If you’ve every watched Dragon’s Den or Shark Tank you know, as a business owner, you better know your numbers. To know your numbers you need to speak, or at least understand, the basics of accounting and finance.
The following glossary is a list of accounting and finance terms we have developed for our clients to help them build their accounting vocabulary. Hopefully this is helpful to you as well!
Bookmark this page for quick reference.
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Glossary
A
Accrual Accounting
Method of recording revenue when earned and expenses when incurred, regardless of when cash is received or paid.
Accounts Payable (AP)
Money owed by a business to suppliers or vendors.
Accounts Receivable (AR)
Money owed to a business by customers.
Accrued Expenses
Expenses recognized before they are paid (e.g., wages payable).
Accumulated Depreciation
The total depreciation expense recorded for an asset over time.
Activity-Based Budgeting
Budgeting approach that allocates funds based on the activities that drive costs.
Allowance for Doubtful Accounts
Allowance (provision) for Accounts Receivable considered unlikely to be collected.
Amortization
Spreading the cost of an intangible asset (like patents or software) over its useful life. The terms Amortization and Depreciation are often used interchangeably but, in accounting, depreciation refers to tangible assets and amortization refers to intangible assets.
Assets
Resources owned by a business with future economic benefit.
Audit
Independent examination of financial statements for accuracy and compliance.
Audit Trail
Record of transactions showing source documents, approvals, and changes.
B
Bad Debt
Accounts Receivable considered unlikely to be collected.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a point in time.
Learn more about financial statements and how to read them
Bank Reconciliation
Comparing and matching a company’s books (cash balance on the balance sheet) with the corresponding amount on its bank statement to ensure accuracy.
Benchmark Interest Rate / Prime Rate
Base rate used for business borrowing. Typically, businesses will receive a rate of Prime plus a percentage (the spread) that is based on several factors including the borrowers creditworthiness and the type of loan.
Benchmarking
Comparing financial performance against industry peers or competitors.
Bookkeeping
Recording day-to-day financial transactions.
Learn more about bookkeeping
Break-Even Point
The total sales required to break even, i.e. the point at which total revenue equals total costs.
Budget
An estimate of income and expenses for a set period of time.
Learn more about budgeting
Burn Rate
The pace at which a business uses up its cash reserves.
C
Capital
Financial resources available for use, such as equity or debt funding.
Capital Expenditure (CapEx)
Spending on assets expected to provide benefits over time (e.g., equipment).
Capital Lease (or Finance Lease)
A lease treated like an asset purchase for accounting purposes, although the finance company is generally the owner of the asset for the life of the lease.
Carrying Amount (or Carrying Value/Book Value)
The value of an asset or a liability recorded on the balance sheet. Typically, original cost less accumulated depreciation, amortization, or impairment.
Cash Accounting
Recording revenue and expenses only when cash is exchanged. For our purposes, this is not a thing, see accrual accounting for what we use in all cases.
Cash Conversion Cycle (CCC)
Metric that measures the time it takes for a company to convert its inventory and accounts receivable into cash while considering the time it takes to pay its suppliers. The CCC indicates how efficiently a company uses short-term assets and liabilities to generate and redeploy cash.
Days of inventory outstanding (DIO) + Days sales outstanding (DSO) – Days payables outstanding (DPO)
Cash Flow
The net movement of money in and out of a business.
Learn more about cash flow
Chart of Accounts (COA)
A structured list of accounts in the general ledger.
Learn more about the chart of accounts
Closing Entries
Journal entries made at the end of an accounting period to reset temporary account balances to zero (e.g. revenue, expenses, dividends).
Collateral
Assets pledged as security against a loan.
Contribution Margin
Revenue minus variable costs, used to analyze profitability.
Controller (see also, Fractional Controller)
Senior-level manager responsible for overseeing a company’s entire accounting function, ensuring financial data accuracy, managing budgets and payroll, and overseeing tax compliance.
Cost of Goods Sold (COGS)
Direct costs of producing or acquiring goods for resale.
Cost of Sales (COS)
Direct costs of producing or acquiring goods for resale or direct costs of delivering services.
Credit The side of an accounting journal entry that increases liabilities or equity and decreases assets. Not to be confused with when a bank “credits” your bank account, meaning that funds are being deposited into your account. A credit in accounting has the opposite effect.
Current Assets
Assets expected to be converted to cash within a year (e.g., AR, inventory).
