Small Business Accounting, Tax & Payroll Glossary

Accounting and tax vocabulary can make simple ideas sound complicated. Each entry below explains one term in plain English, with an example and links to official IRS or government guidance where the term has a tax meaning.

A

• Accounts Payable: Accounts payable is the money your business owes suppliers and vendors for goods or services received but not yet paid for.
• Accounts Receivable: Accounts receivable is money customers owe your business for goods or services already delivered.
• Accounts Receivable Aging: An accounts receivable aging report groups unpaid customer invoices by how long they have been outstanding.
• Accrual Accounting: Accrual accounting records income when it is earned and expenses when they are incurred, regardless of when cash moves.
• Accrued Expenses: Accrued expenses are costs a business has incurred but not yet been billed for or paid.
• Accumulated Depreciation: Accumulated depreciation is the total depreciation recorded on an asset since it was placed in service.
• Adjusted Gross Income (AGI): Adjusted gross income is total income minus certain adjustments, a key figure on an individual tax return.
• Adjusting Entries: Adjusting entries are journal entries made at the end of a period so the books reflect revenue and expenses in the correct period.
• Amortization: Amortization spreads the cost of an intangible asset, or the repayment of a loan, over time.
• Assets: Assets are resources a business owns or controls that are expected to provide future economic benefit.
• Audit Trail: An audit trail is the chain of records that lets anyone trace a number in the financial statements back to its source documents.

B

• Backup Withholding: Backup withholding is federal income tax a payer must withhold from certain payments when the payee's taxpayer identification number is missing or incorrect.
• Balance Sheet: A balance sheet shows what a business owns, what it owes and the owners' equity at a specific date.
• Book Value: Book value is the amount at which an asset or a business is carried on the balance sheet.
• Break-Even Point: The break-even point is the sales level at which revenue exactly covers all costs, producing neither profit nor loss.

C

• Capital Account: A capital account tracks each partner's or member's equity in a partnership or LLC.
• Capital Expenditure: A capital expenditure is spending on assets that will benefit the business for more than a year, such as equipment, vehicles or building improvements.
• Capital Gains: A capital gain is the profit from selling a capital asset for more than its tax basis.
• Cash Flow Statement: The cash flow statement shows how cash moved into and out of a business, grouped into operating, investing and financing activities.
• Cash Method Accounting: The cash method records income when money is received and expenses when they are paid.
• Chargebacks: A chargeback is a reversal of a card payment initiated by the cardholder's bank, often after a customer disputes a transaction.
• Chart of Accounts: A chart of accounts is the organized list of every account a business uses to record transactions in its general ledger.
• Clearing Accounts: A clearing account is a temporary account used to hold amounts until they can be matched and moved to their final accounts.
• Constructive Receipt: Constructive receipt means income is taxable when it is made available to you without restriction, even if you have not taken possession of it.
• Contribution Margin: Contribution margin is revenue minus variable costs, the amount each sale contributes to fixed costs and profit.
• Cost of Goods Sold: Cost of goods sold is the direct cost of the products a business sold during a period.

D

• Debits and Credits: Debits and credits are the two sides of every bookkeeping entry; each account type increases on one side and decreases on the other.
• Deferred Revenue: Deferred revenue is money received for goods or services the business has not yet delivered, recorded as a liability.
• Depreciation: Depreciation spreads the cost of a long-lived business asset over the years it is used, rather than deducting it all at once.
• Depreciation Recapture: Depreciation recapture is the portion of gain on the sale of a depreciated asset that is taxed as ordinary income because of earlier depreciation deductions.
• Disregarded Entity: A disregarded entity is a business entity, usually a single-member LLC, that is ignored as separate from its owner for federal income tax purposes.
• Double-Entry Bookkeeping: Double-entry bookkeeping records every transaction in at least two accounts, with total debits equal to total credits.

E

• EBITDA: EBITDA is earnings before interest, taxes, depreciation and amortization, a measure of operating performance.
• EFTPS: EFTPS, the Electronic Federal Tax Payment System, is a free Treasury service for making federal tax payments electronically.
• Estimated Tax Safe Harbor: The estimated tax safe harbor rules let taxpayers avoid underpayment penalties by paying a set share of current or prior-year tax.
• Exempt and Non-Exempt Employees: Non-exempt employees must receive overtime under federal law; exempt employees meet specific tests that remove that requirement.

F

• FICA Tax: FICA tax is the Social Security and Medicare tax paid on wages, shared between employers and employees.
• FIFO and LIFO: FIFO and LIFO are inventory costing methods that decide which purchase costs are assigned to the goods you sold.
• Fiscal Year: A fiscal year is a 12-month accounting period that ends on the last day of any month other than December.
• Fringe Benefits: Fringe benefits are forms of pay other than wages, such as health coverage, vehicles or discounts, which are taxable unless an exclusion applies.

