Your Guide to All Things Accounting and Finance

Ledger Labs' Glossary

Plain-English definitions of the accounting, tax, finance and ERP terms growing businesses deal with every day, from month-end close to 409A valuations, written by the Ledger Labs team.

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Accounting Glossary

An A–Z of accounting terms from Ledger Labs.

409A Valuation: An independent appraisal of a private company’s common stock fair market value, required by IRS Section 409A before issuing stock options. Typically refreshed annually or after a material event.

Accounts Payable Turnover: A ratio measuring how many times a business pays off its suppliers in a period. Low turnover can signal cash strain; very high may mean you’re paying faster than needed.
Accounts Receivable Aging: A report grouping unpaid customer invoices by how long they’ve been outstanding (0-30, 31-60, 61-90, 90+ days). The first place to look when cash is tight but revenue looks fine.
Accounts Receivable Turnover: A ratio showing how many times a business collects its average receivables balance in a period. A falling ratio usually precedes a cash flow problem by a quarter.
Accrual Accounting: A method recording revenue when earned and expenses when incurred, regardless of when cash moves. Required under GAAP and expected by lenders and acquirers above roughly $5M in revenue.
Accrued Expenses: Costs a business has incurred but not yet paid or been invoiced for, recorded as liabilities. Common examples are wages, interest and utilities at period end.
Amortization: The systematic write-off of an intangible asset’s cost over its useful life, or the gradual repayment of loan principal. The intangible-asset equivalent of depreciation.
Analytic Accounting: A cost-tracking layer that tags transactions to projects, departments or cost centers independently of the chart of accounts. Odoo’s approach to management reporting.
ASC 842 Lease Accounting: The US GAAP standard requiring most leases – operating and finance – to appear on the balance sheet as a right-of-use asset and lease liability.

Bank Reconciliation: The process of matching a company’s internal cash records to its bank statement and resolving differences. The single most common source of unreliable SMB financials.
Bill of Materials (BOM): A structured list of every raw material, component and sub-assembly needed to manufacture one unit of a finished product, with quantities. The foundation of accurate manufacturing costing.
Bonus Depreciation: A tax provision allowing an immediate deduction of a set percentage of qualifying asset cost in the year placed in service, rather than depreciating over its life.
Break-Even Point: The sales level at which total revenue equals total costs and profit is zero. Calculated as fixed costs divided by contribution margin per unit.
Budget Variance: The difference between a budgeted figure and the actual result, expressed in dollars or percent. Favorable or unfavorable depending on direction and line item.
Burn Rate: The rate at which a business consumes cash reserves, usually stated monthly. Gross burn is total cash out; net burn is cash out less cash in.
Business Valuation: The process of determining a company’s economic value, using income, market or asset-based approaches. Required for sale, fundraising, partner buyouts and estate planning.

Cap Table: A record of a company’s ownership – who holds equity, options, warrants and convertible instruments, and at what percentages. Errors here surface expensively during diligence.
Cash Basis Accounting: A method recording revenue when cash is received and expenses when paid. Simple and permitted for smaller businesses, but it obscures true period performance.
Cash Conversion Cycle: The number of days between paying for inventory and collecting cash from its sale. Calculated as DIO + DSO – DPO.
Cash Flow Forecasting: Projecting future cash inflows and outflows over a defined horizon, typically 13 weeks for operations or 12 months for planning.
Cash Runway: How many months a business can operate before cash reaches zero at the current net burn rate.
Chargeback: A forced reversal of a card transaction initiated by the cardholder’s bank. For sellers, chargebacks hit revenue, fees and inventory simultaneously and need dedicated reconciliation treatment.
Chart of Accounts: The organized list of every account used to record transactions in the general ledger, grouped by assets, liabilities, equity, revenue and expenses. Its design determines what your reports can tell you.
Class Tracking: A QuickBooks feature assigning transactions to a segment – location, department, product line – so financials can be reported by that segment without separate accounts.
Cloud ERP: An enterprise resource planning system hosted and maintained by the vendor and accessed over the internet, rather than installed on a company’s own servers.
Contribution Margin: Revenue less variable costs, showing how much each sale contributes toward fixed costs and profit. Expressed per unit, per product line, or as a percentage.
Cost of Goods Sold (COGS): The direct costs of producing or acquiring the goods a business sold in a period – materials, direct labor and inbound freight. Excludes overhead and selling costs.
Current Ratio: Current assets divided by current liabilities, measuring short-term ability to cover obligations. Below 1.0 signals liquidity risk.
Cycle Counting: Counting a subset of inventory on a rolling schedule instead of shutting down for a full physical count. Keeps inventory accurate without halting operations.

