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Basic Accounting and Finance Glossary

Posted: Friday, July 15, 2016 | Author: Carla Kearney

If you’re keen to learn about basic bookkeeping and accountancy then finance courses online prove a great flexible option in learning as it means it’s no longer necessary to give up work if you feel like making a change of direction or enhancing current skills set in this industry.  Regardless of the career, you’re pursuing, you’ll need to learn and understand the specialist jargon used in the industry in order to do your job effectively.

“An Investment in knowledge always pays the best interest”- Benjamin Franklin

Here is a basic bookkeeping and accountancy overview:

Accounts Receivable ‘AR’ – The amount of money owed by your customers after goods or services have been delivered and/or used.

Accounting – ACCG – A systematic way of recording and reporting financial transactions.

Accounts Payable – AP – The amount of money you owe creditors (suppliers, etc.) in return for good and/or services they have delivered.

Accounting period – Time period for which financial statements are prepared (e.g. month, quarter, year).

Accruals basis – The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate

Amortisation – Process similar to depreciation, usually applied to intangible fixed assets.

Articles of association – Document setting out the relative rights of shareholders in a limited liability company.

Assets (Fixed and Current) – FA and CA – Current assets are those that will be used within one year. Typically this could be cash, inventory or accounts receivable. Fixed assets (non-current) are more long-term and will likely provide benefits to a company for more than one year, such as a building, land or machinery.

Balance Sheet – BS – A financial report that summarizes a company’s assets (what it owns), liabilities (what it owes) and owner’s equity at a given time.

Capital – CAP – A financial asset and its value, such as cash or goods. Working capital is calculated by taking your current assets subtracted from current liabilities.

Cash Flow – CF – The revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time. Having a positive cash flow is essential in order for businesses to survive in the long run.

Certified Public Accountant – CPA – A designation given to someone who has passed a standardized CPA exam and met government-mandated work experience and educational requirements to become a CPA.

Cost of Goods Sold – COGS – The direct expense related to producing the goods sold by a company. This may include the cost of the raw materials (parts) and amount of employee labor used in production.

Credit – CR – An accounting entry that may either decrease assets or increase liabilities and equity on the company’s balance sheet, depending on the transaction. When using the double-entry accounting method there will be two recorded entries for every transaction: a credit and a debit.

Current liability – A liability which is expected to be settled in the entity’s normal operating cycle, generally within 12 months after the balance sheet date.

Debit – DR – An accounting entry where there is either an increase in assets or a decrease in liabilities on a company’s balance sheet.

Director(s) – Person(s) appointed by shareholders of a limited liability company to manage the affairs of the company.

Dividend – Amount paid to a shareholder, out of a company’s post-tax profits, as a reward for investment in the company. The amount of dividend paid is proportionate to the number of shares held.

Expenses (Fixed, Variable, Accrued, Operation) – FE, VE, AE, OE – The fixed, variable, accrued or day-to-day costs that a business may incur through its operations. Examples of expenses include payments to banks, suppliers, employees or equipment.

Generally Accepted Accounting Principles – GAAP – A set of rules and guidelines developed by the accounting industry for companies to follow when reporting financial data. Following these rules is especially critical for all publicly traded companies.

General Ledger – GL – A complete record of the financial transactions over the life of a company.

Liabilities (Current and Long-Term) – CL and LTL – A company’s debts or financial obligations it incurred during business operations. Current liabilities are those debts that are payable within a year, such as a debt to suppliers. Long-term liabilities are typically payable over a period of time greater than one year. An example of a long-term liability would be a bank loan.

Materiality – Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.

Memorandum (for a company) – Document setting out main objects of the company and its powers to act.

Net assets – Assets minus liabilities (equals ownership interest).

Net Income – NI –  A company’s total earnings, also called net profit or the “bottom line.” Net income is calculated by subtracting total expenses from total revenues.

Owner’s Equity – OE – An owner’s equity is typically explained in terms of the percentage amount of stock a person has an ownership interest in the company. The owners of the stock are commonly referred to as the shareholders.

Ordinary shares – Shares in a company which entitle the holder to a share of the dividend declared and a share in net assets on closing down the business.

Present Value – PV – The value of how much a future sum of money is worth today. Present value helps us understand how receiving $100 now is worth more than receiving $100 a year from now. See an example of the time value of money here.

Profit and Loss Statement – P&L – A financial statement that is used to summarize a company’s performance and financial position by reviewing revenues, costs and expenses during a specific period of time; such a quarterly or annually.

Provision for doubtful debts – An estimate of the risk of not collecting full payment from credit customers, reported as a deduction from trade receivable (debtors) in the balance sheet.

