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A Glossary of Financial Terms

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Financial Terms
Here’s a brief glossary of terms that will allow you to better read profit-and-loss (P&L) statements.

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.

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