Days Payable Outstanding (DPO): The average number of days a business takes to pay its suppliers. Extending DPO frees cash but can strain vendor relationships.
Days Sales Outstanding (DSO): The average number of days to collect payment after a sale. Rising DSO is an early warning of collection or customer-quality problems.
Debt-to-Equity Ratio: Total liabilities divided by shareholders’ equity, measuring how much of the business is financed by debt versus owner capital. A core lender covenant.
Deferred Revenu: Cash collected for goods or services not yet delivered, recorded as a liability until earned. Misclassifying it overstates revenue and distorts valuation.
Dimensional Accounting: Tagging transactions with attributes – department, location, project, customer – so one chart of accounts can produce many reporting views. Called Dimensions in Sage Intacct and Business Central, Classes in QuickBooks, Tracking Categories in Xero.

EBITDA: Earnings before interest, taxes, depreciation and amortization – a proxy for operating cash generation. The headline figure in most SMB acquisition conversations.
EBITDA Multiple: The ratio of enterprise value to EBITDA, used to price a business. Multiples vary by sector, size, growth and the quality of the financials behind the number.
Economic Nexus: A sales tax obligation triggered by exceeding a state’s revenue or transaction threshold, without any physical presence there. Established by South Dakota v. Wayfair.
Economic Order Quantity (EOQ): The order size that minimizes total inventory cost by balancing ordering costs against holding costs.
Electronic Data Interchange (EDI): A standardized format for exchanging business documents – purchase orders, invoices, shipping notices – between trading partners’ systems without manual entry. Mandatory for most big-box retail vendors.
ERP (Enterprise Resource Planning): An integrated software system running accounting, inventory, purchasing, operations and reporting on one shared database, replacing disconnected tools.
ERP Data Migration: Moving master data, open transactions and historical balances from a legacy system into a new ERP. The step that most often determines whether an implementation succeeds.
ERP Implementation: The full project of configuring, migrating to and going live on an ERP system – covering design, data, testing, training and cutover.
Estimated Tax Payments: Quarterly prepayments of income tax made by businesses and individuals whose tax isn’t fully withheld. Underpayment triggers IRS penalties even if the annual return is filed on time.

FIFO: First In, First Out – an inventory costing method assuming the oldest units are sold first. In rising-cost environments it reports higher profit and higher ending inventory than LIFO.
Financial Modeling: Building a structured projection of a company’s financial performance, linking the income statement, balance sheet and cash flow statement under defined assumptions.
Financial Statement Audit: An independent examination of financial statements by a licensed firm, resulting in a formal opinion on whether they fairly present the company’s position under GAAP.
Fixed Asset Register: A detailed schedule of a company’s fixed assets, with acquisition cost, in-service date, useful life, accumulated depreciation and net book value.
Form 1099-NEC: The IRS form reporting non-employee compensation of $600 or more paid to contractors during the year. Due to recipients and the IRS by January 31.
Form 1120-S: The US income tax return filed by S corporations, reporting income, deductions and credits that pass through to shareholders via Schedule K-1.
Form W-9: The IRS form used to collect a vendor’s or contractor’s legal name, entity type and taxpayer identification number. Collected before payment, not at year end.
Fractional CFO: A senior finance executive engaged part-time or on retainer, providing strategic financial leadership without a full-time hire. Typically engaged by businesses past roughly $2M in revenue.
Free Cash Flow: Operating cash flow less capital expenditures – the cash genuinely available to repay debt, reinvest or distribute to owners.

