Confused About Accounting Terms? Here’s a Primer

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.