G

• GAAP: GAAP, generally accepted accounting principles, is the standard framework for financial reporting in the United States.
• General Ledger: The general ledger is the complete record of every transaction posted to every account in a business's books.
• Gross Pay and Net Pay: Gross pay is an employee's total earnings before deductions; net pay is the amount actually paid after taxes and deductions.
• Gross Profit: Gross profit is revenue minus cost of goods sold, before operating expenses.
• Guaranteed Payments: Guaranteed payments are payments a partnership makes to a partner for services or use of capital, regardless of profit.

I

• Income Statement: An income statement, also called a profit and loss statement, shows revenue, expenses and profit for a period of time.
• Inventory Shrinkage: Inventory shrinkage is the difference between inventory recorded in the books and inventory actually on hand, caused by theft, damage, errors or spoilage.

J

• Journal Entry: A journal entry records a transaction in the books with equal debits and credits and an explanation.

L

• Landed Cost: Landed cost is the total cost of getting a product to your location ready for sale, including purchase price, freight, duties and fees.
• Liabilities: Liabilities are amounts a business owes to others, such as suppliers, lenders, employees and tax authorities.
• Line of Credit: A business line of credit is a revolving loan that lets a business borrow up to a set limit, repay and borrow again.
• Liquidity: Liquidity is a business's ability to meet short-term obligations with cash or assets that can quickly become cash.
• Lookback Period: The lookback period is the 12-month window the IRS uses to decide whether an employer deposits payroll taxes monthly or semiweekly.

M

• Marginal vs Effective Tax Rate: Your marginal rate is the rate on your next dollar of income; your effective rate is total tax divided by total income.
• Merchant Processing Fees: Merchant processing fees are charges businesses pay to accept card and digital payments, including interchange, network and processor fees.

N

• Net Income: Net income is what remains after all expenses are subtracted from revenue for a period.
• Net Operating Loss (NOL): A net operating loss occurs when allowable deductions exceed income, and can generally be carried forward to reduce taxable income in later years.

O

• Operating Expenses: Operating expenses are the costs of running a business that are not directly tied to producing the goods or services sold.
• Ordinary and Necessary Expenses: Ordinary and necessary is the basic test a business expense must meet to be deductible.
• Owner's Draw: An owner's draw is money a sole proprietor or partner takes out of the business for personal use; it is not a business expense.
• Owner's Equity: Owner's equity is the owners' stake in the business: assets minus liabilities.

P

• Pass-Through Entity: A pass-through entity is a business whose income is generally taxed to its owners rather than to the business itself.
• Payroll Liabilities: Payroll liabilities are amounts a business owes from payroll, such as withheld taxes, employer taxes and benefit deductions, until they are paid.
• Payroll Register: A payroll register is a report listing each employee's earnings, deductions and net pay for a payroll period.
• Prepaid Expenses: Prepaid expenses are payments made in advance for goods or services the business will receive in future periods.

R

• Resale Certificate: A resale certificate lets a business buy goods it will resell without paying sales tax to the supplier.
• Retained Earnings: Retained earnings are a corporation's accumulated profits that have not been distributed to shareholders.

S

• Schedule K-1: Schedule K-1 reports each owner's share of a partnership's or S corporation's income, deductions and credits.
• Self-Employment Tax: Self-employment tax is the Social Security and Medicare tax paid by people who work for themselves, calculated on net earnings from self-employment.
• Shareholder Distributions: Shareholder distributions are payments of profit from an S corporation to its owners, separate from wages.
• Statutory Employee: A statutory employee is a worker treated as an employee for Social Security and Medicare purposes by law, even if otherwise considered an independent contractor.
• Suspense Account: A suspense account temporarily holds transactions whose correct account is not yet known.
• SUTA (State Unemployment Tax): SUTA is the state unemployment insurance tax employers pay on wages, at a rate set by each state.

T

• Tax Basis: Tax basis is the amount the tax law treats as your investment in property, used to figure depreciation and gain or loss.
• Tax Credit vs Tax Deduction: A deduction reduces taxable income; a credit reduces the tax itself, dollar for dollar.
• Taxpayer Identification Number (TIN): A taxpayer identification number is the number the IRS uses to identify a person or entity, such as an SSN, EIN or ITIN.
• Trial Balance: A trial balance lists every account's ending balance to confirm that total debits equal total credits.

U

• Use Tax: Use tax is a tax on taxable goods or services used in a state when sales tax was not collected at purchase.

W

• Workers' Compensation Insurance: Workers' compensation insurance covers medical costs and lost wages for employees injured on the job, and is required by state law for most employers.
• Working Capital: Working capital is current assets minus current liabilities, the resources available to run day-to-day operations.

For step-by-step guides, see our resources, or explore our bookkeeping services.