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TAX & ACCOUNTING GLOSSARY
Understanding tax and accounting terminology can help you make more informed financial decisions. This glossary provides clear, straightforward definitions of commonly used tax, accounting, and financial planning terms, making it easy to find the answers you need and better understand your finances.
Financial Accounting Foundation
The Financial Accounting Foundation (FAF) is an independent, not-for-profit organization. Its primary role is to oversee, fund, and appoint members to the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).
The FAF ensures these boards have the resources and independence necessary to quality financial reporting standards.
Accrual Basis of Accounting
Accrual basis accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash actually changes hands. Accrual basis accounting includes revenue recognition, expense recognition and matching principal. For revenue recognition, income is recorded when the service is completed or goods are delivered, even if the customer hasn't paid yet (recorded as Accounts Receivable). For expense recognition, costs are recorded when they are incurred or when a service is used, even if the bill hasn't been paid yet (recorded
as Accounts Payable). For matching principle, matches revenues and their related expenses within the same reporting period.
Modified Cash Basis of Accounting
Accrual basis accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash actually changes hands. Accrual basis accounting includes revenue recognition, expense recognition and matching principal. For revenue recognition, income is recorded when the service is completed or goods are delivered, even if the customer hasn't paid yet (recorded as Accounts Receivable). For expense recognition, costs are recorded when they are incurred or when a service is used, even if the bill hasn't been paid yet (recorded
as Accounts Payable). For matching principle, matches revenues and their related expenses within the same reporting period.
Cash Basis of Accounting
Cash basis accounting is a simple financial method where revenue and expenses are recorded only when cash actually changes hands. Income is booked when you receive payment, and expenses are recorded when you pay your bills, making it a true reflection of available cash flow.
Government Accounting Standard Board (GASB)
The GASB establishes accounting and financial reporting standards for U.S. state and local governments that follow generally accepted accounting principles (GAAP).
Governmental Funds
The funds are used to account for activities supported by taxes, grants, and similar revenue sources.
General Fund: Used for the government's basic operations, including general
administration, public safety, and public works.
Special Revenue Funds: Used for revenues restricted for specific purposes, e.g. a state street fund or a drug fund.
Capital Projects Funds: Used for financial resources restricted for capital outlays, e.g., construction of capital facilities.
Debt Service Funds: Used for the accumulation of resources to meet debt obligations.
Proprietary Funds
The funds account for business-type activities that are financed by fees or charges.
Enterprise Funds: Used for activities that provide goods or services to the public, e.g., water and sewer utilities.
Internal Service Funds: Used for goods or services provided by one department to other departments within the government on a cost-reimbursement basis.
Fiduciary Funds
The funds account for assets held by the government in a trustee capacity for individuals, private organizations, or other governmental units.
Pension Trust Funds: Used to account for assets held for employee retirement benefits.
Investment Trust Funds: Used to account for assets held for investment purposes.
Private-Purpose Trust Funds: Used to account for assets held for specific private
purposes.
Agency Funds: Used to account for assets held by the government as an agent for others, such as collecting taxes for other governments.
Trial Balance
Lists all the balances of a company's general ledger accounts (assets, liabilities, equity, revenues, expenses) at a specific point in time, ensuring that the total debits equal the total credits.
Structure: Two columns, one for debit balances and one for credit balances.
Timing: Prepared at the end of an accounting period, before preparing the financial
statements.
Double-Entry System: A tool in double-entry accounting, where every transaction
must have an equal debit and credit entry.
Error Detection: If the total debits and credits do not match, it means an error in the accounting records needs to be corrected.
Preparation of Financial Statements: After identifying and correcting any errors, the trial balance forms the basis for preparing financial statements.
Normal Balance
Lists T Accounts, Debit and Credit.
Assets: (cash, inventory, and accounts receivable) increase with debits, so their normal balance is a debit.
Liabilities: (accounts payable and loans) increase with credits, so their normal balance is a credit. Unearned revenue or deferred revenue.
Equity: (owner's equity or shareholder's equity) increases with credits, so it's normal
balance is a credit.
Revenue: (income) increases with credits, so its normal balance is a credit.
Expenses: increase with debits, so their normal balance is a debit.
Chart of Accounts
Structure
Account Names: Descriptive names for each account.
Account Numbers: Codes assigned to each account for identification.
Balances: The current value of each account.
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Key Account Types
Assets: What the company owns (cash, equipment, inventory).
Liabilities: What the company owes to others (loans, accounts payable).
Equity: The owner's or shareholder’s stake.
