Understanding Financial Terms
Running a business of any kind can be overwhelming, especially with many new terms. Use this glossary learn the meaning behind many of the common terms used in business financials.
Glossary Index
Accounts Payable
Amounts owed by a business to its suppliers, usually as a result of credit purchases for inventory or services, other expenses (i.e. utilities) or taxes.
Accounts Receivable
Amounts owed to a business by its customers
Accruals
Amounts due to but not yet disbursed, sales tax collected but not yet sent on etc.
Asset
Anything of value owned and used by a business. Assts maybe tangible or intangible and may include accounts and notes receivable, cash, inventory, equipment, real estate, goodwill. Etc.
Bad Debts
Accounts receivable that aren’t collectable
Balance Sheet
A financial report at the end of an accounting period to give a detailed picture of the financial condition of a business as of a specific date.
Budget
An estimate of future income and expenditures over an accounting period (quarterly, yearly etc.) used as a financial control for business.
Capital
The owner’s equity in the business. It can take the form of the proprietor’s capital, or if incorporated, that of common stock, preferred shares and retained earnings.
Cost of Sales / Cost of Goods Sold
Abbreviated as COGS also called Cost of Sales. Direct cost of producing or providing the business’s goods or services. It includes direct labour costs and production overhead plus opening inventory plus purchases less closing inventory.
Current Assets
Cash and other assets that, in the normal course of operations, may be converted into cash, or consumed int the production of income within one year from the date of the Statement of Financial position. They include cash, accounts receivable, inventory and prepaid expenses.
Current Liabilities
Outstanding debts o f the business that are payable within one year of the Statement of Financial Position. They include credit lines, accounts payable, accruals (ex: Sales tax collected) income tax and current portion of long-term debt.
Depreciation
The decline of the value of equipment or other assets over time.
Dividends
Company earnings that are paid to stockholders.
Equipment
All machinery and equipment, items of fixed assets, used by the business to earn revenue. It has a limited lifespan and thus subject to depreciation.
Financial Statements
Formal reports, prepared from accounting records, describing the financial position and performance of the business. They comprise the Statement of Financial position, the Income Statement, the Statement of Changes in Financial Position.
Fixed Assets
Also called capital assets. Property or equipment, not intended to be sold, owned by a business for use in its operations and expected to have a useful life of several fiscal periods. Included in this are land, buildings, vehicles, furniture and equipment.
Fixed Costs
Amounts that do not vary with changes in the volume of sales or production ( i.e.. Rent, depreciation, interest payments).
Gross Profit
Net Sales less Cost of Good Sold. It represents the profit made by the business before deducting selling, administrative and financial expenses.
Income Statement
A financial report showing revenues, expenses and net income or net loss of a business over an accounting period.
Interest
The amount of money charged the borrower for the use of money.
Inventory
Dollar value of all stock or physical items that a business uses in its production process or has for sale.
Leasehold Improvements
Renovations and other improvements done to the leased property at the expense of the lessee.
Liabilities
Amounts owed by the business to its creditors, not necessarily to be paid immediately. An obligation to remit money or services at a future date, i.e. accounts payable, loans.
Long-Term Liabilities
Outstanding term loans less the current portion that are not due within the next 12 months.
Net Profit
The difference when all revenues is larger than all expenses during the same accounting period.
Overhead
Costs not directly attributable to the production of a good, i.e. salary of manager, property taxes.
Prepaid Expenses
Expenses paid in advance during and accounting period, part of which will be used up in the upcoming accounting period. The unused portion of the expense is considered a current asset and recorded of such.
Retained Earnings
In a corporation, the amount earned but not yet distributed to stockholders
Shareholders Equity
Net assets (minus liabilities) that belong to owners of the business.