General Ledger Integration: Connecting an operational system – payroll, POS, ecommerce platform, inventory tool – so its transactions post automatically into the accounting general ledger.
Gross Margin: Revenue less COGS, expressed in dollars or as a percentage of revenue. The clearest single measure of whether a product or business model works.
Gross Merchandise Value (GMV): The total value of goods sold through a platform or channel over a period, before returns, discounts and fees. Not revenue, and frequently confused with it.

Hard Close: A month-end close performed with full year-end rigor – all reconciliations and adjustments completed. Contrasted with a soft close, which skips steps for speed.
Headcount Planning: Forecasting staffing levels and fully loaded employee costs by role and period, tied to the financial plan. Usually the largest controllable line in an operating budget.
Hedge Accounting: An accounting treatment aligning the timing of gains and losses on a hedging instrument with those on the item it hedges, reducing earnings volatility.
High-Low Method: A cost estimation technique separating fixed and variable components by comparing costs at the highest and lowest activity levels in a period.
Historical Cost: The GAAP principle recording assets at original purchase price rather than current market value, adjusted only for depreciation or impairment.
Holdback: A portion of purchase price withheld at closing and released later, protecting the buyer against post-close claims or performance shortfalls.
Holding Company: A parent entity whose primary purpose is owning controlling interests in other companies rather than producing goods or services itself.
Horizontal Analysis: Comparing a financial statement line item across multiple periods to identify trends, expressed in dollar and percentage change.
Human Capital Management (HCM): The ERP module handling payroll, benefits, time tracking and workforce records, integrated with the general ledger.
Hurdle Rate: The minimum rate of return a project must clear to justify investment. Usually set at or above the company’s weighted average cost of capital.

Intercompany Eliminations: Removing transactions and balances between related entities during consolidation so the group’s financials aren’t inflated by internal activity.
Internal Controls: The policies and procedures safeguarding assets, ensuring accurate records and preventing fraud – approval limits, reconciliations, segregation of duties.
Inventory Shrinkage: The gap between recorded inventory and physical inventory on hand, caused by theft, damage, spoilage or clerical error.
Inventory Turnover Ratio: How many times inventory is sold and replaced in a period, calculated as COGS divided by average inventory. Low turnover ties up cash in stock.

Job Costing: Assigning materials, labor and overhead to a specific job, project or batch to determine its individual profitability.
Journal Entry: A record of a transaction in the general ledger, with equal debits and credits, a date and a description. The atomic unit of double-entry bookkeeping.

Kaizen Costing: A continuous-improvement approach targeting incremental cost reductions during production rather than at the design stage.
Kanban: A visual scheduling system triggering replenishment when stock hits a set level, pulling production or purchasing from actual demand rather than forecast.
Key Audit Matter (KAM): A matter the auditor judges most significant to the audit, disclosed in the audit report along with how it was addressed.
Key Performance Indicator (KPI): A quantifiable measure tracked to evaluate progress against a business objective. Finance KPIs typically cover liquidity, profitability, efficiency and growth.
Key Person Insurance: A policy owned by the business on an owner or critical employee, paying out to cover the financial disruption of their loss. Often required by lenders and in buy-sell agreements.
Kiting: A fraud scheme exploiting the float between banks by writing cheques against uncollected funds to conceal a cash shortfall.
Knowledge Process Outsourcing (KPO): Outsourcing judgement-based work such as accounting, analysis and financial reporting, as distinct from routine transaction processing.

Landed Cost: The total cost of getting a product to your warehouse – unit price plus freight, duties, insurance, customs and handling. Ignoring it systematically overstates gross margin.
LIFO: Last In, First Out – an inventory costing method assuming the newest units are sold first. Permitted under US GAAP but prohibited under IFRS.

