Business Term Glossary
Accounting Rate of Return (ARR): Ratio of the increased in average net operating income to the investment. AKA, unadjusted rate, book value rate of return or the return on investment.
Accounts Receivable (AR): Amounts due from customers, tenants, clients, or insurance companies.
Accounts Receivable Aging Reports: A financial report that shows the total amount owed to a company, but segmented by columns of how many days the invoice is past due.
Accounts Receivable Turnover: This is the amount of time that it takes for accounts receivable to be paid. Calculated by finding the Average Accounts Receivable: (Beginning AR plus Ending AR)/2. Then NetCredit Sales/Average Accounts Receivable.
Accounts Payable: Current or short term amounts due to vendors who have extended credit to the company. Another name for it is ‘Vendor Payable.’
Accounts Payable Aging Reports: A report that shows the total amount due to vendors and shows how many days the invoices are past due. This report is useful for collecting money from customers. It shows roughly how many days the Accounts Receivable is past due.
Adjusted Basis: The value used when selling a property or an asset. Usually cost plus improvements less any depreciation, accelerated depreciation, tax credits and other adjustments.
Advertising Expense: Marketing, brochures, advertising in newspapers, online. Marketing materials. Trade Show expenses, coupons in local mailers.
Adviser of a Letter of Credit: A bank that sends a letter of credit from the beneficiary to the issuer. It verifies and authenticates the letter of credit during the process. Letters of credit are mostly used in international transactions.
Antecedent Debt: Preexisting Debt.
Asset Turnover: Sales divided by Total Assets.
Backward Vertical Merger: A business merger between a company and one of it’s suppliers.
Bad Debts Expense: These are the amounts that the company has written off from Customers bouncing checks, reversing credit cards or other non-payments. Please don’t lump these in with your sales. This is important information to track and may show ongoing problems before they become large problems.
Balance Sheet: A Financial statement showing the position as of a certain date. This information is important because it shows a snapshot of your company. Many banks and investors use this to evaluate whether or not you will receive a loan or investment. For instance, it should show how much money the business has, how much money have you invested in it and how much money the business owes other people.
Bank Charges: Fees for having an account with a bank or a financial institution.
Bank Loan: An amount of money borrowed from a Bank or other Financial Institution. The Loan needs to be applied for by the Business, often requires disclosure of financial information to the lenders, and has formal contract.
Basis: A business asset cost plus shipping, installation and sales tax. Depreciation, Depletion and tax credits decrease the basis.
Benchmarking: Comparing a company’s numbers to the industry best practices.
Blue Sky Laws: State laws that dictate and prescribe how stock sales are permitted.
Bond: A debt financial instrument that is issued by corporations and governments.
Bookkeeper: A professional accountant who records transactions in an accounting system. Most bookkeepers have 10 to 15 years of experience.
Break Even Point: Total Revenue = Total Expenses. This equation is used in cost analysis, budgeting, and financial analysis.
Brick & Mortar Store: A physical retail location where customers come in to purchase goods/services. Recently there has been talk about the brick and mortar locations becoming showrooms for online shops.
C Corporation: A business entity that sells stock.
Capital Asset: Investments owned by companies or individuals. The investments can be stocks, bonds or other financial instruments.
Capital Budgeting: Budgeting for company purchases that will have a future return. There are a variety of calculating the rate of return for capital projects: payback, NPV, IIR, or ARR methods.
Carrying Costs: The costs to carry or house assets. An example is the warehouse expense to house inventory.
Cash Accounting Method: Reporting revenue and expenses when cash is collected or paid. There may still be some accrual for depreciation or amortization.
Cash and Cash Equivalents: These are the amounts on the Balance Sheet in the top part of the Asset Section. It is usually the cash, plus any cash that is ‘current’ or easily converted to cash (i.e. sold). The categories are usually Cash, Accounts Receivable and other Current Assets.
Cash Conversion Cycle: The amount of time between paying cash for production materials/labor and receiving customer cash. This is an important component of managing cash flow.
