Domain Context

Why this chapter

You'll be talking with Controllers, Treasurers, and FP&A leads. They speak their own dialect. Using the correct term in the correct context buys you trust faster than any technical depth. Skim this once a day until the words are reflexive.

The close cycle

• Close (monthly / quarterly / annual): the process of finalizing the financial period — booking all transactions, reconciling all accounts, producing financial statements.
• 1-day / 3-day / 5-day close: shorthand for how fast the books close after period end. World-class is 3-5 day monthly close; legacy is 10-20.
• Hard close vs. soft close: hard = full close including all reconciliations and reporting; soft = preliminary, for management view, refined later.
• Period end: the cutoff date (e.g., last day of the month).
• Cutoff: the rules ensuring transactions are recorded in the right period.
• Close calendar: the schedule of tasks, owners, dependencies for the close.
• Sign-off: Controller / CFO certification that the close is complete and accurate.
• True-up: an adjusting entry that corrects an earlier estimate to actuals.

SOX, ICFR, controls

• SOX: Sarbanes-Oxley Act of 2002. Public companies must attest to ICFR effectiveness.
• Section 302: CEO/CFO certify financial statements quarterly.
• Section 404: Management documents and tests ICFR annually; external auditor opines.
• ICFR: Internal Controls over Financial Reporting.
• COSO framework: the conceptual scaffolding for ICFR (control environment, risk assessment, control activities, info/comms, monitoring).
• Key control: control whose failure could lead to material misstatement.
• Preventive vs. detective control: preventive blocks the bad thing happening; detective catches it after.
• Walkthrough: auditor traces one transaction through every control.
• Test of controls vs. substantive testing: testing the control vs. testing the balances directly.
• Deficiency / significant deficiency / material weakness: increasing severity of control failures.
• Segregation of duties (SoD): no single person creates and approves a financial action.
• Management representation letter: management's written attestation to the auditor.

GL, subledger, journal entries

• General Ledger (GL): the summary book; every account's balance.
• Subledger: detailed transaction records by account (AR, AP, fixed assets, crypto lots).
• Chart of accounts (CoA): hierarchical structure of accounts.
• Journal entry (JE): a single posting that affects 2+ accounts (debit/credit must balance).
• Trial balance: snapshot of every GL account's balance at a date.
• Top-side / topside JE: a JE posted directly to the GL bypassing the subledger. Audited closely — these are often where errors live.
• Reversing entry: a JE that reverses a previous one — accounting's substitute for delete.
• Adjusting entry: a JE made during close to record items not captured by daily transaction processing.
• Recurring entry: a JE that repeats each period (depreciation, rent accrual).
• AR (Accounts Receivable): money owed to the company.
• AP (Accounts Payable): money the company owes.
• Intercompany: transactions between entities of the same parent; eliminate in consolidation.
• Elimination entry: a JE removing intercompany balances at consolidation.
• Consolidation: rolling up subsidiary financials into the parent.

Accruals & deferrals

• Accrual basis accounting: record when earned/incurred, not when cash moves.
• Accrued expense: incurred but not yet billed/paid (e.g., December utilities bill arriving in January).
• Accrued revenue: earned but not yet billed.
• Deferred revenue: cash received but not yet earned (subscription paid upfront).
• Prepaid expense: cash paid but not yet incurred (annual insurance premium).
• Depreciation / amortization: allocating cost of an asset over its useful life.
• Impairment: writing down an asset's value when fair value drops below book.

Reconciliation types

• Bank reconciliation: GL cash account vs. bank statement.
• Custody reconciliation: GL crypto holdings vs. Fireblocks / Lukka.
• On-chain reconciliation: internal records vs. blockchain reality.
• Intercompany reconciliation: receivables on one entity vs. payables on the other.
• Subledger-to-GL reconciliation: detail rolls up to summary.
• Trial balance reconciliation: prior-period closing balance ties to current opening.
• Open item vs. balance reconciliation: matching specific items vs. matching ending totals.
• Three-way match: PO + receipt + invoice tie before payment (AP control).
• Bank rec break: an item appearing on one side but not the other.
• Reconciling item: an item explaining a balance difference.

