Business Finance Terms,
Simply Explained.

A tax-deferral strategy that allows real estate investors to sell one investment property and reinvest the proceeds into a "like-kind" property without paying capital gains taxes at the time of sale. The exchange must follow strict IRS timelines — 45 days to identify the replacement property and 180 days to close. Proper bookkeeping of your original property's cost basis is essential to calculate any deferred gain correctly.

An IRS information return used to report income paid to non-employees, most commonly independent contractors. If your business pays a contractor $600 or more during the year, you're required to issue them a 1099-NEC. Accurate bookkeeping throughout the year makes 1099 preparation simple — disorganized records often lead to missed filings and IRS penalties.

The total amount your business currently owes to vendors, suppliers, and creditors for goods or services received but not yet paid. AP is listed as a current liability on your balance sheet. Keeping AP organized ensures you never miss a payment deadline, avoid late fees, and maintain strong vendor relationships.

Money that customers owe your business for products delivered or services rendered but not yet paid for. AR is listed as a current asset on your balance sheet. Monitoring AR closely is critical to cash flow — the longer invoices go unpaid, the harder it becomes to meet your own obligations.

A metric that measures the average number of days it takes a healthcare practice to collect payments after services are rendered. Calculated as AR Balance ÷ Daily Revenue. A high AR days number can signal slow insurance reimbursements or billing inefficiencies — and is a key performance indicator for practice profitability.

An accounting method that records revenue when it's earned and expenses when they're incurred, regardless of when cash actually changes hands. For example, if you complete a job in December but don't get paid until January, the revenue is recorded in December. This method gives a more accurate picture of your business's financial health than cash basis accounting.

A standardized billing format developed by the American Institute of Architects, widely used in construction for progress billing on large projects. AIA billing documents (G702 and G703) show work completed, materials stored, and amounts previously billed. Clean bookkeeping is essential for accurately completing AIA pay applications and tracking retainage balances.

The process of spreading the cost of an intangible asset — such as a patent, trademark, or business loan — over its useful life. Similar to depreciation but applied to non-physical assets. For a business loan, amortization refers to the gradual reduction of the principal balance through scheduled payments, with each payment split between principal and interest.

The total value of predictable, recurring revenue generated by subscriptions or contracts on an annualized basis. ARR = MRR × 12. It's one of the most important financial metrics for SaaS and subscription businesses because it shows the stability and growth trajectory of revenue — making it essential for investor reporting and forecasting.

Everything your business owns that has monetary value — including cash, accounts receivable, inventory, equipment, real estate, and intellectual property. Assets are listed on the balance sheet and classified as current (cash, AR, inventory) or non-current (property, equipment, long-term investments). Understanding your asset base is foundational to understanding your business's net worth.

A formal examination of your financial records and statements by either the IRS (tax audit) or an independent accounting firm (financial audit). IRS audits are triggered by red flags like unusually large deductions or income inconsistencies. Maintaining clean, well-organized books throughout the year is the best protection against audit risk — and makes the process far less stressful if one occurs.

A financial statement that provides a snapshot of your business's financial position at a specific point in time, showing what you own (assets), what you owe (liabilities), and what's left (equity). The fundamental equation is: Assets = Liabilities + Equity. A well-maintained balance sheet is one of the three core financial reports your bookkeeper should deliver every month.

The process of comparing your accounting records to your bank and credit card statements to ensure they match exactly. Reconciliation catches errors, duplicate charges, missing transactions, and potential fraud before they snowball. Tides reconciles every account every month so discrepancies are identified and resolved quickly.

Time spent on client work that can be directly invoiced to a client. Tracking billable vs. non-billable hours is essential for service businesses — it directly impacts revenue recognition, project profitability analysis, and payroll calculations. Accurate time-tracking feeds directly into clean books and accurate financial reporting.

