Accounting Terms Glossary

The love language of business numbers. A quick guide to each key accounting term and what they really mean.

Accounting

The process of recording, organizing, and interpreting financial transactions and information of a business or organization.

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Accounts Payable

The amount of money a company owes to its suppliers or creditors for goods or services received on credit.

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Accounts Receivable

The amount of money owed to a company by its customers for goods or services sold on credit.

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Accrual Basis

An accounting method in which revenues and expenses are recognized and recorded when they are earned or incurred, regardless of when cash is exchanged.

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Accrued Expenses

Expenses that have been incurred but not yet paid for or recorded in the books of accounts.

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Accrued Interest

The interest that has been earned but not yet paid or received.

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Accrued Revenue

Revenue that has been earned but not yet received or recorded.

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Amortization

Amortization is the process of expensing the cost of an asset or loan over time.

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Angel Investor

An individual who provides capital to startups or small businesses in exchange for ownership equity or convertible debt.

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Assets

Economic resources owned by a company or individual that have measurable value and can be used to generate future benefits.

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Audit

A systematic examination and verification of financial records, transactions, and statements to ensure accuracy, compliance, and reliability.

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Bad Debt

An unpaid or uncollectible debt that is unlikely to be recovered.

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Balance Sheet

A financial statement that provides a snapshot of a company's financial position, showing its assets, liabilities, and shareholders' equity at a specific point in time.

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Bank Reconciliation

The process of comparing and reconciling a company's internal financial records with the bank statement to ensure consistency and accuracy.

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Bookkeeping

The process of accurately recording and organizing all financial transactions of a business, including income, expenses, and payments. It provides a clear picture of your business's financial performance, helps you analyze trends, and enables informed decision-making regarding investments, expansions, or cost-cutting measures

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Break-Even Point

The level of sales or revenue at which total costs equal total revenue, resulting in neither profit nor loss.

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Budget

A financial plan that outlines estimated revenues, expenses, and cash flows for a specific period, serving as a guideline for financial decision-making and control.

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Build Profitably

The act of generating consistent profits and increasing the financial sustainability of a business over time.

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Burn Rate

Your company’s burn rate describes how quickly it’s losing (burning) money. Many venture-backed startups need time and money to build their customer base and improve their products or services before becoming profitable.

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C Corporation (C Corp)

A C corporation, or C corp, is a type of legal business entity. C corps are the default corporation type and a popular choice for startup founders. Other options include S corporations and limited liability companies (LLCs).

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Capital Expenditures (CapEx)

Capital expenditures (CapEx) are when you spend money to buy, maintain, or improve assets that you plan to use for longer than a year. These can include tangible assets, such as equipment and property, and intangible assets, like patents or licenses.

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Capital Gains

The profit earned from the sale of an investment or asset that has increased in value.

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Cash Basis

An accounting method in which revenues and expenses are recognized and recorded only when cash is received or paid.

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Cash Burn

The rate at which a company depletes its cash reserves to cover operating expenses before it generates positive cash flow or profitability.

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Cash Flow

The movement of cash into and out of a business, including cash inflows from revenues and financing and cash outflows for expenses and investments.

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Cash Flow Statement

A financial statement that shows the inflows and outflows of cash during a specific period, providing insights into a company's liquidity.

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Cash Ratio

A financial metric that compares a company's cash and cash equivalents to its current liabilities, measuring its ability to cover short-term obligations with cash.

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Chart of Accounts

A systematic listing of all the individual accounts used in a company's accounting system. It provides a standardized framework for organizing and classifying financial transactions, making it easier to record, track, and report on various financial activities.

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Churn

The rate at which customers or subscribers discontinue their relationship with a company or stop using its products or services.

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COGS Percentage

The percentage of revenue consumed by the cost of goods sold, indicating the profitability of a product or service.

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Collateral

Property or assets that are pledged as security for a loan or credit.

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Cost of Goods Sold (COGS)

Cost of goods sold (COGS) — sometimes called cost of revenue (COR) or cost of sales (COS) — is the costs that are directly associated with making a company’s products or services.

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Credit

An accounting entry that represents an increase in assets or a decrease in liabilities or equity.

