A Glossary of Financial Terms
Whenever Dave Mulcahy (of the Small Business Development Center) works with a business, he shares a “basic” 22-page spreadsheet that allows businesses to track all financial information, including income statements, balance sheets, cash flow reports, amortization, depreciation, and basic ratios.
Here’s a brief glossary provided by Mulcahy for the terms you’ll find in that spreadsheet, which will allow you to better read profit-and-loss (P&L) statements:
- Accounts Payable: These entries represent a company’s obligation to pay off bills to its creditors.
- Accounts Receivable: The money the company is owed from clients.
- Amortization: Paying off of debt with a fixed repayment schedule in regular installments over a period of time.
- Assumptions: Expected costs for a business. Assumptions are used to enable companies to plan and make decisions in the face of uncertainty.
- Cost of Goods Sold: The direct costs attributable to the production of goods (aka material and labor costs) sold in a company.
- Current Assets: These items represent the value of all assets (like accounts receivable, prepaid expenses) that you can expect to convert into cash within one year.
- Depreciation: Allocating the cost of a tangible asset (includes fixed assets) over its useful life. For tax purposes, businesses can deduct the cost of tangible assets as business expenses.
- Fixed Assets: A long-term, tangible piece of property that a company owns (equipment, land) that will not be converted into cash within one year’s time.
- Prepaid Expenses: When a business pays for good and services to be used in the near future. For example, you purchase insurance in case something unfortunate happens.
- Liabilities: Financial debt that arises during the course of its business operations. Liabilities are used to finance operations and pay for large expansions.