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Financial Concepts

Use this as a quick reference guide to key financial terms and concepts, as a way to further your own education, or as a resource as you train others. Most include an example that illustrates the concept.

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Economic depreciation implies that an asset loses its value over time. But accounting depreciation has more to do with cost allocation than with loss of value.
Don't Let the Language Confuse You
Finance and accounting has its own language, as does any field. But finance and accounting have seemed to add a twist by using several words or phrases that mean the same thing.
EBIT or Operating Profit
Operating profit is the profitability of the business, before taking into account interest and taxes. To determine operating profit, operating expenses are subtracted from gross profit.
An expense is simply a cost of a business. Expenses are subtracted from revenues to determine profit on the income statement.
Expensing vs Capitalizing
Expensing vs. capitalizing refers to how a cost is treated on the financial statements. Expensing a cost indicates it is included on the income statement and subtracted from revenue to determine profit
GAAP stands for Generally Accepted Accounting Principles. The U.S. Securities and Exchange Commission (SEC) requires that GAAP be followed by all companies whose stock is publicly traded on the open market.
Gross Profit Margin
Gross profit margin (also called gross margin or gross profit margin percentage) is how much out of every sales dollar is left after Cost of Goods Sold (COGS) is subtracted from Revenue.
Historical Value
One of the key GAAP principles is the use of historical value for assets on the balance sheet.
Income / Profit / Bottom Line
Profit is no more and no less than what shows up on a company's income statement. Any income statement begins with the sales that the company generated during a given time period, which may be called revenue
Inventory Turns
Inventory turns is a measure of how many times inventory turns over in a year.

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