Differences
Confusable terms, side by side
Pairs of terms that are easy to mix up and expensive to get wrong. Each page states the difference in a sentence, sets the two out aspect by aspect, and works an example with computed figures — most of them from Northwind Traders, the company the free course is taught on.
- Pairs
- 31
- Definitions from
- The glossary
- Basis
- Accrual, US GAAP
Every pair
- Accrual basis vs cash basisCash basis records revenue and expenses when money moves; accrual basis records them when they are earned and incurred — so a cost paid a year in advance is one month's expense under cash and twelve months' under accrual.
- Debit vs creditA debit is an entry on the left side of an account and a credit is an entry on the right; neither means increase or decrease on its own — a debit increases assets and expenses and decreases liabilities, equity and revenue, and a credit does the opposite.
- Accounts payable vs accounts receivableAccounts payable is money the company owes to its suppliers; accounts receivable is money its customers owe it — a liability on one side of the balance sheet and an asset on the other.
- Gross margin vs net marginGross margin is revenue less only the cost of delivering it, as a share of revenue; net margin is what is left after every cost — operating expenses, interest and tax — as a share of revenue.
- EBITDA vs operating incomeOperating income is profit after all operating expenses, depreciation and amortization included; EBITDA adds depreciation and amortization back, so it is always at least as large and ignores what the company's assets cost to use up.
- EBIT vs EBITDAEBIT is earnings before interest and taxes; EBITDA is EBIT with depreciation and amortization added back — the difference between them is exactly the period's D&A.
- Deferred revenue vs accrued revenueDeferred revenue is cash billed or received before the work is done, a liability; accrued revenue is work done before it is billed, an asset — they are the same timing gap in opposite directions.
- Accrued expenses vs accounts payableAccrued expenses are costs incurred that no bill has arrived for yet; accounts payable are bills received and approved but not yet paid — both are liabilities, separated by whether the vendor's invoice exists.
- Prepaid expense vs accrued expenseA prepaid expense is cash paid before the cost is used, an asset; an accrued expense is a cost used before it is paid or billed, a liability — the same timing difference running in opposite directions.
- Accrual vs deferralAn accrual records revenue or expense before the cash moves; a deferral records cash that has moved before the revenue or expense is recognized — accruals create receivables and payables, deferrals create prepaids and deferred revenue.
- Depreciation vs amortizationDepreciation spreads the cost of a tangible asset over its useful life; amortization does the same for an intangible asset — and, in loans and prepaids, for the paying down of a balance over time.
- Operating lease vs finance leaseBoth put a right-of-use asset and a lease liability on the balance sheet under ASC 842; an operating lease shows one straight-line lease cost in the P&L, while a finance lease shows interest and amortization separately, front-loading the expense.
- Realized FX gain or loss vs unrealized FX gain or lossA realized FX gain or loss is locked in when a foreign-currency item is settled; an unrealized one is the paper change in an item still open at a balance-sheet date — both go through the P&L under ASC 830.
- Current ratio vs quick ratioThe current ratio divides all current assets by current liabilities; the quick ratio counts only cash, short-term investments and receivables, leaving out inventory and prepaids that cannot pay a bill this month.
- Gross burn vs net burnGross burn is all the cash a company spends in a month; net burn is that spending less the cash it collects — net burn is what shortens runway.
- MRR vs ARRMRR is recurring revenue normalized to one month; ARR is the same figure annualized — ARR is MRR × 12, so the two never disagree about the business, only about the unit.
- Net revenue retention vs gross revenue retentionNet revenue retention counts expansion from existing customers and can exceed 100%; gross revenue retention ignores expansion and can never exceed 100% — together they separate churn from upsell.
- Reversal vs reversing entryA reversal is a new entry that cancels a posted entry that was wrong, leaving both in the ledger; a reversing entry is a planned reversal of a month-end accrual on the first day of the next period, so the real bill can be booked normally.
- Adjusting entry vs closing entryAdjusting entries are made at period-end to put revenue and expenses in the right period; closing entries are made at year-end to move the period's revenue and expense balances into retained earnings.
- Trial balance vs balance sheetA trial balance lists every account's balance to prove debits equal credits; a balance sheet presents only assets, liabilities and equity, grouped and ordered for a reader, as of one date.
- Journal vs general ledgerThe journal records each transaction in date order as a complete entry; the general ledger regroups the same lines by account, so each account shows its running balance.
- Balance sheet vs income statementThe balance sheet shows what a company owns and owes at one moment; the income statement shows what it earned and spent over a period — one is a snapshot, the other a film.
- Retained earnings vs net incomeNet income is one period's profit; retained earnings is the running total of every period's net income less every dividend since the company began — a flow against a balance.
- Temporary account vs permanent accountTemporary accounts — revenue, expenses, dividends and drawings — measure one period and are closed to zero at year-end; permanent accounts — assets, liabilities and equity — carry their balances forward.
- Direct method vs indirect methodThe direct method lists operating cash receipts and payments; the indirect method starts from net income and adjusts for non-cash items and working-capital changes — both arrive at the same operating cash flow.
- CapEx vs OpExCapital expenditure buys an asset that will serve for more than a year and is depreciated over that life; an operating expense is consumed in the period and hits the P&L in full immediately.
- Soft close vs hard closeA soft close produces management numbers quickly with estimates and lighter checks and leaves the period open; a hard close completes every reconciliation and review, locks the period and produces numbers that are final.
- Two-way match vs three-way matchA two-way match checks a vendor invoice against its purchase order; a three-way match adds the goods receipt, so the company pays only for what it ordered and actually received.
- DSO vs DPODSO measures how many days of sales are still uncollected; DPO measures how many days of purchases are still unpaid — together with inventory days they make the cash conversion cycle.
- Bad debt expense vs write-offBad debt expense is the cost of expected credit losses booked when the allowance is built; a write-off removes a specific invoice from receivables against that allowance and does not touch the P&L.
- Functional currency vs presentation currencyFunctional currency is the currency of the economic environment an entity operates in, in which its books are kept; presentation currency is the currency its financial statements are reported in — they differ when a group consolidates foreign subsidiaries.
Keep going
Where the definitions come from, and where the figures are computed.