The following is a glossary of some commonly used accounting and bookkeeping terms:
Accruals: Charges that are incurred and increase even though an invoice has not been received. An example is interest that accrues before you receive a bank statement.
Amortization: The depreciation of an intangible asset such as a loan or mortgage over a fixed period of time.
Burn Rate: The rate at which a company spends money.
Capital: An amount of money put into a business.
Credit: A column in a journal or ledger to record the “from” side of a transaction.
Cost of Goods Sold: A formula for determining the direct cost of merchandise sold over a given period.
Days Sales Outstanding: The average number of days it takes to collect money owed.
Debit: A column in a journal or ledger to record the “to” side of a transaction.
EBIT: Earnings before interest and taxes are deducted.
EBITDA: Earnings before interest, taxes, depreciation and amortization are deducted.
Equity: The net value of a business, calculated by subtracting liabilities from assets.
FIFO: This means first in, first out. It is a method of valuing inventory.
Fiscal Year: A business’s accounting year. It can begin at any point during the calendar year.
Gross Margin: The percentage difference between the selling price of a product or service and the cost of producing that product or service.
Income Statement: A report that summarizes all income and expense accounts and is used to calculate the net income/loss reported on the balance sheet.
Liabilities: Amounts owed to others outside the business.
LIFO: This means last in, first out. It is a method of valuing inventory.
Normalize: This term can be applied to many aspects of accounting. It means to average or smooth out a set of figures so they are more consistent with the general trend of the business.
Profit and Loss Account (P&L): An account composed of revenue and expense accounts. The P&L shows the current profit or loss of the business.
Profit Margin: The percentage difference between the cost of a product and the amount it sells for.
ProForma Financial Statements: Financial statements that have not been officially audited.
Retained Earnings: The amount of money held in a business after the owners have taken their share of profits.
Revenue: The sales and any other taxable income from all sources including sales.
Run Rate: An annual forecast based on current year-to-date figures.
Selling, General and Administrative Expenses (SG&A): Overhead or expenses involved in running a business.
Write-off: An asset that is depreciated to zero.