Current Liabilities
Debts due within a year (e.g., AP, short-term loans).
Current Ratio
A liquidity ratio that measures a company’s ability to pay its short-term debts.
Current Assets / Current Liabilities
D
Days of Inventory Outstanding (DIO)
Metric that measures the time it takes a business to sell its inventory. A lower DIO indicates the company turns over its inventory quicker (higher inventory turnover ratio).
Average Inventory ÷ Cost of Goods Sold x 365 Days
Days of Sales Outstanding (DSO)
Metric that measures the time it takes a business to collect cash generated from sales. A lower DSO indicates the company collects cash from its customers in a shorter period.
Average Accounts Receivable ÷ Revenue Per Day
Days Payable Outstanding (DPO)
Metric that measures the time it takes a business to pay its obligations to suppliers. A higher DPO indicates the company holds onto cash longer.
Average Accounts Payable ÷ COGS Per Day
Debit
An accounting entry that increases assets and expenses, decreases liabilities and equity. Not to be confused with when a bank “debits” your bank account, meaning that your deposits in your account are being reduced. A debit in accounting has the opposite effect.
Deferred Revenue (Unearned Revenue)
Cash received before goods or services are delivered. Another way of looking at this is, cash received before you have earned the revenue.
Deficit
When expenses exceed revenue (relevant for non-profits). Also can refer to a cash deficit when forecasting cash or analyzing cash flows.
Depreciation
Allocation of the cost of a tangible asset over its useful life. The terms Amortization and Depreciation are often used interchangeably but, in accounting, depreciation refers to tangible assets and amortization refers to intangible assets.
Direct Costs
Expenses that can be traced directly to the production of goods or the provision of services.
Dividends
Profits distributed to shareholders.
Double-Entry Accounting
Method of bookkeeping where every transaction affects at least two accounts, reflecting both a debit and a credit. Each entry must be balanced (net to zero) with the debit side of the entry presented as a positive number and the credit side of the entry reflected as a negative number.
Draw (Owner’s Draw)
Cash withdrawn by an owner from the business.
Due Diligence
A comprehensive investigation of a company’s financial, legal, and operational details before investment.
E
Earnings Per Share (EPS)
Net income divided by outstanding shares. Typically a measure used to assess the performance of public companies, but can be used in any business that has issued shares to it’s owners.
EBIT
Earnings Before Interest and Taxes. Reflects a business’ operational profitability without the effect of capital structure.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization. Similar to EBIT (above), although it omits depreciation and amortization, making it easier to compare companies regardless of their depreciation assumptions or capital structure.
Endowment
Investment fund where the principal is preserved and income is used for non-profit operations.
Equity
Residual interest in assets after liabilities are subtracted. Also known as net assets (assets – liabilities = equity OR net assets = equity)
Escrow
Funds held by a neutral third party until certain conditions (contractual obligations) are met.
Expense
Costs incurred in operating a business, or more importantly, reasonable costs incurred to earn business income (as defined by the CRA).
External Audit
Examination and analysis of financial statements by an independent auditor.
F
Fair Market Value (FMV)
The price for which an asset can be sold in an open market.
FIFO (First-In, First-Out)
Inventory valuation method assuming the oldest items (the first items into inventory) are sold first (the first items out of inventory).
Finance Lease (or Capital Lease)
A lease treated like an asset purchase for accounting purposes, although the finance company is generally the owner of the asset for the life of the lease.
Financial Reporting
Financial reporting is the process of preparing and sharing standardized documents that summarize a company’s financial activities and results over a specific period, providing a comprehensive picture of its financial health to various stakeholders like investors, creditors, and management.
Learn more about financial reporting
Financial Statements
Financial Statements are made up of three core statements. The Balance Sheet, Income Statement, and Cash Flow Statement. Sometimes, a separate Statement of Owner’s Equity is prepared.
Learn more about financial statements and how to read them
Fixed Assets
Long-term resources such as land, buildings, and equipment.
Fixed Costs
Costs that do not vary with production or service delivery (e.g., rent, salaries).
Forecasting
A dynamic prediction of future financial results using current assumptions and current and historical data. This differs from budgeting because a budget is static.
Learn more about forecasting
Fringe Benefits
Non-wage compensation, e.g. health insurance, company car, etc.
Full Disclosure Principle
Accounting principle requiring all material relevant information that could impact the decision making process of the stakeholders to be shared.
