. Investors and lenders use balance sheets to evaluate stability.
Use Case: A business prepares a balance sheet at year-end to review its financial position. The statement helps identify strengths, such as high cash reserves, and weaknesses, like rising liabilities. This analysis supports strategic planning for the following year.
Use Case: A business prepares a balance sheet at year-end to review its financial position. The statement helps identify strengths, such as high cash reserves, and weaknesses, like rising liabilities. This analysis supports strategic planning for the following year.
Break-Even Point
Definition:
The break-even point is when a company’s revenue equals its total costs—resulting in zero profit or loss. It is used to determine the minimum performance needed to avoid losing money. Understanding break-even helps guide pricing and sales goals.
Use Case: A startup calculates that it must sell 120 units per month to break even. The team uses this figure to set sales targets and pricing strategies. Tracking break-even performance helps guide marketing and budget decisions.
Use Case: A startup calculates that it must sell 120 units per month to break even. The team uses this figure to set sales targets and pricing strategies. Tracking break-even performance helps guide marketing and budget decisions.
Bookkeeping
Definition:
Bookkeeping involves recording, organizing, and maintaining all financial transactions within a business. It ensures accurate financial data for reporting, budgeting, and tax preparation. Clean books support stronger decision-making.
Use Case: A small business hires a bookkeeper to manage monthly transactions, including expenses and customer payments. Consistent bookkeeping helps identify spending trends and spot missing invoices. This keeps financial records accurate and accessible.
Use Case: A small business hires a bookkeeper to manage monthly transactions, including expenses and customer payments. Consistent bookkeeping helps identify spending trends and spot missing invoices. This keeps financial records accurate and accessible.
Budget
Definition:
A budget is a financial plan that outlines expected income and expenses over a specific period. It helps businesses control spending and forecast future financial needs. A well-structured budget supports financial discipline.
Use Case: A business creates an annual budget to allocate spending for marketing, payroll, and operations. Mid-year, the owner reviews budget variances to identify overspending. Adjustments are made to prevent year-end cash shortages.
Use Case: A business creates an annual budget to allocate spending for marketing, payroll, and operations. Mid-year, the owner reviews budget variances to identify overspending. Adjustments are made to prevent year-end cash shortages.
Burn Rate
Definition:
Burn rate measures how quickly a business spends cash, usually for startups or growth-stage companies. It helps determine how long cash reserves will last. Monitoring burn rate prevents premature cash depletion.
Use Case: A startup tracks its monthly burn rate to determine runway—the number of months before funds run out. When costs rise, leadership reduces non-essential spending to extend the runway. This gives the company more time to reach profitability.
Use Case: A startup tracks its monthly burn rate to determine runway—the number of months before funds run out. When costs rise, leadership reduces non-essential spending to extend the runway. This gives the company more time to reach profitability.
Book Value
Definition:
Book value represents the value of an asset after subtracting depreciation and liabilities from the balance sheet. It is often used to evaluate the worth of tangible assets. Book value helps investors determine financial strength.
Use Case: A company calculates the book value of its equipment before deciding whether to replace it. The owner compares book value to market value to determine timing. This helps guide budget planning for future purchases.
Use Case: A company calculates the book value of its equipment before deciding whether to replace it. The owner compares book value to market value to determine timing. This helps guide budget planning for future purchases.
Bookkeeper
Definition:
A bookkeeper records daily financial transactions to keep a business’s books organized and accurate. They handle invoices, receipts, and reconciliations. Their work provides the foundation for financial reporting.
Use Case: A business hires a bookkeeper to manage growing transaction volume. The bookkeeper maintains updated ledgers and ensures timely reconciliation. This improves accuracy and supports effortless tax preparation.
Use Case: A business hires a bookkeeper to manage growing transaction volume. The bookkeeper maintains updated ledgers and ensures timely reconciliation. This improves accuracy and supports effortless tax preparation.
C
Credit (Accounting)
Definition:
A credit increases liabilities or equity and decreases assets. Credits are essential to maintaining accurate financial records. Each credit entry must match a corresponding debit.
Use Case: A business receives a $5,000 loan and records a credit to its loan liability account. This reflects an increase in money owed. Credits help track financial obligations and equity changes.
Use Case: A business receives a $5,000 loan and records a credit to its loan liability account. This reflects an increase in money owed. Credits help track financial obligations and equity changes.
Cash Flow
Definition:
Cash flow refers to the movement of money in and out of a business. Positive cash flow ensures bills and employees can be paid on time. Strong cash flow management prevents financial shortages.
Use Case: A business tracks weekly cash flow to forecast upcoming needs. When projections show a shortfall, the owner delays a discretionary purchase to maintain stability. Cash flow monitoring helps avoid unnecessary debt.
Use Case: A business tracks weekly cash flow to forecast upcoming needs. When projections show a shortfall, the owner delays a discretionary purchase to maintain stability. Cash flow monitoring helps avoid unnecessary debt.
Cash Flow Statement
Definition:
A cash flow statement summarizes operating, investing, and financing cash activities during a given period. It shows how money is generated and spent. This helps owners understand liquidity.
Use Case: A business reviews its cash flow statement to determine why cash reserves dropped despite high revenue. It discovers large equipment purchases affected liquidity. This insight helps improve future budgeting decisions.
Use Case: A business reviews its cash flow statement to determine why cash reserves dropped despite high revenue. It discovers large equipment purchases affected liquidity. This insight helps improve future budgeting decisions.
Chart of Accounts
Definition:
The Chart of Accounts is a structured list of all accounts used in a business’s financial system. It categorizes assets, liabilities, equity, income, and expenses. A well-organized chart improves accuracy and reporting.
Use Case: A company customizes its chart of accounts to separate consulting revenue from product sales. This helps the business analyze profitability by service type. Proper account structure improves bookkeeping consistency.
Use Case: A company customizes its chart of accounts to separate consulting revenue from product sales. This helps the business analyze profitability by service type. Proper account structure improves bookkeeping consistency.
Current Assets
Definition:
Current assets are resources expected to be converted into cash within one year, such as cash, inventory, and receivables. They support daily operations and short-term obligations. Strong current assets improve liquidity.
Use Case: A retail business tracks inventory, cash, and AR as part of its current assets. During a seasonal sales period, the company increases inventory to meet demand. Managing current assets ensures the business maintains sufficient cash flow.
Use Case: A retail business tracks inventory, cash, and AR as part of its current assets. During a seasonal sales period, the company increases inventory to meet demand. Managing current assets ensures the business maintains sufficient cash flow.