Treasury concepts

• Cash position: how much cash, where, in what currency, right now.
• Liquidity: how much cash (or near-cash) you can access on short notice.
• Sweep: automatic movement of excess cash from operating accounts into a concentration / investment account.
• ZBA (zero-balance account): account that empties to a concentration account each day.
• MMF (money-market fund): short-term, high-quality liquid investment for excess cash.
• FX (foreign exchange): currency conversion; spot, forward, swap.
• FX revaluation: period-end re-pricing of foreign-currency balances to functional currency.
• Functional currency: the primary currency of the entity's operations.
• Reporting currency: the currency the consolidated statements are presented in.
• Hedge / hedging: offsetting an exposure (FX, rate, commodity).
• Counterparty exposure: how much you have at risk with a single counterparty (bank, exchange, custodian).
• SWIFT / MT940 / BAI2: bank data formats.
• Cash forecasting: predicting future cash positions.
• Payment factory: centralized payments execution.

FP&A vocabulary

• FP&A (Financial Planning & Analysis): forward-looking finance — budgets, forecasts, variance analysis.
• Budget: annual plan, approved.
• Forecast: updated expectation, typically monthly or quarterly.
• Actuals: what really happened (from the GL).
• Variance: actual vs. budget or actual vs. forecast difference.
• Flux analysis: explaining period-over-period variance.
• P&L (Profit & Loss) or income statement: revenue - expenses = net income.
• Balance sheet: assets = liabilities + equity at a point in time.
• Cash flow statement: operating, investing, financing flows over a period.
• EBITDA: earnings before interest, tax, depreciation, amortization.
• Run rate: annualized projection from recent period.
• KPI: key performance indicator.

Regulators & standards

• SEC (Securities and Exchange Commission): US securities regulator; public companies file periodic reports.
• PCAOB (Public Company Accounting Oversight Board): regulates the audit firms that audit public companies.
• FASB: Financial Accounting Standards Board — sets US GAAP.
• GAAP (Generally Accepted Accounting Principles): US accounting standards.
• IFRS: International Financial Reporting Standards (used outside US).
• ASU 2023-08: FASB's crypto-asset fair-value standard — relevant to the company's books.
• 10-K / 10-Q / 8-K: SEC annual / quarterly / material-event filings.
• FINRA, FCA, MAS, BaFin: various securities / financial regulators by jurisdiction.

Crypto-native finance

The pieces that make the company's finance stack different from a traditional fintech.

• Custody: holding crypto assets securely. Self-custody, qualified custody (e.g., Anchorage), MPC-based (Fireblocks).
• MPC (Multi-Party Computation): cryptographic technique for distributed signing without ever assembling a private key.
• Hot wallet / warm wallet / cold storage: gradations of availability vs. security.
• Vault: Fireblocks-style organizational holder of assets.
• On-chain reconciliation: tying internal books to blockchain-confirmed reality.
• Confirmation depth: how many blocks deep a transaction is — confidence in finality.
• UTXO model (Bitcoin) vs. account model (Ethereum) — different transaction shapes.
• Cost basis: original cost of an asset for gain/loss calculation.
• Lot accounting: tracking individual purchase lots for disposal accounting.
• FIFO / HIFO / specific ID: lot selection methods for disposals.
• Fair value: principal-market price at a timestamp.
• Realized vs. unrealized gain: realized = sold; unrealized = held but marked.
• Staking rewards: yield from validating a proof-of-stake chain; income at receipt.
• Airdrop: free tokens distributed; income at receipt at FV.
• Fork: chain split creating new tokens; income event.
• Wrapped token: a token representing another asset (wBTC = wrapped Bitcoin on Ethereum).
• Lukka: crypto subledger and fair-value vendor; produces accounting-grade ledgers from on-chain + exchange data.
• Travel Rule: regulatory requirement to share counterparty info on crypto transfers above a threshold.

