Financial Glossary
Learn essential financial terms and accounting definitions.
204 terms across 8 categories
Understanding financial terminology is the first step toward making confident business decisions. Whether you're reading a balance sheet for the first time, reviewing a loan agreement, or preparing for tax season, knowing exactly what terms like "accounts receivable," "accrual basis," and "depreciation" mean gives you the clarity to manage your money instead of guessing.
This glossary covers 204 financial and accounting terms organized alphabetically, with plain-language definitions, practical examples, and explanations of why each concept matters for small business owners and freelancers. Every definition is written for people running businesses, not for accountants studying for an exam.
A
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accounts Receivable
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Amortization
The gradual reduction of a loan balance or spreading the cost of an intangible asset over its useful life.
Accrued Expenses
Expenses that have been incurred but not yet paid.
Adjusting Entries
Journal entries made at the end of an accounting period to update account balances.
Adjusted Gross Income
Gross income minus specific deductions like retirement contributions.
Alternative Minimum Tax
A parallel tax system to prevent high earners from avoiding taxes.
Amended Return
A corrected tax return filed to fix errors on an original return.
ACH
Automated Clearing House - an electronic network for financial transactions.
APR
Annual Percentage Rate - the yearly cost of borrowing including fees.
APY
Annual Percentage Yield - the real rate of return on savings including compound interest.
AR Aging
A report categorizing outstanding invoices by age.
Accounts Reconciliation
Ensuring account balances match between different records.
Asset Allocation
The mix of different asset classes in a portfolio.
B
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
Bookkeeping
The process of recording daily financial transactions including sales, purchases, payments, and receipts.
Bad Debt
Accounts receivable that cannot be collected and must be written off as an expense.
Bonus Depreciation
Additional first-year depreciation deduction on qualifying business assets.
Bank Reconciliation
Matching bank statements with internal records to identify discrepancies.
Business Checking
A bank account designed for business transactions.
Business Loan
A loan used to fund business operations, expansion, or purchases.
Business Credit Score
A rating of a business creditworthiness from agencies like Dun & Bradstreet.
Burn Rate
The rate at which a company spends cash monthly.
Billing Cycle
The recurring period between billing statements.
Break-Even Point
The sales volume at which revenue equals costs.
Budget
A financial plan estimating income and expenses.
Bonus
Additional one-time payment on top of regular compensation.
Bond
A debt security where the issuer owes the holder payment.
C
Cash Accounting
An accounting method that records revenues and expenses only when cash is received or paid.
Chart of Accounts
A complete list of all accounts used by a business to record financial transactions.
Cost of Goods Sold
The direct costs of producing goods sold by a company, including materials and labor.
Credit
In bookkeeping, an entry on the right side of an account that increases liabilities and decreases assets.
Current Assets
Assets expected to be converted to cash or used within one year.
Current Liabilities
Obligations due within one year.
Closing Entries
Journal entries that transfer temporary account balances to permanent accounts at period end.
Contra Account
An account that offsets the balance of a related account, such as accumulated depreciation.
Cost Accounting
A method of accounting focused on capturing production and operational costs.
Capital Gains
Profit from selling an asset for more than its purchase price.
Capital Loss
Loss from selling an asset for less than its purchase price.
Collateral
An asset pledged as security for a loan.
Compound Interest
Interest calculated on both principal and accumulated interest.
Credit Score
A numerical rating of creditworthiness based on credit history.
Cash Flow
The movement of money in and out of a business.
Cash Flow Forecast
A projection of expected cash inflows and outflows.
Cash Flow Statement
A financial statement showing cash movements from operations, investing, and financing.
Cash Conversion Cycle
Time between paying for inventory and receiving payment from customers.
Cash Reserves
Money set aside for emergencies or unexpected expenses.
Credit Memo
A document reducing the amount owed by a customer.
Collections
The process of pursuing payment on overdue invoices.
Capital Expenditure
Funds used to acquire or upgrade physical assets.
Current Ratio
Current assets divided by current liabilities.
C Corporation
A standard corporation taxed separately from its owners.
Commission
Variable pay based on sales or performance.
Compound Returns
Returns earned on both principal and previous gains.
D
Debit
In bookkeeping, an entry on the left side of an account that increases assets and decreases liabilities.