Cost of Goods Sold (COGS)
Definition:
COGS refers to the direct costs of producing goods or providing services, including materials and labor. It is subtracted from revenue to calculate gross profit. Accurate COGS reporting helps determine pricing and profitability.
Use Case: A bakery tracks flour, sugar, packaging, and labor as part of COGS. At month-end, they calculate total COGS to assess margins. This helps adjust production levels and pricing strategies.
Use Case: A bakery tracks flour, sugar, packaging, and labor as part of COGS. At month-end, they calculate total COGS to assess margins. This helps adjust production levels and pricing strategies.
Capital Expenditures (CapEx)
Definition:
CapEx refers to funds spent on long-term assets such as buildings, machinery, or software systems. These investments support future growth and are not expensed immediately. Instead, they are capitalized and depreciated.
Use Case: A business invests $50,000 in a new production machine to increase output. The machine is added to the fixed asset register and depreciated over several years. This approach spreads the cost and aligns it with long-term revenue generation.
Use Case: A business invests $50,000 in a new production machine to increase output. The machine is added to the fixed asset register and depreciated over several years. This approach spreads the cost and aligns it with long-term revenue generation.
CPA (Certified Public Accountant)
Definition:
A CPA is a licensed accounting professional who provides tax, financial analysis, and advisory services. CPAs undergo rigorous testing and continuing education. Many businesses rely on CPAs for specialized expertise.
Use Case: A company hires a CPA to review financial records before submitting tax filings. The CPA identifies deductions the owner overlooked and ensures compliance with current tax laws. This saves money and reduces audit risk.
Use Case: A company hires a CPA to review financial records before submitting tax filings. The CPA identifies deductions the owner overlooked and ensures compliance with current tax laws. This saves money and reduces audit risk.
Cash Basis Accounting
Definition:
Cash basis accounting records revenue when money is received and expenses when they are paid. It is simpler than accrual accounting and is commonly used by small businesses. Cash basis provides a clear view of actual cash on hand.
Use Case: A freelance designer chooses cash basis accounting to simplify bookkeeping. Payments from clients are recorded only when received, making cash flow easier to manage. This method helps prevent confusion between billed and collected income.
Use Case: A freelance designer chooses cash basis accounting to simplify bookkeeping. Payments from clients are recorded only when received, making cash flow easier to manage. This method helps prevent confusion between billed and collected income.
Capital
Definition:
Capital refers to the financial resources used to operate or grow a business, such as cash, investments, or equipment. It can come from owners, investors, or loans. Strong capital supports expansion.
Use Case: A business owner invests $40,000 of personal capital to purchase new equipment. This increases production capacity and supports future revenue growth. Tracking capital helps owners see how funds are being used.
Use Case: A business owner invests $40,000 of personal capital to purchase new equipment. This increases production capacity and supports future revenue growth. Tracking capital helps owners see how funds are being used.
Cash Reserves
Definition:
Cash reserves are funds set aside for emergencies or unexpected expenses. They act as a financial safety net to support operations during downturns. Healthy reserves improve business stability.
Use Case: During a slow sales quarter, a business relies on its cash reserves to cover payroll and rent. This prevents taking on unnecessary debt. Maintaining reserves ensures the business can survive temporary financial challenges.
Use Case: During a slow sales quarter, a business relies on its cash reserves to cover payroll and rent. This prevents taking on unnecessary debt. Maintaining reserves ensures the business can survive temporary financial challenges.
Corporate Tax
Definition:
Corporate tax is a tax on the profits of a corporation. Rates vary depending on jurisdiction and income level. Businesses must calculate and remit corporate taxes accurately to avoid penalties.
Use Case: A corporation reviews its financial statements to prepare its corporate tax return. After identifying allowable deductions, the company reduces its taxable income significantly. Accurate corporate tax planning improves cash flow availability.
Use Case: A corporation reviews its financial statements to prepare its corporate tax return. After identifying allowable deductions, the company reduces its taxable income significantly. Accurate corporate tax planning improves cash flow availability.
Controller
Definition:
A controller oversees a company’s accounting operations, financial reporting, and internal controls. They manage budgets, supervise accounting staff, and ensure compliance. Controllers are vital for growing or mid-sized companies.
Use Case: As a business expands, the owner hires a controller to strengthen financial oversight. The controller implements standardized reporting and identifies cost-saving opportunities. This enhances financial stability and strategic planning.
Use Case: As a business expands, the owner hires a controller to strengthen financial oversight. The controller implements standardized reporting and identifies cost-saving opportunities. This enhances financial stability and strategic planning.
CFO (Chief Financial Officer)
Definition:
A CFO manages high-level financial strategy, forecasting, budgeting, and risk management. They guide long-term planning and investment decisions. CFOs focus on optimizing financial performance and supporting growth.
Use Case: A scaling business brings on a fractional CFO to improve financial strategy. The CFO refines forecasting models and secures investment funding. This helps position the business for rapid expansion.
Use Case: A scaling business brings on a fractional CFO to improve financial strategy. The CFO refines forecasting models and secures investment funding. This helps position the business for rapid expansion.
D
Deductions
Definition:
Deductions are expenses allowed by the IRS that reduce taxable income. They encourage business investments and support. Common deductions include supplies, software, travel, and home office use.
Use Case: A business owner tracks all expenses and deducts $8,000 worth of eligible costs on their tax return. This lowers their tax bill and increases net savings. Keeping receipts ensures compliance during potential audits.
Use Case: A business owner tracks all expenses and deducts $8,000 worth of eligible costs on their tax return. This lowers their tax bill and increases net savings. Keeping receipts ensures compliance during potential audits.
Debit (Accounting)
Definition:
A debit increases assets or expenses and decreases liabilities or equity. Debits are one half of double-entry bookkeeping. Every transaction must balance with an equal credit.
Use Case: When a business buys a laptop for $1,500, it records a debit to the equipment asset account. This reflects the increase in business resources. Debits ensure accurate financial tracking across accounts.
Use Case: When a business buys a laptop for $1,500, it records a debit to the equipment asset account. This reflects the increase in business resources. Debits ensure accurate financial tracking across accounts.
Depreciation
Definition:
Depreciation is the gradual reduction in value of an asset as it wears out over time. Businesses spread the asset’s cost over its useful life. This reduces taxable income.
Use Case: A business buys $20,000 worth of equipment and depreciates it over five years. The annual depreciation expense helps lower taxable income and reflects the asset’s true value decline. This method improves accuracy in financial reporting.
