18 Common accounting terms explained

accountant explaining common terms

Common accounting terms explained

The use of terms, abbreviations and acronyms used to explain common accounting processes can sometimes seem overwhelming to the uninitiated. However, whether you are a student or business owner, if you have just started dealing with taxes or set up your own company, there are some things that you will need to know when talking about your financial and tax activities. 

Here are some of the more common items that you will encounter:

1. Accounts Payable (Creditor)

The money that is paid or owed to creditors for goods, services or supplies. 

2. Accounts receivable (Debitor)

The money owed to you by customers or clients who have purchased goods, services, or supplies. 

3. Balance Sheet

A summary record of a company’s assets, liability, and equity at any point in time.

4. Assets and Fixed Assets

Cash, inventory or payments from accounts receivable are all current assets of your business which can be quickly converted to cash. A fixed asset is one that provides long-term benefits like property, land, or equipment. 

5. Gross Profit

Also sometimes known as sales profit or gross income. Gross profit is the revenue of a company less the cost of goods sold. 

6. Net Profit

A company’s net profit is the amount left after all expenses and costs have been subtracted. This number can be used to show a business’s overall profitability.

7. Liabilities

Any debts or financial obligations that a company has accrued. Current liabilities typically must be paid within a year, and long-term liabilities can be paid over a longer period.

8. Profit and Loss

Company profits and losses are summarised in a P & L statement to review revenue, costs, and expenses for a specific time period. It can be used to review performance monthly, quarterly or annually as needed. 

9. Cost of Goods Sold

The money it takes to make the goods and products sold by the company. This can include the cost of materials, production expenses, and employee wages. 

10. Trial Balance

A compilation of the company’s debit and credit history is used to check the accuracy of record keeping and financial transactions as a cross-check of accounting systems. 

11. Director Loan Account

Money taken from the business or given to it is tracked using a Director Loan Account. All transactions must be recorded. If the company has shareholders an overdrawn Directors Loan Account may be a cause for concern. 

12. Capital 

Any asset of the business such as goods, money, or equipment. Current liabilities are subtracted from company assets to show working capital, the amount of money which can be used. 

13. Cash Flow

The amount of revenue or expenses that are generated from the sale of goods, products or services.

14. Asset classes

Securities that are grouped together and perform similarly. The main asset classes are stocks or equities, fixed income bonds, and money market accounts or cash equivalents

15. ROI (Return on Investment)

Typically reported as a percentage and calculated by dividing net profit by the cost of investment used as a performance measurement. 

16. Cash Basis Accounting

Tracks revenue and expenses when the money concerned actually moves in or out of the business. 

17. Dividends

The amount of money that is paid out to company investors usually occurs monthly, quarterly or annually. This amount is often paid in money, but it could also be property, stock, or the proceeds of a liquidation. 

18. Income statement 

Documents the total revenue earned minus expenses in a specific period. Along with the balance sheets and P&L statement, an income statement is one of the standard financial documents used by companies.

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