The systematic process of recording, organizing, and maintaining a business's daily financial transactions — including income, expenses, invoices, and payments. Bookkeeping is the foundation of all accounting and financial reporting. Without accurate bookkeeping, it's impossible to produce reliable financial statements, prepare accurate taxes, or make confident business decisions.

A calculation that identifies the exact point at which your total revenue equals your total costs — meaning you're making neither a profit nor a loss. Break-even point = Fixed Costs ÷ (Price per Unit − Variable Cost per Unit). Understanding your break-even point helps you set pricing, plan sales targets, and evaluate the viability of new products or services.

A budget is a financial plan set at the beginning of a period based on expected revenue and expenses. A forecast is an updated projection that reflects actual results to date and revised expectations going forward. Budgets are static goals; forecasts are dynamic predictions. Both are essential for managing cash flow and setting realistic financial targets.

The rate at which a startup or early-stage company is spending its cash reserves, typically expressed as a monthly figure. If a company has $500,000 in the bank and spends $50,000/month, its burn rate is $50,000 and it has 10 months of runway. Burn rate is a critical metric for any founder who has raised capital and needs to manage cash carefully before reaching profitability.

The total cost of acquiring a new customer, including sales, marketing, and advertising expenses. CAC = Total Sales & Marketing Spend ÷ Number of New Customers Acquired. Tracking CAC alongside LTV (lifetime value) is essential for understanding whether your customer acquisition strategy is profitable and sustainable at scale.

Short for capitalization rate, it measures the expected annual return on an investment property relative to its value. Calculated as Net Operating Income ÷ Current Market Value. A higher cap rate generally indicates higher return potential but also higher risk. Real estate investors use cap rates to compare properties and evaluate investment performance across their portfolios.

An accounting method that records revenue when cash is actually received and expenses when cash is actually paid — regardless of when the work was done or invoice issued. Simpler than accrual accounting, cash basis is popular with very small businesses and sole proprietors. However, it can create a misleading picture of profitability if you have significant outstanding invoices or unpaid bills.

The movement of money into and out of your business over a given period. Positive cash flow means more money is coming in than going out; negative cash flow means the opposite. A business can be profitable on paper but still run out of cash — which is why cash flow management is often more important day-to-day than net income.

One of the three core financial statements, it shows all cash inflows and outflows from operating, investing, and financing activities during a reporting period. Unlike the P&L, which can include non-cash items, the cash flow statement shows exactly how much cash your business generated or consumed. It's the most accurate indicator of short-term liquidity.

A structured list of all the financial categories — accounts — used to organize your business's transactions in your accounting software. A well-built chart of accounts is the backbone of clean bookkeeping: it ensures transactions are categorized consistently so your reports are accurate and meaningful. Customizing it to your industry makes your financial reports far more useful.

The fees and expenses paid at the closing of a real estate transaction — including lender fees, title insurance, appraisal fees, attorney fees, and recording fees. Closing costs typically run 2–5% of the purchase price. For real estate investors, proper categorization of closing costs between capital expenses and deductible items is essential for accurate tax reporting.

The division of a real estate commission between the listing agent, buyer's agent, their respective brokerages, and any referral partners. For example, a 6% commission might be split 50/50 between listing and buyer sides, with each agent further splitting with their brokerage. Tracking commission splits accurately is one of the most important bookkeeping tasks for real estate agents.

The original value of an asset — typically what you paid for it — used to calculate capital gains or losses when the asset is eventually sold. For real estate investors, cost basis includes the purchase price plus acquisition costs and capital improvements. Keeping accurate records of your cost basis from day one saves significant money and headaches at tax time.

The direct cost of producing the food and beverages you sell — including ingredients, packaging, and any supplies used in production. COGS is subtracted from revenue to calculate gross profit. For restaurants, keeping food cost low relative to revenue (typically 28–35% for full-service restaurants) is one of the most critical factors in overall profitability.

The average amount you spend to acquire one new paying customer through advertising or marketing. CPA = Total Ad Spend ÷ Number of Customers Acquired. For e-commerce businesses, knowing your CPA against your average order value and customer lifetime value determines whether your marketing spend is profitable or burning through cash.

