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)

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 N through S:

• Net Assets – The value represented by the difference between securities, receivables, cash and other owned assets, and the liabilities that a nonprofit entity possesses. The term is used in the nonprofit sector and is similar to Net Worth in the for-profit sector.
• Net Income – The excess or deficit of the total revenues or gains of the company, compared with the total expenses or losses, as determined over a given accounting period (typically a month, quarter, year or year-to-date evaluation).
• Net Present Value (NPV) – A method used in evaluating investments in which the value of all cash outflows and cash inflows is calculated using a defined discount rate, which is usually defined as the required rate of return.
• Net Proceeds – The amount that is received from the sale or disposition of a property; from a loan; or from the sale or issuance of securities, after all transaction costs have been deducted.
• Net Worth – The amount of an equity that a company possesses, i.e. the difference between its total assets and total liabilities. This is similar to equity, defined as the excess of assets when compared to liabilities.
• Obligations – Any amount by which the company or entity is required to make payment to another party at a present or future point in time.
• Operating Agreement – The agreement by which the rules of a limited liability company (LLC) are to be operated. It is the functional equivalent of the bylaws for a corporation or partnership.
• Operating Cycle – The period of time between the acquisition of goods and services used in production and the final realization of cash received from the sale and subsequent collection of payment.
• Operating Expenses – The combination of sales expenses and general and administrative expenses incurred by the company (also referred to as SG&A).
• Operating Lease – A specific type of lease (typically used for equipment leases) in which the contract is written for a period of time significantly shorter than the full lifetime of the equipment, and the lesser covers all maintenance and servicing. Operating leases are often used to acquire equipment on a short-term basis.
• Overhead – The fixed expenses or indirect costs of operating the company (i.e. the costs incurred which are not directly related to the production of a product or the delivery of a service). These typically include rent, administrative costs and marketing expenses.
• Ordinary Income – As defined by the Internal Revenue Service (IRS), ordinary income is one of two primary classes of income. Ordinary income typically includes earned income and all other forms of income except income obtained through capital gains. Traditionally, ordinary income has been taxed at a higher rate than income from capital gains (i.e. investment income).
• Owner’s Equity – The total value of the residual interest in the assets of a business entity that is present after deducting the entity’s total liabilities.
• Partnership – A relationship between two or more persons based upon an agreement to carry on business activities or trade for profit and share the profits that result from the venture. Unlike the shareholders of a corporation, general partners in a partnership are liable for the debts of the entity.
• Passive Income – Income that is derived from such sources as interest, royalties, dividends, rents and estate or trust beneficiary interests.
• Payables Management – The process of managing and administering the outstanding debts (or liabilities) of an entity, to vendors for credit-based purchases (i.e. purchased on one date and paid on a different date) which have been made to obtain goods and/or services.
• Periodic Inventory (or Physical Inventory) – An inventory determination method that involves performing a physical count of products on hand, at the end of an accounting period.
• Perpetual Inventory – An inventory determination method that involves maintaining a continuous record of all receipts and withdrawals for every type of product on hand.
• Petty Cash – A store of physical cash (denominated currency) that is kept on hand to pay for minor and incidental expenses associated with business operations.
• Post-Closing Trial Balance – A trial balance prepared at the end of an accounting period, and performed once all adjusting entries and closing entries have been posted in the accounting system. This is typically used as a final check on the balance of the ledger.
• Prepaid Expense – A prepaid expense is a cost that the company incurs in order to acquire goods or services that are anticipated to be consumed or fully utilized in the revenue-earning process within the operating cycle.
• Present Value (PV) – This is the current value of a future sum of money, as defined based upon a specific rate of return. For example, a dollar received today can be invested so that its value at a future point in time is greater than one dollar; whereas the same dollar received a year from now would still be equal to one dollar. The purpose of the calculation is to recognize the value of a rate of return on monies that are available today for investment (i.e. a representation of the time value of money).
• Professional Employer Organization (PEO) – A PEO is a third-party business that serves as the employer-of-record or ‘technical’ employer of personnel who in actually work for a variety of other companies, and are ‘leased’ by the PEO to the firms where they are actually employed. PEOs exist to provide greater efficiencies, better compliance and lower benefit costs to other companies, and are enabled under federal and state laws governing this form of employment.
• Profit & Loss Statement (P&L) – The profit and loss statement is a report that presents earnings, expenses and net profit for a period or a given period of time.
• Rate of Return – The gain or loss on an investment over the course of a given period of time, presented as a percentage of the investment’s cost.
• Return on Equity (ROE) – The amount of net income that a company returns as a percentage of shareholders’ equity. This measures a company’s profitability by demonstrating how much profit the entity generates with the monies invested by shareholders.
• Return on Investment (ROI) – The amount obtained by dividing net profit by net worth, thus serving as another measure of profitability.
• Revenue – The total amount of monies collected in exchange for goods and services sold by the business, before any expenses are subtracted. In accounting, revenue also includes the value of credits (such as those for returned merchandise) or discounts.
• Savings Incentive Match Plan for Employees (SIMPLE Plan) – An individual retirement account designed specifically for businesses with 100 or fewer employees. Similar to a 401(K).
• Small Business Administration (SBA) Loan – A term loan from a bank, commercial lender or economic development agency that is guaranteed in in part by the U.S. Small Business Administration. SBA loans can be guaranteed to the lender for as much as 80% of the principal of the loan.
• Self-Employment Tax (Schedule SE) – The social security and Medicare tax primarily applied to individuals who work for themselves (the self-employed). The self-employment tax works similarly to that withheld from the pay of most wage-earning individuals.
• Simplified Employee Pension Plan (SEP Plan) – The SEP is a retirement plan that allows individuals to contribute and deduct up to 20% of self-employment income (or 25% of one’s pay as the employee of their own corporation).
• Subchapter “S” Corporation (S Corp) – An “S” corporation is a special entity format that allows for the protection of limited liability but also provides for direct follow-through of profits and losses to the corporation’s owner(s).

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!

Image Credit: PT Money (Flickr @ Creative Commons)