Marketplace Facilitator Tax: State laws making the marketplace – Amazon, Walmart, eBay – responsible for collecting and remitting sales tax on seller transactions, rather than the seller.
Material Requirements Planning (MRP): A system calculating what materials to purchase or produce, in what quantity and by when, based on demand forecasts, BOMs and current inventory.
Month-End Close: The recurring process of reconciling accounts, posting accruals and adjustments, and finalizing financial statements for a completed month.
Multi-Book Accounting: Maintaining parallel sets of books for the same transactions under different accounting standards or reporting bases – GAAP, IFRS, tax or management.
Multi-Entity Consolidation: Combining the financial results of multiple legal entities into a single set of group statements, with intercompany activity eliminated.
Multi-Warehouse Inventory: Tracking stock levels, costs and movements across multiple physical locations within one inventory system, including transfers between them.

Net Profit Margin: Net income as a percentage of revenue – what’s left after every cost, including interest and taxes.

Obsolete Inventory: Stock that can no longer be sold at normal price because of age, damage or lost demand. Must be written down, and the write-down hits gross margin.
Operating Expenses (OpEx): The costs of running the business that aren’t direct product costs – rent, salaries, software, marketing, insurance.
Overhead Absorption Rate: The rate at which indirect manufacturing costs are applied to units produced, usually per labor hour, machine hour or unit.

Prepaid Expenses: Payments made in advance for goods or services to be received later, recorded as assets and expensed as consumed. Insurance and annual software contracts are typical.
Purchase Order (PO): A buyer-issued document authorizing a purchase, specifying items, quantities, prices and terms. Becomes a binding commitment once the seller accepts it.
Purchase Price Variance (PPV): The difference between the standard cost of a purchased item and the price actually paid. Tracks procurement performance and flags costing errors.

QBI Deduction (Section 199A): A deduction of up to 20% of qualified business income for owners of pass-through entities, subject to income thresholds and business-type limits.
Quality of Earnings (QoE): An independent analysis assessing how sustainable and accurately stated a company’s earnings are, separating recurring operating performance from one-offs. Standard in acquisition diligence.

R&D Tax Credit: A federal credit for qualified research expenses, available to businesses developing or improving products, processes or software. Can offset payroll tax for eligible small businesses.
Reorder Point: The inventory level triggering a new purchase order, calculated from lead time demand plus safety stock.
Retained Earnings: Cumulative net income a business has kept rather than distributed to owners, carried on the balance sheet within equity.
Return on Equity (ROE): Net income divided by shareholders’ equity, measuring how efficiently owner capital generates profit.
Revenue Recognition (ASC 606): The US GAAP standard defining when and how much revenue to record, using a five-step model built around the transfer of control to the customer.
Rolling Forecast: A forecast continuously extended as periods close, always covering a fixed horizon ahead – typically 12 or 18 months – rather than stopping at fiscal year end.

S Corporation: A corporation electing pass-through taxation under Subchapter S, so income is taxed at the shareholder level rather than the corporate level. Owners must take reasonable compensation as W-2 wages.
Safety Stock: Extra inventory held as a buffer against demand spikes and supply delays, preventing stockouts between reorder and delivery.
Sales Tax Nexus: The connection between a business and a state sufficient to create a sales tax collection obligation – through physical presence, economic activity or affiliates.
Schedule K-1: The form reporting each partner’s or S-corp shareholder’s share of income, deductions, credits and distributions, used to complete their personal return.
Section 174 R&D Capitalization: The requirement to capitalize and amortize research and experimental expenditures rather than deducting them immediately – five years domestic, fifteen foreign.
Section 179 Deduction: An election to expense the full cost of qualifying equipment and software in the year placed in service, up to an annual dollar limit, instead of depreciating it.
Segregation of Duties: Splitting responsibility for authorizing, recording and holding custody of assets across different people, so no one individual can both commit and conceal an error or fraud.
Sell-Through Rate: The percentage of received inventory sold in a period, showing how quickly stock moves and whether buying decisions matched demand.
Standard Costing: Assigning predetermined costs to materials, labor and overhead, then analyzing variances against actual costs to explain performance.
Straight-Line Depreciation: Spreading an asset’s depreciable cost evenly across its useful life, producing the same expense each period.
Subaccount: A child account nested beneath a parent account in the chart of accounts, allowing detail without cluttering summary reports.
Subledger: A detailed ledger supporting a single general ledger control account – accounts receivable, accounts payable, fixed assets, inventory. Its total must tie to the GL balance.
Subsidiary (Accounting): A legal entity controlled by a parent company, maintained as a separate set of books and consolidated into group financials.