In double-entry bookkeeping, a credit is an entry that increases liabilities, equity, or revenue accounts — and decreases asset or expense accounts. Credits are always recorded on the right side of a ledger entry. A credit to your bank account means money left the account; a credit to a revenue account means income was recorded. Understanding credits is foundational to how your books work.

In double-entry bookkeeping, a debit is an entry that increases asset or expense accounts — and decreases liabilities, equity, or revenue accounts. Debits are always recorded on the left side of a ledger entry. For example, a debit to your bank account means money came in; a debit to an expense account means you recorded a cost. Debits and credits must always balance.

The process of allocating the cost of a tangible asset (equipment, vehicles, machinery) over its expected useful life rather than expensing it all in the year of purchase. A $30,000 delivery truck might be depreciated over 5 years at $6,000/year. Depreciation reduces your taxable income each year and appears as a non-cash expense on your P&L.

The electronic transfer of employee wages directly into their bank accounts via the ACH (Automated Clearing House) network — the standard payroll delivery method for most businesses. For bookkeeping purposes, each payroll run should be recorded with the correct gross wages, tax withholdings, and net pay amounts for each employee in your accounting system.

The accounting system in which every financial transaction is recorded in at least two accounts — one as a debit and one as a credit — so the books always remain balanced. The equation Assets = Liabilities + Equity always holds. Double-entry bookkeeping is the foundation of modern accounting and is what makes financial statements reliable and auditable.

A good-faith deposit made by a homebuyer when submitting an offer on a property, typically 1–3% of the purchase price. Earnest money demonstrates serious buyer intent and is held in escrow until closing, at which point it's typically applied toward the down payment or closing costs. For investor bookkeeping, earnest money must be tracked carefully as it flows through transactions.

A nine-digit number assigned by the IRS to identify your business for tax purposes — essentially the business equivalent of a Social Security Number. EINs are required to open a business bank account, hire employees, file business tax returns, and issue 1099s. All business financial accounts and records should be organized under your EIN, not your personal SSN.

A document issued by an insurance company after a medical claim is processed, detailing what was billed, what the insurer covered, and what the patient owes. EOBs are not bills — they're informational statements that explain how the claim was adjudicated. For healthcare practice bookkeeping, EOBs are critical documents for reconciling insurance payments against expected reimbursements.

The owner's claim on the business's assets after all liabilities have been paid — essentially, what the business is "worth" to you. Equity = Assets − Liabilities. It includes paid-in capital (money you invested) and retained earnings (profits kept in the business). As your business grows and pays down debt, equity increases, appearing in the equity section of the balance sheet.

The costs incurred in running your business — including rent, utilities, payroll, software, supplies, and professional fees. Expenses are categorized in your chart of accounts and recorded on your P&L, reducing taxable income when properly documented. Consistent, accurate expense categorization is one of the most valuable things a bookkeeper does for a small business owner.

Federal Insurance Contributions Act taxes — the mandatory payroll taxes that fund Social Security and Medicare. FICA = 7.65% from the employee (withheld from their paycheck) + 7.65% from the employer, for a total of 15.3% per employee. Self-employed individuals pay the full 15.3% as Self-Employment Tax. FICA taxes must be deposited with the IRS on a regular schedule throughout the year.

The three core reports that summarize a business's financial health: the Profit & Loss Statement (income and expenses), the Balance Sheet (assets, liabilities, equity), and the Cash Flow Statement (cash inflows and outflows). Together they give a complete picture of profitability, net worth, and liquidity. Tides delivers all three to clients every month.

A 12-month accounting period used for financial reporting and tax filing that may or may not align with the calendar year (January–December). Most small businesses use the calendar year as their fiscal year. Choosing the right fiscal year for your business type can sometimes offer tax planning advantages worth discussing with your CPA.

