Terminology

Money that your business owes for goods and services. The businesses that sell to you will usually require payment within 30 to 90 days. Once you’ve received the delivery and before you pay for it, the amount owing is called an Account Payable.

Money that a customer owes to your business for goods and services. Unless you’re in a cash business or retail, you’ll probably deliver goods or services before you’re paid for them. Try to get paid as quickly as possible. Until you’re paid for something that you’ve delivered, the amount owing to you is called an Account Receivable.

This type of accounting is commonly used in business. It allows you to report income when it’s earned and expenses when they’re incurred. This means that if you make a sale today, but don’t get paid for it for 90 days, you report it now. On the other hand, if you pay for a year’s worth of insurance now, you only record it as paid as you go along. The other way to record revenue and expenses is called cash basis accounting, which reports income when received and expenses when paid. Cash basis accounting is more commonly used in the non-profit sector.

Accrued Expenses

Are expenses that have occurred but are not yet recorded through the normal processing of transactions.

Operating costs incurred in the normal course of running a business, such as telephone, management and office salaries, professional fees, property taxes, etc.

Amortization refers to the process of paying off a debt or mortgage, usually by equal monthly payments.

An Asset is something that has value, or that contributes to creating value, for your business. Assets can be tangible (such as raw materials and equipment) or they can be intangible (such as the skills and experience that you bring to the business or your reputation).

An annual review of a business’ accounts and transactions to ensure that they’re accurate.

A financial statement listing all assets, liabilities and equity of a business at a certain point in time. It provides a quick “snapshot” of a business.

Value of an asset as shown on the balance sheet. The book value takes into account depreciation and is often different from its market value.

The point in time at which a new business’ revenues equals its fixed and variable expenses. A break even point is determined by conducting a ‘Break Even Analysis’.

An estimate of future income and expenses over an accounting period (quarterly, yearly, etc.) used as a financial control for business.

The owner's equity in the business. It can take the form of the proprietor's or partners' capital, or if incorporated, that of common stock, preferred shares and retained earnings.

See Accrual Accounting

Money coming into and going out of your business. It’s important to track how money moves into and out of your business because you need to know whether you’ll have enough money to pay important bills on time, such as your employees’ pay cheques.

A spreadsheet of monthly inflows (e.g., earnings) and outflows (e.g., expenses) of cash in the business during an accounting period (usually one year). It helps a business to plan its financial requirements.

Value of the total inventory or the number of units (goods) that a business has on hand at the end of the accounting period.

A competitor is another business that is selling a similar product or service to yours, in the same geographic location. Competition arises when your business and another business are trying to sell the same or similar things to the same customer. In order to make a sale, you may have to change something: charge a lower price or offer better service, for example.

A legal entity incorporated under federal or provincial legislation. This entity is distinct from parties or individuals that own it. Shareholders are not liable for the debts or obligations of the corporation.

Abbreviated as COGS, also called cost of sales. Direct cost of producing or providing the business' goods or services. It includes direct labour expenses/costs and production overhead, plus opening inventory, plus purchases, less closing inventory.

Customers purchase goods or services from your business. Clients usually have ongoing relationships with a business. The business provides advice and sometimes a sense of protection to a client.

Something owed, usually money. A debt can take the form of a loan, a line of credit, a credit card balance, or a mortgage. In each case, the lender will usually charge interest or a fee until the debt is repaid.

Depreciation means to reduce the value of an asset over the lifespan of that asset. For example, if you buy a large piece of equipment that you expect will last 10 years, you ‘depreciate’ the asset by showing that its value is reduced by a certain amount each year. Your accountant will help you to determine the amount of depreciation to show each year on your Income Statement.

Funds paid out of a business in settlement of obligations.

A sum of money paid to shareholders of a corporation out of earnings.

Withdrawals of assets (usually cash) from a business by a sole proprietor or a partner.

Equity refers to the value of the business, after debts have been paid. If you invest $10,000 in the business and don’t have any debts, the equity in your business is $10,000. If you use the $10,000 as a down payment to purchase equipment worth $20,000, you would have $10,000 in debt and $10,000 in equity.

