Dictionary of Accounting Terms

It involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level. The $1,000 amount is entered as debit to increase the company’s expense account and the same amount is listed as a credit to decrease the cash account. A stakeholder summary includes quarterly financial statements. They cover three months of the business’s financial activities. On credit or on account means that products or services have been sold with the use of credit. Payment has not immediately been provided for these items, and there may be terms on account that may result in interest charges. While not everyone has the opportunity to study accounting, a CEO needs to possess knowledge of all aspects of a successfully-run business, even when a company is hiring outsourced bookkeeping.

Operating expenses are expenses that are paid as part of a business’s day-to-day https://accounting-services.net/ operations. This includes equipment, inventory, payroll, and marketing costs.

Cash Method vs. Accrual Method of Accounting

If a business sells a stereo system for $1,000 that only cost the business $700 then gross profit would be $300. Gross profit is calculated by subtracting the cost of the goods from the revenue brought in. This is one way analysts compare efficiency of delivery between companies or even products within the same company. A restaurant’s accountant used details from the general ledger to produce a trial balance, income statement, balance sheet and cash flow statements. A debit is an accounting entry on the left column of a company’s balance sheet that shows either an increase or decrease in the firm’s assets or liabilities. It is one of the two entries on a double-entry accounting method. It’s usually generated quarterly or annually, but it’s always compared to previous years’ performance and expectations.

Learn these terms before your accounting classes start and you will definitely be a step ahead of everyone else in your classes. An enrolled agent is a finance professional legally permitted to represent people and businesses in Internal Revenue Service encounters. EAs must earn licensure from the IRS by passing a three-part exam or accruing direct experience as an IRS employee. Some students enter accounting programs with little technical knowledge — and that is OK. This guide is an easy-to-use resource for developing the vocabulary accounting professionals use. It was developed for students and entrepreneurs to build their familiarity with accounting vocabulary.

Estate Tax

In addition discounted stock options do not qualify for Incentive Stock option treatment. (ISO there is no payroll tax orwithholdingrequirements for ISO’s) – If company mistakenly treats backdated stock as an ISO the company my fail to meet payroll tax andincometax withholding requirements. A ratio for measuring the relative size of a company’s accounts receivable and the success of itsCREDITand collection policies during anaccountingperiod.

Net profit is how much money the business has made after subtracting every single expense. Net loss is how much money the company lost after this same calculation if profit is negative. Fixed expenses are payments that are the same each period, like rent or mortgage. Diversification is the process of spreading investments into varied assets.

Sum-of-the-Years-Digits Method

An expense is a type of cost, but the two are not exactly the same. A cost is a one-time amount that is spent to acquire an asset. These expenditures apply to the organization as a whole, are generally static, and are incurred even if the organization does not operate for some period of time. A reduction in the value of an asset as that asset is used to generate revenue. The language of accounting can seem perplexing at first, especially when some words that we use in everyday transactions take on different meanings in a financial context. By understanding a few dozen foundational terms, you will be on track to talk about, and manage, money with confidence. A limited liability company is a business structure in which the owners are not personally accountable for company debts or liabilities.

Insolvency is when a business or individual cannot meet debt obligations with lenders. There are two forms of insolvency—cash-flow insolvency and balance-sheet insolvency. Cash-flow insolvency can usually be solved by negotiation while balance-sheet Accounting Terms insolvency may end with bankruptcy. Inflation is the rising costs of goods and services over time. A company reported a quarterly gross margin of 35%, meaning that it retained 35 cents from each dollar of generated revenue.

Liability

Supplies – Consumable materials used in business and replenished as needed. Supplies are not inventory for sale; rather they are used to carry out business activities. Retained Earnings – Money left after all the bills have been paid and all the shareholder dividends have been distributed; often reinvested in the business. Non-operating Income – Income not generated from the business. Liability – Liabilities are the obligations of an entity, usually financial in nature. In The Black – Makes reference to a profit on the books; opposite of “in the red.” Black Friday sales are known for the profit retailers are adding to their books. Goodwill – Intangible asset a business enjoys like its reputation or brand popularity.

A temporaryaccountused during the closing process that holds a summary of allREVENUESand EXPENSES before theNET INCOMEorlossis transferred to the capital account. An individual entitled to specialtaxrates that fall midway between single rates and married filing joint rates, if they fit the qualifying profile. Official legal documents that dictate how an entity is operated. A validtransferof property from one taxpayer to another without consideration or compensation. Agiftmay be subject to the unified estate and gifttransfer tax.

Payroll refers to a business’ running costs, including rent and salaries. A large company has a building destroyed in a hurricane and after insurance reimbursement, it reports a loss of $10,000. Since the company has a net income of $10 million, the loss is immaterial since the loss is only .1% of its net come.

Netofcashreceipts and cash disbursements relating to a particular activity during a specifiedaccountingperiod. INTERESTcost incurred during the time necessary to bring anASSETto the condition and location for its intended use and included as part of theHISTORICAL COSTof acquiring the asset. Outlay of money to acquire or improve capital assets such as buildings and machinery. Standardrate multiplied by a level of activity to determine theOVERHEADcost of that activity. The average number of days required to sell the current inventory of products available for sale. It is found by dividing the number of days in a year by inventory turnover.

A company receives a bank statement each month documenting deposits, withdrawals and account balance. Allocation is a term that represents the process of assigning funds to different accounts or periods. 18.She was considering giving up working as an accountant for that company and becoming a self-employed freelancer because the ___ she had to pay was lower. She also had the expertise to file her own tax return, which was an additional advantage.