The reduction in value of a company's vehicles over time due to use, age, and wear. For trucking companies and logistics businesses, vehicle fleets are typically major assets that depreciate quickly. Tracking fleet depreciation accurately is essential for both tax purposes (Section 179 expensing and bonus depreciation) and for understanding the true cost of operating each vehicle.

The ratio of the cost of ingredients used to prepare menu items compared to the revenue those items generate. Food Cost % = COGS ÷ Food Revenue × 100. Most successful restaurants target a food cost percentage of 28–35%. Tracking this metric monthly is essential for identifying menu pricing issues, waste problems, and vendor cost increases before they erode your margins.

A billing document issued by a carrier or freight broker to the shipper for transportation services rendered. Freight invoices detail the shipment, weight, distance, rates, and accessorial charges. For transportation and logistics businesses, accurate recording and reconciliation of freight invoices is critical — billing errors and duplicate charges are common and can significantly impact margins.

A standardized set of rules and conventions governing how businesses record and report financial information in the United States, established by the Financial Accounting Standards Board (FASB). While small businesses aren't required to follow GAAP strictly, adhering to GAAP principles — like consistency and full disclosure — makes financial statements more reliable, comparable, and useful to lenders and investors.

The master record of all financial transactions in your business, organized by account. Every journal entry made in your accounting system flows into the general ledger, which serves as the source of truth for all financial reports. When your bookkeeper "closes the books" each month, they're ensuring the general ledger is complete, accurate, and reconciled.

An employee's total compensation before any deductions are taken out — including base salary or hourly wages, overtime, bonuses, and commissions. Gross pay is what you budget for when planning labor costs, but it's not what hits your bank account per employee (that's net pay after taxes and deductions). Both figures must be recorded accurately in your payroll bookkeeping.

The revenue remaining after subtracting the direct cost of goods sold (COGS) or direct service delivery costs. Gross Profit = Revenue − COGS. It measures how efficiently you're producing your product or delivering your service, before accounting for overhead. Gross profit margin (gross profit ÷ revenue) is one of the most important indicators of business health and pricing adequacy.

A tax collection agreement among US states and Canadian provinces that simplifies fuel tax reporting for motor carriers operating in multiple jurisdictions. Commercial truckers and fleet operators must file quarterly IFTA reports showing miles driven and fuel purchased in each state. Accurate fuel and mileage records are critical — improper IFTA filings can result in significant penalties and audits.

Also called the Profit & Loss Statement (P&L), it shows your business's revenue, expenses, and net profit or loss over a specific period. It answers the fundamental question: "Is my business making money?" It's one of the three core financial statements and should be reviewed every month by every business owner — not just at tax time.

The process by which a healthcare provider applies to and gets approved to participate in an insurance network as an in-network provider. Credentialing affects your revenue significantly — in-network reimbursement rates differ substantially from out-of-network rates. For bookkeeping, tracking which payers have credentialed your providers and their respective reimbursement rates is essential for revenue cycle management.

A measure of how many times your business sells and replaces its inventory during a given period. Inventory Turnover = COGS ÷ Average Inventory. High turnover means you're selling efficiently; low turnover may indicate overstocking or poor demand forecasting. E-commerce businesses should track inventory turnover by product category to make smart purchasing and pricing decisions.

The practice of tracking all costs — labor, materials, subcontractors, equipment, and overhead — associated with a specific project or job and comparing them to the revenue earned. Job costing answers: "Did we actually make money on this project?" Without it, contractors often discover they've been underbidding or losing margin without realizing it until it's too late.

The most basic unit of bookkeeping — a record of a financial transaction showing which accounts were debited and credited, along with the date, amount, and description. In QuickBooks, most journal entries are created automatically when you record invoices, bills, or bank transactions. Manual journal entries are used for adjustments, corrections, and complex transactions.

Measurable financial and operational metrics used to evaluate how effectively a business is achieving its goals. Common financial KPIs include gross margin, net profit margin, cash runway, AR days, and revenue growth rate. The right KPIs vary by industry and business stage — but all of them depend on accurate bookkeeping data to be meaningful. Without clean books, your KPIs are just guesses.

