Decoding common tax terms

Key Tax Terms

Figuring out your taxes shouldn’t require a dictionary, a thesaurus, and a thick accounting manual. We’ve narrowed down the common tax terms you’ll need to know and explained them using plain English.

Accrual-based accounting

A way to organize your accounting by recognizing revenue and expenses as they’re incurred. The other way is cash-based, which instead keeps track of transactions when the payment is actually made.

Here’s an example: You get a bill in July but don’t pay it until September. If you’re using the accrual basis, you would date the transaction in your accounting records as the bill date of July, rather than the payment date of September.

Amortization

Recognizing the cost of an asset over time and spreading out its deductions across several years. This only applies to a company’s intangible assets, meaning non-physical things like patents, trademarks, and brand recognition. For tangible assets (i.e. physical things) the process is called depreciation.

Average monthly withholding amount (AMWA)

The amount you deduct from your employees’ payroll in taxes to send to the CRA. Your AMWA determines when and how much payroll tax you have to pay depending on which bracket you fall into.

Capital assets

An asset with a significant and ongoing use at a business that typically isn’t meant to be sold or easily converted into cash. Some common examples include property, vehicles, machinery and office equipment.

Cash-based accounting

A way to organize your accounting by recognizing revenue and expenses as they’re paid. The alternative to this is called accrual-based, which instead tracks transactions as they’re incurred.

Here’s an example: You send out an invoice in January but don’t get paid until March. By using the cash basis, you’ll mark down the payment in March.

Cost of goods sold (COGS)

The total direct cost to produce the goods or services that your company sells. It factors in the price of materials, direct labour, and production operations (such as factory rent and utilities). It doesn’t include the cost of marketing, sales or general administrative costs.

The COGS is essential to figure out a company’s gross profit, which is done by subtracting it from total revenue.

Depreciation

A way to measure how much of the original value of an asset has been used up over time. Companies deduct a portion of an asset’s value over each of several years to space out the cost, and avoid distorting their profit/loss calculations by expensing it all up front.

Note that depreciation technically only applies to tangible assets, which are defined as physical things you buy for your business, like a company car or photocopier. For intangible assets (i.e., non-physical things) accountants like to use the word amortization.

Period adjustment

Recording journal entries to make sure that transactions are recognized in the correct period. Doing this ensures your accounting records are accurate for year-end, or even month-end.

Be sure to check out our overview of adjustments to make if you’re unsure of what types of transactions you should move.

Sole proprietorship

An unincorporated business that’s owned and operated by a single person. Revenue for these businesses is considered personal income, which makes filing taxes relatively simple.

It’s important to note that you don’t need to file any forms to be recognized as a sole proprietor. It’s the default for any new business owners who haven’t incorporated, or formed a partnership or limited liability company.

Categories:   Year end
Tags:  
Max Schreiter
By Max Schreiter
Disclaimer

The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.