Cash Flow: The cash life cycle in a business. It’s a monthly description of the cash flowing in and out of your business. This can be immensely valuable to any business owner. Common large purchases or expenditures for Payroll, Fixed Asset purchases, or large inventory purchases need to be planned for in advance. A good understanding of the cash flow in the business will help you plan for large purchases.
Cash Flow Analysis: A spreadsheet that records the daily use of cash. It’s helpful when planning monthly expenditures, payroll and loan payments. A monthly schedule can highlight the monthly cash flow process.
Cash Flow Statement: A financial statement that describes the how the cash increased or decreases each year. This is usually calculated using the differences in the Balance Sheet using the beginning and ending balances. It shouldn’t be confused with managing the day to day cash flow of the business.
Certified Public Accountant: Professionals who pass a professional competency examination to practice public accounting. CPA’s usually have over ten years of experience. They may work at private companies, at public accounting firms or at governmental agencies. They usually gain proficiency is a particular field or specialty. Be sure to ask for their CV before working with them or hiring them.
Check: A type of voucher that allows other people or companies to withdraw funds from a bank account. Blank checks may be ordered from your bank, an online vendor or a local printer. Be sure to check prices before ordering.
Closely Held Corporation: Only a few investors or family members own the corporation. They usually manage it as well.
Coding Transactions: Assigning a general ledger account or category to a sale, bill payable, or an expense. This is sometimes one of the biggest mysteries of accounting. Try thinking this way: What type of Expense is it? Copy paper = Office Supply Expense; Hotel = Travel or Hotel Expense; Parking = Parking Expense; and renting office = Rent Expense. Give it a try, it may be easier than you think.
Commissions & Fees Paid: These are fees that you pay to commission sales people, online referral systems, or a referral group. These are usually paid once a month or other regular intervals.
Continuing Education (CE): like all professionals this is important because it helps you keep on track with changes in your field. It’s important to remember that if there is a vacation element to the class. Example a cruise to Hawaii, that you may need to mention this at year end to your tax accountant.
Contribution Margin (CM): Sales minus variable costs. It might also be expressed as a sales unit less variable unit costs.
Conversion Costs: Direct Labor and overhead that are necessary to turn the Raw Materials into a Finished Good.
Cost Leadership Strategy: Selling your products/Services at the lowest price. It’s a competitive strategy. The key is not to unintentionally be the lowest priced provider.
Cost of Goods Sold (COGS): How much did the products sold cost?
Credit Card: A plastic card that allows a person to purchase items via an ongoing line of credit established through a financial institution.
Current Ratio: Current Assets divided by Current Liabilities. (Quick Ratio)
Daily Deal Coupons: Using Groupon or Living Social to attract new customers. These coupons don’t work for every business. Be sure to evaluate carefully before pursuing.
Debit Card: A card used for accessing money located in bank accounts.
Debt to Assets Ratio: Debt divided by Total Assets.
Debt to Total Equity Ratio: Debt divided by Total Equity.
Debt to Total Capital Ratio: Debt divided by Total Capital
Décor and decorating: The amount of purchases and improvements for your office. Decorating is a deductible business expense.
Draw: A withdrawal from the company bank account that is paid to the company owner. This is sometimes called a dividend.
Dues & Publications: Amounts for professional Publications, Memberships in professional organizations, or other types of subscriptions.
Economic Order Quantity (EOQ): The amount of product ordered that has the least amount of cost for product and carrying costs.
Employee: A person who works for wages and benefits for the benefit of an employer. Usually they are paid at regular intervals, have a series of laws and regulations that control the relationship, and often contribute a great deal to the success of any company.
Employee Benefit Programs: Medical Insurance, Life Insurance, and other types of benefits purchased on the behalf of employees.
Employee Income: The amount of salary that a worker receives from an employer: This is often negotiated during the hiring or interview process.
Employer: A company that contracts with people to work for salary and benefits.
Equity: The amount invested plus accumulated net income less any withdrawals, and adjustments of equity. Think of it as the lifetime total of all profits less all draws from the company.
Estimated Payments: Prepayments of calculated income taxes to federal and state tax agencies. They may be for personal or corporate income taxes.