Depreciation
The gradual reduction in the value of an asset over time due to wear and tear.
Double-Entry Bookkeeping
An accounting system where every transaction affects at least two accounts, with debits equaling credits.
Direct Deposit
Electronic payment of wages directly into a bank account.
Default
Failure to meet the legal obligations of a loan.
Days Sales Outstanding
Average days to collect payment after a sale.
Dunning
The process of sending payment reminders for overdue invoices.
Debt-to-Equity Ratio
A measure of financial leverage comparing debt to equity.
Dividend
A distribution of profits to shareholders.
Diversification
Spreading investments across different assets to reduce risk.
E
Equity
The owners stake in a business after all liabilities are paid.
Expense
The cost incurred in operating a business, such as rent, utilities, and salaries.
Estimated Taxes
Quarterly tax payments made by self-employed individuals and businesses.
Effective Tax Rate
The average rate at which income is taxed.
Estate Tax
Tax on the transfer of assets from a deceased person.
Economic Nexus
Tax nexus based on sales volume or transaction count in a state.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization.
Employee Benefits
Non-wage compensation like health insurance and retirement plans.
Exempt Employee
An employee not entitled to overtime pay under FLSA.
ETF
Exchange-Traded Fund - a tradable investment fund.
F
Fiscal Year
A 12-month period used for accounting and tax purposes.
Fixed Asset
A long-term tangible asset used in business operations, such as buildings or machinery.
FIFO
First In, First Out - an inventory valuation method assuming oldest items are sold first.
Financial Accounting
Accounting focused on reporting to external stakeholders like investors and regulators.
Forensic Accounting
Investigation of financial records to detect fraud or support litigation.
Federal Income Tax
Tax levied by the federal government on personal and business income.
Form 1099
IRS forms reporting various types of income other than wages.
Form W-2
Annual statement from employers showing employee wages and taxes withheld.
FICA
Federal Insurance Contributions Act taxes fund Social Security and Medicare.
Form W-4
Employee form that determines federal tax withholding from paychecks.
Free Cash Flow
Cash from operations minus capital expenditures.
Financial Forecast
A prediction of future financial performance.
Financial Statements
Reports summarizing financial performance and position.
Fixed Costs
Expenses that remain constant regardless of production.
FLSA
Fair Labor Standards Act - federal law governing wages and hours.
Form I-9
Employment eligibility verification form.
FUTA
Federal Unemployment Tax Act - employer tax for unemployment.
G
GAAP
Generally Accepted Accounting Principles - the standard framework for financial accounting in the US.
General Ledger
The master accounting document containing all financial transactions of a business.
Gross Profit
Revenue minus cost of goods sold, showing product profitability before operating expenses.
Goodwill
An intangible asset representing the premium paid for a company above its tangible asset value.
Gross Income
Total income from all sources before deductions or taxes.
Gift Tax
Tax on the transfer of assets as gifts above annual exclusion limits.
Gross Margin
Gross profit as a percentage of revenue.
Gross Pay
Total earnings before any deductions.
H
I
Income Statement
A financial statement showing revenues, expenses, and profits over a period of time.
Inventory
Goods held for sale or materials used to produce goods.
Independent Contractor
A self-employed individual who provides services to clients.
IRS
The Internal Revenue Service - US government tax collection agency.
Itemized Deductions
Individual deductions claimed on Schedule A instead of the standard deduction.
Interest Rate
The percentage charged for borrowing money.
Invoice
A document requesting payment for goods or services.
L
Liability
A financial obligation owed by a business to others.
LIFO
Last In, First Out - an inventory valuation method assuming newest items are sold first.
Line of Credit
A flexible loan allowing businesses to borrow up to a limit as needed.
Loan
Money borrowed that must be repaid with interest.
Liquidity
The ease with which assets can be converted to cash.
Late Fee
A charge applied when payment is not received by the due date.
LLC
Limited Liability Company - a business structure with liability protection.
M
Matching Principle
Recording expenses in the same period as the revenues they helped generate.
Materiality
The significance of an item relative to the overall financial statements.
Management Accounting
Accounting focused on providing information for internal decision-making.
Marginal Tax Rate
The tax rate applied to the last dollar of income.
Merchant Account
A bank account that allows businesses to accept card payments.
