Accounting Terms 101

Meeting with your accountant can be a stressful endeavor. They often use terms that non-accountants may not understand. The following is a list of terms that can help you better understand what your accountant is talking about the next time that you meet with them.

• Balance Sheet – Consists of assets (resources owned by a company with value, ex. cash, equipment, inventory), liabilities (debts or obligations owed to others, ex. loans, accounts payable) and equity (ownership interest in a company, ex. retained earnings, dividends, common stock). Balance sheets are often used on corporate returns and are not required for businesses that are reported on a personal tax return. It is encouraged that all businesses use a balance sheet to better evaluate how their business is performing.

• Tax Return – A form filed with the tax authority to report income and calculate taxes owed. There are three main kinds of tax returns that we prepare in our office: 1040 personal tax returns, 1120 corporate tax returns and 1065 partnership tax returns.

• Tax Year – The period for which taxes are calculated and reported. (usually a calendar year, but some of our corporate tax returns have a fiscal tax year where the year-end is on a month other than the month of December)

• Filing Status – A taxpayer’s marital and family status, which affects their tax liability. (Used on personal returns, ex. married filing joint, married filing separate, head of household, and single)

• Sales Tax – Tax levied on the sale of goods and services.

• Dependent – A person who relies on another for financial support.

• Taxable Income – The amount of income subject to taxation.

• Deduction – An expense that can be subtracted from income to reduce tax liability.

• Standard Deduction – Is a fixed amount that can be deducted from taxable income.

• Itemized Deductions – Specific expenses that can be deducted from taxable income, such as medical expenses, charitable contributions, and mortgage interest.

• Tax Bracket – A range of income subject to a specific tax rate.

• Tax Rate – The percentage at which income is taxed.

• Income Tax – Tax levied on income earned by individuals or businesses.

• Capital Gains Tax – Tax on profits from the sale of assets.

• Tax Liability – The total amount of tax owed.

• Credit – A direct reduction in the amount of tax owed.

• Withholding – Taxes withheld from an employee’s paycheck by the employer.

• Estimated Tax Payments – Tax payments made throughout the year by self-employed individuals and other income sources not subject to withholding.

• Cash Basis Accounting – An accounting method that recognizes revenue when cash is received and expenses when the cash is paid. (Most tax returns use the cash method)

• Accrual Basis Accounting – Records revenue and expenses when earned/incurred, not just when cash is received/paid.

• Accounts Receivable – Money owed to a company by its customer for goods or services sold on credit.

• Accounts Payable – Money owed by a company to its suppliers for goods or services sold on credit.

• Depreciation – The systematic allocation of the cost of a tangible asset over its useful life. (for major purchases on assets over a value of $2,500, we depreciate the cost over the useful life of the asset set by the tax code)

• Tax Code – The body of laws that govern taxation.

• Tax Avoidance – Legally reducing one’s tax liability.

• Tax Evasion – Illegally failing to pay taxes.

• Generally Accepted Accounting Principles (GAAP) – A set of rules and standards for financial reporting.

• Audit – An independent examination of a company’s financial statements to ensure that they are accurate and fairly presented.

• Tax Audit – An examination of a taxpayer’s tax return by the tax authority.

When in doubt, always ask your accountant to clarify what they are explaining.