When starting a new business or filing your business taxes for the first time, there are number of terms a person should know. Below are our top 10 accounting and 10 tax terms business owners should familiarize themselves with.
Accounting Terms – Top 10
1. Balance Sheet – a financial statement of a business’ assets, liabilities, and capital/equity at a particular point in time
2. Profit and Loss Report/Income Statement – A financial statement reporting on a company’s income, expenses, and profits over a stated period
3. General Ledger – A ledger listing each account number and account name, the various transactions that occurred, the date of each transaction, a description of the transaction, and the monetary value of each transaction
4. Trial Balance – A list of all the General Ledger accounts and the value of that account at a specific point in time.
5. Accrual-Based Accounting – 1 of 2 primary bookkeeping method – Organized accounting by recognizing revenue and expenses as they are incurred – Example – You get a bill for services rendered in July but do not pay until September – Expenses recognized in July
6. Cash-Based Accounting – Second primary bookkeeping method – organized accounting by recognizing revenue and expenses when received/paid – Example – You get a bill for services rendered in July but do not pay until September – Expenses recognized in September
7. Depreciation/Amortization – Recognizing the cost of an asset (Equipment, machinery, building, proprietary software, etc.) over time and spreading the deductions across its useful life – Depreciation is for tangible assets, amortization for intangible assets – Example – A car is purchased for $10,000 on January 1 202X and has an expected life of 5 years - $2,000 will be expensed in each year
8. Cost of Goods Sold (COGS) – Total direct cost to produce the goods or services that a company provides – it includes price of materials, direct labor, production overhead (factory rent, utilities, etc.) but does not include marketing, sales, or general admin costs.
9. Capital/Equity – The value left over for investors/owners when assets are subtracted from liabilities
10. Accrued Expense – An expense which has been incurred but not paid
Tax Terms – Top 10
1. M-1/M-3 Adjustments – Reconciliation between book income and taxable income, showing differences between two
2. Bonus Depreciation: Tax law allows for certain capital assets to be completely expensed in the year of purchase (common M-1/M-3 adjustment)
3. Section 179 – Akin to Bonus depreciation, different rules and limitations apply to which capital assets may be expensed under Section 179
4. Basis – Similar to capital/equity but with some differences – Starting point for determining whether you have a gain/loss when selling your business or whether you can deduct current year business losses. The basis typically starts out as what you paid for the property, adding income, and subtracting losses. Other factors may increase or decrease basis, but owners need to consult tax professionals to determine ultimate basis.
5. Nondeductible Expenses – Tax law does not allow certain expenses to be deducted against taxable income. These include but are not limited to tax penalties, federal taxes paid, entertainment, 50% of meals, political donations, bribes, officer/partner life insurance, and lobbying expenses.
6. Sole Proprietorship – An unincorporated business that’s owned and operated by a single person, revenue for these businesses is considered personal income and is included on a taxpayer’s personal income tax return
7. Partnership – A business entity that exists for federal tax purposes when one or more persons join to carry on a trade or business and share in the profits and losses. Partners in a partnership may NOT receive wages/salaries
8. S-Corp – A business entity which is a corporation with no more than 100 shareholders and passes its income through to the shareholders akin to a partnership. As a result It pays no corporate taxes. Shareholders may receive salaries/wages.
9. C-Corp – Any corporation that is taxed separately from its owners, may have more or less than 100 shareholders
10. Tax Year – A term describing the 12-month period covered by a tax return. As a result, you typically file a return for a specific tax year in the subsequent year. While not required, many businesses elect to be on a calendar year end, meaning their returns cover the period from January 1st-December 31st of a given year