Every field has its jargon, and small business finance, accounting, and taxes is worse than most. This glossary covers the 38 terms that come up again and again in our guides and in the questions readers send us. Definitions are short on purpose: enough to unblock you, with links to deeper guides throughout the site when you want the full story.

Accounts Payable

Money your business owes to suppliers and vendors for goods or services purchased on credit. It appears as a liability on your balance sheet and represents short-term debt you need to pay.

Accounts Receivable

Money customers owe your business for products or services already delivered. It’s an asset on your balance sheet and shows sales made on credit that haven’t been paid yet.

Accrual Accounting

A method of recording income and expenses when they occur, not when money actually changes hands. Most businesses use this method because it gives a more accurate picture of financial performance.

Amortization

The process of spreading the cost of an intangible asset, like a patent or business loan, over several years. Each year you deduct a portion as an expense on your income statement.

Asset

Anything of value that your business owns, such as cash, equipment, inventory, or property. Assets appear on the left side of your balance sheet.

Balance Sheet

A financial statement showing what your business owns, owes, and the owner’s equity at a specific point in time. It follows the formula: Assets = Liabilities + Equity.

Break-Even Point

The sales level where your business’s revenue equals its total costs, resulting in zero profit or loss. Knowing this helps you understand how much you need to sell to cover expenses.

Cash Flow

The movement of money in and out of your business over time. Positive cash flow means more money is coming in than going out, while negative cash flow is the opposite.

Cost of Goods Sold

The direct costs of producing goods that your business sells, including materials and labor but not overhead. It’s used to calculate gross profit on your income statement.

Deduction

An expense that the IRS allows you to subtract from your income to reduce the amount of tax you owe. Business deductions must be ordinary, necessary, and directly related to your business.

Depreciation

The process of deducting the cost of a physical asset, like equipment or vehicles, over several years as it loses value. This reduces your taxable income while the asset is in use.

Equity

The owner’s stake in the business, equal to assets minus liabilities. It represents how much of the business actually belongs to you after all debts are paid.

Estimated Tax Payment

A quarterly payment made directly to the IRS if you’re self-employed or have income not subject to withholding. These payments cover both income tax and self-employment tax.

Expense

Money your business spends to generate revenue, including supplies, rent, wages, and utilities. Expenses reduce your profit and are tracked on your income statement.

Fixed Cost

A business expense that stays the same each month regardless of sales, such as rent or insurance premiums. These costs must be paid whether you sell anything or not.

Form 1040

The main individual income tax return form filed with the IRS. Self-employed business owners use this along with additional schedules like Schedule C.

Form 1099

A tax document sent to independent contractors and freelancers reporting income paid by clients. Recipients must report this income on their tax return.

Gross Profit

Revenue minus the cost of goods sold, showing the profit before operating expenses are deducted. A higher gross profit margin means you’re producing goods efficiently.

Income Statement

A financial statement showing your business’s revenue, expenses, and profit or loss over a specific period. It’s also called a profit and loss statement or P&L.

Inventory

The goods or materials your business holds for sale or use in production. It’s valued as an asset on your balance sheet but only becomes an expense when sold.

Liability

A debt or financial obligation your business owes to others, such as loans, credit card balances, or unpaid bills. Liabilities appear on the right side of your balance sheet.

Markup

The amount added to the cost of a product to determine its selling price, usually expressed as a percentage. For example, a 50 percent markup means you sell an item for 1.5 times its cost.

Net Income

The bottom-line profit or loss after all expenses, taxes, and costs are subtracted from revenue. This is what’s left for the business owner.

Net Profit Margin

A percentage showing how much of each sales dollar becomes profit after all expenses are paid. It’s calculated by dividing net income by total revenue.

Operating Expense

The regular costs of running your business that don’t directly create products, such as office rent, utilities, and salaries. These are deducted from gross profit to calculate operating income.

Payroll Tax

Taxes withheld from employee paychecks and employer contributions for Social Security, Medicare, and unemployment. Businesses must remit these regularly to the appropriate agencies.

Profit

The money left over after you subtract all costs and expenses from revenue. It’s the main goal of running a business.

Quarterly Report

A financial summary of your business’s performance for a three-month period. Many businesses prepare these to track progress and manage taxes.

Receipt

A written record of a transaction showing what was purchased, the amount paid, and the date. Keeping receipts is essential for tracking expenses and proving deductions.

Revenue

The total amount of money your business brings in from selling products or services before any expenses are deducted. It’s also called sales or income.

Schedule C

The IRS form used by sole proprietors and single-member LLCs to report business income and expenses on their personal tax return. It calculates net profit or loss from self-employment.

Self-Employment Tax

The Social Security and Medicare taxes that self-employed people pay, which includes both the employer and employee portions. This is calculated and paid quarterly or annually.

Tax Deduction

An allowable expense that reduces your taxable income, lowering the amount of tax you owe. You must have documentation to support business deductions.

Taxable Income

The amount of income remaining after deductions and exemptions are subtracted, which is used to calculate how much tax you owe. Lower taxable income means lower tax liability.

Trial Balance

A list of all your account balances at a specific date to verify that debits equal credits. It’s an accounting tool used to check for errors before preparing financial statements.

Variable Cost

A business expense that changes based on your level of sales or production, such as materials or shipping costs. Higher sales typically mean higher variable costs.

W-4 Form

The form employees complete to tell their employer how much federal income tax to withhold from their paycheck. The amount withheld depends on your filing status and number of dependents.

Year-End Close

The process of finalizing all accounting records at the end of the fiscal year and preparing financial statements. This includes reconciling accounts, recording adjustments, and closing out temporary accounts.