Use Case: A business buys $20,000 worth of equipment and depreciates it over five years. The annual depreciation expense helps lower taxable income and reflects the asset’s true value decline. This method improves accuracy in financial reporting.
Dividend
Definition:
A dividend is a portion of a company’s profits distributed to shareholders. Dividends are typically paid quarterly but vary depending on company performance. Not all businesses choose to issue dividends.
Use Case: An investor receives quarterly dividends from a corporation based on shares owned. The consistent dividend payments help supplement income. The company continues issuing dividends due to strong profits and investor expectations.
Use Case: An investor receives quarterly dividends from a corporation based on shares owned. The consistent dividend payments help supplement income. The company continues issuing dividends due to strong profits and investor expectations.
Double-Entry Accounting
Definition:
Double-entry accounting requires every transaction to have both a debit and a credit entry. This system ensures books remain balanced. It is the foundation of modern financial accounting.
Use Case: A business purchases equipment on credit. The asset account is debited while the liability account is credited. This maintains balance and ensures accurate recordkeeping.
Use Case: A business purchases equipment on credit. The asset account is debited while the liability account is credited. This maintains balance and ensures accurate recordkeeping.
Divestiture
Definition:
Divestiture is the process of selling off assets, divisions, or subsidiaries. Companies use divestitures to streamline operations, generate cash, or refocus on core activities. It can improve financial performance and clarity.
Use Case: A corporation sells a non-profitable product line to focus on high-performing services. The divestiture brings in immediate cash and reduces operational burden. This leads to stronger long-term profitability.
Use Case: A corporation sells a non-profitable product line to focus on high-performing services. The divestiture brings in immediate cash and reduces operational burden. This leads to stronger long-term profitability.
E
Equity
Definition:
Equity represents the owner’s claim to the business after all liabilities are subtracted from assets. It reflects the true value of the business from an ownership perspective. Equity can increase through profits or decrease through losses.
Use Case: If a business has $120,000 in assets and $40,000 in liabilities, its equity is $80,000. When the business earns a profit, equity grows, increasing the owner’s investment value. Equity reporting helps owners make strategic financial decisions.
Use Case: If a business has $120,000 in assets and $40,000 in liabilities, its equity is $80,000. When the business earns a profit, equity grows, increasing the owner’s investment value. Equity reporting helps owners make strategic financial decisions.
Expenses
Definition:
Expenses are the costs a business incurs to operate, such as rent, software, utilities, and labor. They reduce net income and are closely monitored to maintain profitability. Keeping accurate expense records is essential for tax and budgeting purposes.
Use Case: A business spends $1,200 per month on tools, software, and supplies. These expenses are categorized to help identify areas where costs can be reduced. Regular expense reviews help maintain financial health and reduce waste.
Use Case: A business spends $1,200 per month on tools, software, and supplies. These expenses are categorized to help identify areas where costs can be reduced. Regular expense reviews help maintain financial health and reduce waste.
EIN (Employer Identification Number)
Definition:
An EIN is a unique identifier issued by the IRS to businesses for tax purposes. It functions like a Social Security number but for companies. An EIN is required for hiring employees, opening business accounts, and filing taxes.
Use Case: A new business applies for an EIN before opening a bank account. The EIN allows the owner to set up payroll and comply with reporting requirements. Without an EIN, the business cannot legally hire employees.
Use Case: A new business applies for an EIN before opening a bank account. The EIN allows the owner to set up payroll and comply with reporting requirements. Without an EIN, the business cannot legally hire employees.
Estimated Taxes
Definition:
Estimated taxes are quarterly tax payments made by individuals and businesses that expect to owe more than $1,000 in taxes. They cover income not subject to withholding. Failure to pay estimated taxes can result in penalties.
Use Case: A self-employed consultant pays estimated taxes every quarter based on projected profits. When income increases mid-year, the consultant adjusts payments to avoid penalties. This prevents a large tax bill during filing season.
Use Case: A self-employed consultant pays estimated taxes every quarter based on projected profits. When income increases mid-year, the consultant adjusts payments to avoid penalties. This prevents a large tax bill during filing season.
Expense Report
Definition:
An expense report is a detailed record of business-related purchases submitted for reimbursement. It tracks spending categories and supports tax documentation. Clear expense reporting prevents fraud and overspending.
Use Case: An employee attends a conference and submits an expense report for travel, meals, and supplies. Management reviews receipts before reimbursement. This helps the company maintain accurate financial records.
Use Case: An employee attends a conference and submits an expense report for travel, meals, and supplies. Management reviews receipts before reimbursement. This helps the company maintain accurate financial records.
EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization)
Definition:
EBITDA is a measure of a company’s operating performance before accounting for interest, taxes, and non-cash expenses like depreciation. It helps compare profitability across businesses. Analysts use EBITDA to evaluate core operations without external financial factors.
Use Case: A business owner reviews EBITDA to determine whether operations alone are profitable. After analyzing the results, they identify cost efficiencies and adjust pricing. This helps improve operational performance before considering financing decisions.
Use Case: A business owner reviews EBITDA to determine whether operations alone are profitable. After analyzing the results, they identify cost efficiencies and adjust pricing. This helps improve operational performance before considering financing decisions.
Escrow
Definition:
Escrow is a financial arrangement where a third party holds funds until specific conditions are met. It is commonly used in real estate and large transactions to ensure fairness. Escrow protects both buyers and sellers.
Use Case: A business purchasing a commercial property deposits funds into escrow while inspections are completed. Once conditions are met, the escrow agent releases the funds to the seller. This ensures a smooth and secure transaction.
Use Case: A business purchasing a commercial property deposits funds into escrow while inspections are completed. Once conditions are met, the escrow agent releases the funds to the seller. This ensures a smooth and secure transaction.
F
Fixed Assets
Definition:
Fixed assets are long-term resources such as buildings, vehicles, and equipment that a business uses for more than one year. They are recorded on the balance sheet and depreciated over time. Fixed assets help generate revenue but lose value gradually.
Use Case: A company purchases a new delivery van for $30,000. It is added to the fixed asset register and depreciated annually to reflect usage. This approach aligns the asset’s cost with the revenue it helps produce.
Use Case: A company purchases a new delivery van for $30,000. It is added to the fixed asset register and depreciated annually to reflect usage. This approach aligns the asset’s cost with the revenue it helps produce.