Fund Accounting (for profit – e.g. Investment Firms)
A method of accounting where each investment fund is treated as a distinct entity with its own financial records.
Fund Accounting (non-profit)
System used by non-profits to track restricted/unrestricted funds.
G
GAAP (Generally Accepted Accounting Principles)
Standard accounting rules for the preparation and presentation of financial statements.
General Ledger (GL)
Record of all financial transactions.
Goodwill
Intangible value of a company’s brand, reputation, or customer relationships.
Grant
Funds provided by government or foundations, often restricted in use.
Gross Margin (or Gross Profit)
Revenue minus COGS, expressed in dollars or as a percentage of revenue.
Going Concern
Assumption that a business will continue operating for the foreseeable future (usually 12 months).
H
Historical Cost
Recording assets at their original purchase price.
Holding Company
A company without its own operations, that owns shares in other companies or other assets.
Horizontal Analysis
Comparing financial results across multiple accounting periods to identify trends.
I
Impairment
Reduction in an asset’s estimated value to below its carrying amount.
Impact Measurement/Reporting
How non-profits or social enterprises show funders the results of their work.
Income Statement (Profit & Loss)
Financial report showing a company’s revenues, expenses, gains, and losses over a specific period of time. A measure of a company’s profitability using generally accepted accounting principles.
Learn more about how to read an income statement
Incremental Budgeting
Budgeting method that uses the previous year’s budget as a base and adjusts for the upcoming fiscal year.
Indirect Costs
Expenses that are not directly traceable to the production of goods or the provision of services – e.g. administrative costs.
Inflation
Increase in the general price level over time.
Intangible Assets
Non-physical assets like trademarks and patents.
Internal Audit
An independent internal evaluation of the effectiveness of a company’s processes and controls.
Internal Controls
Policies and procedures designed to prevent errors or fraud.
Inventory
Goods held for resale.
Invoice
Document issued to customers requesting payment for specified goods and/or services provided.
J
Journal Entry
Record of a single business transaction in the accounting system.
Joint Venture (JV)
A business arrangement between two or more companies where they maintain their separate operations but work on the venture in a shared capacity, pooling resources, expertise, and capital.
Just-in-Time (JIT)
Inventory strategy minimizing stock by receiving goods only as needed.
K
Key Performance Indicator (KPI)
A quantifiable measure of performance over time.
L
Landed Cost
Total cost of a product once it has arrived at the buyer’s location (includes production, freight, duties, handling).
Leasehold Improvements
Modifications made to a leased property.
Leverage
Using borrowed funds to increase return potential.
Liabilities
Debts and financial obligations of a business.
Liquidity
Ease and ability with which an asset can be converted to cash quickly and without a material impact on the market price.
Loan Covenant
Conditions imposed by lenders which requires the borrower to maintain certain financial metrics. Used by the lender to assess the financial health of the company.
Long-Term Debt
Obligations due beyond one year.
M
Margin (%) (or Gross Margin %)
The amount of gross profit, expressed as a percentage of the selling price.
e.g. Selling Price = $100, Cost of Goods = $75, Gross Profit = $25, Gross Margin % = $25/$100 = 25%
Markup (%)
Amount added to the cost of a product or service to arrive at a selling price. This differs from Margin as Markup is expressed as a % of the cost.
e.g. Cost of Goods = $75, Markup % = 33.33%, Selling Price = $75+($75×33.33%) = $100
Materiality
Threshold for determining whether an item is significant and would affect the decision making process of the stakeholders.
Matching Principle
Accounting principle that requires expenses are matched (recorded in the same accounting period) with the revenues they help generate.
N
Net Assets
Total assets of an entity minus its total liabilities.
Net Income
Profit after all expenses, taxes, and interest.
Net Worth
Total assets minus total liabilities.
Notes Payable
Written promises to pay a debt.
O
Operating Expenses (OPEX)
Day-to-day costs not tied to production, i.e. indirect costs.
Operating Income
Profit from core operations (see also, EBIT).
Opportunity Cost
Value of the next best alternative forgone.
Overhead
Ongoing business expenses not directly tied to production.
Owner’s Equity
Value of a business attributable to owners.
P
Payroll
Compensation paid to employees.
Petty Cash
Small cash fund for incidental expenses.
Prepaid Expenses
Payments made in advance for expenses relating to future accounting periods.
Present Value (PV)
Value today of a future cash flow.
Profit Margin
Percentage of revenue that is profit.
Provision
Liability of uncertain timing or amount.
