Basic Accounting Terms

In this compilation, we highlight some of the most commonly used accounting terms, with precise and very easy to understand definitions.

Account

A section of General Ledger with similar entries

Accounts Payable (AP)

Accounts Payable commonly known as AP refers to all accrued expenses in a business that has not been cleared yet. Since it’s a debt, it is recorded on the debit side of the balance sheet.

Accounts Receivable (AR)

When a business offers sales without receiving payment upon supply, it is recorded in accounts receivable. On the balance sheet, these sales are recorded on the assets’ side since they will be converted to cash upon payment.

Accounts Receivable – Net

In a business, the Accounts Receivable – Net is the total debt owed to it, minus the total debt that may not be paid. For instance, if the company sales total $100, but $2 may not be paid, its net receivables will be equal to $98.

Accounts Receivable Turnover Ratio

The Accounts Receivable Turnover Ratio is calculated by dividing the net sales over a period, by the average accounts receivable over the same period. The ratio should be close to 1, if the business was able to recover most of the debt it’s owed.

Accounting Period

This is the period that appears in all financial documents, usually a specified time frame like 6 months or 1 year.

Accounts Written Off

An Accounts Written Off is a debt that the business considers irrecoverable, and therefore counts it as a loss. If an account is written off, it won’t appear on the credit report anymore. A customer, with a written-off account, may not receive credit anymore from the business.

Accounting Net Income Flows

The Accounting Net Income Flows are the amounts reported in a business’s income statement. They are different from the business’s cash flow because of the recorded expenses.

Allocation

Allocation is the process of distributing funds to different departments or sections for a given period.

Allocated

Allocated is a term that refers to costs that a business divides and assigns different products, departments, periods, services, etc. For instance, with regard to an asset depreciation, it is the cost assigned to each year that the asset was in use.

Auditor

The one who examines and advises accordingly on financial accounts ensuring they are per the required policies.

Audited Financial Statements

These are examined financial statements by an independent auditor, which includes the auditor’s report of the examination. The report includes any disclosures the auditor wants to make, about the fairness of those financial statements.

Audit Trail

An audit trail is the tracking of all transactions from their source.

Asset

This refers to all valuable property, material or immaterial owned by a business and which are recorded from the most liquid to the least liquid.

Accrued Expense

An accrued expense is that expense a business incurs but is yet to be paid for.

Balance Sheet

This is a document that contains all records of business assets, liabilities, and equity. It must be balanced in that the sum of all assets must be equal to the sum of liabilities and equity put together i.e (A= L+ E).

Balance Sheet Account

A company uses its balance sheet account (real or permanent accounts) to store and sort transactions of its liabilities, assets, and shareholders’ equity. You may also call them permanent accounts or real accounts because they remain open at the end of the financial year.

Bank Reconciliation

A bank reconciliation statement summarizes a business’s financial activities, by reconciling its financial records with its bank account balance. In that regard, the bank reconciliation statement gives a confirmation of a business’s processed payments, collected cash, and bank account deposits.

Book Value (BV)

Book value states the original/ initial value of a given asset before it depreciates.

Business (or Legal) Entity

This is a commercial establishment.

Cash Flow (CF)

This term refers to the total amount of cash coming in and out of the business. In other words, it’s the sum of all revenues and expenses within a given accounting period.

Cash Flow Net of Tax

A Cash Flow Net of Tax is the cash amount a business receives, after deducting the related income taxes, and the cash amount a business pays, after it deducts the cash saved, if the cash amounts qualify for an income tax deduction.

Cash Flow Statement

The Cash Flow Statement or statement of cash flows is a report of a business’s sources and uses of cash during a specified period. It details how the business uses its cash flow to finance its activities, and it includes some supplemental information for periods specified on the cash flow statement’s heading.

Cost of Goods Sold (COGS)

This is the total cost incurred in producing a product or service but does not include maintenance costs.

Credit

A credit is an entry in the right-hand column of books of accounts and depicts an increase in revenue, equity or liability.

Creditor

A creditor is a business entity that has given credit to another entity. For instance, if you get a loan from a bank, the bank becomes the creditor. If a supplier delivers goods or services on credit, the supplier becomes the creditor.

Current Year Earnings

This is the profit/loss accounted for in the current financial year

Debit

A debit is an entry on the left side of the account and depicts an increase in expenses and assets.

Debtor

The debtor is the person that owes another person or entity money (receives credit). Therefore, if you get a loan from a bank, you become a debtor. You will also become a debtor if you get goods or services on credit.

Depreciation (Dep)

This is the loss of value of a companies’ asset over a given period. Assets such as machinery and vehicles lose value after a given period from their book value.

Dividends

These refer to profits that a company gives to shareholders.

Entry

An amount recorded in an Account as debit or credit

Equity (E)

Part of the company can be owned by investors, and this forms the equity of a company. This is what remains after subtracting liabilities from assets; (Assets- Liabilities= Equity).

Expense (Cost)

Any expenditure by the business is referred to as an expense.

Financial Year

It is a 12- month period in accounting terms and which is used when preparing financial statements and for tax reporting. Not necessarily similar to a normal calendar year.

Fixed Cost (FC)

This is a business cost, like rent, that does not vary with change in output or sales.

General Ledger (GL)

A general ledger is a record of all debit and credit transactions.

Gross Margin (GM)

This is the difference between the cost of goods and revenue expressed in percentile form. It is obtained by dividing gross profit and revenue i.e. GP/Rev

Gross Profit (GP)

Gross profit is the total profit obtained by a business. It is the difference between net sales or revenue and the cost of goods sold i.e. Net Sales- COGs = Gross profit

Income Statement (Profit and Loss) (IS or P&L)

This is a financial statement that shows the company’s profit and loss over a financial period. It’s a summary of the difference between all the expenses and the revenues.

Interest

Interest refers to the amount paid for obtaining a given sum of money on credit. It is normally expressed as a fraction of the borrowed sum.

Inventory

This is a detailed list of company assets that are in the store waiting for buyers. The list decreases as items are sold out to customers.

Journal Entry (JE)

A journal entry is a record of all transactions in business as they occur. Each entry is recorded with a special code to differentiate it from the rest.

Liability (L)

This is an unpaid debt that is owed to a company.

Liquidity

Liquidity is a term used to describe the rate at which something can be converted into cash. For instance, the land is considered less liquid since it can take more time to sell than stock.

Loan

This is a sum of money obtained from an individual or financial institution to be repaid at an agreed date, usually with interest.

Net Income (NI)

This is the income after taxation. It is obtained by getting the difference between Gross profit and operating expenses and taxes.

Net Margin

Net Margin is the profit a business makes after deducting all expenses including tax, expressed in percentage form.

Note

This is a document that shows that someone owes a certain amount of money to someone else and promises to pay.

Overhead

Overheads are those costs incurred to run the business but do not include production or delivery costs.

Payroll

This is a list of all employees, their wages and the salaries due to each one of them.

Posting

Posting is the act of recording entries in a ledger.

Receipts

A receipt is a written acknowledgment showing that payment has been made or a given sum of money received.

Retained Earnings

This is an entry on Profit/Loss taken from the previous financial year. We enter this amount on the balance sheet

Return on Investment (ROI)

Return on investment is the benefit a business gains from an investment.

Revenue (Sales) (Rev)

Revenue is all income a business generates.

Trial Balance (TB)

A trial balance depicts the balance of accounts in all nominal ledgers. The total sum of the debit side should balance with that of the credit side, hence the name trial balance.

 

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