Forecasting
Definition:
Forecasting involves predicting future financial performance based on historical data, market trends, and assumptions. It helps businesses anticipate revenue, expenses, and cash flow. Forecasts assist with strategic planning.
Use Case: A company analyzes sales data from the previous year to forecast next quarter’s revenue. Based on the forecast, the business increases production to meet expected demand. This preparation prevents stock shortages and maximizes sales opportunities.
Use Case: A company analyzes sales data from the previous year to forecast next quarter’s revenue. Based on the forecast, the business increases production to meet expected demand. This preparation prevents stock shortages and maximizes sales opportunities.
Fixed Costs
Definition:
Fixed costs remain constant regardless of business activity, including rent, salaries, and insurance. They are essential for maintaining operations. Understanding fixed costs helps determine break-even points.
Use Case: A business pays $2,000 in monthly rent, unaffected by changes in sales volume. During slow months, the owner reviews spending but ensures fixed costs are always covered. This helps maintain financial stability.
Use Case: A business pays $2,000 in monthly rent, unaffected by changes in sales volume. During slow months, the owner reviews spending but ensures fixed costs are always covered. This helps maintain financial stability.
Fiscal Year
Definition:
A fiscal year is a 12-month financial reporting period chosen by a business, which may differ from the calendar year. It is used for budgeting, reporting, and tax filing. Many companies choose a fiscal year that aligns with operational cycles.
Use Case: A business operating seasonally selects a fiscal year ending in June to align with its busy season. This allows financial reports to reflect true business cycles more accurately. Planning becomes easier with predictable reporting periods.
Use Case: A business operating seasonally selects a fiscal year ending in June to align with its busy season. This allows financial reports to reflect true business cycles more accurately. Planning becomes easier with predictable reporting periods.
FICA Tax
Definition:
FICA taxes fund Social Security and Medicare and are withheld from employee wages. Employers must match the employee’s FICA contribution. These taxes support federal benefits programs.
Use Case: A business runs payroll for employees and calculates FICA withholdings accurately. The employer submits both the employee and employer share to the IRS. Staying compliant avoids costly payroll audits.
Use Case: A business runs payroll for employees and calculates FICA withholdings accurately. The employer submits both the employee and employer share to the IRS. Staying compliant avoids costly payroll audits.
Financial Statement
Definition:
Financial statements include balance sheets, income statements, and cash flow statements. They provide a comprehensive view of a company’s financial health. Investors and lenders rely on these reports for decision-making.
Use Case: A business prepares quarterly financial statements for a lender reviewing a loan application. The statements demonstrate strong revenue and steady cash flow. This increases the likelihood of loan approval.
Use Case: A business prepares quarterly financial statements for a lender reviewing a loan application. The statements demonstrate strong revenue and steady cash flow. This increases the likelihood of loan approval.
G
Gross Income
Definition:
Gross Income refers to total earnings before any deductions, taxes, or expenses. It is used as a starting point for calculating taxable income. Understanding gross income helps determine profit potential.
Use Case: A contractor earns $12,000 in a month before deducting materials and labor expenses. This gross income gives a baseline for evaluating performance and setting price points. Proper tracking ensures accurate tax filing and budgeting.
Use Case: A contractor earns $12,000 in a month before deducting materials and labor expenses. This gross income gives a baseline for evaluating performance and setting price points. Proper tracking ensures accurate tax filing and budgeting.
General Ledger (GL)
Definition:
The General Ledger is the central record containing all financial transactions of a business. It organizes data into accounts such as assets, liabilities, revenue, and expenses. The GL is the foundation for preparing financial statements.
Use Case: A bookkeeper posts daily transactions into the GL, including sales, expenses, and payroll entries. At month-end, the accountant reviews the GL to generate accurate financial reports. This system ensures financial visibility and compliance.
Use Case: A bookkeeper posts daily transactions into the GL, including sales, expenses, and payroll entries. At month-end, the accountant reviews the GL to generate accurate financial reports. This system ensures financial visibility and compliance.
Gross Profit
Definition:
Gross Profit is revenue minus COGS. It measures how efficiently a business produces or delivers its products. Higher gross profit margins indicate strong operational performance.
Use Case: A business calculates gross profit for each product line to determine which offerings are most profitable. After analysis, the company reduces low-margin products and increases production of high-margin ones. This boosts overall profitability.
Use Case: A business calculates gross profit for each product line to determine which offerings are most profitable. After analysis, the company reduces low-margin products and increases production of high-margin ones. This boosts overall profitability.
GAAP (Generally Accepted Accounting Principles)
Definition:
GAAP is a standardized set of accounting rules and principles used to ensure consistency and accuracy in financial reporting. It governs how companies record transactions and prepare financial statements. Compliance improves transparency and comparability.
Use Case: A company preparing for investors adopts GAAP-compliant reporting practices. This ensures financial statements are clear, accurate, and trustworthy. GAAP compliance increases investor confidence and credibility.
Use Case: A company preparing for investors adopts GAAP-compliant reporting practices. This ensures financial statements are clear, accurate, and trustworthy. GAAP compliance increases investor confidence and credibility.
I
Income Statement
Definition:
An income statement shows revenue, expenses, and profit over a specific time period. It is used to evaluate business performance. The statement helps identify patterns in income and spending.
Use Case: A business reviews its quarterly income statement to compare profit results against the previous quarter. The analysis reveals rising marketing expenses that reduced net income. Management uses this information to adjust spending.
Use Case: A business reviews its quarterly income statement to compare profit results against the previous quarter. The analysis reveals rising marketing expenses that reduced net income. Management uses this information to adjust spending.
Inventory
Definition:
Inventory represents goods a business holds for sale or materials used in production. It is considered a current asset. Managing inventory effectively reduces waste and improves profitability.
Use Case: A boutique orders new clothing inventory for the upcoming season and tracks each item using inventory software. By analyzing sales patterns, the owner adjusts future orders to prevent overstock. This helps reduce carrying costs and increase cash flow.
Use Case: A boutique orders new clothing inventory for the upcoming season and tracks each item using inventory software. By analyzing sales patterns, the owner adjusts future orders to prevent overstock. This helps reduce carrying costs and increase cash flow.
IRS (Internal Revenue Service)
Definition:
The IRS is the U.S. tax authority responsible for collecting taxes and enforcing tax laws. It issues regulations, processes returns, and conducts audits. Businesses must comply with IRS requirements to avoid penalties.