Federal Income Tax: The amount of tax that is paid to the federal government or the Internal Revenue Service. Usually the tax is calculated on a 1040, 1065, 1120S or an 1120.
Federal Withholding: The amount the employer withholds from paychecks and remits to the IRS for the employee’s personal income tax.
Fixed Assets: Large purchases that are considered to be used for producing revenue over the course of a more than one year. Examples would be: Office Furniture, Computers, Machinery, Buildings, and Software.
Flexible Budget: A budget that changes when sales units change.
Freight Expense: Shipping or Package Delivery. This may be used for incoming shipments or outgoing shipments.
FUTA: Federal Unemployment Tax. This tax is calculated on the 940 Form with the IRS. Generally, it’s calculated on the first $7,000.00 of a worker’s gross wages. May be subject to change.
Generally Accepted Accounting Principles (GAAP): Rules used by CPA firms and accountants to prepare financial statements, accounting records, and evaluate companies.
Health Insurance Expense: The amounts paid to insurance companies for Health Insurance. Obama care is bringing significant changes to health insurance. Since it’s an ever changing landscape, it’s best to read up on some current information.
Income Statement/Profit & Loss Statement: This shows your net profit and loss for a company. It answers the question: How much did I make during this time period? The first section is the Income or Gross Sales. It then shows a subtotal ‘Total Income.’ The next section is ‘Cost of Goods Sold’ which is the amount it cost you to produce the income or sales in the previous section. The difference between the two is called the ‘Gross Profit.’ Startups often focus on this number as an early indicator of success. The next section is reserved for Operating Expenses. These are the day to day expenses of running the business. Subtract the total operating expenses from the gross profit, and you will have your net loss or income.
Income Tax: A fee or levy on earned income, employee income or investment income. Usually referred to as Federal or State Income Tax.
Incremental Costs: The cost difference to make one more unit. For instance, if you merely need normal variable costs to make one more unit; then the incremental costs is VC. If you need to build a factory to make one more unit, the factory cost is the VC.
Insurance Expense: Insurance that you have purchased on behalf of your corporation. Business liability insurance is important because it protects your company from certain types of damages. Talk to your insurance company for the coverage that you will probably need.
Inventory: Amounts of product produced that is kept on the shelf. These amounts are on the balance sheet, usually under the category ‘Inventory.’ Companies may make their own inventory using labor or raw materials or purchase inventory or products from distributors or manufacturer’s. QuickBooks Online does have some processes for Manufacturing but they aren’t as complex as the desktop version.
Inventory Turnover: Cost of Goods Sold (COGS) divided by Average Inventory.
Janitor: A professional who cleans offices, workplaces, and factories.
Journal Entry: This is a type of transaction that has a Debit and a Credit amount. The amounts of the debits and credits are equal. This is the basis of the modern accounting cycle. It also the reason it’s called ‘double entry’ bookkeeping. It is referring to the debits and the credits. Journal entries are used to record depreciation expense, correct mistakes in data entry, and often used to record transactions when there isn’t any process prebuilt into QuickBooks Online.
Laundry & Cleaning Expense: Do you have uniforms that need to be cleaned? How about Janitorial or Laundry? If you are using your personal laundry, track the utilities, electricity, and water bills, and how many loads of laundry are completed.
Liabilities: The amount of money that is owed to others. Examples are Accounts Payable, Loans Payable, and amounts owed to Customers. They can be future obligations that are due from future revenues. They are usually split into two different groups. Current and Long-Term Liabilities. Current Liabilities are anything due in less than a year. Long-Term Liabilities are due in more than one year.
Loan Ratio: Cash and other assets easily sold divided by the amount of loans.
Local Taxes: Taxes assessed by local municipalities. This may include business licenses, permits and other types of fees.
Manufacturing Overhead: The manufacturing costs that can’t be attributed to direct costs or variable costs. An example would be factory electricity. It would be difficult to assign a particular amount of electricity to a manufacturing unit.
Marginal Costs (MC): Cost to produce one more manufacturing unit.
Marginal Revenue (MR): The revenue produced by selling one more unit.