Revenue: Income generated from business operations.
Expenses: Costs incurred in running the business.
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Importance
Financial Reporting: To create accurate financial statements - income statements, balance sheets, and cash flow statements.
Financial Analysis: To allow companies to analyze their financial performance and make business decisions.
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Audit
An annual financial report prepared by an independent auditor. A comprehensive audit document contains a summary statement of the scope of the audit, explanatory comments concerning any exceptions to generally accepted auditing standards, explanatory comments concerning verification procedures, financial statements and schedules, statistical information, supplemental comments, and any finding or recommendations.
Corporate Bonds
Debt securities that are issued by companies to raise capital for operations, expansion, or acquisitions. Investors lend money to companies, and companies are legally committed to paying periodic interest and principal amount at a specific maturity date.
Municipal Bonds
Debt securities issued by state and local governments to fund public projects. Investors lend money to state and local governments in exchange for regular interest payments and the return of principal at maturity. The interest earned is exempt from federal income taxes.
Revenue Bonds
Municipal debt securities issued by state and local governments to fund specific public projects, e.g., toll roads, airports or water utilities. The principal and interest are repaid from the income generated by the funded project, not from general tax revenues.
Budget
A budget is a financial operational plan including an estimate of proposed expenditures and the means of financing them. The budget designates the financial plan presented for adoption and finally approved. It usually specifies whether the budget under consideration is preliminary and proposed, or whether the appropriating body, such as a company's board of directors, has approved it.
Zero-Based Budgeting
When companies plan to use income minus expenses, savings and investments that equal zero. Not using previous spending patterns, it requires companies to justify and assign a specific purpose to every single dollar before the budget year begins.
Activity-Based Budgeting (ABB)
When companies identify the specific operational activities that drive costs. It requires companies to measure cost drivers, evaluate efficiency and only finance required business activities.
Tax Avoidance & Tax Evasion
The difference between tax avoidance and tax evasion is legality. Tax avoidance is the legal use of the tax system to minimize a tax bill, while tax evasion is the illegal practice of not paying taxes through fraud and concealment.
Tax avoidance operates within tax codes to reduce the tax liability. Individuals and companies use legal tax breaks, credits, deductions, exemptions, and maximize contributions to a retirement account or use tax-advantaged bonds.
Tax evasion occurs when individuals and companies intentionally escape paying their tax liability through misrepresentation, hiding assets, underreporting, omitting income, claiming personal expenses as business deductions, and hiding money in illegal offshore accounts. Tax evasion is a criminal offense that results in hefty fines, penalties and imprisonment.
Section 179 & Bonus Depreciation
Section 179 allows immediate expensing of up to $1.2 million in qualifying equipment (for the year of 2025 limit).
Bonus depreciation (80% allowed in 2025) is a method to accelerate deductions for qualified property and equipment.
Partnership, S Corporations &
C Corporations
Partnerships involve two or more people sharing profits, losses and management. They file Form 1065 and do not pay taxes. Their income flows through to the partners via Schedule K-1.
S Corporations avoid double taxation. They elect pass-through taxation, file Form 1120-S and income passes to shareholders via Schedule K-1.
Shareholders report income on their personal tax return and avoid self-employment tax on dividends distributions.
C Corporations file Form 1120 and pay tax at the corporate level. The dividends distributions to shareholders are taxed again on personal tax returns. C Corp have a flat 21% federal tax rate based on 2025 tax rate. Their losses are carried forward as Net Operating Losses.
Cost Allocation Methodology
An accounting process used to distribute indirect or shared expenses (rent, IT, and overhead) across departments, divisions and programs.
Identify Cost Object: Identify where costs should be distributed.
Group Cost Pools: Organize indirect and overhead expenses into cost pools. For example, companies create one pool for facilities/rent and another for administrative salaries.
Choose Allocation Drivers: Measure how much a cost object benefits from a specific cost pool, e.g., square footage, Headcount or Labor Hours, and usage or transaction volume.
Distribution Method: Direct Allocation that directly assigns shared costs to departments without considering any services provided between internal support departments, and Activity-Based Costing (ABC) allocates costs based on the specific activities required to departments.
Cost Recovery Models
Once costs are allocated, these models define how companies recoup the costs.
Full Cost Recovery: Calculates the true total of delivering a project, including both direct costs and proportional overhead, so companies fully break even.
Fee-Based: Establish a fee structure so that the departments benefiting from a service directly pay for its maintenance and operation.
Chargebacks: Used in IT or shared services that directly invoice departments on their actual consumption.