Essential Accounting Terms
Every industry has its own language and terms. These words and phrases can be confusing to anyone who is not part of the daily operations of a specific sector, and the accounting business is no exception.
To help you understand the terms, acronyms, and phrases regularly used when working with an accountant, Furrh And Associates has created this handy reference guide. Here you’ll find valuable information allowing you to comprehend and communicate your accounting needs effectively.
CPA: These initials stand for certified public accountant. It’s a widely respected indication that the person who puts those initials behind their name is a professional accountant. A person must meet educational and experience requirements and pass a challenging national uniform exam before including those initials behind their name.
Assets: Items (tangible or intangible) owned by a business, such as cash, inventory, equipment, buildings, goodwill, and patents.
Liabilities: It’s all the debts of a person or business.
Taxes: The primary way governments raise money from their citizens to finance government operations and programs. Taxes come in many forms, including income taxes, payroll taxes, sales taxes, and property taxes.
Balance sheet: The balance sheet summarizes everything the company owns (assets), everything the company owes for those assets (liabilities), and the net worth of the company (sometimes called equity or stockholders’ equity).
Corporation: A separate legal entity set up to conduct business while protecting its owners. A corporation has continuous existence independent of its members, and powers and liabilities are separate and distinct from its members.
S-Corporation: An S-Corporation is a small corporation with specific constraints on the number of owners (100), ownership (primarily individuals), and shares (one class of stock). The S-Corp is filed on Form 1120S, and the income flows to the owners on K-1s.
Sole proprietor: A term that refers to a business owner who is not a partner in a partnership or a shareholder in a corporation but is just an individual who owns a business. Unlike partnerships and corporations, which have separate tax returns to file with the IRS as they are entities in themselves, a sole proprietor must file the tax information for his business on his individual form 1040. The information is reported on a supporting schedule called a schedule C. This schedule is for reporting only the revenue and expenses of the sole proprietor for the business activity.
Enrolled agent: A tax professional recognized by the US Federal Government to represent taxpayers in dealings with the IRS. To obtain the EA designation, an individual must pass a rigorous two-day exam or work for the IRS in a tax-related position for five years. EAs are required to maintain their credentials with ongoing continuing education.
1099: One of several IRS tax forms that report various types of income other than wages, salaries, and tips. There are multiple kinds of 1099s, each with its own individual form that must be filled out and sent to the IRS and the recipient at the beginning of each tax season.
Profit and loss statement (PNL): A financial report that’s used to summarize a company’s performance and financial position by reviewing revenues, costs, and expenses during a specific period, such as quarterly or annually.
Franchise tax: A tax required by a state against a business for doing business within the state. Not all states charge a franchise tax, and businesses with sole proprietors that are not required to register with the state may not be required to pay this particular tax. The laws and regulations for franchise tax vary by state.
E-file forms: A form required by the IRS and some state tax agencies that give a tax preparer or organization authorization to submit your taxes electronically.
Engagement letter: A legal document that defines the relationship between a business providing professional services and its clients. The letter includes information on the services offered and what is required from the client to complete the service.
Tax organizer: A set of worksheets that help a person gather and “organize” their tax information to assist in the tax preparation process. These are often useful for people who have complex or lengthy tax returns.
We hope these terms made you feel more confident to liaise with an accountant. If you’re looking for an accountant, reach out to the experts at Furrh And Associates.
With many years of experience in the accounting sector, our team handles your finances with honesty and integrity.
We specialize in accounting, bookkeeping, payroll, small business accounting, tax preparation, and auditing.
We offer our services across South-West Oklahoma and North Texas.