For most entrepreneurial minds, keeping track of business transactions and staying on top of your business accounting needs might not be a favorite pastime. If you have a solid understanding of accounting basics, but still find yourself scratching your head when you see these 12 common accounting terms, we’ve got you covered.
Accounting Terms Explained
- Accounting cycle
The accounting cycle is the process of recording all of your company’s financial transactions. It includes eight steps: transaction, journal entries, posting, trial balance, worksheet, adjusting entries, financial statements, and closing the books. While bookkeepers are typically in charge of keeping track of an accounting cycle from start to finish, every business owner should have a solid grasp on how each of these steps functions. Even small business owners that experience very few transactions can benefit from following the accounting cycle.
- Chart of accounts
A chart of accounts is an organizational tool that lists all accounts used in the general ledger of a company. It provides business owners with a clear view of every aspect of their company that is spending or making money. This tool is typically used by a company’s financial accounting software to collect and organize data into financial reports.
While bookkeepers and accountants often provide the same services, a bookkeeper’s primary responsibility is to record and organize all financial transactions. An accountant on the other hand provides business owners with financial advice based on their transactions.
With time, a physical asset’s monetary value will begin to decrease due to expected wear and tear, neglect, or changing market conditions. Depreciation is an accounting term used to describe and measure how much of an asset’s value is lost over time. This accounting method involves allocating the cost of a physical asset over its useful life.
Reconciliation is a process that helps a business recognize whether their financial records are accurate and consistent with monthly statements provided by external sources such as a bank or credit card company. Understanding how to reconcile your accounts can help you avoid any discrepancies and overdraft fees.
A certified public accountant (CPA) is a title given to accountants who pass the Uniform CPA Examination and meet all other state education and experience requirements. Individuals with a CPA are qualified to provide the same services as a general accountant, but also have the ability to prepare audited financial statements.
- Gross Tax Receipts
Gross receipt tax is an accounting term used to describe state tax on the gross sales made by a business. Gross tax receipts represent the total amount of receipts in cash or property without adjustment for expenses or other items that might be deductible. Also, gross tax receipts cover everything unrelated to normal business activity including tax refunds, donations, interest, and others. New Mexico’s Gross Receipts Tax laws can be daunting for new business owners which is why we offer payroll and tax services that will help take the mystery out of navigating complex rules and regulations.
A financial audit involves an examination of financial statements made by an organization. Someone independent of the corporation will examine the financial reports to determine whether they are accurate and in accordance with accounting standards, regulations, and laws. At Granite Mountain Accounting, we provide tax representation in the event that you receive an audit notice from the IRS.
Audit and compliance are two very similar accounting terms that involve reviewing business objectives to ensure that companies comply with legal regulations. However, compliance is usually involved in discussions about where the company is headed and how objectives can be achieved in a compliant way. Whereas an audit involves looking back at past objectives to review whether they were handled as they should have been.
- Recovery Rebate Credit
A recovery rebate is a one-time benefit that most U.S. citizens received last year during the COVID-19 Pandemic. The recovery rebate came in the form of a stimulus payment. With the approval of the Consolidated Appropriations Act, 2021, additional relief is now being provided to taxpayers impacted by COVID-19.
- Tax Deductions
A tax deduction is an expense that can be subtracted from your gross income to reduce the amount owed. Medical expenses, donations, property taxes, and educator expenses are just a few examples of potential itemized deductions.
- Tax Credits
While tax deductions reduce the amount of taxable income, tax credits reduce the amount of tax owed. Three types of basic tax credits include nonrefundable, refundable, and partially refundable. Each is granted based on the specific location, industry, or classification of an individual or business.
Free 30-minute Consultation. Contact Granite Mountain Accounting
Hopefully, our definitions helped clear up any confusion you might have about these 12 accounting terms, but if you still have questions, feel free to visit our contact page. If you’re looking for financial insight regarding your business, book a free, 30-minute consultation with our professional tax consultants today!
More From Granite Mountain