Business Termonology

401k & Roth 401k definition: A 401K is a savings vehicle that allows an employee to defer some of their compensation into an investment-based retirement account. The deferred money is usually not subject to tax until it is withdrawn; however, an employee with a Roth 401K can make contributions after taxes. Additionally, some employers chose to match the contributions made by their employees up to a certain percentage.

401K & Roth 401K

Accounts payable (AP) definition: The amount of money a company owes creditors (suppliers, etc.) in return for goods and/or services they have delivered.

AP

Accounts receivable (AR) definition: The amount of money owed by customers or clients to a business after goods or services have been delivered and/or used.

AR

Method of ACCOUNTING that recognizes REVENUE when earned, rather than when collected. Expenses are recognized when incurred rather than when paid.

Accrual Basis

Company that becomes controlled by another.

Acquiree

Gradual and periodic reduction of any amount, such as the periodic writedown of a BOND premium, the cost of an intangible ASSET or periodic payment Of MORTGAGES or other DEBT.

Amortization

Just like your real estate appraisal when buying a house, an appraisal is a professional opinion of market value. When closing a loan for your small business, you will probably need one or more of the three types of appraisals: real estate, equipment, and business value.

Appraisal

Asset class definition: An asset class is a group of securities that behaves similarly in the marketplace. The three main asset classes are equities or stocks, fixed income or bonds, and cash equivalents or money market instruments.

Asset classes

A professional examination of a company's financial statement by a professional accountant or group to determine that the statement has been presented fairly and prepared using GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP).

Audit

Bonds and coupons (B&C) definition: A bond is a form of debt investment and is considered a fixed income security. An investor, whether an individual, company, municipality or government, loans money to an entity with the promise of receiving their money back plus interest. The "coupon" is the annual interest rate paid on a bond.

B&C

Balance sheet (BS) definition: A financial report that summarizes a company's assets (what it owns), liabilities (what it owes) and owner or shareholder equity ;at a given time.

BS

(Book Value) As an asset is depreciated, it loses value. The Book Value shows the original value of an Asset, less any accumulated Depreciation.

BV

A process by which an accountant determines whether and why there is a difference between the balance shown on the bank statement and the balance of the cash account in the firm's GENERAL LEDGER.

Bank Reconciliation

Legal process, governed by federal statute, whereby the DEBTS of an insolvent person are liquidated after being satisfied to the greatest extent possible by the DEBTOR'S ASSETS. During bankruptcy, the debtor's assets are held and managed by a court appointed TRUSTEE.

Bankruptcy

Capital (CAP) definition: A financial asset or the value of a financial asset, such as cash or goods. Working capital is calculated by taking your current assets subtracted from current liabilities—basically the money or assets an organization can put to work.

CAP

Cash flow (CF) definition: The revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time.

CF

Liabilities (current and long-term) definition: A company's debts or financial obligations incurred during business operations. Current liabilities (CL) are those debts that are payable within a year, such as a debt to suppliers. Long-term liabilities (LTL) are typically payable over a period of time greater than one year. An example of a long-term liability would be a multi-year mortgage for office space.

CL, LTL

Cost of goods sold (COGS) definition: The direct expenses related to producing the goods sold by a business. The formula for calculating this will depend on what is being produced, but as an example this may include the cost of the raw materials (parts) and the amount of employee labor used in production.

COGS

Credit (CR) definition: An accounting entry that may either decrease assets or increase liabilities and equity on the company's balance sheet, depending on the transaction. When using the double-entry accounting method there will be two recorded entries for every transaction: A credit and a debit.

CR

ASSET account on a balance sheet representing paper currency and coins, negotiable money orders and checks, bank balances, and certain short-term government securities.

Cash

BUSINESS COMBINATION of two or more entities that occurs when the entities transfer all of their NET ASSETS to a new entity created for that purpose.

Consolidation

A credit is an increase in a liability or equity account, or a decrease in an asset or expense account.

Credit

(depreciation) Depreciation is the term that accounts for the loss of value in an asset over time. Generally, an asset has to have substantial value in order to warrant depreciating it. Common assets to be depreciated are automobiles and equipment. Depreciation appears on the Income Statement as an expense and is often categorized as a "Non-Cash Expense" since it doesn't have a direct impact on a company's cash position.

DEP

Debit (DR) definition: An accounting entry where there is either an increase in assets or a decrease in liabilities on a company's balance sheet.

DR

A debit is an increase in an asset or expense account, or a decrease in a liability or equity account.

Debit

Diversification definition: The process of allocating or spreading capital investments into varied assets to avoid over-exposure to risk.

Diversification

(Equity) Equity denotes the value left over after liabilities have been removed. Recall the equation Assets = Liabilities + Equity. If you take your Assets and subtract your Liabilities, you are left with Equity, which is the portion of the company that is owned by the investors and owners.

E

Enrolled agent (EA) definition: A tax professional who represents taxpayers in matters where they are dealing with the Internal Revenue Service (IRS).

EA

Assets (fixed and current) definition:Current assets (CA) are those that will be converted to cash within one year. Typically, this could be cash, inventory or accounts receivable. Fixed assets (FA) are long-term and will likely provide benefits to a company for more than one year, such as a real estate, land or major machinery.

