Accounting, with its myriad of terms and concepts, can often feel like a foreign language to small business owners. While familiar terms like “revenue,” “expenses,” and “profits” are part of the everyday vernacular, there’s a whole lexicon of less common, yet equally important, terms that can provide deeper insights into your business’s financial health. Understanding these terms can empower you to make more informed decisions and communicate more effectively with financial professionals. Here are 20 uncommon accounting glossary words demystified.
1. Accrual Basis Accounting
A method where transactions are recorded when they are earned or incurred, regardless of when cash is exchanged. This approach provides a more accurate picture of financial health than cash basis accounting.
2. Amortization
The process of gradually writing off the initial cost of an intangible asset over its useful life. For instance, patent amortization spreads the cost of a patent over the years it is in force.
3. Capitalization
The recording of a cost as an asset, rather than an expense. This is done with large purchases that provide value over multiple periods, such as equipment or buildings.
4. Deferment
The act of postponing the recognition of an expense or revenue to a later accounting period. This is commonly applied to prepaid expenses or revenues received in advance.
5. Equity Financing
Raising capital through the sale of shares in the business. This method dilutes ownership but doesn’t require repayment like debt financing.
6. Fiscal Year
A one-year period that companies use for financial reporting and budgeting, which does not necessarily align with the calendar year.
7. Going Concern
The assumption that a business will remain in operation for the foreseeable future, which is crucial for financial planning and reporting.
8. Leverage
The use of borrowed funds to finance the acquisition of assets, with the expectation that the profits made from the assets will exceed the cost of borrowing.
9. Liquidity Ratios
Measures of a company’s ability to meet its short-term obligations. Examples include the current ratio and quick ratio.
10. Markup
The difference between the cost of a good or service and its selling price. It is often expressed as a percentage over the cost.
11. Operating Leverage
A measure of how revenue growth translates into growth in operating income, indicating the proportion of fixed versus variable costs.
12. Present Value
The current value of a future sum of money or stream of cash flows, given a specified rate of return. This concept is vital in assessing investment opportunities.
13. Retained Earnings
The portion of net earnings not paid out as dividends but retained by the company to be reinvested in its core business or to pay debt.
14. Segment Reporting
The practice of breaking out a company’s financial data by divisions, departments, or other segments to provide a more detailed analysis of performance.
15. Sunk Cost
A cost that has already been incurred and cannot be recovered. Sunk costs should not factor into future business decisions.
16. Variable Cost
A cost that changes in proportion to the level of activity or volume of goods produced, such as materials and labor.
17. Working Capital
The difference between a company’s current assets and current liabilities, indicating the short-term financial health and efficiency of a business.
18. Write-down
Reducing the book value of an asset because it is overvalued compared to the market value. This is a non-cash expense that affects the income statement.
19. Yield
The income return on an investment, such as the interest or dividends received from holding a particular security.
20. Zero-Based Budgeting
A budgeting method where all expenses must be justified for each new period, starting from a “zero base,” regardless of whether each budget is higher or lower than the previous one.
Conclusion
For small business owners, diving into the depths of accounting terminology can unveil a wealth of information about your company’s financial situation, enabling smarter, more strategic decisions. By familiarizing yourself with these 20 terms, you’ll not only enhance your financial literacy but also gain the confidence to navigate the complex financial landscape of your business with ease.

Anshuman Sehgal, CPA
Certified Public Accountant, Fellow Chartered Accountant
CPA since 2001 and Owner of NJ Sehgal & Associates Inc, a Full Service accounting Firm since 2009 specializing in small to medium size Business bookkeeping, payroll processing & Tax Planning. Also experienced in Consolidation, Process Improvement initiatives and KPI Analysis while working for fortune 500 companies.