Accounting and Tax Practices Industry Terminology

Accounts Payable (AP)

A current liability representing amounts owed to suppliers and creditors for goods and services received but not yet paid.

- Enter the vendor bill in AP and schedule it for payment next Friday. - Our AP aging report shows 35% of invoices are over 60 days past due. - The audit found missing approvals in the AP workflow.

Accounts Receivable (AR)

A current asset representing amounts owed by customers for credit sales that have been invoiced but not yet collected.

- Post the customer invoice to AR and set the due date to Net 30. - The AR aging indicates rising delinquencies in the 90+ day bucket. - We recorded an allowance for doubtful accounts based on AR risk.

Accrual Basis Accounting

An accounting method that records revenues when earned and expenses when incurred, regardless of when cash is received or paid.

- Recognize March revenue when services are delivered, even if cash arrives in April. - Accrue utilities expense for the month-end cutoff. - Record unbilled receivables at period end under accrual accounting.

Adjusted Gross Income (AGI)

For U.S. individual tax, gross income minus certain adjustments (above-the-line deductions); it is a key threshold for many deductions and credits.

- Many deductions and credits phase out based on AGI thresholds. - Student loan interest deduction is limited by the taxpayer’s AGI. - Use AGI from last year’s return to e-file this year.

Amortization

The systematic allocation of the cost of an intangible asset over its useful life, or the periodic reduction of loan principal per an amortization schedule.

- Amortize the patent over its 15-year life. - The loan amortization schedule shows principal versus interest each month. - Capitalized software costs are amortized over three years.

Basis (Tax Basis)

The tax investment in an asset or ownership interest, adjusted over time; determines depreciation, gain or loss on disposition, and certain deductibility limits.

- Adjust basis for capital improvements before computing gain on sale. - S corporation shareholder basis increases with income and decreases with distributions. - Gain or loss equals amount realized minus adjusted basis.

Capital Expenditure (CapEx)

Spending to acquire or improve long-term assets that provide benefits beyond the current period; capitalized and depreciated or amortized.

- Capitalize the new manufacturing line and depreciate it over 10 years. - Distinguish CapEx from repairs and maintenance for tax purposes. - The budget includes CapEx for warehouse automation.

Cash Basis Accounting

An accounting method that records revenues and expenses only when cash is actually received or paid.

- Recognize revenue when cash is received and expenses when cash is paid. - Many small businesses elect cash basis for tax simplicity. - Prepaid expenses are generally deducted when paid under cash basis.

Chart of Accounts

An organized listing of all account names and numbers used in a company’s general ledger, structured to enable consistent recording and reporting.

- Create a standardized COA: 1000 Cash, 2000 Liabilities, 4000 Revenue. - Map legacy accounts to the new ERP chart during migration. - Use segments in the COA to track departments and locations.

Cost of Goods Sold (COGS)

The direct costs of producing or purchasing goods that were sold during the period; used to compute gross profit.

- Record materials and direct labor to COGS when inventory is sold. - LIFO increased COGS this year due to inflation. - Gross margin equals revenue minus COGS.

Debit

In double-entry accounting, an entry on the left side of an account. Debits increase assets and expenses and decrease liabilities, equity, and revenue.

- Debit Cash and credit Revenue for a cash sale. - Debit AR and credit Revenue when invoicing on account. - Debit Expense and credit AP for accrued bills.

Deferred Tax Asset (DTA)

An asset representing future tax reductions from deductible temporary differences or carryforwards under ASC 740/IAS 12.

- Record a DTA for NOL carryforwards expected to offset future taxable income. - Allowance for doubtful accounts often creates a DTA. - Evaluate a valuation allowance if realization of the DTA is not more likely than not.

Deferred Tax Liability (DTL)

A liability representing future tax payments due to taxable temporary differences between book and tax bases.

- Accelerated tax depreciation vs. straight-line book depreciation creates a DTL. - Revenue recognized earlier for book than tax can create a DTL. - Reverse the DTL as temporary differences unwind.

Depreciation

The systematic allocation of the cost of a tangible fixed asset over its useful life.

- Depreciate machinery over 7 years using straight-line. - For tax, use MACRS to accelerate depreciation. - Record monthly depreciation: Dr Depreciation Expense, Cr Accumulated Depreciation.

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization; a proxy for operating performance and cash flow from operations.

- Lenders set debt covenants based on EBITDA. - Normalize EBITDA by removing nonrecurring costs. - Valuation multiples are often expressed as Enterprise Value/EBITDA.

Enrolled Agent (EA)

A U.S. federally licensed tax practitioner authorized to represent taxpayers before the IRS in audits, collections, and appeals.

- As an EA, she represents clients before the IRS in audits. - EAs must complete annual continuing education. - The EA signed the e-file authorization for the client’s return.