One-page glossary — print and tape to your monitor

✓ Check yourself

Answer from memory before opening each one.

1. A $2M entry is posted directly to the general ledger with no subledger activity behind it. Why does an auditor look at it closely, and what is it called?

   Show answer

   It is a top-side entry. It bypasses the subledger, so no detail supports the balance and the GL and subledger can drift apart, which is where errors tend to live. Expect the auditor to ask who approved it and what evidence supports it. See GL, subledger and journal entries.

2. A company pays $120,000 for annual insurance in January and also receives $60,000 in March for a twelve-month subscription it has not yet delivered. Classify each, and say which side of the balance sheet it sits on.

   Show answer

   The insurance is a prepaid expense, an asset, because cash left before the cost was incurred. The subscription is deferred revenue, a liability, because cash arrived before it was earned. Both unwind month by month. See accruals and deferrals.

3. One control requires a human to approve every agent-proposed entry. Another job samples last month's posted entries for exceptions. Classify each.

   Show answer

   The approval is a preventive control, since it blocks a bad entry from posting. The sampling is detective, since it finds problems after the fact. The sampling job is a test of controls when it checks that approvals occurred, and a substantive test when it checks the balances. See SOX, ICFR and controls.

4. An entity's functional currency is euros, and it holds a US dollar cash balance. What happens to that balance at period end, and what do the two currency terms mean here?

   Show answer

   The dollar balance is revalued into euros at the period-end rate, and the difference is booked as a gain or loss. The functional currency is the entity's operating currency, while the reporting currency is the one the consolidated statements use. See treasury concepts.

5. A wallet receives a staking reward, an airdrop, and a transfer from another wallet the company owns. Which are income events, and how do you treat the third?

   Show answer

   The staking reward and the airdrop are income at receipt, measured at fair value. The transfer between owned wallets is not income and not a disposal, though on-chain it looks like a transaction. It still has to be matched on both sides so it nets out. See crypto-native finance.

6. Why does a Controller prefer to hear "flux analysis" and "top-side entry" from you rather than a paraphrase, and what does that cost you if you get a term wrong?

   Show answer

   The right term shows you know what the practitioner is accountable for, and that builds trust faster than technical depth. A wrong term in the wrong context signals that you have not worked inside a close, and it can send a design conversation the wrong way. Learn the terms by saying them aloud. See why this chapter.

Takeaway

• Using the right finance term in the right context buys trust with Controllers, Treasurers and FP&A faster than technical depth does.
• The close is a calendar of owned tasks that ends in sign-off. Hard versus soft close and the 1, 3 or 5 day shorthand describe how complete and how fast it is.
• SOX section 302 is the quarterly certification and section 404 is the annual control assessment. Know preventive versus detective, test of controls versus substantive testing, and the deficiency ladder up to material weakness.
• The GL is the summary and the subledger is the detail, a top-side entry bypasses the subledger and is an audit hotspot, and a reversing entry is the only way to undo a posting.
• Prepaid expenses are assets, deferred revenue is a liability, and accruals record what was incurred or earned before cash moved.
• Crypto finance adds custody, on-chain reconciliation, lot accounting, fair value under ASU 2023-08 and income events such as staking and airdrops.

Vocabulary in hand, the next chapter turns it into answers: 28 questions to drill aloud. → Practice Interview Questions

Further reading

• ASU 2023-08: Accounting for and Disclosure of Crypto Assets — FASB, 2023. The fair value standard for crypto assets.
• Internal Control, Integrated Framework — COSO, 2013. The five components of internal control used in the glossary.
• Sarbanes-Oxley Act of 2002 — US Congress, 2002. Sections 302 and 404 in the original text.
• AS 2201: An Audit of Internal Control Over Financial Reporting — PCAOB. Walkthroughs, testing and deficiency severity as auditors apply them.
• Management's Report on Internal Control Over Financial Reporting — SEC, 2003. Management's assessment duty and the definition of ICFR.
• Virtual assets — FATF. The Travel Rule and the standards for virtual asset service providers.