All financial obligations your business owes to outside parties — including accounts payable, business loans, credit card balances, accrued taxes, and deferred revenue. Liabilities are listed on the balance sheet and classified as current (due within one year) or long-term (due beyond one year). Managing liabilities carefully is essential to maintaining the financial health and creditworthiness of your business.

A document signed by a contractor, subcontractor, or supplier waiving their right to file a mechanic's lien against a property in exchange for payment. Lien waivers are standard in construction and protect property owners from liens being placed on their properties after work has been paid. For contractor bookkeeping, tracking which lien waivers have been collected and issued is critical for job closeout and compliance.

A flexible business structure that provides owners (called "members") with personal liability protection while offering tax flexibility. By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC as a partnership — but LLCs can elect S-Corp taxation to potentially reduce self-employment tax. Most small business owners form an LLC as their first formal business structure.

The fees charged by payment processors (Stripe, Square, PayPal, Shopify Payments) for processing credit and debit card transactions — typically 1.5–3.5% per transaction plus a flat fee. For e-commerce businesses with high sales volume, merchant fees can represent a significant expense that must be tracked carefully and recorded as a separate expense line item, not netted against revenue.

The total predictable, recurring revenue your subscription-based business generates each month. MRR = Number of Paying Customers × Average Revenue per Account. Tracking MRR growth, churn, and expansion revenue each month is foundational for SaaS businesses. It's the single most important revenue metric for software and subscription companies when communicating with investors or evaluating business health.

The final "bottom line" profit remaining after all revenue has been earned and all expenses — COGS, operating expenses, taxes, interest, depreciation — have been deducted. Also called "net profit," it's the number that flows into retained earnings on your balance sheet at year-end. Positive net income means your business was profitable; negative means you operated at a loss.

The actual amount an employee takes home after all mandatory deductions — federal/state income tax, FICA, health insurance premiums, 401k contributions — are subtracted from gross pay. For payroll bookkeeping, it's important to record both the gross pay as a labor expense and the tax liabilities separately — not just the net pay amount that leaves your bank account.

The ongoing costs required to run day-to-day business operations that are not directly tied to producing a product or service — including rent, utilities, insurance, salaries, software subscriptions, and office supplies. OpEx is distinct from COGS (direct production costs) and appears below gross profit on the P&L. Keeping OpEx in check relative to revenue is essential for maintaining healthy profit margins.

A profitability ratio that measures how much profit a business generates from its core operations as a percentage of revenue, before accounting for interest and taxes. Operating Margin = Operating Income ÷ Revenue × 100. A higher operating margin indicates better operational efficiency and is a key metric for comparing profitability between businesses in the same industry.

The ratio of indirect business costs (office expenses, insurance, equipment, administrative staff) to direct labor costs, used by contractors to ensure indirect costs are factored into project bids. Overhead Rate = Total Indirect Costs ÷ Total Direct Labor Costs. Without an accurate overhead rate, contractors chronically underbid jobs and wonder why strong revenue doesn't translate to profit in the bank.

The percentage of a medical practice's total revenue consumed by non-clinical operating costs — staff salaries, rent, utilities, billing services, supplies. Overhead Ratio = Total Overhead Costs ÷ Total Revenue × 100. Industry benchmarks vary by specialty, but most practices aim to keep overhead below 55–60%. Tracking this ratio monthly is essential for practice profitability analysis.

The unique set of costs incurred by independent owner-operators in the trucking industry — including fuel, truck payments, insurance, maintenance, tires, permits, and IFTA taxes. Unlike employee drivers, owner-operators are responsible for all costs themselves, making accurate expense tracking essential for calculating true profitability per mile or per load. Many owner-operators are surprised by their effective hourly rate when all costs are properly accounted for.

