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Accounting Terms

• Accounting Equation– The Accounting Equation is Assets = Liabilities + Equity. With accurate financial records, the equation balances.
• Accounts Payable– It is the liabilities of a business and represents money owed to others.
• Accounts Receivable– Assets of a business and represent money owed to a business by others.
• Accrual Method – Records financial transactions when they occur rather than when cash changes hands.
• Accrued Expense –An expense that has occurred but is not recognized in the accounts.
• Accrued Income –is an amount that has been 1) earned, 2) there is a right to receive the amount, and 3) it has not yet been recorded in the general ledger accounts.
• Acid test ratio –The relationship of a company’s current assets that can be converted into cash to its current liabilities.
• Adjusting Entries – These entries are usually made on the last day of an accounting period (year, quarter, month) so that the financial statements reflect the revenues that have been earned and the expenses that were incurred during the accounting period.
• Affiliated Company – Company or other organization related through common ownership, control of management etc
• Accumulated Depreciation –Total depreciation relating to an asset from the time it was placed in service until the date of the financial statement
• Ageing report – The aging report will list each customer’s outstanding balance of accounts receivable & payables, will then sort the total amount into Current, 1-30 days past due, 31-60 days past due etc.
• Amortization – Amortization usually refers to spreading an intangible asset’s cost over that asset’s useful life.
• Balance Sheet– Provides a snapshot of a business’ assets, liabilities, and equity on a given date.
• Bank Reconciliation Statement- Statement prepared by bank to determine whether & why there is a difference between the balance shown on the bank statement & the balance of the bank account of the customer.
• Bad debt – All or portion of an account, loan, or note receivable considered being noncollectable.
• Break Even Point – The point at which total revenue equals total costs.
• Bank OD – Refers to an account where amount of cheques presented to bank for payment exceeds the amount of deposits.
• Capital Expenditure – Outlay of money to acquire/improve capital assets such as buildings & machinery.
• Cash in Hand – Amount kept to pay small amounts but not deposited in bank.
• Chart of Accounts– An organization’s list of accounts used to record financial transactions.
• Closing Entry –A journal made at the end of accounting period in order to prepare for the next accounting period.
• Cost Centre – A department within a company that does not produce direct profit and adds to the cost of running a company.
• Cost of Goods Sold – It is the accumulated total of all costs used to create a product or service, which has been sold.
• Credit Note – A form or letter sent by a seller to a buyer, stating the amount of goods returned after sales and also its price. (Sales Return or Return Inward)
• Current Asset – An asset that one can reasonably expect to convert into cash.
• Current Liability –Obligation whose liquidation is expected to require the use of existing resources.
• Current Ratio –Used as an indicator of a company’s liquidity & ability to pay short term debts.
• Debit Note – Document used by buyer to inform a seller of the quantity of goods being returned & also its amount. (Purchase Return or Return Outward)
• Deferred Revenue – Deferred revenue is not yet revenue. It is an amount that was received by a company in advance of earning it. The amount unearned as of the date of the financial statements should be reported as a liability.
• Depreciation– The decrease in an asset’s value over time. Straight Line Method and Written Down Value Method are 2 types of depreciation.
• Deferred Expense – A payment that has been made, but won’t be reported as an expense until a future accounting period.
• Dividends– Share of profit given to the shareholders.
• Dormant Account – If you don’t do any transactions from a bank account for 24 months, then it will be classified as dormant.
• ERP – Enterprise resource planning is business-management software that an organization can use to collect, store, manage and interpret data from many business activities.
• Gratuity – Part of salary that is received by an employee on leaving the job, from employer, in return for the services offered by the employee in the company.
• GAAP – Generally Accepted Accounting Principles is the common set of accounting principles, standards and procedures that companies use to compile their financial statements.
• Gross Profit – A company’s total revenue minus the cost of goods sold.
• Fictitious Assets – Assets, which have no market value, are called fictitious assets. Examples of fictitious assets are preliminary expenses, loss on issue of shares or debentures etc.
• FIFO – Accounting method of valuing inventory under which the costs of the first goods acquired are the first costs charged to expense.