Use Case: A business receives a notice from the IRS requesting clarification on a tax deduction. The accountant gathers documentation and responds before the deadline. Quick action prevents fines and keeps the case from escalating.
Use Case: A business receives a notice from the IRS requesting clarification on a tax deduction. The accountant gathers documentation and responds before the deadline. Quick action prevents fines and keeps the case from escalating.
Installment Agreement
Definition:
An Installment Agreement is a monthly payment arrangement with the IRS for unpaid taxes. It allows taxpayers to pay back debt over time. This helps avoid more severe collection actions.
Use Case: A business unable to pay a $12,000 tax bill applies for an Installment Agreement. Payments are spread over two years, easing financial strain. The arrangement keeps the business compliant while avoiding liens.
Use Case: A business unable to pay a $12,000 tax bill applies for an Installment Agreement. Payments are spread over two years, easing financial strain. The arrangement keeps the business compliant while avoiding liens.
Interest (Loan or IRS)
Definition:
Interest is the cost charged for borrowing money or the fee assessed on unpaid taxes. It accumulates over time until the balance is paid. Managing interest helps reduce total financial burden.
Use Case: A business delays paying a tax balance, causing interest to accrue monthly. After reviewing cash flow, the owner decides to pay off the balance early to avoid further charges. This saves money and improves financial stability.
Use Case: A business delays paying a tax balance, causing interest to accrue monthly. After reviewing cash flow, the owner decides to pay off the balance early to avoid further charges. This saves money and improves financial stability.
Inventory Turnover
Definition:
Inventory turnover measures how quickly inventory is sold and replaced within a period. High turnover indicates strong sales, while low turnover may signal poor demand or overstocking. This metric is essential for efficient operations.
Use Case: A retail business calculates inventory turnover to identify slow-moving products. Based on the results, they adjust purchasing and increase promotions for older stock. This helps free up cash and improve profitability.
Use Case: A retail business calculates inventory turnover to identify slow-moving products. Based on the results, they adjust purchasing and increase promotions for older stock. This helps free up cash and improve profitability.
K
KPI (Key Performance Indicator)
Definition:
A KPI is a measurable value that indicates how effectively a business is achieving key objectives. KPIs help leaders track progress and make data-driven decisions. Common KPIs include revenue growth, customer acquisition cost, and gross margin.
Use Case: A business monitors monthly revenue and client retention as core KPIs. When retention drops, the owner reviews customer feedback and improves service delivery. This proactive approach helps stabilize revenue and maintain long-term growth.
Use Case: A business monitors monthly revenue and client retention as core KPIs. When retention drops, the owner reviews customer feedback and improves service delivery. This proactive approach helps stabilize revenue and maintain long-term growth.
L
Liability
Definition:
Liabilities are financial obligations that a business must settle in the future, such as loans, credit card balances, or unpaid invoices. They represent claims against company assets. Managing liabilities is crucial for maintaining financial stability.
Use Case: A business takes out a $50,000 loan to expand operations. The loan is recorded as a long-term liability, and the company tracks monthly payments to ensure timely repayment. Proper liability management helps the business maintain good credit and borrower relationships.
Use Case: A business takes out a $50,000 loan to expand operations. The loan is recorded as a long-term liability, and the company tracks monthly payments to ensure timely repayment. Proper liability management helps the business maintain good credit and borrower relationships.
Loan Principal
Definition:
Loan principal is the original amount borrowed before interest. Monthly loan payments reduce the principal over time. Tracking principal helps businesses plan debt payoff.
Use Case: A business takes out a $100,000 equipment loan. Each monthly payment reduces the principal, allowing the company to track progress and forecast future cash needs. Understanding principal reduction aids long-term planning.
Use Case: A business takes out a $100,000 equipment loan. Each monthly payment reduces the principal, allowing the company to track progress and forecast future cash needs. Understanding principal reduction aids long-term planning.
Liquidity
Definition:
Liquidity measures how quickly a business can convert assets into cash. High liquidity means the company can meet short-term obligations easily. Strong liquidity improves financial flexibility.
Use Case: A business assesses liquidity before taking on a large project. Noticing that most assets are tied up in inventory, the owner postpones the project until more cash becomes available. This prevents cash flow problems and late bill payments.
Use Case: A business assesses liquidity before taking on a large project. Noticing that most assets are tied up in inventory, the owner postpones the project until more cash becomes available. This prevents cash flow problems and late bill payments.
Lease
Definition:
A lease is a contract that allows a business to use property or equipment in exchange for scheduled payments. Leases help businesses obtain resources without large upfront costs. They may be categorized as operating or capital leases.
Use Case: A business leases printing equipment instead of purchasing it outright to reduce startup costs. Monthly payments allow predictable budgeting and preserve cash reserves. This supports smoother cash flow management.
Use Case: A business leases printing equipment instead of purchasing it outright to reduce startup costs. Monthly payments allow predictable budgeting and preserve cash reserves. This supports smoother cash flow management.
LLC (Limited Liability Company)
Definition:
An LLC is a flexible business structure that provides liability protection without requiring corporate formalities. It can be taxed as a sole proprietorship, partnership, or corporation. LLCs offer legal protection for owners.
Use Case: A new entrepreneur forms an LLC to separate personal and business finances. This protects personal assets if the company faces lawsuits or debt. The structure provides flexibility as the business grows.
Use Case: A new entrepreneur forms an LLC to separate personal and business finances. This protects personal assets if the company faces lawsuits or debt. The structure provides flexibility as the business grows.
M
Margin
Definition:
Margin measures the difference between the cost of producing a product and the selling price. It is expressed as a percentage and helps determine profitability. High margins indicate efficient operations.
Use Case: A business evaluates its service packages and increases prices for low-margin offerings. By improving service delivery efficiency, the company boosts margins and long-term profitability. This allows reinvestment into marketing and staff.
Use Case: A business evaluates its service packages and increases prices for low-margin offerings. By improving service delivery efficiency, the company boosts margins and long-term profitability. This allows reinvestment into marketing and staff.
Merchant Account
Definition:
A merchant account allows businesses to accept credit and debit card payments. It works with payment processors to settle transactions. Merchant accounts are essential for modern commerce.
Use Case: A retail store sets up a merchant account to process customer payments. At the end of each day, funds from card transactions are deposited into the business bank account. This allows the store to provide convenient payment options.
Use Case: A retail store sets up a merchant account to process customer payments. At the end of each day, funds from card transactions are deposited into the business bank account. This allows the store to provide convenient payment options.