Enterprise Resource Planning (ERP)

Integrated business software that centralizes core processes such as general ledger, payables, receivables, inventory, and reporting.

- Implementing an ERP integrated AR, AP, inventory, and GL. - Configure the ERP chart of accounts before go-live. - Automate three-way match in the ERP to strengthen controls.

FIFO (First-In, First-Out)

An inventory costing method that assumes the earliest purchased items are sold first.

- Under FIFO, older inventory costs flow to COGS first. - Rising prices produce lower COGS and higher ending inventory with FIFO. - Reconcile the FIFO inventory subledger to the GL.

Fiscal Year

A 12-month accounting period that may or may not align with the calendar year.

- The company’s fiscal year runs July 1 to June 30. - Align the fiscal year with the business cycle for better comparability. - File tax returns based on the designated fiscal year-end.

Fixed Asset

A long-lived tangible asset used in operations (e.g., machinery, buildings) that is capitalized and depreciated.

- Capitalize and track fixed assets in the subledger. - Dispose of an old truck and recognize gain or loss. - Perform a fixed asset inventory and reconcile to the GL.

GAAP (Generally Accepted Accounting Principles)

Authoritative U.S. accounting standards and principles governing financial reporting.

- Prepare financial statements in accordance with U.S. GAAP. - Apply GAAP’s matching principle for expense recognition. - GAAP requires ASC 606 revenue recognition disclosures.

General Ledger (GL)

The central repository of all accounts and transactions used to prepare financial statements.

- Post journal entries to the GL each month-end. - Reconcile subledgers (AR, AP, fixed assets) to the GL. - The GL trial balance supports the financial statements.

Going Concern

An assumption that an entity will continue operations for the foreseeable future; also a required assessment in audits.

- The auditor evaluated substantial doubt about going concern. - Management prepared a cash flow forecast to support going concern. - Disclose going concern uncertainties in the footnotes if necessary.

Head of Household (HOH)

A U.S. individual tax filing status for unmarried taxpayers who pay more than half the cost of keeping up a home for a qualifying person.

- She qualifies for HOH by supporting a qualifying child. - HOH status offers more favorable tax brackets than Single. - Verify HOH eligibility to avoid IRS notices.

Historical Cost Principle

The accounting principle that assets are recorded at their original cost and generally not adjusted to fair value.

- Record the building at purchase price, not current market value. - Depreciation is based on historical cost, not replacement cost. - Do not adjust PPE for inflation under historical cost.

IFRS (International Financial Reporting Standards)

Globally used accounting standards issued by the IASB governing financial reporting outside the U.S.

- Consolidated statements are prepared under IFRS for foreign subsidiaries. - IFRS 16 governs lease accounting internationally. - Compare GAAP vs. IFRS differences in revenue and leases.

Impairment

A write-down of an asset when its carrying amount exceeds its recoverable amount or fair value less costs to sell.

- Test goodwill annually and record impairment if carrying amount exceeds fair value. - Recognize impairment of a long-lived asset under ASC 360. - Impair securities when declines are not expected to recover.

Internal Controls

Processes designed to provide reasonable assurance regarding the reliability of financial reporting, effectiveness of operations, and compliance with laws.

- Implement segregation of duties for cash disbursements. - Perform monthly bank reconciliations as a key control. - Test SOX 404 controls over revenue recognition.

Internal Revenue Service (IRS)

The U.S. federal agency responsible for administering and enforcing the Internal Revenue Code.

- The IRS issued guidance clarifying ERC eligibility. - Respond to the IRS CP2000 notice within 30 days. - E-file acceptance comes from the IRS MeF system.

Journal Entry

A record of a financial transaction in the general ledger using debits and credits to affected accounts.

- Dr Depreciation Expense, Cr Accumulated Depreciation. - Dr Rent Expense, Cr Accounts Payable. - Dr Accounts Receivable, Cr Revenue for invoiced sales.

K-1 (Schedule K-1)

A tax schedule reporting each owner’s distributive share of a pass-through entity’s income, deductions, and credits (partnerships, S corps, some trusts).

- Partners receive a K-1 reporting their share of income and deductions. - Use the S corporation K-1 to adjust shareholder basis. - Tie K-1 totals to the partnership return’s Schedule M-1.

Lease Accounting (ASC 842)

U.S. GAAP rules requiring lessees to recognize most leases on the balance sheet via a right-of-use asset and corresponding liability.

- Recognize a right-of-use asset and lease liability at lease commencement. - Classify leases as finance or operating based on criteria. - Disclose maturity analysis of lease liabilities in the notes.

LIFO (Last-In, First-Out)

An inventory costing method that assumes the most recently acquired items are sold first.

- Under LIFO, the latest inventory costs flow to COGS first. - The LIFO reserve reconciles LIFO to FIFO inventory values. - File Form 970 to elect LIFO for tax purposes.