Registrar of Companies – An official authorised by the government to maintain a record of all annual reports and other documents issued by a company.

Reserves – The claim which owners have on the assets of a company because the company has created new wealth for them over the period since it began. Most common example is retained earnings.

Retained earnings – Accumulated past profits, not distributed in dividends, available to finance investment in assets.

Return on Investment – ROI – A measure used to evaluate the financial performance relative to the amount of money that was invested. The ROI is calculated by dividing the net profit by the cost of the investment. The result is often expressed as a percentage. See an example here.

Secured loan – Loan where the lender has taken a special claim on particular assets or revenues of the company to give extra protection in the event of the loan remaining unpaid.

Share capital – Name given to the total amount of cash which the shareholders have contributed to the company.

Share certificate – A document providing evidence of share ownership.

Share premium – The price paid for shares in a company over and above their nominal value.

Shareholders – Owners of a limited liability company.

Sole trader – An individual owning and operating a business alone.

Stakeholders – A general term devised to indicate all those who might have a legitimate interest in receiving financial information about a business because they have a ‘stake’ in it.

Stock – A word with two different meanings. It may be used to describe an inventory of goods held for resale or for use in business. It may also be used to describe shares in the ownership for a company. The meaning will usually be obvious from the way in which the word is used.

Tangible fixed assets – A fixed asset (also called a non-current asset) which has a physical existence. Used to differentiate it from an Intangible fixed asset.

Trade creditors – Persons or businesses who supply goods or services to a business in the normal course of trade and allow a period of credit before payment must be made.

Turnover – The sales of a business or other form of revenue from operations of the business.

Working capital – Finance provided to support the short-term assets of the business (stocks and debtors) to the extent that these are not financed by short-term creditors. It is calculated as current assets minus current liabilities.

 

Balance sheet terminology

Balance sheet – The financial statement that presents a snapshot of the company’s financial position as of a particular date in time. It’s called a balance sheet because the things owned by the company (assets) must equal the claims against those assets (liabilities and equity).

Assets – All the things a company owns in order to successfully run its business, such as cash, buildings, land, tools, equipment, vehicles, and furniture.

Liabilities – All the debts the company owes, such as bonds, loans, and unpaid bills.

Equity – All the money invested in the company by its owners. In a small business owned by one person or a group of people, the owner’s equity is shown in a Capital account. In a larger business that’s incorporated, owner’s equity is shown in shares of stock.

Another key Equity account is Retained Earnings, which tracks all company profits that have been reinvested in the company rather than paid out to the company’s owners. Small businesses track money paid out to owners in a Drawing account, whereas incorporated businesses dole out money to owners by paying dividends.

 

Other common basic bookkeeping and accountancy terms

Accounting period – The time period for which financial information is being tracked. Most businesses track their financial results on a monthly basis, so each accounting period equals one month. Some businesses choose to do financial reports on a quarterly or annual basis. Businesses that track their financial activities monthly usually also create quarterly and annual reports.

Accounts payable – The account used to track all outstanding bills from vendors, contractors, consultants, and any other companies or individuals from whom the company buys goods or services.

Accounts receivable – The account used to track all customer sales that are made by store credit. Store credit refers not to credit card sales but rather to sales in which the customer is given credit directly by the store and the store needs to collect payment from the customer at a later date.

Depreciation – An accounting method used to track the ageing and use of assets. For example, if you own a car, you know that each year you use the car its value is reduced (unless you own one of those classic cars that go up in value). Every major asset a business owns ages and eventually needs replacement, including buildings, factories, equipment, and other key assets.

General Ledger – Where all the company’s accounts are summarized. The General Ledger is the granddaddy of the bookkeeping system.

Interest – The money a company needs to pay if it borrows money from a bank or other company. For example, when you buy a car using a car loan, you must pay not only the amount you borrowed but also interest, based on a percent of the amount you borrowed.

Inventory – The account that tracks all products that will be sold to customers.

Journals – Where bookkeepers keep records (in chronological order) of daily company transactions. Each of the most active accounts — including cash, Accounts Payable, and Accounts Receivable — has its own journal.

Payroll – The way a company pays its employees. Managing payroll is a key function of the bookkeeper and involves reporting many aspects of payroll to the government, including taxes to be paid on behalf of the employee, unemployment taxes, and workman’s compensation.

Trial balance – How you test to be sure the books are in balance before pulling together information for the financial reports and closing the books for the accounting period.

 

Wow, you made it to the bottom of our basic accounting glossary!  There’s so much more to learn so please take a look at our Bookkeeping Courses to see what a future in basic bookkeeping and accountancy could hold for you.

#Accounting#Bookkeeping#bookkeeping glossary#Finance#icb bookkeeping

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