Meals and Entertainment: Taking your clients or vendors out to lunch is a time honored business expense. However, there are a few rules. Write on the receipt who you had lunch with and the business purpose. In addition, like all business expenses keep the receipt.
Mortgages: Amounts that are due to lenders for the purchase of property. These are usually long term liabilities. Rental properties, Office Buildings, and Land are often purchased with Mortgages. A hallmark is the business property can be repossessed by the lender if there is non-payment of the loan.
Net Book Value: Asset price less the Accumulated Depreciation.
Networking: The art of meeting and making connections with business associates who will provide assistance and you will provide assistance to. Great networking is effortless and well worth the effort.
Nexus and Taxes: Nexus is the way to describe the economic ties between your company and various taxing districts. So if you conduct business in a city/county/state, you could end up owing sales tax/income tax/franchise tax or other types of taxes. Consult your accountant/CPA for specific information on Nexus. The rules are ever-changing and complex and could require some interpretation.
Niche Strategy: Focusing on a narrow market segment to compete.
Office Supplies Expense: Paper, Ink Toner, staples, file folders, tissue, pens and pencils, or Laser jet cartridges. This includes most items purchased at office supply stores.
Opening Balance: A general ledger account that QuickBooks opens when a company file is being created. The first amount is usually opening the bank account. Other amounts are added for past accounts receivable or payable, fixed assets, or existing loans. There may be other adjustments. It’s supposed to be all transferred out of that account to the appropriate equity by your accountant.
Operating Agreement: LLC Membership contract.
Operating Cycle: Cash conversion cycle. How many days it takes to purchase raw materials to receiving customer payments for those products.
Ordinary Income Tax: You will be required to pay ordinary income tax. The amount you will pay will be based on the net income of your business.
Overdraft fee: A Bank fee for overdrawing the bank account.
Overhead: Manufacturing costs that are not labor or material.
Parking/Toll/Ferry Expense: Amounts you pay for business parking. An example would be if you paid to park when taking a client out to lunch.
Payback Method: How much time it will take for a capital investment to repay itself.
Payroll Taxes: There are many different payroll taxes: Federal Income Tax, FICA, Medicare, FUTA, and State Payroll taxes. These taxes and rates can change over time. Be sure to check the current tax rates in your area.
Period Costs: Selling, General and Administrative Costs.
Postage Expense: Postage stamps and shipping expense.
PNL: Profit and Loss or Income Statement.
Point of Sale Software: This is a specific type of either online or PC based software that tracks cash register sales or online sales. It’s possible that it also tracks customer appointments and bookings. Many businesses use POS systems. For example, a restaurant usually has a system for waitress and waiters to use to order items/meals from the kitchen, ring up customers, record tips and run credit cards. They are often essential to doing business. It’s standard in your business to use a Point of Sale system. Consider the extra steps you will need to do to record the sales and work with customers.
Practical Capacity: The most that can be manufactured with current factory space and resources.
Prevention Costs: Quality Control costs.
Prime Costs: Manufacturing direct labor and material.
Price Point: A specific price range for a product for a particular type of customer. A retail customer would pay $60.00 per hour and an insurance company would pay $45.00 per hour as an example.
Profit: Total revenue less total cost.
Quarterly Tax Payments (IRS): 4 payments a year for business owners to pay the current year’s tax liability.
Quarterly Tax Payments (State): 4 payments a year to prepay potential tax liabilities with each state.
QuickBooks: An accounting program that helps millions of small business owners each year keep track of their income and expenses.
Quick Ratio: Cash plus marketable securities plus AR divided by current liabilities. (Current Ratio & Working Capital)
Real Estate Tax Expense: Taxes assessed on property. Landlords may assess renters this tax.
Receipt: A slip or piece of paper that shows the details of a business transaction. Usually, at the point of sale, say you buy groceries, you are given one.
Rent: An amount paid to use an Office Space or Equipment for a specific time period.
Reports: A summary or detailed account of business activity that is compiled from accounting data.
Relevant Costs: Costs that will change when a decision is made. Non-relevant costs are sunk costs.
Retail Sales: Amounts sold directly to end users. It is usually sold at a higher price point than wholesale prices.