N
Net Income
Definition:
Net Income is the profit a business keeps after all expenses, taxes, and interest are subtracted from revenue. It represents the company’s bottom line. Consistently strong net income indicates healthy operations.
Use Case: A business earns $40,000 in revenue but spends $30,000 on various expenses, resulting in $10,000 net income. By analyzing net income trends, the owner identifies areas to improve productivity and control costs. This helps guide long-term planning and investment.
Use Case: A business earns $40,000 in revenue but spends $30,000 on various expenses, resulting in $10,000 net income. By analyzing net income trends, the owner identifies areas to improve productivity and control costs. This helps guide long-term planning and investment.
Net Worth
Definition:
Net worth is the value of all assets minus all liabilities. It measures the overall financial health of a business or individual. A positive net worth indicates strong financial standing.
Use Case: A business conducts a net-worth assessment before applying for a loan. The analysis shows sufficient equity to support financing approval. This helps secure funding for expansion.
Use Case: A business conducts a net-worth assessment before applying for a loan. The analysis shows sufficient equity to support financing approval. This helps secure funding for expansion.
O
Operating Expenses (OpEx)
Definition:
Operating Expenses are the day-to-day costs of running a business, such as rent, utilities, and administrative salaries. These costs do not directly relate to production. Effective OpEx control supports strong net income.
Use Case: A company reviews its annual OpEx and notices rising subscription and utility costs. Management negotiates with vendors and cuts unnecessary software expenses. These adjustments help the business improve cash flow and profitability.
Use Case: A company reviews its annual OpEx and notices rising subscription and utility costs. Management negotiates with vendors and cuts unnecessary software expenses. These adjustments help the business improve cash flow and profitability.
Offer in Compromise (OIC)
Definition:
An Offer in Compromise allows taxpayers to settle their tax debt for less than the full amount owed. Approval depends on financial hardship and ability to pay. It is a solution for those facing overwhelming tax burdens.
Use Case: A business owner struggling with low revenue applies for an OIC to settle a $60,000 tax bill. After reviewing financial records, the IRS accepts a settlement of $7,500. This provides a fresh start and prevents further penalties.
Use Case: A business owner struggling with low revenue applies for an OIC to settle a $60,000 tax bill. After reviewing financial records, the IRS accepts a settlement of $7,500. This provides a fresh start and prevents further penalties.
Owner’s Draw
Definition:
An owner’s draw is money an owner withdraws from the business for personal use. It reduces owner equity. Draws are common in sole proprietorships and partnerships.
Use Case: A business owner withdraws $3,000 per month as a draw instead of taking a salary. The draw is recorded to ensure accurate equity reporting. This helps the accountant prepare tax returns accurately.
Use Case: A business owner withdraws $3,000 per month as a draw instead of taking a salary. The draw is recorded to ensure accurate equity reporting. This helps the accountant prepare tax returns accurately.
Overhead
Definition:
Overhead refers to ongoing expenses not directly tied to production, such as rent, utilities, and administrative salaries. It is essential for business operations. Reducing overhead can significantly improve net income.
Use Case: A small business analyzes its overhead costs and realizes it is overspending on unused subscriptions. The owner cancels unnecessary tools and negotiates better rates with suppliers. This increases profitability and improves cash flow.
Use Case: A small business analyzes its overhead costs and realizes it is overspending on unused subscriptions. The owner cancels unnecessary tools and negotiates better rates with suppliers. This increases profitability and improves cash flow.
P
Payroll
Definition:
Payroll is the process of paying employees wages, withholding taxes, and managing benefits. It must comply with federal and state laws. Accurate payroll protects the business from penalties.
Use Case: A company runs biweekly payroll and uses software to ensure correct tax withholding. The system also tracks vacation time and employee benefits. This reduces errors and saves time for the accounting team.
Use Case: A company runs biweekly payroll and uses software to ensure correct tax withholding. The system also tracks vacation time and employee benefits. This reduces errors and saves time for the accounting team.
Payroll Tax
Definition:
Payroll taxes are mandatory taxes withheld from employees’ paychecks, including Social Security and Medicare (FICA). Employers are responsible for withholding and remitting them. Accurate payroll tax management prevents legal issues.
Use Case: A business runs monthly payroll and calculates payroll tax liabilities. The accountant ensures payments are submitted on time to the IRS. This prevents penalties and maintains compliance.
Use Case: A business runs monthly payroll and calculates payroll tax liabilities. The accountant ensures payments are submitted on time to the IRS. This prevents penalties and maintains compliance.
Penalties
Definition:
Penalties are additional charges imposed by the IRS for late payments, inaccurate filings, or noncompliance. They can accumulate quickly. Proper tax planning helps avoid penalties.
Use Case: A business files taxes 45 days late and incurs penalties and interest. The accountant reviews the situation and requests penalty abatement due to reasonable cause. This reduces the financial impact on the company.
Use Case: A business files taxes 45 days late and incurs penalties and interest. The accountant reviews the situation and requests penalty abatement due to reasonable cause. This reduces the financial impact on the company.
Profit & Loss Statement (P&L)
Definition:
A P&L statement shows a business’s revenue, expenses, and net income over a specific period. It helps evaluate profitability and operational performance. It is one of the most commonly reviewed financial reports.
Use Case: A business compares quarterly P&L statements to identify trends in revenue growth and rising expenses. The analysis helps the owner adjust pricing and reduce unnecessary spending. This leads to better forecasting and financial decision-making.
Use Case: A business compares quarterly P&L statements to identify trends in revenue growth and rising expenses. The analysis helps the owner adjust pricing and reduce unnecessary spending. This leads to better forecasting and financial decision-making.
Petty Cash
Definition:
Petty cash is a small fund used for minor business expenses such as office supplies or quick purchases. It helps handle small transactions without writing checks or using credit. Businesses track petty cash through receipts and logs.
Use Case: An office keeps $200 in petty cash for small day-to-day needs. Employees record all purchases with receipts, ensuring accountability. This simplifies small spending without altering the main bookkeeping system.
Use Case: An office keeps $200 in petty cash for small day-to-day needs. Employees record all purchases with receipts, ensuring accountability. This simplifies small spending without altering the main bookkeeping system.
Profit Margin
Definition:
Profit margin measures how much profit a business earns from every dollar of revenue. It is expressed as a percentage and helps evaluate efficiency. Higher margins indicate stronger profitability.
Use Case: A business analyzes its profit margin and notices a decline due to rising material costs. Management negotiates better supplier terms and adjusts pricing to restore margins. This improves long-term financial strength.
