Glossary of Terms

Chart of Accounts

System of accounting records developed by every organization to be compatible with its particular financial structure, and in agreement with the amount of detail required in its financial statements. It consists of a list of ledger account names and numbers showing classifications and sub-classifications, and serves as an index to locate a given account within the ledger.

Asset

Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities, common stock, preferred stock, and retained earnings.

From an accounting perspective, assets are divided into the following categories:

  • Current assets (cash and other liquid items),
  • Long-term assets (real estate, plant, equipment),
  • Prepaid and deferred assets (expenditures for future costs such as insurance, rent, interest), and
  • Intangible assets (trademarks, patents, copyrights, goodwill)

Liability

An obligation that legally binds a company to settle a debt. When one is liable for a debt, they are responsible for paying the debt. A liability is recorded on the balance sheet and can include accounts payable, taxes, wages, accrued expenses, and deferred revenues. Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period.

Equity

An ownership interest in a corporation in the form of common stock or preferred stock. It is calculated by taking the total assets minus total liabilities; here also called shareholder’s equity or net worth or book value.

  • Income = Revenue = Profit

The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted. Revenue is shown usually as the top item in an income (profit and loss) statement from which all charges, costs, and expenses are subtracted to arrive at net income.

Cost of Goods

An income statement figure which reflects the cost of obtaining raw materials and producing finished goods that are sold to consumers. Cost of Goods Sold = Beginning Merchandise Inventory + Net Purchases of Merchandise – Ending Merchandise Inventory.

For example:

Beginning Merchandise Inventory = $150,000

Net Purchases of Merchandise = $400,000

Ending Merchandise Inventory = $125,000

COGS = 150,000 + 400,000 – 125,000 = $425,000.

In standard accounting practices, gross margin can be calculated by subtracting the cost of goods sold from total sales.

Expense

Any cost of doing business resulting from revenue-generating activities.

Direct

A direct tax will refer to any levy that is both imposed and collected on a specific group of people or organizations. An example of direct taxation would be income taxes that are collected from the people who actually earn their income.

Indirect

Indirect taxes are collected from someone or some organization other than the person or entity that would normally be responsible for the taxes. A sales tax, for instance, would not be considered a direct tax because the money is collected from merchants, not from the people who actually pay the tax (the consumers).

Profit and Loss

The income statement (sometimes called the profit-and-loss statement or P&L) is the first financial statement that you’ll find in the annual report.

Balance Sheet

A quantitative summary of a company’s financial condition at a specific point in time, including assets, liabilities and net worth. The first part of a balance sheet shows all the productive assets a company owns, and the second part shows all the financing methods (such as liabilities and shareholders’ equity).

Inventory

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business’s assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company’s shareholders/owners.

Payroll

The sum total of all compensation that a business must pay to its employees for a set period of time or on a given date. Payroll is usually managed by the accounting department of a business. Small-business payrolls may be handled directly by the owner or an associate.

Employee

A person employed for wages or salary, esp. at nonexecutive level.

Vendor/Contractor

A person or company offering something for sale, esp. a trader in the street.

Customer

A person or organization that buys goods or services from a store or business.

Products

An article or substance that is manufactured or refined for sale.

Services

Perform routine maintenance or repair work on.

Invoice – Immigration

A list of goods sent or services provided, with a statement of the sum due for these; a bill.

Bill – Emigration

An amount of money owed for goods supplied or services rendered, set out in a printed or written statement of charges.

Pre-Venture/Pre-Entrepreneur

Of or pertaining to an investment or investments in new businesses.

Financial Health

Describe the state of one’s personal financial situation, including the amount of savings you have, how much you are setting away for retirement and how much of your income you are spending on fixed or non-discretionary expenses.

Cash accounting

An accounting method where receipts are recorded during the period they are received, and expenses are recorded in the period in which they are actually paid.

Accrual accounting

An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur.

Tax

A compulsory contribution to state revenue levied by the government on workers’ income and business profits or added to the cost of some goods, services, and transactions.

Management Accounting

The provision of financial data and advice to a company for use in the organization and development of its business.