A tax structure in which business income is not taxed at the entity level but instead "passes through" to the owner's personal tax return, where it's taxed at individual rates. Sole proprietorships, partnerships, LLCs, and S-Corps all qualify as pass-through entities. The main advantage is avoiding the "double taxation" that C-Corps face — understanding your entity type is essential for tax planning.

The total income generated by a healthcare practice from patient services — including insurance reimbursements, patient copays, coinsurance, self-pay amounts, and cash-pay services. Patient revenue must be tracked separately from other income sources (ancillary services, retail, etc.). Accurate tracking requires reconciling EOBs, insurance remittances, and patient payments consistently every month.

The complete cycle of calculating employee wages, withholding taxes and deductions, issuing payments, and filing required payroll tax reports with federal and state agencies. Payroll must be processed accurately and on schedule — errors result in unhappy employees, IRS penalties, and complicated corrections. Every payroll run must be recorded with gross wages, tax liabilities, and net disbursements in the correct accounts.

The taxes that employers are required to withhold from employee paychecks and/or contribute themselves — including federal and state income tax withholding, Social Security (6.2%), Medicare (1.45%), and federal and state unemployment taxes (FUTA/SUTA). Payroll taxes must be deposited with the IRS on a strict schedule. Late or missed deposits result in significant penalties that compound quickly.

A daily allowance given to employees — particularly truck drivers and traveling workers — to cover meals, lodging, and incidental expenses while away from home for work. The IRS sets standard per diem rates that are tax-deductible by the business. For trucking companies and businesses with traveling staff, per diem is a significant expense line item that must be properly documented and recorded.

The sum of a restaurant's two largest controllable costs: Cost of Goods Sold (food and beverage) plus total labor costs (wages, payroll taxes, benefits). Prime Cost = COGS + Labor. Most successful full-service restaurants target a prime cost of 55–65% of revenue. It's considered the most important financial metric in the restaurant industry because it directly reflects operational control and profitability.

Also called the Income Statement, it summarizes your business's revenues, costs, and expenses over a specific time period to show whether the business is profitable or operating at a loss. The P&L is one of the three core financial statements. Business owners should review their P&L every single month — it's the clearest window into whether your business is actually making money.

The percentage of revenue that translates into profit after expenses are paid. Net Profit Margin = Net Income ÷ Revenue × 100. For example, a 15% profit margin means you keep $0.15 of every dollar of revenue as profit. Profit margins vary significantly by industry — restaurant margins might be 3–9%, while software companies can run 20–40%+. Tracking your margin consistently is the best way to measure business improvement over time.

An invoicing method used in construction and project-based work where invoices are issued incrementally as a project reaches predefined milestones or completion percentages — rather than waiting until the full project is finished. Progress billing improves cash flow for contractors by aligning payments with work completed. Each progress invoice should be tracked against the total contract value and previously billed amounts.

The process by which employees earn paid time off over time, typically at a rate of hours per pay period worked. For bookkeeping purposes, PTO accrual creates a liability on the balance sheet — the value of PTO earned but not yet used. When employees take PTO, the liability is reduced and payroll expense is recorded. Properly accruing PTO ensures your balance sheet accurately reflects this obligation.

Prepayments of income tax made by self-employed individuals, business owners, freelancers, and others who don't have taxes automatically withheld from their income. The IRS requires quarterly estimated payments if you expect to owe at least $1,000 in taxes for the year. Due dates are typically April 15, June 15, September 15, and January 15. Accurate bookkeeping that tracks income throughout the year is essential for calculating the right payment amounts and avoiding underpayment penalties.

The cumulative amount of net profit that a business has kept (retained) rather than distributing to owners as dividends or draws. Retained Earnings = Prior Retained Earnings + Net Income − Owner Draws/Dividends. It appears in the equity section of the balance sheet and grows over time as a profitable business reinvests its profits. A healthy retained earnings balance indicates financial stability.

A portion of a contractor's earned payment withheld by the project owner until the project is substantially or fully completed — typically 5–10% of each progress payment. For contractor bookkeeping, retainage must be tracked as a separate receivable because it doesn't hit your bank account until project closeout — sometimes months after the work is done and the invoice was submitted.

