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.
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.
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.
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.
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.
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.
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.
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.
The information and tips we’re sharing in this article are meant to be a starting point for your year-end tax prep, so you can be informed and feel confident when working with your accountant. Be sure to check with a tax expert in your country or region for any specific advice you need, as each business (and tax district) is different. As our lawyers would say: “This article is for informational purposes only. It should not be considered legal or financial advice.”