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Debit

An accounting entry that represents a decrease in assets or an increase in liabilities or equity.

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Debt Financing

Obtaining funds by borrowing money, often from banks or other financial institutions.

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Debt-to-Equity

A company's total debt to its total shareholder equity

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Deferred Revenue

Deferred revenue, also called unearned revenue or customer deposits, is money that you received for products or services you haven’t delivered yet. With accrual-based accounting, you don’t recognize the revenue until you’ve fulfilled your side of the transaction.

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Depreciation

Depreciation is how a company writes off the value of fixed assets over their useful life. It can apply to tangible assets, such as office equipment, computers, and buildings.

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Dividend

A distribution of a portion of a company's earnings to its shareholders.

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Doing Business As (DBA)

A doing business as (DBA or d/b/a) name is a pseudonym that you can use for your business. DBAs are also called trade names, fictitious names, or assumed names. You can register a DBA if you don’t want to use your personal name or legal business entity name with customers and clients.

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Double-Entry Bookkeeping

Double-entry bookkeeping is a system of recording financial transactions where each transaction is entered twice, once as a debit and once as a credit, ensuring accurate and balanced financial records.

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EBITDA

Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a financial metric that can help you understand your company’s cash flow from its core activities.

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Equity

The ownership interest in a company or the residual claim on assets after deducting liabilities.

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Equity Financing

Raising capital by selling shares or ownership stakes in a company.

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Financial Statement

A formal record of a company's financial activities, including the balance sheet, income statement, and cash flow statement.

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Fixed Assets

Tangible assets that are held for long-term use, such as buildings, machinery, vehicles, or equipment.

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Fixed Cost

Costs that remain constant regardless of the level of production or sales.

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Forecasts

A forecast is a data-backed estimate of your company’s future financial performance. It can be important for making educated investment decisions, creating realistic budgets, and avoiding a cash flow crunch.

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Future Value

The value of an investment or asset at a specified future date, considering the effects of compound interest or investment returns.

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GAAP

GAAP stands for Generally Accepted Accounting Principles and refers to the standard guidelines and rules that businesses use to prepare and present their financial statements, ensuring accuracy, consistency, and comparability.

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Gross Margin

Your gross margin is how much you make, as a percentage, after you pay the cost directly associated with making your products or services. Gross margins tend to vary by industry, so a high or low gross margin isn’t necessarily good or bad. But software as a service (SaaS) companies tend to have low direct costs and high gross margins.

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Gross Profit

The difference between a company's total sales revenue and its cost of goods sold, representing the profit generated from core operations before deducting expenses.

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Gross Sales

The total sales revenue generated by a company before deducting any discounts, returns, or allowances.

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Income Statement

A financial statement that summarizes a company's revenues, expenses, and net income over a specific period, also known as a profit and loss statement.

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Intangible Assets

Non-physical assets that lack a physical presence but hold value for a company, such as patents, trademarks, copyrights, or brand reputation.

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Internal Rate of Return (IRR)

The discount rate at which the net present value of an investment becomes zero, indicating the expected return on an investment.

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Inventory

The goods or products that a company holds for sale or raw materials used in the production process.

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Investment

The allocation of money or resources with the expectation of generating income or appreciation in value over time.

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Journal Entries

The recordings of financial transactions in chronological order using double-entry bookkeeping, involving debits and credits to maintain the accounting equation.

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Key Performance Indicator (KPI)

Key performance indicators (KPIs) are the core metrics that you and your investors can measure to determine if your business is financially healthy and on track to meet its goals. Tracking KPIs can also give you insight into what’s driving or hindering your business.

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Liabilities

The financial obligations or debts that a company or individual owes to other parties, such as loans, accounts payable, or accrued expenses.

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Limited Liability Company (LLC)

A limited liability company (LLC) is a type of business entity that’s popular for small business owners who want to create a legal separation between their business and personal assets. However, a C corporation is often a better option for startup founders.

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Line of Credit

A pre-approved borrowing limit provided by a bank or financial institution that allows a company or individual to access funds as needed.

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Liquidity

The ability of an asset or investment to be easily converted into cash without significant loss of value.