An upfront payment made by a client to secure ongoing access to a service provider's time and expertise over a specified period. Common in law, accounting, consulting, and marketing. From a bookkeeping standpoint, retainer fees are often deferred revenue — they should be recognized as income gradually as services are delivered, not all at once when payment is received.

A performance metric that measures the efficiency of an investment by comparing the gain or loss relative to its cost. ROI = (Net Gain − Cost of Investment) ÷ Cost of Investment × 100. ROI can be applied to any business decision — a marketing campaign, new equipment, or expanding a location. Accurate financial records are the foundation of any reliable ROI calculation.

The total income generated by a business from its primary activities — selling products, delivering services, or earning rental income — before any expenses are deducted. Revenue is the top line on your P&L. Revenue growth is a key indicator of business momentum, but it must always be evaluated alongside expenses and margins to understand true financial health.

A metric that measures how much revenue a restaurant generates per available seat per hour of operation. RevPASH = Total Revenue ÷ (Number of Seats × Operating Hours). It's used to evaluate table turn rates, peak-hour performance, and the effectiveness of reservations management. Higher RevPASH generally means better utilization of your physical space and staff.

The number of months a business can continue operating at its current spending rate before exhausting its cash reserves. Runway = Current Cash Balance ÷ Monthly Burn Rate. For funded startups, runway is the single most critical metric to monitor. A runway of 12–18 months is generally considered healthy; below 6 months creates urgency for fundraising or dramatic cost cuts. Clean books are essential for calculating accurate runway.

A special IRS tax designation that allows a corporation or LLC to pass income, losses, deductions, and credits through to shareholders for federal tax purposes, while potentially allowing owners to reduce self-employment tax by splitting income between salary and distributions. S-Corp election can save thousands in SE taxes for profitable small businesses, but comes with specific IRS requirements including payroll obligations and reasonable compensation rules.

The 15.3% tax paid by self-employed individuals and business owners to cover Social Security (12.4%) and Medicare (2.9%) contributions — the equivalent of both the employer and employee FICA share. SE tax applies to net self-employment income. You can deduct half of SE tax as a business deduction. Accurate bookkeeping ensures you're calculating SE tax correctly and not over- or under-paying throughout the year.

The loss of inventory due to theft, damage, administrative errors, or supplier fraud — resulting in fewer items on hand than your records show. Shrinkage directly impacts COGS and profit margin. For e-commerce and retail businesses, conducting regular physical inventory counts and reconciling them to your accounting records is the only way to accurately measure and address shrinkage before it erodes your margins.

A unique identifier assigned to each distinct product variant in your inventory — tracking specific combinations of size, color, model, or other attributes. SKUs enable accurate inventory tracking, reorder management, and profitability analysis by product. For bookkeeping purposes, organizing COGS and inventory records by SKU allows you to identify which products are most and least profitable.

The simplest and most common business structure, in which the business and owner are considered the same legal entity. There's no formal registration required, and all business income flows to your personal tax return on Schedule C. While easy to set up, sole proprietors have unlimited personal liability for business debts and pay self-employment tax on all net profits — making it worth reviewing other structures as the business grows.

Business expenses that the IRS allows you to subtract from your gross income, reducing the amount of income subject to tax. Common deductions include rent, utilities, equipment, professional fees, health insurance premiums, vehicle mileage, and home office costs. Every legitimate business expense is a potential deduction — which is why organized bookkeeping throughout the year is directly tied to a lower tax bill.

The total amount of tax a business or individual legally owes to federal, state, and local governments for a given tax period. Clean books throughout the year allow you to estimate your tax liability in real time, avoid surprises, and plan accordingly — rather than facing a large unexpected bill at filing time when options to reduce it are limited.