Q
Quick Ratio
Measure of a company’s ability to meet its short-term obligations, excluding inventory.
(Current Assets – Inventory) / Current Liabilities
Qualified Opinion
Auditor’s statement that financials are fairly presented except for certain issues that prevent a clean (unqualified) opinion.
R
Ratio Analysis
Use of financial ratios to evaluate a company’s performance, such as liquidity (e.g., current ratio = current assets / current liabilities) and profitability (e.g. return on equity = net income / shareholders’ equity).
Receivables Turnover
Measure of how quickly Accounts Receivable is collected.
Net Credit Sales / Average Accounts Receivable
Restricted Funds
Contributions designated by donors for a specific use.
Retained Earnings
Net profits that are retained by or reinvested into the business.
Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings
Revenue
Income generated or earned from its primary activities.
Return on Assets (ROA)
Measure of how efficient a company is at using its assets to generate profits.
Net Income / Total Assets
Return on Equity (ROE)
Measure of how efficient a company is at generating profits from its equity.
Net Income / Shareholder’s Equity.
Reconciliation
Process of matching accounts (e.g., bank vs. books).
Runway (sometimes referred to as cash burn runway)
How long cash reserves will last at the current burn rate.
S
Sarbanes-Oxley Act, The (SOX)
US federal law enacted to protect investors and the public from fraud by improving the accuracy and reliability of financial reporting for public companies by more closely monitoring corporate governance and internal controls.
Shareholder’s Equity
A company’s net worth, representing total assets remaining after all liabilities are paid off.
Short-Term Debt
Liabilities due/payable within one year.
(SKU) Stock Keeping Unit
A unique identification code used to track and manage inventory or billable services.
Slotting Fees (Listing Fees)
Payments to retailers for placing a product on shelves or gaining initial distribution.
Subsidiary
Company controlled by another company (parent).
Suspense Account
Temporary account for transactions pending final classification or adjustment. In most cases we should not be using these.
T
Taxable Income
Income subject to tax after deductions and adjustments.
Temporary Accounts
Accounts reset each period (e.g., revenues, expenses).
Trade Spend
Discounts, coupons, slotting fees, and other incentives given to retailers/distributors.
Trend Analysis
Reviewing financial results across multiple periods to identify whether key items like revenue, expenses, or margins are increasing, decreasing, or stable.
Trial Balance
Report listing all general ledger account closing balances.
U
Unearned Revenue (Deferred Revenue)
Cash received before goods or services are delivered. Another way of looking at this is, cash received before you have earned the revenue.
Unit Economics
The measurement of an items profitability on a per-unit basis. More simply put, the measurement of a single units revenue and direct costs.
Unrealized Gain/Loss
Change in value of an asset not yet sold.
V
Valuation
Process of estimating worth of an asset or business.
Variable Costs
Costs that change with production volume or level of output.
Variance Analysis
Quantifying and comparing actual vs. budgeted performance to understand the cause and make informed decisions.
Velocity
Sales per store per week (often used as a measure of product performance).
Vendor
Supplier of goods or services.
W
WACC (Weighted Average Cost of Capital)
Company’s average cost of financing from all capital sources (debt and equity).
Working Capital
Amount of cash and other current assets a business has available after accounting for current liabilities.
Current Assets – Current Liabilities
Write-Down
A reduction in the estimated or nominal value of an asset.
Write-Off
Recording an entry to record losses relating to assets that are no longer recoverable, e.g. bad debts, unpaid loans receivable, lost/damaged inventory.
X
Admittedly we didn’t have anything for the letter X, but one of our generous clients shared the following:
XRBL (eXtensible Business Reporting Language)
A standardized digital format for exchanging business and financial data, widely used for regulatory filings (e.g., SEC in the U.S., European Securities authorities). It makes financial information computer-readable and easier to analyze across companies.
Y
Yield
Income return on an investment, expressed as a percentage.
Year-End Close
Process of finalizing accounts at year-end by reviewing, reconciling and verifying all financial transactions from the past fiscal year.
Z
Zero-Based Budgeting
Budgeting approach where each expense must be justified for each new period, rather than using the prior fiscal year as a baseline.
Zombie Company
A business that earns just enough to keep operating but cannot pay down debt.
Find Financial Clarity with Origin
If you are looking for more than just short definitions of specific terms, Origin Accounting & Advisory helps owners and management teams across Canada turn numbers into insights. Book your free consultation today!