Use Case: A business analyzes its profit margin and notices a decline due to rising material costs. Management negotiates better supplier terms and adjusts pricing to restore margins. This improves long-term financial strength.
R
Revenue
Definition:
Revenue is the total income generated from selling goods or services before any expenses are deducted. It is one of the core indicators of business performance. Higher revenue typically enables growth and reinvestment.
Use Case: A bookkeeping service bills clients a total of $25,000 in one month. This revenue is tracked separately from expenses to calculate profitability. Consistent revenue helps predict future cash flow and plan business operations.
Use Case: A bookkeeping service bills clients a total of $25,000 in one month. This revenue is tracked separately from expenses to calculate profitability. Consistent revenue helps predict future cash flow and plan business operations.
Reconciliation
Definition:
Reconciliation is the process of comparing internal financial records to external statements (like bank or credit card statements) to ensure accuracy. It helps identify discrepancies, errors, or fraudulent activity. Monthly reconciliation is essential for maintaining clean books.
Use Case: A business reviews its bank statement and matches each transaction to bookkeeping entries. During reconciliation, a duplicated payment is discovered and corrected. This prevents overstating expenses and improves financial accuracy.
Use Case: A business reviews its bank statement and matches each transaction to bookkeeping entries. During reconciliation, a duplicated payment is discovered and corrected. This prevents overstating expenses and improves financial accuracy.
ROI (Return on Investment)
Definition:
ROI measures the profitability of an investment by comparing the gain to the cost. It is expressed as a percentage. A higher ROI indicates greater profitability.
Use Case: A business invests $5,000 in an email marketing campaign and tracks the $20,000 in new revenue generated. With an ROI of 300%, management allocates more budget to email marketing. This leads to higher overall revenue.
Use Case: A business invests $5,000 in an email marketing campaign and tracks the $20,000 in new revenue generated. With an ROI of 300%, management allocates more budget to email marketing. This leads to higher overall revenue.
Retained Earnings
Definition:
Retained earnings represent accumulated profits reinvested into the business rather than distributed as dividends. They support growth, reserves, and operational stability. Each year’s net income adds to retained earnings.
Use Case: A business reinvests $30,000 in retained earnings to expand its production facility. This investment increases future revenue potential. Tracking retained earnings helps inform reinvestment strategies.
Use Case: A business reinvests $30,000 in retained earnings to expand its production facility. This investment increases future revenue potential. Tracking retained earnings helps inform reinvestment strategies.
R&D Expense (Research & Development)
Definition:
R&D expenses are costs associated with developing new products, services, or technologies. They are considered operating expenses and may qualify for tax credits. R&D drives innovation and competitive advantage.
Use Case: A tech company invests $15,000 into testing a new software feature. These costs are tracked as R&D expenses and used to qualify for available tax credits. The investment helps the business stay innovative and competitive.
Use Case: A tech company invests $15,000 into testing a new software feature. These costs are tracked as R&D expenses and used to qualify for available tax credits. The investment helps the business stay innovative and competitive.
Revenue Recognition
Definition:
Revenue recognition refers to the rules determining when and how revenue should be recorded. Under accrual accounting, revenue is recognized when earned—not necessarily when paid. Proper recognition ensures accurate reporting.
Use Case: A service company delivers a 3-month project and recognizes revenue only after each phase is completed. This aligns income with work performed and provides accurate reporting. The approach prevents overstating short-term earnings.
Use Case: A service company delivers a 3-month project and recognizes revenue only after each phase is completed. This aligns income with work performed and provides accurate reporting. The approach prevents overstating short-term earnings.
S
Sales Tax
Definition:
Sales tax is a percentage charged on the sale of goods or services, collected by businesses and remitted to the state. It does not belong to the business. Proper sales tax tracking is critical for compliance.
Use Case: An online store collects sales tax on all orders shipped to states where it is required. Monthly, the store remits collected tax to the appropriate state agencies. Accurate tracking prevents costly audits.
Use Case: An online store collects sales tax on all orders shipped to states where it is required. Monthly, the store remits collected tax to the appropriate state agencies. Accurate tracking prevents costly audits.
Solvency
Definition:
Solvency refers to a business’s ability to meet long-term financial obligations. It indicates financial strength and stability. High solvency reduces bankruptcy risk.
Use Case: A business reviews its solvency ratio to determine whether it can safely take on additional debt. After analyzing liabilities, the company decides to delay borrowing. This prevents overleveraging and reduces financial risk.
Use Case: A business reviews its solvency ratio to determine whether it can safely take on additional debt. After analyzing liabilities, the company decides to delay borrowing. This prevents overleveraging and reduces financial risk.
S-Corporation (S-Corp)
Definition:
An S-Corporation is a business structure that passes income, losses, and credits through to shareholders for tax purposes. It avoids double taxation but requires strict IRS guidelines. Many small businesses choose S-Corp status to reduce tax burden.
Use Case: A business converts to an S-Corp to reduce self-employment tax obligations for the owner. The accountant structures payroll and distributions to remain compliant. This leads to significant annual tax savings.
Use Case: A business converts to an S-Corp to reduce self-employment tax obligations for the owner. The accountant structures payroll and distributions to remain compliant. This leads to significant annual tax savings.
T
Taxable Income
Definition:
Taxable Income is the amount of income subject to tax after deductions, adjustments, and credits have been applied. It determines how much tax a person or business must pay. Lowering taxable income legally reduces tax liability.
Use Case: A business earns $90,000 but deducts $30,000 in expenses, reducing taxable income to $60,000. This reduction allows the business to save significantly during tax season. Accurate bookkeeping ensures these deductions are properly documented.
Use Case: A business earns $90,000 but deducts $30,000 in expenses, reducing taxable income to $60,000. This reduction allows the business to save significantly during tax season. Accurate bookkeeping ensures these deductions are properly documented.
Trial Balance
Definition:
A Trial Balance is a report listing the ending balance of all ledger accounts to verify that total debits equal total credits. It is used before creating financial statements. Any discrepancies in the trial balance indicate recording errors.
Use Case: Before preparing the monthly financial statements, a business generates a trial balance report. The accountant spots a misposted $500 transaction and corrects it before proceeding. This ensures accurate reporting and prevents cascading errors.
Use Case: Before preparing the monthly financial statements, a business generates a trial balance report. The accountant spots a misposted $500 transaction and corrects it before proceeding. This ensures accurate reporting and prevents cascading errors.