Return on Assets (ROA): Profit margin multiplied by Asset turnover.
Return on Investment (ROI): Operating income divided by average operating assets.
Revolving Line of Credit: A bank loan with flexible terms. Typically, the business is approved for an amount. The business can either withdraw or write checks using up to that amount. There are monthly payments of principle and interest.
S Corporation: Corporation that has elected to be a Subchapter S Corporation. If all the requirements are met, the company flows through to the shareholder’s tax returns. Note that there are significant restrictions for this corporation type.
Salary Expense: Gross employee wages.
Sales: The total amount sold to customers during a specific period of time.
Sales Reports: Types of reports that show total dollars, total units and dollars per unit. The basic sales reports in QuickBooks Online can be changed to show more specific information or comparisons to the previous periods.
Sick Time: Some cities are now legally requiring sick time for employees. Sick time can encourage workers to see their doctor and get minor medical issues resolved. The schedule for earning Sick Time is often located in the Employee Handbook.
Sole Proprietorship: One person owns and controls the business. The business and the owner are regarded as the same entity.
Small Business Association (SBA): A government agency that provides training and assistance to small companies. www.sba.gov. Most people are surprised to learn how many resources it has available. In addition to looking at the website, I encourage you to visit a local office.
State Unemployment Tax (SUTA): This is paid and calculated according to state tax laws. Check with a local CPA for the laws in your area.
Sunk Cost: A cost that has already occurred. The sunk cost isn’t considered important for planning purposes. Only future costs are relevant.
Supplies: Supplies for Manufacturing, Store Supplies, etc. Feel free to create different categories of supplies expense. For example, a florist would track Floral Supplies separately from Office Supplies.
Telephone Expense: Amounts paid for Telephone service. This general ledger account may include phone, fax, and internet services. Remote fax services are also under this category.
Travel Expense: This may consist of airfare, lodging and rental cars and taxis for business travel. Be sure to record the reason for the business travel.
Trust Fund taxes: These are the amounts that you withhold from Employee Paychecks and Sales Taxes. You are collecting them on behalf of the tax authorities. One of the chief ways people get into trouble is to use these funds for other items, with the hope that this money gets magically funded by customer sales. Please remember these types of taxes have the highest nonpayment or late fee penalties.
Uniform Franchise Offering Circular (UFOC): A franchise document that is sent before any before a franchise is purchased. It is a regulated description and has some legal requirements to mention specific terms and conditions.
Utilities: Electricity, Water, Security Services, and Heat for office. This is something that can be negotiated with a landlord or rental companies.
Vacation Expense: Amounts paid to employees for Vacation Time. The amount of vacation time is often negotiated during salary negotiations or paid out according to the employee handbook. These amounts need to be accrued if the accounting records are prepared according to GAAP or Generally Accepted Accounting Principles.
Wages: The gross amount of either hourly or salaried workers that they are paid. These amounts are negotiated during the hiring process. In addition, there are minimum wage requirements, contractual amounts for government contracts, and various laws that interact with these amounts.
Web Store: A retail location entirely based on a web site. It typically consists of an online catalog where customers can find goods/services for sale. There is a checkout or a shopping cart section where customers finish their purchases and enter in their personal credit information. Without security systems in place, these are susceptible to hackers and credit card issues.
Wholesale Sales: Sales to customers who resell those products to their customers. It’s important to track these sales vs. retail sales. Wholesale and retail sales often have two different price points and need to be monitored separately.
Wire Transfer: When banks transfer money between bank accounts electronically. This is sometimes recorded as a journal entry in QuickBooks Online.
Workers Compensation: A payroll tax expense or insurance expense that provides insurance to workers who are injured on 0the job or while working.
Working Capital: Cash, Current receivables, and other assets that are cash equivalents. This is something that banks or lenders might look at when considering a loan.
Xero: Xero Accounting is an online accounting system for businesses that do not have inventory. It is a competitor for QuickBooks Online.
Zero Based Budget: Budgeting technique that starts from zero each year. Therefore, any future costs will need to be justified. It helps prevent people from automatically carrying forward budget amounts from the previous year.
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