As a CEO, you’re busy every day managing numerous tasks, challenges, opportunities and priorities. At the same time, you need to be conversant with the language of business, and that includes core accounting terms. In this article, we continue our ongoing series on the essential accounting terms that every small business owner needs to know.
Editor’s Note: This article is the fifth in an ongoing series designed to provide small business owners with a clear understanding of essential accounting terminology. To read prior articles in the series, please visit:
- Understanding Small Business Accounting Terminology — Part 1 (A through C)
- Understanding Small Business Accounting Terminology — Part 2 (D through F)
- Understanding Small Business Accounting Terminology — Part 3 (G through I)
- Understanding Small Business Accounting Terminology — Part 4 (J through M)
- Understanding Small Business Accounting Terminology — Part 5 (N through S)
It’s essential that small business owners know the language of accounting, since accounting is the language of business. With that in mind, here are essential terms worth exploring, covering those that begin with the letters T through Z:
Tangible Asset – Any asset of the business that exists physically. This may include cash, land, real estate, equipment or machinery, as well as claims on property or investments.
Target Costing – A pricing method that identifies the price at which a product will compete successfully in them marketplace; the desired profit margin to be made on the product; and a target cost for the product (that is achieved by subtracting the desire profit from the competitive market price).
Tax – Any ongoing charge levied by a governmental unit on income, consumption, wealth or other basis by requirement of law.
Tax Basis – The original cost of an asset, minus accumulated depreciation, that in turn goes into the calculation of a gain or loss for tax purposes.
Tax Shelter – An arrangement in which allowable tax deductions or exclusions result in the deferral of tax in income that would otherwise be presently payable.
Tax Year – The annual period used to compute a taxpayer’s taxable income. Typically it is either a calendar year or a fiscal year.
Taxable Income – A taxpayer’s adjusted gross income during the tax year, less any allowable exemptions and/or deductions.
Term Loan – A loan for a specified time period (as opposed to a revolving line of credit, which remains available for use on an ongoing basis).
Time Value of Money – The concept that cash flows of equal dollar amounts separated by a time interval have different present values because of the effect of compounding interest.
Total Capitalization – The capital structure of a company, including long-term debt and all forms of equity in the business.
Transaction – For accounting purposes, a transaction is any event, condition or activity that requires recognition by an entry in the accounting books of the business.
Transfer Price – The price charged by individual entities in a multi-entity corporation for transactions among themselves. For example, if one division of the corporation sells equipment to another division, the amount of this transaction is a transfer price.
Treasurer – The officer of a company who is responsible for the receipt, custody, investment and disbursement of funds, as well as for borrowing and (in a public company) maintaining a market for the company’s securities. In a non-profit organization the board may appoint an officer as treasurer. In many private, non-public companies, the duties of a treasurer are fulfilled by a controller or Chief Financial Officer (CFO).
Trial Balance – A process used to confirm final figures before generating an entity’s financial statements. It involves placing debits and credits on a worksheet to ensure that any current balances are correct.
Underwrite – To underwrite is to assume the risk associated with a security or a loan. For example, when a loan is undertaken by a bank, the bank is underwriting the loan.
Unearned Income – Payments received by an entity for services which have not yet been performed, or products that have not yet been shipped.
Unrestricted Funds – In a nonprofit organization, unrestricted funds are those funds raised or collected by the organization that are not restricted in how they may be used by the organization in the performance of its various functions.
Valuation – The process of evaluating and assessing a business (or a security) to assess and identify its present value to a potential buyer.
Variable Costs – Total costs that change in direct proportion to changes in the nature of the production output itself.
Variable Rate Loan – A loan whose interest rate changes over its life in relation to the level of an index.
Variance – Any deviation or difference between an estimated value and the actual value. For example, in manufacturing a variance is used to record and monitor any discrepancies between budgeted production costs and actual costs incurred.
Vesting – The point at which certain benefits available to an organization’s employee are no longer contingent on the employee continuing to work for the employer. Typically, this is associated with defined benefit plans (pensions) whereby an employee will received the full value of the pension, once eligible, at or after the point of vesting.
Withholding – The amount of funds deducted or withheld from an employee’s pay by the employer and paid by the employer, on the employee’s behalf, to one or more statutory taxing authorities.
Work in Progress (WIP) – In industrial or construction enterprises, WIP is an inventory account consisting of partially completed goods awaiting completion and then transfer from WIP to finished inventory.
Working Capital – Funds available as the excess of current assets over current liabilities, which may be invested in the day-to-day operation of the business if desired.
Worksheet – A type of working paper used by an accountant, auditor or CPA as a preliminary step in the process of preparing financial statements.
Yield – The return on investment (ROI) that an investor receives from the dividends and/or interest from a given investment, expressed as a percentage of the cost of the investment security itself.
Write-Down / Write-Off – An accounting transaction that reduces the value of an asset.
Want to learn more about these terms, or explore additional terms relevant to your business? Use the links at the top of this article to visit previous articles in this series.
In the meantime, speak to your small business CPA today to learn how you can become more conversant – and confident – with essential accounting terms that are relevant to the growth of your business!
Image Credit: George Redgrave (Flickr @ Creative Commons)