Glossary
Let’s be honest, accounting and tax terminology can feel confusing, especially for small business owners, entrepreneurs, and nonprofit leaders who already have a lot on their plates. This glossary breaks down common accounting, bookkeeping, tax, and financial terms into plain, easy-to-understand language. It’s meant to serve as a quick reference, not a textbook, so you can spend less time decoding terminology and more time focusing on what matters most - running your business or organization.
A
Accrual Accounting – Records income and expenses when earned or incurred, not when cash moves.
Accounts Payable (AP) – Money owed to vendors or suppliers.
Accounts Receivable (AR) – Money owed to the business by customers.
Assets – Items of value owned by a business, such as cash, equipment, or inventory.
Audit – A formal review of financial records for accuracy and compliance.
B
Balance Sheet – A snapshot of assets, liabilities, and equity at a specific date.
Bookkeeping – The ongoing recording of financial transactions.
Business Entity – The legal structure of a business (LLC, corporation, sole proprietorship).
C
Cash Flow – The movement of money in and out of a business.
Cash Basis Accounting – Records transactions when cash is received or paid.
Chart of Accounts – A categorized list of all accounts in the accounting system.
Cost of Goods Sold (COGS) – Direct costs tied to producing goods or services.
Capital – Funds used to start or operate a business.
D
Deductions – Expenses that reduce taxable income.
Depreciation – Spreading the cost of an asset over its useful life.
Distributions – Payments made to business owners or shareholders.
E
EIN (Employer Identification Number) – A federal tax ID issued by the IRS.
Equity – The owner’s interest in a business after liabilities.
Estimated Taxes – Quarterly tax payments made throughout the year.
F
Financial Statements – Reports that summarize financial performance and position.
Fiscal Year – A 12-month accounting period that may differ from the calendar year.
Fixed Assets – Long-term assets such as buildings, vehicles, or equipment.
G
Gross Income – Total income before expenses or deductions.
General Ledger – The master record of all financial transactions.
Grant Income – Funding received by nonprofits that generally does not require repayment.
H
Home Office Deduction – A deduction for eligible business owners using part of their home for business.
Hybrid Accounting – A mix of cash and accrual accounting methods.
I
Income Statement (Profit & Loss) – Shows revenue, expenses, and net income over a period.
Independent Contractor – A self-employed individual who provides services to clients.
Internal Controls – Procedures designed to prevent errors or fraud.
J
Journal Entry – A record of a financial transaction entered into the accounting system.
K
Key Performance Indicators (KPIs) – Metrics used to evaluate financial or operational performance.
K-1 (Schedule K-1) – A tax form reporting income from partnerships and S corporations.
L
Liabilities – Debts or obligations owed by a business.
Liquidity – A business’s ability to meet short-term financial obligations.
Loss Carryforward – Net losses applied to future tax years.
M
Margins – The difference between revenue and costs, often shown as a percentage.
Materiality – The significance of financial information in decision-making.
Mission Statement – A nonprofit’s purpose and guiding principles.
N
Net Income – Profit remaining after all expenses and taxes.
Nonprofit Organization – An entity formed to serve a charitable or public purpose.
Nexus – A connection that creates tax obligations in a state.
O
Operating Expenses – Costs required to run daily business operations.
Owner’s Draw – Money taken out of the business by the owner.
P
Payroll – Compensation paid to employees.
Payroll Taxes – Taxes related to employee wages and salaries.
Pass-Through Entity – A business where income passes to the owner’s tax return.
Profit Margin – A measure of business profitability.
Q
Quarterly Estimated Taxes – Periodic tax payments made throughout the year.
QuickBooks – Widely used accounting software for small businesses and nonprofits.
R
Reconciliation – Matching accounting records to bank or credit card statements.
Revenue – Income earned from normal business activities.
Restricted Funds – Nonprofit funds limited to specific uses by donors.
S
Sales Tax – Tax collected on taxable sales and remitted to authorities.
Self-Employment Tax – Social Security and Medicare taxes paid by self-employed individuals.
Startup Costs – Expenses incurred before a business begins operations.
Statement of Cash Flows – A report showing how cash moves through a business.
T
Tax Planning – Proactive strategies to minimize tax liability.
Tax Credits – Direct reductions of taxes owed.
Taxable Income – Income subject to taxation.
U
Unrelated Business Income (UBI) – Taxable income earned by nonprofits outside their mission.
Unrestricted Funds – Nonprofit funds without donor limitations.
V
Voluntary Withholding – Extra tax withheld to avoid underpayment penalties.
Variable Expenses – Costs that change based on activity level.
W
Write-Off – A deductible business expense.
Working Capital – Current assets minus current liabilities.
X
X-Date (Fiscal Year-End) – The closing date of an accounting period.
Y
Year-End Closing – The process of finalizing financial records for the year.
Z
Zero-Based Budgeting – A budgeting method where every expense must be justified each period.