The world of accounting is full of specialized jargon and easily confused abbreviations.

A fiscal year can begin on any date but is often aligned with the calendar year (January 1 to December 31).

Here, we’ll demystify 26 tricky terms you’re likely to encounter as a small-business owner:

1. Accounting: Interpreting and analyzing those transactions to facilitate informed business decisions.
2. Accounts Payable/Accounts Receivable (AP/AR): A/P refers to the money a business owes to its suppliers or vendors for goods or services. A/R refers to the money its customers owe the business for goods or services they purchased.
3. Accrual Basis/Cash Basis: Accrual basis accounting is a method of accounting that records revenues and expenses when the transactions occur, regardless of when money actually changes hands. Cash basis accounting records revenues and expenses when the money is received or paid.
4. Accrued Expense: An expense that has been incurred and entered into the business’ balance sheet but that has not yet been paid for, such as salaries and interest.
5. Asset: Something of value that a business owns or has control over, which is expected to provide the business with future economic benefit. Examples of assets include cash, inventory, and property.
6. Balance Sheet: A financial statement that reports a company’s assets, liabilities, and equity at a specific point in time. It shows what a company owns, what it owes, and what remains for the owners.
7. Book Value: The value of an asset as it appears on a company’s balance sheet. It is calculated by subtracting accumulated depreciation from the original cost of the asset.
8. Cash Flow Statement: A financial statement that shows the cash inflows and outflows of a business during a specific period, including information about how cash is being generated and used by the business.
9. Certified Public Accountant (CPA): A professional who has met certain requirements for education and experience and has passed a rigorous exam. CPAs are authorized to provide a wide range of specified accounting and financial services to businesses and individuals.
10. Cost of Goods Sold (COGS): The direct costs incurred in producing or acquiring the goods that a business sells. It includes the cost of materials, labor, and overhead directly involved in production. COGS is subtracted from revenue to calculate gross profit.
11. Depreciation: The process of allocating the cost of a tangible asset over its useful life. It is an accounting method used to reflect the decline in value of the asset over time.
12. Equity: The value of a company’s assets that are owned by the shareholders, also known as owner’s equity. It is calculated as the difference between the total assets and total liabilities of a company.
13. Expense: A cost that a business incurs to generate revenue, such as supplies and depreciation
14. Fiscal Year: A 12-month period that companies use for financial reporting purposes. It can begin on any date, usually the beginning of a quarter, and is often aligned with the calendar year (January 1 to December 31). However, the U.S. government’s fiscal year, for example, runs from October 1 to September 30, and educational institutions may align their fiscal years with the school year.
15. Generally Accepted Accounting Principles (GAAP): A set of accounting principles and standards that are widely accepted and used in the United States to ensure consistency and comparability in financial reporting.
16. Gross Margin: The difference between the revenue generated by a business and the cost of goods sold (COGS). It is expressed as a percentage of revenue.
17. Gross Profit: The revenue generated by a business minus the cost of goods sold (COGS). It does not take into account other expenses such as salaries, rent, and utilities.
18. Income Statement: A financial record, also known as a profit and loss statement, that shows a company’s revenues, expenses, and net income over a specific period of time. It provides information on the profitability of a business.
19. Liabilities: Debts or obligations that a business owes to others. Examples include accounts payable, loans, and accrued expenses.
20. Net Income: The revenue generated by a business minus its expenses.
21. Net Margin: The difference between the revenue generated by a business and the funds that remain after all expenses have been deducted. It is calculated as net income divided by revenue and expressed as a profitability ratio.
22. Present Value: The current value of a future cash flow or stream of cash flows. It takes into account the value of money, recognizing that money received in the future is worth less than money received today.
23. Retained Earnings: A company’s net profits reserved after dividends or distributions are paid out.
24. Revenue: The income that a company earns from its normal business operations, such as the sale of goods or services.
25. Working Capital: The difference between a company’s current assets and current liabilities. It represents the amount of money that is available to a company to fund its day-to-day operations.
26. Zero-Based Budgeting: A budgeting approach in which all expenses must be justified for each new period. This means that every expense must be evaluated and approved, regardless of whether it was included in the previous budget.

Defining Success

If you’re ready to put your knowledge into action, consult your financial institution.