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Loan

A financial transaction in which money is borrowed from a lender with an agreement to repay the principal amount plus interest over a specified period.

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Market Value

The current price at which an asset or investment can be bought or sold in the market.

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Month Over Month (MoM)

Month-over-month (MoM) measures, such as monthly changes in recurring revenue, are commonly used to analyze software as a service (SaaS) companies.

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Net Income

The total revenue generated by a company after deducting all expenses, taxes, and costs associated with doing business.

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Net Profit

Net profit is also known as your bottom line since it appears at the very end of your profit and loss statement.

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Net Worth

The difference between a person's or company's total assets and total liabilities, representing their overall financial value.

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Operating Cash Flow

The cash generated or consumed by a company's core operations, excluding financing or investment activities.

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Operating Income

The profit generated from a company's core operations, excluding non-operating expenses or revenue.

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Operating Margin

A percentage of a companys revenue that is left over after deducting its operating expenses

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Overhead

The ongoing expenses of running a business that are not directly attributed to the production of goods or services.

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Owners Equity

The residual interest in the assets of a company after deducting liabilities, representing the owner's or shareholders' claim on the business.

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Payback Period

The length of time required for an investment to recover its initial cost through generated cash flows.

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Payroll

The total amount of wages, salaries, bonuses, and deductions paid to employees of a company within a specific period.

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Preferred Stock

A class of stock that usually pays a fixed dividend and has priority over common stock in the event of liquidation.

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Prepaid Expense

An expenditure paid in advance but not yet incurred, representing an asset on the balance sheet until the related benefit is received.

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Present Value

The current value of a future cash flow or sum of money, adjusted for the time value of money and potential interest or investment returns.

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Principal & Interest

The amount of money borrowed (principal) and the additional cost paid for borrowing (interest) in a loan or credit agreement.

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Profit Margin

The percentage of each sales dollar that represents profit after deducting all expenses, indicating the profitability of a company.

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Quarter over Quarter (QoQ)

A comparison of financial or business performance between consecutive quarters of the same year.

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Retained Earnings

The accumulated profits of a company that are reinvested or retained for future use.

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Return on Investment (ROI)

A measure of profitability that calculates the return on an investment relative to its cost.

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S Corporation (S Corp)

An S corporation, or S corp, is a corporation that elects to be treated as a pass-through entity. It’s a popular option for small business owners, but might not be a good fit for startups.

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SEP IRA

A SEP IRA, or Simplified Employee Pension Individual Retirement Account, is a retirement plan option for small business owners that allows them to make tax-deductible contributions to their own retirement account and their employees' retirement accounts.

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Solvency

The ability of a company to meet its long-term financial obligations.

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Stakeholder

An individual or group with a vested interest in the activities, operations, or success of a company, including shareholders, employees, customers, suppliers, and the community.

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Tax

A compulsory financial charge or levy imposed by the government on individuals or businesses to fund public expenditures or projects.

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Tax Deduction

An expense or allowance that reduces the amount of taxable income, resulting in lower tax liability.

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Unearned Revenue

Costs that vary proportionally with the level of production or sales.

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Variable Cost

Costs that vary proportionally with the level of production or sales.

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Venture Capital

Investment capital provided by firms or investors to support early-stage, high-potential, and high-risk businesses.

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W-2 Form

A form provided by employers to employees, summarizing their annual wages, taxes withheld, and other relevant information for income tax purposes.

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W9 Form

The W-9 form is a document used by small business owners to collect the necessary taxpayer information from independent contractors and freelancers for tax reporting purposes.

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Working Capital

The difference between a company's current assets and current liabilities, representing its short-term liquidity and ability to meet short-term obligations.

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Working Capital Ratio

A measure of a company's short-term liquidity, calculated by dividing current assets by current liabilities.

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Write-Off

The removal of an asset or liability from a company's financial records, typically due to it being deemed uncollectible or of no value.

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Year over Year (YoY)

A comparison of financial or business performance between the same period in consecutive years.

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Zero-Based Budgeting

A budgeting approach where all expenses must be justified from scratch for each budgeting period, regardless of previous spending levels.

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