All machinery and equipment used by the business to earn revenue. It has a limited lifespan and thus is subject to depreciation.

Formal reports, prepared from accounting records, describing the financial position and performance of the business. They comprise the Balance Sheet, the Income Statement and the Statement of Changes in Financial Position. Also see these definitions.

The term ‘financing’ refers to money that investors and lenders put into your business. Investors become owners of the business because they’re hoping that the business will grow. They’ll get a return on their investment when you pay dividends, or if someone else buys their ownership share for more than they paid for it. Lenders don’t become owners of your business. They expect to receive their money back with interest within a set period of time.

Also called capital assets. Property or equipment, not intended to be sold, owned by a business for use in its operations and expected to have a useful life of several fiscal periods. Included in this are land, buildings, vehicles, furniture and equipment.

Amounts that don’t vary with changes in the volume of sales or production (e.g., rent, depreciation, interest payments).

When you’re planning your business, you’re often required to estimate or predict what your revenues and your costs will be in the future. This is called a forecast, or sometimes a projection. Forecasts can be made on a monthly, yearly or even multi-year basis. The longer the term, the less accurate the forecast will be.

The term ‘funding’ refers to money offered as subsidies or incentives by Governments (First Nation, municipal, provincial and federal) or the private sector. These institutions often provide money to businesses that operate in certain places, or that hire new employees, or purchase new equipment. Funders don’t usually expect to be repaid, but they’ll expect businesses that receive funding to report on their activities. They’ll want to know that you’re spending the money as you promised and that you’re achieving the intended results (e.g., jobs created).

Net sales less the cost of the goods sold. It represents the profit made by the business before deducting selling, administrative and financial expenses. It helps to evaluate sales performance, buying policies, mark-ups and inventory controls.

Financial statement showing revenues, expenses and net income of a business over an accounting period.

Intangible Assets

Assets that cannot be touched, weighed or measured. They cannot be used for payments of debts and in goodwill (probability that a regular customer will remain so), patent, trademark, and incorporation costs. They may produce income and can be sold; that is why they’re listed under assets.

Interest is the fee that a lender charges to a borrower. It’s usually expressed as an annual percentage of the amount owing. For example, “She borrowed money at 5 per cent to buy a delivery van” means that if she owes $1,000, she must pay the lender $50, as well as repaying at least some of the debt (called the principal of the loan) each year.

The word “interest” can also refer to a share of ownership in a business (e.g., Joe has an interest in the Gas Bar).

The merchandise and raw materials that a business has on hand to be sold or to be turned into goods to be sold.

Each year, a business must count its entire inventory and report it on its Balance Sheet.

Financial ratio that measures the number of times inventory has been sold in a given year. If it’s low, it means that products are not selling well.

When someone invests money (or time) in a business, they do so with the expectation that they’ll generate a profit as a result. People may hold investments in many businesses by purchasing shares on a public stock exchange. They may also make an investment of time in developing their own business.

Total direct cost to the business for its employees during an accounting period. Includes actual wages paid and cost of all fringe benefits, unless listed separately.

Legal contract covering the use of property drawn up between an owner (lessor) and a tenant (lessee) for a stated amount of money (rent) and for a specified length of time.

Renovations and other improvements to the leased property at the expense of the lessee.

Letters Patent are granted by the Government to certain corporations to permit them to undertake certain activities. Such corporations are usually non-profit or charitable.

A liability is an amount that is owed by a business, whether to employees, suppliers or lenders.

A licence is permission to practice a certain business, trade or profession. Licences are also required to operate some kinds of equipment. Obtain information on the licences you require from your Band Office, local government office, or from your industry or trade association. Some licences require specialized training and testing. Remember that everyone who operates a vehicle for your business must have a driver’s licence!

Agreement between a lender and a borrower under which the latter can borrow continuously up to a fixed maximum amount.

The exchange of goods and services, or a place where the needs of one person are satisfied by the offerings of another. A market has at least one seller and one buyer and usually has many more of each. In a free market, every buyer has information about every seller and can decide, based on price and other factors, which product to purchase. Also, a group of consumers that can be described in a specific way (e.g., men aged 25 to 35 with an annual income of over $40,000 and living in the Toronto area).