Three-Way Match: Verifying that the purchase order, receiving document and vendor invoice agree before payment is released. A core accounts payable control.
Transfer Pricing: The pricing of goods, services or IP transferred between related entities, often across borders. Must meet arm’s-length standards to withstand tax authority scrutiny.
Trial Balance: A listing of all general ledger account balances at a point in time, used to confirm total debits equal total credits before producing financial statements
Two-Tier ERP: An architecture where a corporate parent runs one ERP while subsidiaries or divisions run a second, lighter system that integrates with it.

Undeposited Funds: A holding account for payments received but not yet deposited to the bank, cleared when the actual deposit is recorded. A frequent source of unreconciled QuickBooks balances.

Valuation Allowance: A contra-asset reserve reducing a deferred tax asset to the amount more likely than not to be realized.
Value Added Tax (VAT): A consumption tax applied at each stage of production and distribution, with businesses reclaiming tax paid on inputs. Applies in the UK, EU and many other markets – not to US domestic sales.
Variable Cost: A cost that changes in direct proportion to production or sales volume – materials, shipping, transaction fees.
Variable Overhead: Indirect production costs that fluctuate with output, such as utilities, supplies and machine maintenance.
Variance Analysis: Comparing actual results against budget or standard and explaining each difference by cause – price, volume, mix or efficiency.
Vendor Master: The central record of approved suppliers, holding payment terms, tax details, banking data and contacts. A key fraud-control point in accounts payable.
Vertical Analysis: Expressing each line of a financial statement as a percentage of a base figure – revenue on the P&L, total assets on the balance sheet – to compare across periods or companies.
Vesting: The schedule on which an employee earns full ownership of granted equity or retirement contributions, typically over years with a cliff.

Warehouse Management System (WMS): Software controlling day-to-day warehouse operations – receiving, putaway, picking, packing, shipping and stock locations.
Weighted Average Cost: An inventory costing method valuing units at the average cost of all units available for sale, recalculated as new stock arrives.
Work in Progress (WIP): Partially completed goods on the production floor, carrying accumulated materials, labor and overhead but not yet finished.

XBRL: eXtensible Business Reporting Language – a standardized XML format for tagging financial data so it can be read and compared automatically. Required for SEC filers.
XBRL Taxonomy: The dictionary of defined tags used in an XBRL filing, specifying what each reported element means and how elements relate.

Year to Date (YTD): The cumulative total of a metric from the start of the fiscal year through the current date.
Year-End Close: Finalizing accounting records for a fiscal year – closing temporary accounts to retained earnings and preparing for audit and tax filing.
Year-over-Year (YoY) Growth: The percentage change in a metric compared with the same period one year earlier, removing seasonal distortion.
Yellow Book: The Government Auditing Standards issued by the GAO, governing audits of entities receiving federal funds.
Yield: The income generated by an investment over a period, expressed as a percentage of its cost or current value.
Yield to Maturity: The total annualized return on a bond held until maturity, accounting for coupon payments, purchase price and time remaining.

Z-Score: The Altman Z-Score, a composite of five financial ratios estimating a company’s probability of bankruptcy within two years.
Zero Balance Account (ZBA): A bank account held at zero, automatically funded from a master account as payments clear. A standard cash-concentration technique.
Zero-Based Budgeting: A budgeting method in which every expense must be justified from zero each cycle, rather than carried forward from the prior period.
Zero-Coupon Bond: A bond sold at a discount that pays no periodic interest, returning face value at maturity.
Zero-Rated Supply: Goods or services taxable at 0% VAT, letting the seller reclaim input VAT – distinct from exempt supplies, where input VAT cannot be reclaimed.