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 third 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)
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, beginning with the letters G through K:
- GAAP – Stands for Generally Accepted Accounting Principles. GAAP is a combination of clearly defined standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. The highest level of these standards is set in the U.S. by the Financial Accounting Standards Board (FASB).
- Gain – The additional amount of revenues received above costs in a specific transaction.
- GAO – The U.S. Government Accountability Office, the independent federal agency that serves as the auditing and accounting offices for the U.S. government as a whole. The GAO reports directly to the U.S. Congress.
- General Ledger – The record that brings together all asset, liability, owners’ equity, revenue and expense accounts for the enterprise. Also referred to commonly as the “GL”.
- Gift – In tax accounting, a gift is a valid, recognized transfer of property from one taxpayer to another without consideration, and with no compensation. Under IRS code, a gift may the subject to the gift tax or estate tax.
- Going Concern – The term used to describe the assumption that a given business can remain in operation on a continuing basis, without risk of premature or unexpected closure.
- Goodwill – The premium paid for the acquisition of an entity that is over and above the fair value of its identifiable tangible and intangible assets, less the liabilities that are assumed through the acquisition.
- Gross Margin – The difference between Net Sales and Cost of Goods Sold (COGS).
- Guaranty – The legal promise by one person or entity to provide for the obligations of a second person or entity, to a third person or entity in the event that the second person or entity fails to perform in accordance with the terms of the agreement.
- Historical Cost – The original cost of an asset to an entity. This is distinct from Mark-to-Mark or Fair Value accounting. Historical cost accounting is an accounting method in which the assets listed on a company’s financial statements are recorded based on the price at which the assets were purchased.
- Holding Period – In tax planning, the holding period represents the time between the date when a taxpayer acquires property and the date upon which the property is sold.
- Improvement – In accounting, an improvement is the expenditure directed to the improvement or enhancement of the value, capacity, capabilities, performance or useful life of an asset.
- Income – The revenue received by the business during a given period of time.
- Indirect Cost – A cost that cannot be clearly and specifically assigned to a specific department or one that is not assignable directly the production of a specific product, and therefore must be assigned through a method of allocation.
- Intangible Asset – An asset that does not have a physical existence but has real and definable value to the enterprise, such as a patent or trademark.
- Internal Control – A process designed to provide reasonable assurance regarding the company’s financial processes and procedures, thereby reducing risk exposure.
- Inventory – The tangible property of a business that is held for sale, or the materials used in the process of manufacturing a product that will be held for sale.
- Inventory Turnover – The ratio that defines the number of times a company’s average inventory is sold during a given accounting period.
- Invoice – The bill produced by a seller of goods or services, and submitted to the purchaser for payment.
- IRA – Stands for Individual Retirement Account, a personal savings plan that allows an individual to make cash contributions each year dependent on the individual’s adjusted gross income and participation in an employer’s retirement plan. Under a traditional IRA, these earnings are not taxable until the time of withdrawal from the plan.
- Issue – In finance, an issue is the stock or bonds sold by a corporation or government entity at a particular point in time.
Want to learn more about these terms, or explore additional terms relevant to your business? Stay tuned for future installments 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!