A billing method in which clients are charged based on the actual time spent on their project plus the cost of any materials or expenses used, often with a markup. T&M billing is common in consulting, IT services, engineering, and some construction work. It protects service providers from scope creep but requires meticulous time and expense tracking to bill accurately and avoid disputes.

A practice in which servers, bartenders, and other tipped employees contribute a portion of their tips into a communal pool redistributed among a broader group of employees, potentially including back-of-house staff. Tip pooling rules are regulated by the Fair Labor Standards Act (FLSA) and vary by state. For restaurant bookkeeping, tip income must be tracked carefully for payroll tax withholding and accurate labor cost reporting.

The percentage of a team member's total available working hours that are spent on billable client work. Utilization Rate = Billable Hours ÷ Total Available Hours × 100. For professional services firms, utilization rate is a direct driver of revenue and profitability. A fully loaded staff member billing 75–80% of their time is generally a healthy benchmark — below 60% often signals a capacity or sales problem worth investigating.

The process of comparing actual financial results to a budget, forecast, or prior period to understand why numbers came in higher or lower than expected. Variance analysis turns raw financial data into actionable insight — it's how business owners identify cost overruns, underperforming revenue streams, or unexpected efficiency gains. Without it, a P&L is just a scoreboard; with it, it becomes a management tool.

An IRS form issued by employers to employees each January showing the employee's total wages earned and taxes withheld during the prior calendar year. Employees use their W-2 to file their personal income tax returns. Employers are required to distribute W-2s by January 31. W-2 data must reconcile precisely with your payroll records — discrepancies raise red flags with the IRS.

An IRS form completed by employees when starting a new job (or when their tax situation changes) that tells the employer how much federal income tax to withhold from each paycheck. Accurate W-4s on file ensure employees aren't over- or under-withheld — both of which create problems at tax time and are a common source of employee complaints if not handled correctly.

An IRS form used to collect a contractor's or vendor's taxpayer identification information (name, address, Social Security Number or EIN) before you pay them for services. You need a completed W-9 from any independent contractor you pay $600 or more per year so you can issue them a 1099. Collecting W-9s before issuing payment — not after — is a best practice that saves significant headaches at year-end.

The amount deducted from an employee's paycheck and remitted to the IRS and state tax agencies on their behalf throughout the year — covering federal and state income taxes, Social Security, and Medicare. Employers are legally responsible for withholding the correct amounts and remitting them on time. Under-withholding leads to employee tax bills; over-withholding is essentially an interest-free loan to the government.

Services that have been performed but not yet billed to or paid by the client — representing revenue that has been "earned" but not yet recognized. WIP is tracked as an asset on the balance sheet. For project-based businesses and professional services firms, accurate WIP tracking is essential for understanding true revenue and profitability, especially at month-end and year-end close.

A state-mandated insurance program that provides wage replacement and medical benefits to employees who suffer work-related injuries or illnesses. Workers' comp premiums are paid by the employer (not withheld from employees) and are calculated as a percentage of payroll, varying by industry risk classification. Workers' comp is a required operating expense for almost all employers and must be tracked as a separate insurance cost in your books.

The difference between your current assets (cash, AR, inventory) and current liabilities (AP, short-term debt, accrued expenses). Working Capital = Current Assets − Current Liabilities. Positive working capital means your business can cover its short-term obligations; negative working capital is a warning sign. Maintaining adequate working capital is especially critical in businesses with seasonal revenue cycles.

The act of recording an expense or reducing the value of an asset to decrease taxable income. In everyday business usage, a "write-off" refers to any legitimate business expense that can be deducted from taxable income. More technically, it can also refer to writing off a bad debt (uncollectible AR) or a worthless asset. Write-offs are legal and often significant — but must be properly documented to survive an audit.

The process of finalizing all financial records at the end of a fiscal year — including completing all reconciliations, recording adjusting journal entries, depreciating assets, reconciling payroll, and ensuring the financial statements are accurate and complete. The year-end close is critical: it's the foundation for your tax return, provides the final baseline for the new year, and closes the books so they can't be accidentally changed going forward.