Business Words That Start With R: Key Terms for Accounting and Finance

Understanding key financial terms is essential for making informed business decisions. Whether managing a company, investing, or interpreting financial reports, knowing the terminology helps analyze data accurately and improve financial literacy.

This article focuses on accounting and finance terms that start with “R,” fundamental concepts for assessing profitability, financial health, and business performance.

Revenue

Revenue is the total income a business earns before deducting expenses. It serves as the foundation for evaluating financial performance. Companies report revenue on income statements, distinguishing between operating revenue from core activities and non-operating revenue from investments, asset sales, or legal settlements.

For businesses selling goods, revenue is calculated by multiplying units sold by the selling price per unit. Service-based companies recognize revenue when services are rendered. Accounting standards such as GAAP and IFRS dictate when revenue should be recognized. The ASC 606 standard, for example, requires recognizing revenue when control of a good or service transfers to the customer, not when payment is received.

Sales discounts, returns, and allowances reduce total revenue, resulting in net revenue. Businesses must track these deductions carefully to avoid overstating financial health. Subscription-based companies, such as streaming services or SaaS providers, account for deferred revenue—money received for services yet to be delivered—which is recorded as a liability until earned.

ROI

Return on Investment (ROI) measures the efficiency of an investment by comparing the gain or loss relative to its cost. The formula is:

ROI = (Net Profit / Cost of Investment) × 100

For example, if a company spends $50,000 on a marketing campaign and generates $200,000 in additional sales, the net profit from the campaign (assuming $150,000 in costs) results in an ROI of 200%. While useful, ROI does not account for time horizon, risk, or opportunity cost.

A key limitation is that it ignores the time value of money. Two investments may yield the same percentage return, but if one takes five years and the other takes one, the faster return is more valuable. To address this, businesses use metrics like Internal Rate of Return (IRR) or Net Present Value (NPV), which factor in cash flow timing.

Industry benchmarks for ROI vary. Retail businesses may expect high ROI on seasonal inventory, while manufacturers investing in equipment might have lower but stable returns. Investors use ROI to compare asset classes such as stocks, bonds, and real estate.

Tax implications also affect ROI. Capital gains taxes, depreciation, and deductible expenses impact net returns. A company purchasing commercial property, for example, can deduct depreciation under IRS Section 179, lowering taxable income and improving real ROI.

Retained Earnings

Retained earnings represent the portion of net income a company reinvests instead of distributing as dividends. This figure accumulates over time, adjusting each reporting period based on profits earned and dividends paid. Businesses use retained earnings to fund expansion, research, debt reduction, or other strategic initiatives without additional financing.

Retained earnings appear in the shareholders’ equity section of the balance sheet. They are calculated by adding net income to the previous period’s balance and subtracting dividends. Consistently negative retained earnings, known as an accumulated deficit, may indicate financial distress or an aggressive dividend policy.

Growth-oriented companies, particularly in technology, often reinvest most earnings to finance innovation. Tesla and Amazon, for example, historically reinvested profits instead of paying dividends, allowing for rapid scaling. Mature corporations with stable cash flows, such as Procter & Gamble or Coca-Cola, allocate a portion of earnings to shareholders while maintaining reserves for reinvestment.

Receivables

Receivables are amounts owed to a business by customers who purchased goods or services on credit. These outstanding balances are recorded as assets on the balance sheet under accounts receivable. Unlike cash sales, credit transactions create a delay between revenue recognition and actual payment, making efficient receivables management essential for liquidity.

Businesses establish credit policies to reduce non-payment risk. Creditworthiness assessments, payment terms, and collection procedures influence how receivables are handled. A standard net-30 policy requires payment within 30 days, though industries with longer sales cycles, such as construction or manufacturing, may extend terms to 60 or 90 days. Companies analyze their accounts receivable turnover ratio to assess how efficiently they collect payments, with a higher ratio indicating faster cash conversion.

Uncollected receivables can lead to bad debt expenses, requiring businesses to estimate potential losses through an allowance for doubtful accounts. Under GAAP, the allowance method is preferred over direct write-offs, as it aligns with the matching principle by recognizing potential losses in the same period as related revenue. Some businesses sell receivables to third parties through factoring, receiving immediate cash at a discount, which improves liquidity at the expense of profit margins.

Reserve

Reserves are funds set aside for future expenses, contingencies, or financial obligations. These allocations help businesses manage uncertainty, ensuring resources for unexpected costs or planned expenditures without disrupting operations.

General reserves are discretionary funds retained from profits to strengthen financial stability. Unlike retained earnings, which represent accumulated profits available for reinvestment or distribution, general reserves are earmarked for financial security. Specific reserves, on the other hand, are designated for particular purposes, such as asset replacement, debt repayment, or legal settlements. A company planning a major equipment upgrade, for example, may establish a capital reserve to fund the purchase without external financing.

Regulatory requirements often dictate reserve policies, particularly in banking and insurance. Financial institutions must maintain statutory reserves to comply with capital adequacy regulations, ensuring they can absorb potential losses and protect depositors. The Federal Reserve mandates that U.S. banks hold a percentage of deposits as reserves to manage liquidity risks. Similarly, insurance companies establish claim reserves to cover future policyholder payouts.

Ratio Analysis

Ratio analysis helps assess performance, efficiency, and risk by comparing financial metrics. These ratios provide insights into profitability, liquidity, solvency, and operational effectiveness.

Profitability ratios measure a company’s ability to generate earnings relative to revenue, assets, or equity. The gross profit margin, calculated as (Revenue – Cost of Goods Sold) ÷ Revenue, indicates how efficiently a company produces goods or services. Return on assets (ROA) and return on equity (ROE) analyze how effectively a company utilizes resources to generate profit. Investors compare these ratios across industry benchmarks to gauge competitive standing.

Liquidity and solvency ratios assess a company’s ability to meet short- and long-term obligations. The current ratio, (Current Assets ÷ Current Liabilities), determines whether a company has sufficient assets to cover immediate debts. A ratio above 1 generally indicates financial stability, though excessively high values may suggest inefficient capital allocation. The debt-to-equity ratio, which compares total liabilities to shareholders’ equity, helps evaluate financial leverage and risk exposure. Companies with high debt levels may struggle to secure additional financing or manage interest expenses.

Revaluation

Revaluation adjusts the book value of assets to reflect fair market value, ensuring financial statements accurately represent a company’s financial position. This process is particularly relevant for businesses holding fixed assets, foreign currency balances, or long-term investments.

Fixed asset revaluation is common in industries with significant property, plant, and equipment holdings. Under IFRS, companies can use the revaluation model, periodically updating asset values based on market conditions. A real estate firm, for example, may reassess property values to align with market trends, affecting depreciation calculations and financial ratios. In contrast, GAAP generally requires assets to be recorded at historical cost, with impairments recognized only when a permanent decline in value occurs.

Foreign currency revaluation is necessary for multinational corporations dealing with exchange rate fluctuations. Companies with foreign-denominated receivables or payables must adjust their financial statements to reflect current exchange rates. Accounting standards such as ASC 830 outline guidelines for translating foreign currency transactions, requiring gains or losses to be recorded in either net income or other comprehensive income, depending on the nature of the exposure.