This glossary of Financial Terms may help you to better understand the terminology used in our industry and is intended as a reference for informational purposes. We recommend that you contact your attorney, accountant or other business professional for advice specific to your business.

Accounts payable
Accounts receivable
Accrual basis accounting
Amortization
Asset
Audit
Bad debt
Balance sheet
Barter
Break-even analysis
Capital expenditure
Capitalization
Cash basis accounting
Cash flow
Collateral
Commercial loan
Cost of goods sold
Credit rating
Current assets
Current liabilities
Current ratio
Debenture
Depreciation
Disbursement
Extraordinary item
Factoring
First in, first out (FIFO)
Fiscal year
Fixed expenses
Gross profit
Income statement
Last in, first out (LIFO)
Liabilities
Lien
Liquid assets
Markup
Modified accelerated cost recovery system (MACRS)
Net income
Operating expenses
Operating profit/loss
Overhead
Principal
Pro forma
Profit
Quick ratio
Receivables
Receivables financing
Retained earnings
Return on investment
Sales projection
Turnover
Variable expenses
Working Capital


Accounts payable
Money a company owes to suppliers who have provided goods or services on credit.

Accounts receivable
Money owed to a company by customers who purchased goods or services on credit.

Accrual basis accounting
An accounting method in which income is reported when earned and expenses when incurred. See Cash basis accounting.

Amortization
The gradual reduction of an obligation, for example a loan, through regular payments over a specified period of time.

Asset
Any item that has economic value, i.e. which can be converted to cash.

Audit
An examination of a company’s financial and accounting records conducted by an independent professional to assess whether the company’s records conform to generally accepted accounting principles.

Bad debt
Accounts Receivable that appear uncollectible and will be deducted from net income, or written off.

Balance sheet
A statement of a company’s financial position at a particular point in time, summarizing the company’s assets, liabilities, and owner’s equity.

Barter
The exchange of goods or services without using money.

Break-even analysis
A calculation of the sales volume required to cover costs. Sales above this level are profitable, and below this level are unprofitable.

Capital expenditure
Money spent to acquire or upgrade long-term assets such as buildings or machinery.

Capitalization
The total amount of a company’s long-term debt, stock and retained earnings.

Cash basis accounting
An accounting method that reports income when received and expenses when cash is paid. See accrual basis accounting.

Cash flow
The difference between a company’s cash receipts and cash disbursements in a particular period.

Collateral
Assets pledged as security for a loan, which can be claimed by the lender if the borrower defaults.

Commercial loan
A renewable short-term loan used to cover a company’s working capital needs.

Cost of goods sold
The direct costs of a given product, for example wholesale cost of the clothing sold by a retailer in a particular period.

Credit rating
An assessment of a company’s ability to repay its obligations, based on a detailed assessment of its financial history.

Current assets
Assets such as cash, accounts receivable, inventories, and marketable securities that can be converted to cash in less than one year.

Current liabilities
Obligations such as salaries, accounts payable, loans, and other debts that are due within one year.

Current ratio
Current assets divided by current liabilities; the higher the ratio, the better the company’s ability to pay its short-term obligations. See quick ratio.

Debenture
Unsecured debt backed only by the integrity of the borrower, i.e. without the use of collateral. The terms of a debenture are documented by an indenture.

Depreciation
The amount by which the cost of an asset is allocated over time; it is used in part to prepare financial statements and calculate tax liabilities.

Disbursement
A payment towards the discharge of an obligation, such as accounts payable or a loan.

Extraordinary item
A one-time event that significantly affect’s a company’s finances, such as the purchase or sale of a major asset.

Factoring
A method of financing in which a business sells its accounts receivable to a third party– called a factor–often for a percentage of the amount outstanding.

First in, first out (FIFO)
An accounting method for cost of goods sold that uses the oldest items in inventory first. See last in, first out (LIFO).

Fiscal year
A period of any consecutive 12 months used for accounting purposes. A fiscal year may or may not correspond to a calendar year.

Fixed expenses
Business expenses that don’t vary depending on production or sales levels; examples might include rent, property taxes, insurance, or interest expenses. See variable expenses.

Gross profit
Sales minus the cost of goods sold.

Income statement
A financial statement that tracks a business’ sales and operating costs over a given period of time; also called a profit and loss (P&L) statement.

Last in, first out (LIFO)
An inventory accounting method that ties the cost of goods sold to the cost of the most recent purchases. See first in, first out (FIFO).

Liabilities
In accounting, the debts your business owes; may include accounts payable, taxes owed, long-term loans, etc.

Lien
A legal claim against an asset used to secure a loan; a lien generally must be paid when the property is sold.

Liquid assets
An asset that can easily and inexpensively be turned into cash, such as cash itself, money market funds, treasury bills, or bank deposits.

Markup
The amount added to the cost of goods to produce a desired profit.

Modified accelerated cost recovery system (MACRS)
The rate at which the value of a fixed asset is depreciated for tax purposes.

Net income
Total income minus expenses; generally translates to a company’s profit.

Operating expenses
Expenses associated with running a business, which may not be directly applicable to current products or services being sold; examples might include sales and marketing, research and development, or administrative costs.

Operating profit/loss
A company’s profit or loss before taking into account deductions of interest payments and income taxes; also called earnings before interest and taxes, or EBIT.

Overhead
Ongoing business expenses that cannot be directly linked to a specific business activity, but are necessary for the business to run efficiently; examples might include rent, utilities, insurance, indirect labor costs, etc.

Principal
The amount of a loan borrowed, or the part of the loan that remains unpaid, on which interested is owed.

Pro forma
A type of financial statement that has assumptions or hypothetical conditions built into the data; often used for projected balance sheets or income statements.

Profit
The positive difference between revenue minus cost.

Quick ratio
A financial ratio that measures a company’s liquidity, it is calculated by dividing current assets less inventories by current liabilities. The optimal quick ratio is 1 or higher. Also called the acid test ratio.

Receivables
Money owed to a company by customers who purchased goods or services on credit; also called accounts receivable.

Receivables financing
A form of financing in which a company sells its accounts receivable at a discount to a third party (see factoring), or uses them as collateral against a loan.

Retained earnings
Earnings that are not paid out as dividends but are instead reinvested into the business or used to pay off debt.

Return on investment
The income that a particular investment provides.

Sales projection
An estimate of the amount of sales over a specific period of time.

Turnover
The number of times a given asset is replaced during an accounting period; often used to measure inventory or accounts receivable.

Variable expenses
Business costs that fluctuate from period to period based on sales volume; might include material or labor needed to manufacture a product. See fixed expenses.

Working Capital
Current assets minus current liabilities; it is used to measure the assets a company needs to carry on its work.

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