Limited Liability Company (LLC)

A flexible business entity offering limited liability to owners and pass-through or elective taxation options.

- A multi-member LLC is taxed by default as a partnership. - Elect S corporation status for an eligible LLC via Form 2553. - Members enjoy limited liability protection.

Matching Principle

An accounting principle requiring expenses to be recognized in the same period as the revenues they help generate.

- Accrue sales commissions in the same period as related revenue. - Defer and amortize contract costs over the contract term. - Recognize warranty expense when the related sale occurs.

Materiality

The threshold at which an omission or misstatement could influence users’ economic decisions; drives audit scope and disclosure depth.

- Set planning materiality at 5% of pre-tax income. - Pass small misstatements that are immaterial individually and in aggregate. - Consider qualitative factors when assessing materiality.

Net Operating Loss (NOL)

When tax-deductible expenses exceed taxable income; may be carried forward (and sometimes back) to offset taxable income in other years.

- Create a DTA for post-2017 NOLs, subject to the 80% limitation. - The CARES Act temporarily allowed NOL carrybacks. - Evaluate valuation allowance based on future profitability.

Other Comprehensive Income (OCI)

Items recognized in equity that bypass net income (e.g., certain investments, foreign currency translation, pension adjustments).

- Record unrealized gains on AFS securities in OCI. - FX translation adjustments flow through OCI. - Recognize pension actuarial gains/losses in OCI.

Payroll Tax

Taxes imposed on wages, including employee and employer portions (e.g., Social Security, Medicare, unemployment, and income tax withholding).

- Withhold and remit FICA and Medicare from employee wages. - File Form 941 quarterly and Forms W-2 annually. - Accrue employer payroll tax expense on bonuses.

Permanent Difference

A book-tax difference that does not reverse over time, affecting the effective tax rate but not creating deferred taxes.

- Municipal bond interest is tax-exempt, creating a permanent difference. - Fines and penalties are nondeductible for tax purposes. - Life insurance proceeds on a key person are excluded from taxable income.

Provision for Income Taxes (ASC 740)

The accounting for income tax expense, including current and deferred components, recognition of DTAs/DTLs, and related disclosures.

- Record current tax expense and deferred tax expense in the provision. - Recognize a valuation allowance against DTAs if needed. - Prepare the rate reconciliation to explain the ETR.

Qualified Business Income (QBI) Deduction

A U.S. tax deduction (Section 199A) for qualified income from pass-through entities, subject to wage, property, and specified service trade limits.

- Claim up to 20% deduction of QBI from eligible pass-through income. - Apply W-2 wage and UBIA tests for high-income taxpayers. - SSTB limitations may phase out the QBI deduction.

Reconciliation

The process of comparing two sets of records and resolving differences to ensure completeness and accuracy.

- Perform a monthly bank reconciliation for all cash accounts. - Tie AR subledger totals to the GL control account. - Reconcile deferred revenue rollforwards to contract records.

Retained Earnings

Cumulative net income less cumulative dividends since inception; part of shareholders’ equity.

- Close current-year net income to retained earnings at year-end. - Dividends reduce retained earnings. - Record a prior-period adjustment to opening retained earnings.

Revenue Recognition (ASC 606)

The GAAP framework for recognizing revenue from contracts with customers using a five-step model.

- Identify performance obligations and recognize revenue when satisfied. - Recognize SaaS revenue over time as services are provided. - Constrain variable consideration until it is probable a significant reversal will not occur.

S Corporation

A U.S. pass-through tax election for eligible corporations/LLCs where income, losses, deductions, and credits flow to shareholders.

- Elect S status via Form 2553 for a qualifying domestic entity. - Income passes through to shareholders and is reported on K-1s. - Track shareholder stock basis for distribution and loss limitations.

SALT (State and Local Tax)

The body of state and local tax regimes, including income/franchise, sales/use, payroll, and property taxes.

- Nexus analysis determines SALT filing obligations. - Monitor apportionment factors for multistate income. - Address sales and use tax for online transactions.

Sarbanes-Oxley Act (SOX)

U.S. legislation enhancing corporate governance, internal controls, and auditor independence for public companies.

- Section 404 requires management and auditor attestations on internal controls. - Implement SOX-compliant controls over financial reporting. - Maintain documentation for key SOX processes and controls.

Section 179 Expensing

A U.S. tax provision allowing immediate expensing of qualifying property up to statutory limits, subject to phase-outs and income limits.

- Expense qualifying equipment purchases up to the annual limit. - Coordinate Section 179 with bonus depreciation for optimal tax outcomes. - Consider taxable income limitations when planning Section 179 elections.

Taxable Income

Income subject to tax after subtracting allowable exclusions, adjustments, and deductions.

- Start with book income, adjust for permanent and temporary differences to arrive at taxable income. - Apply NOL carryforwards to reduce taxable income. - Tax credits reduce tax liability, not taxable income.