Mortgage
A loan secured by real estate property.
Medicare
Federal health insurance program funded by payroll taxes.
Mutual Fund
An investment vehicle pooling money from many investors.
N
Net Income
Total revenue minus all expenses, taxes, and costs - the bottom line profit.
Negative Cash Flow
When cash outflows exceed inflows in a period.
Net 30
Payment terms requiring payment within 30 days.
Net 15
Payment terms requiring payment within 15 days.
Net 60
Payment terms requiring payment within 60 days.
Net Worth
Total assets minus total liabilities.
Net Pay
The amount received after all deductions.
Non-Exempt Employee
An employee entitled to overtime pay under FLSA.
O
Overdraft
When a bank account balance goes negative.
Operating Cash Flow
Cash generated from core business operations.
Overhead
Ongoing expenses not directly tied to production.
Operating Expense
Day-to-day costs of running a business.
Overtime Pay
Additional compensation for hours worked beyond 40 per week.
P
Prepaid Expenses
Expenses paid in advance before they are incurred, recorded as assets.
Payroll Tax
Taxes withheld from employee wages for Social Security and Medicare.
Property Tax
Tax on real estate based on assessed property value.
Principal
The original amount borrowed on a loan.
Positive Cash Flow
When cash inflows exceed outflows in a period.
Payment Terms
Conditions specifying when and how payment is due.
Pro Forma Invoice
A preliminary invoice sent before delivery.
Profit Margin
Net income divided by revenue as a percentage.
Profit and Loss
Another name for the income statement.
Partnership
A business owned by two or more individuals.
Payroll
The process of calculating and distributing employee wages.
Pay Period
The recurring interval for calculating wages.
Paycheck
A check or deposit for employee wages.
Portfolio
A collection of investments held by an investor.
Q
R
Retained Earnings
Cumulative profits kept in the business rather than distributed as dividends.
Revenue
Total income from sales of goods or services before any expenses are deducted.
Runway
The time a company can operate before running out of cash.
Recurring Invoice
An invoice automatically generated on a regular schedule.
Retainer
An advance payment for ongoing services.
Return on Investment
A measure of profitability comparing profit to investment.
Revenue Recognition
The accounting principle determining when revenue is recorded.
Risk Tolerance
An investors ability and willingness to lose money.
S
Subsidiary Ledger
A detailed ledger for a specific account like accounts receivable or payable.
State Income Tax
Tax levied by state governments on personal and business income.
Standard Deduction
A fixed dollar amount that reduces taxable income.
Schedule C
IRS form used by sole proprietors to report business income and expenses.
Self-Employment Tax
Social Security and Medicare taxes paid by self-employed individuals.
Sales Tax
A consumption tax charged on retail sales.
Section 179
A tax provision allowing immediate expensing of certain business assets.
Simple Interest
Interest calculated only on the principal amount.
SBA Loan
A small business loan partially guaranteed by the Small Business Administration.
Sole Proprietor
A business owned and operated by one person.
S Corporation
A tax election allowing pass-through taxation with salary requirements.
Salary
Fixed annual compensation regardless of hours worked.
Social Security
Federal retirement and disability program funded by payroll taxes.
Stock
A share of ownership in a company.
T
Trial Balance
A report listing all account balances to verify that debits equal credits.
Tax Audit
An examination of tax returns by the IRS to verify accuracy.
Tax Deduction
An expense that reduces taxable income.
Tax Bracket
Income ranges that are taxed at specific rates.
Tax Credit
A dollar-for-dollar reduction in taxes owed.
Taxable Income
Income subject to tax after all deductions and exemptions.
Tax Return
A form filed with the IRS reporting income, deductions, and tax liability.
Tax Refund
Money returned when tax payments exceed actual tax liability.
Tax Liability
The total amount of tax owed to the government.
Tax Withholding
Amount deducted from employee wages for taxes.
Tax Extension
An extension of time to file a tax return, not to pay taxes owed.
Tax Penalty
A fine for late filing, late payment, or underpayment of taxes.
Tax Year
The 12-month period for which taxes are calculated and reported.
Tax Nexus
A connection between a business and a state that creates a tax obligation.
Term Loan
A loan with a fixed repayment schedule over a set period.