• Fixed Asset– Used for a long period of time, e.g. – equipment or buildings.
• Financial Statements – Presentation of financial data including balance sheets, income statements and statements of cash flow etc.
• General Ledger– Where debit and credit transactions are recorded.
• Inactive Account – If you have a current or a savings bank account and have not done any transactions through it for more than 12 months, then it will be classified as an inactive account.
• Imprest system of Cash – A fixed amount is reserved, which after a certain period or when circumstance require because money was spent, it will be replenished.
• Inventory– Inventory includes a small business’s finished products, as well as the raw materials used to make the products, anything that goes into producing the items sold by your business is part of its inventory.
• Intangible asset – Asset having no physical existence such as trademarks and patents.
• Inter Company Accounts – The accounts of two or more business units of the same parent company.
• Journal– The first place financial transactions are entered. They are entered chronologically.
• Last In, First Out (LIFO) – Accounting method of valuing inventory under which the costs of the last goods acquired are the first costs charged to expense.
• Legal Reserve – Minimum amount of money that companies are required by law to keep as security, also called Statutory Reserve.
• Letter of Credit (LOC) – A letter issued by a bank to another bank (in different country) to serve as a guarantee for payment made to a specified person under specified conditions. (issued to supplier)
• Letter of Guarantee (LG) – A written undertaking issued by guarantor (bank) at the request of the applicant, to the beneficiary guaranteeing the fulfillment of certain obligations. (issued to customer)
• Liaison with auditors – Communicate the data required by the auditors at the time of audit.
• LPO (Local Purchase Order) – Commercial document & 1st official offer issued by buyer to seller, showing types, quantities & agreed prices for goods.
• Marginal Cost – Suppose you have to produce an additional unit of output. The estimated cost of additional inputs to produce that output is actually the marginal cost.
• Nominal Account – Nominal accounts are the accounts that report revenues, expenses, gains, and losses.
• Net profit – Often referred to as net income, is the amount of money a company has left after all expenses, including taxes, have been subtracted from total revenue.
• Owner’s Equity – It represents the owner’s investment in the business minus the owner’s withdrawals from the business plus the net income (or minus the net loss) since the business began.
• Payroll– An account, listing employee’s wages, salaries, overtime pay, bonus, incentives etc due to them.
• Petty Cash – A small amount of cash in hand that is used for paying small amounts owed.
• Periodic Inventory System – A system for determining inventory on hand by a physical count that is taken at the end of an accounting period.
• Perpetual Inventory – System that requires a continuous record of all receipts and withdrawals of each item of inventory.
• Post Dated Cheque (PDC) – Cheque that has a future date written upon it by the user. The amount of the cheque will not be drawn from the account until the date written on it.
• Prepaid Expense – Expense paid in advance or before due date but has not been incurred.
• Provision – Provisions are the liabilities or the anticipated items such as depreciation, it is an expense.
• Quick Assets – Assets that are or are expected to be converted into cash in the near term.
• Real Account – Account relating to all assets and properties are called real accounts.
• Retained Earnings –Amount of profit left after shareholder dividends have been distributed; often reinvested in the business or used to pay debts.
• Revenue Expenditure – It is an amount that is expensed immediately—thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense.
• Scrap Value – It is the value that any asset holds after its estimated life time.
• Statement of Cash Flows – It categorizes net cash provided or used during a period as operating, investing and financing activities, and reconciles beginning and ending cash and cash equivalents.
• Stock – Stock is the finished product that is sold by the business.
• Subsidiary Ledger – A subsidiary ledger is a ledger designed for the storage of specific types of accounting transactions. Once information has been recorded in a subsidiary ledger, it is periodically summarized and posted to an account in the general .
• T account – A T-account is an uppercase or capital T that is used by accountants to visualize a general ledger account.
• Trial Balance – A comparison of the total of debit and credit balances in the ledger to check that they are equal.
• Tangible Asset – Assets having a physical existence, such as cash, land, buildings, machinery, or claims on property, investments or goods in process.
• Work in Progress – Inventory account consisting of partially completed goods awaiting completion and transfer to finished inventory.
• Working Capital – Excess of current assets over current liabilities.