Tax Resolution
Definition:
Tax resolution refers to services that help individuals or businesses settle tax issues with the IRS, such as back taxes, penalties, or audits. The goal is to negotiate manageable solutions. CPAs and enrolled agents typically handle tax resolution cases.
Use Case: A business owner owes $35,000 in back taxes and is overwhelmed by IRS notices. A tax professional helps negotiate a payment plan and reduces penalties. This allows the owner to regain financial control.
Use Case: A business owner owes $35,000 in back taxes and is overwhelmed by IRS notices. A tax professional helps negotiate a payment plan and reduces penalties. This allows the owner to regain financial control.
Tax Return
Definition:
A tax return is a formal document filed with tax authorities reporting income, expenses, credits, and deductions. Individuals and businesses file tax returns annually or quarterly. Accurate returns prevent penalties and ensure compliance.
Use Case: A business gathers all financial data—revenue, expenses, payroll records—to prepare its tax return. The accountant identifies additional deductions that reduce the tax liability. Submitting a complete and accurate return avoids delays and audit triggers.
Use Case: A business gathers all financial data—revenue, expenses, payroll records—to prepare its tax return. The accountant identifies additional deductions that reduce the tax liability. Submitting a complete and accurate return avoids delays and audit triggers.
Tax Planning
Definition:
Tax planning involves analyzing financial situations to reduce tax liability legally. It includes timing income, maximizing deductions, and leveraging tax-advantaged accounts. Effective tax planning improves overall profitability.
Use Case: A business owner schedules major equipment purchases before year-end to increase deductions. The tax advisor also recommends contributing to a retirement plan for additional savings. This strategy reduces the current tax burden and boosts long-term financial health.
Use Case: A business owner schedules major equipment purchases before year-end to increase deductions. The tax advisor also recommends contributing to a retirement plan for additional savings. This strategy reduces the current tax burden and boosts long-term financial health.
Tax Year
Definition:
The tax year is the 12-month period a taxpayer uses to file returns and calculate tax obligations. Most businesses use the calendar year, while others choose a fiscal year. The IRS uses this timeframe to evaluate compliance.
Use Case: A business with seasonal sales chooses a tax year ending in September to better align reporting with its busy season. This provides clearer financial comparisons year-over-year. Aligning the tax year with operations simplifies planning and budgeting.
Use Case: A business with seasonal sales chooses a tax year ending in September to better align reporting with its busy season. This provides clearer financial comparisons year-over-year. Aligning the tax year with operations simplifies planning and budgeting.
Tax Liability
Definition:
Tax liability is the total amount of tax owed to the government before payments or credits are applied. It is influenced by income, deductions, and tax rates. Proper calculation prevents penalties.
Use Case: A business calculates a $15,000 tax liability for the year. After applying credits and previous payments, the remaining balance is reduced to $8,000. Knowing the liability helps the owner plan cash reserves.
Use Case: A business calculates a $15,000 tax liability for the year. After applying credits and previous payments, the remaining balance is reduced to $8,000. Knowing the liability helps the owner plan cash reserves.
V
Variable Costs
Definition:
Variable costs change depending on production or sales volume, such as materials, packaging, and shipping. They rise when output increases. Managing variable costs is essential for accurate pricing.
Use Case: A candle-making business notices that wax and fragrance costs increase as orders rise. By negotiating bulk pricing with suppliers, the owner reduces variable costs and improves margins. This strategy boosts profitability during busy seasons.
Use Case: A candle-making business notices that wax and fragrance costs increase as orders rise. By negotiating bulk pricing with suppliers, the owner reduces variable costs and improves margins. This strategy boosts profitability during busy seasons.
W
W-2 Form
Definition:
A W-2 is a tax form employers give to employees showing yearly wages and tax withholding. Employees use it to file their personal tax returns. It is required by law to be issued by January 31.
Use Case: A company prepares W-2 forms for all staff at year-end. Employees use the form to verify their earnings and complete their tax filings. Accurate reporting prevents penalties and filing delays.
Use Case: A company prepares W-2 forms for all staff at year-end. Employees use the form to verify their earnings and complete their tax filings. Accurate reporting prevents penalties and filing delays.
1099 Form
Definition:
A 1099 form records income paid to independent contractors or non-employees. Businesses must issue a 1099 to anyone they pay more than $600 in a year. Contractors use it to file taxes.
Use Case: A marketing firm pays a freelance designer $3,200 during the year and issues a 1099-NEC. The form helps the contractor report accurate income. Proper filing keeps the firm compliant with IRS rules.
Use Case: A marketing firm pays a freelance designer $3,200 during the year and issues a 1099-NEC. The form helps the contractor report accurate income. Proper filing keeps the firm compliant with IRS rules.
Working Capital
Definition:
Working Capital is the difference between current assets and current liabilities. It measures a business’s ability to meet short-term obligations. Positive working capital indicates strong liquidity.
Use Case: A business reviews its working capital before making a major inventory purchase. By ensuring enough cash remains for payroll and bills, the owner avoids cash flow shortages. This supports smoother operations.
Use Case: A business reviews its working capital before making a major inventory purchase. By ensuring enough cash remains for payroll and bills, the owner avoids cash flow shortages. This supports smoother operations.
Withholding Tax
Definition:
Withholding tax is the portion of an employee’s income withheld by an employer and sent to the government as prepayment of taxes. It helps individuals meet tax obligations throughout the year. The amount withheld is based on the employee’s W-4.
Use Case: A business processes payroll and withholds federal, state, and local taxes from each paycheck. At month-end, these taxes are remitted to the IRS and state agencies. This ensures employees stay compliant and avoids underpayment penalties.
Use Case: A business processes payroll and withholds federal, state, and local taxes from each paycheck. At month-end, these taxes are remitted to the IRS and state agencies. This ensures employees stay compliant and avoids underpayment penalties.
Write-Off
Definition:
A write-off is an expense that reduces taxable income, or the recognition of an uncollectible receivable as a loss. Write-offs reflect financial reality and support accurate reporting. Businesses use write-offs during tax preparation.
Use Case: A business has a customer who refuses to pay a $1,200 invoice after multiple attempts. The accountant writes it off as bad debt, reducing taxable income. This keeps financial records accurate and prevents inflating expected revenue.
Use Case: A business has a customer who refuses to pay a $1,200 invoice after multiple attempts. The accountant writes it off as bad debt, reducing taxable income. This keeps financial records accurate and prevents inflating expected revenue.