Part of a market (e.g., men aged 25 to 35 with an annual income of over $40,000 who live in the Toronto area and are interested in the arts).

A form of debt that is used to purchase a piece of property (real estate). A mortgage has a fixed term, usually many years, and a fixed payment schedule. It’s usually secured, or guaranteed, by the property. That is, if the borrower does not make the required payments, the lender will take ownership of the property. It may not be possible to purchase property with a mortgage on reserve. Check with your Economic Development Officer or Band Office, as rules and programs change frequently.

Total revenue less total expenses for an accounting period calculated in accordance with generally accepted accounting principles.

Net profit divided by sales; expressed as a percentage.

Part of a market segment (e.g., men aged 25 to 35 with an annual income of over $40,000 who live in the Toronto area and are interested in performance arts).

Value of total inventory or number of units a business has on hand at the opening of the accounting period.

Anticipated earnings of a business determined by estimating sales and subtracting expected expenses.

Excess of revenue of a business over its expenses, excluding income derived from sources other than its regular activities (i.e., extraordinary income and expenses, income taxes, dividends, bonuses, withdrawals by owners).

Costs not directly attributable to the production of a good or service (e.g., salary of factory manager, property taxes).

Form of business ownership in which two or more individuals (or companies) provide the equity capital for a business enterprise. Partners share in the profits as well as the losses of the business.

Expenses paid in advance during an accounting period (e.g., a two-year insurance premium), part of which will be "used up" in the upcoming accounting period. The unused portion of the expense is considered a current asset and recorded as such on the Balance Sheet.

Analysis that compares financial ratios of a business from one year to another to determine the change in performance over time; it also compares financial ratios of a business to that of other similar businesses or to that of its industry to determine its performance in relation to others.

Every business is subject to regulation. Each level of government and every jurisdiction has its own set of rules and regulations. It’s essential, before you begin your business, to find out which regulations will apply to you and what you must do to comply with them. Sometimes regulations are enforced by industry itself, so also check with your industry or trade association to find out what the rules are.

Profits not spent or distributed among owners of a business, but reinvested in it.

Financial ratio that indicates how efficiently the business has used its available resources to generate income.

Financial ratio that measures the profitability of the business for its shareholders.

The availability of raw materials may be controlled by governments that limit access to certain resources. For example, there may be limits on how much ground water can be withdrawn by a supplier of bottled water. There may be limits on how many fur-bearing animals can be harvested in a particular season. By restricting supply, governments manage the wellbeing of the resource and the community; the effect on business is to drive up the cost of the raw material and the value of everything produced from it. In every case where your business relies on access to natural resources, work with your Band Council to find out what this means for you.

Gross proceeds received by a business from the sale of goods or services during an accounting period. It also includes gains from the sale or exchange of assets, interest and dividends earned on investments and other increases in owner's equity.

Total value of goods sold or revenue from services rendered. Returns and discounts must be shown as a reduction from total sales.

Operating costs directly related to the selling of a product or service (selling salaries, commission, advertising, etc).

Form of business owned and operated by one individual who is responsible for the debts and obligations of the business.

Financial statement showing the fluctuation of capital of a business over an accounting period.

A supply chain is the network of businesses that take a raw material, transform it and bring it to the end consumer.

The supply chain links the forest, field, or mine, to processing, manufacturing, packaging, shipping, displaying and ultimately selling. The supply chain includes purchasing, inventory management, warehousing and many other functions. A business may be involved in only one link in the chain, or may be involved in many of them.

Loan having a fixed term of repayment greater than one year, and a monthly or seasonal principal reduction schedule.

Financial ratio that measures the solvency for the business: if this ratio is high, the business is at higher risk of not meeting its obligations should a drop in sales occur.

A sale or transfer of goods or services in exchange for money.

Expenses that vary directly with changes in the volume of sales or production (e.g., raw material costs and sales commissions).

Financial ratio that measures the amount of cash a business has to develop itself as opposed to the capital it has invested in fixed assets. A high ratio means the business can convert some assets into cash or obtain cash readily to meet its current obligations and represents a safety cushion for creditors.