FA, CA

Expenses (FE, VE, AE, OE) definition: The fixed, variable, accrued or day-to-day costs that a business may incur through its operations. Fixed expenses (FE): payments like rent that will happen in a regularly scheduled cadence. Variable expenses (VE): expenses, like labor costs, that may change in a given time period. Accrued expense (AE): an incurred expense that hasn't been paid yet. Operation expenses (OE): business expenditures not directly associated with the production of goods or services—for example, advertising costs, property taxes or insurance expenditures.

FE, VE, AE, OE

A fiscal year is the 12 month period that constitutes the start and end of the annual financial records for a business. It does not necessarily correspond to the calendar year. For example, seasonal businesses such as farming often use a fiscal year that ends in the fall.

Fiscal Year

Generally accepted accounting principles (GAAP) definition: A set of rules and guidelines developed by the accounting industry for companies to follow when reporting financial data. Following these rules is especially critical for all publicly traded companies.

GAAP

(Gross Margin) Gross Margin is a percentage calculated by taking Gross Profit and dividing by Revenue for the same period. It represents the profitability of a company after deducting the Cost of Goods Sold.

GM

(Gross Profit) Gross Profit indicates the profitability of a company in dollars, without taking overhead expenses into account. It is calculated by subtracting the Cost of Goods Sold from Revenue for the same period.

GP

Individual retirement account (IRA) definition: IRAs are savings vehicles for retirement. A traditional IRA allows individuals to direct pre-tax dollars toward investments that can grow tax-deferred, meaning no capital gains or dividend income is taxed until it is withdrawn, and, in most cases, it's tax deductible. Roth IRAs are not tax-deductible; however, eligible distributions are tax-free, so as the money grows, it is not subject to taxes upon with-drawls.

IRA, Roth IRA

Limited liability company (LLC) definition: An LLC is a corporate structure where members cannot be held accountable for the company's debts or liabilities. This can shield business owners from losing their entire life savings if, for example, someone were to sue the company.

LLC

reflect a compact accounting of the things the company owns and from which it derives its value. These include tangible assets such as plants, property, and equipment, and intangible assets, such as patents and trademarks.

Left side: assets

This business finance term and definition is a creditor's legal claim to the collateral pledged as security for a loan is called a lien.

Lien

Equity and owner's equity (OE) definition: In the most general sense, equity is assets minus liabilities. An owner's equity is typically explained in terms of the percentage of stock a person has ownership interest in the company. The owners of the stock are known as shareholders.

OE

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.

On credit/On account

Profit and loss statement (P&L) definition: A financial statement that is used to summarize a company's performance and financial position by reviewing revenues, costs and expenses during a specific period of time, such as quarterly or annually.

P&L

Present value (PV) definition: The current value of a future sum of money based on a specific rate of return. Present value helps us understand how receiving $100 now is worth more than receiving $100 a year from now, as money in hand now has the ability to be invested at a higher rate of return.(because of Inflation)

PV

describe the means by which the assets have been financed, either through debt and other ownigs (liabilities) or through the equity that shareholders stumped up, along with retained earnings (shareholders' equity).

Right side: liabilities and shareholders' equity

Subchapter S corporation (S-CORP) definition: A form of corporation (that meets specific IRS requirements) and has the benefit of being taxed as a partnership versus being subject to the "double taxation" of dividends with public companies.

S-CORP

Certified public accountant (CPA) definition: A designation given to an accountant who has passed a standardized CPA exam and met government-mandated work experience and educational requirements to become a CPA.

CPA

(Asset) Anything the company owns that has monetary value. These are listed in order of liquidity, from cash (the most liquid) to land (least liquid).

A

Accounting (ACCG) definition: A systematic way of recording and reporting financial transactions for a business or organization.

ACCG

The recognition of an expense or revenue that has occurred but has not yet been recorded.

Accrual

Series of payments, usually payable at specified time intervals.

Annuity

Method of bookkeeping by which REVENUES and EXPENDITURES are recorded when they are received and paid.

Cash Basis

General ledger (GL) definition: A complete record of the financial transactions over the life of a company.

GL

Net income (NI) definition: A company's total earnings, also called net profit. Net income is calculated by subtracting total expenses from total revenues.

NI

Insolvency definition: A state where an individual or organization can no longer meet financial obligations with lender(s) when their debts come due.

Insolvency

(Liability) All debts that a company has yet to pay are referred to as Liabilities. Common liabilities include Accounts Payable, Payroll, and Loans.

L

Return on investment (ROI) definition: A measure used to evaluate the financial performance relative to the amount of money that was invested. The ROI is calculated by dividing the net profit by the cost of the investment. The result is often expressed as a percentage.

ROI

Trial balance definition: A business document in which all ledgers are compiled into debit and credit columns in order to ensure a company's bookkeeping system is mathematically correct.

Trial balance

The ratio of liquid assets to current liabilities.

acid test ratio

Company that obtains control of another.

acquirer

An acquisition takes place where one company - the acquirer - acquires control of another - the Acquiree - usually through purchase of shares.

acquisition