If you want to know about accounting then you need to know about the basics of Accounting. Find here the list of accounting glossary and terms that will help you to gather some knowledge about accounting.
Accounting is the business of language. No business can be successful without accounting. Whether you are from an accounting background or you are a businessman, it is important to have some basic knowledge about accounting.
You should be aware of how every transaction of your business is going. If you are from a finance background, then these are very important things for you. Because it is the responsibility of an accountant to record every transaction of the company in a systematic way. That’s why you need to know about some accounting glossaries and terms. This list of accounting glossary and terms will give you some information about accounting.
List of Accounting Glossary and Terms
Find here the list of 241 Accounting Glossary and Terms:
Acceptance is a contractual agreement by an importer to pay an amount due for the purchase of goods at a future specified date. In international trade, documents are submitted for acceptance. The buyer or importer of the goods accepts to pay the draft and the word “accepted” is also written indicating the acceptance. The buyer becomes the acceptor and is bound to make the payment by the date of maturity as per the agreement.
An accountant is a professional person who records business transactions of an organization, reports on company performance to management, and issues financial statements.
Accounting is is the recording, measurement, processing, and communication of financial and non-financial information about economic entities such as businesses and corporations. It is also called as “language of business”.
An accounting body is an organization or association of accountants in a particular jurisdiction. Generally, a person who wants to become a professional accountant is required to be a member of such a professional body to be placed before the public of the jurisdiction as an accountant.
An accounting period is a period of time in which the financial statements are prepared and reported to related users. It is usually a period of 12 months. But there is some variation in months as per different company’s rules. Some company can choose their accounting period from January to December, while some company may choose their accounting period from April to March.
The accounting policy is a set of specific principles and procedures that are decided by the organization or management of the company. This policy sets out how and when a company’s financial statements, including accounting methods, procedures, will be made.
The process of recording transactions in journals, posting in a ledger book, preparation of trial balance & final accounts, then communicating the information to related users is called an accounting process.
Accounting Standards are written policies issued by accounting bodies to perform accounting transactions and events in financial statements.
An account is a transaction record in accounting that is used in a general ledger for posting related transactions.
Accruals means revenues earned or expenses incurred that impact a company’s net income on the income statement, although cash related to the transaction has not yet changed hands.
Accrued expenses are those expenses that have been incurred but there is no document for it. Such as any interest on the loan, giving wages to the employee, taxes, receiving commissions, etc.
Accrued revenue is the revenue in which the goods or services have been sold to the buyer but he has not yet been billed and the payment has not been received.
Accumulated depreciation is the total amount of depreciation expense that has been allocated to a particular asset since the asset is used.
Adjusting entries journal entries that are usually made in the general ledger at the end of an accounting period to record some unrecognized income and expenditure.
Advances in accounting are payments made prior to the performance of a service or product delivery. These payments are recorded as prepaid expenses in accrual accounting and recorded as assets on the balance sheet.
Analysis in accounting is a process in which detailed line items in a financial transaction or statement are carefully examined. This is often done by a trained accountant or auditor.
An annual report is a document that will be sent by a public corporation to its shareholders annually to explain the activities and financial conditions of the corporation.
Artificial Personal Accounts
Artificial Personal Accounts are those accounts that are not human beings but can act and work like humans. They have a separate identity in the eyes of law and they are capable to enter into agreements. Examples of such types of accounts are companies, HUF, Firms, Government, and clubs.
An asset is a type of resource which have some economic value and is owned or controlled by a business or an economic entity. Assets can be converted into cash.
Auditing is a part of the accounting world. It is an examination of the accounting and financial records that are undertaken independently. This is done to determine if the company or the business undertaking has conformed to its operations to the laws and the generally accepted accounting principles.
Authorised Share Capital
Authorized share capital is the maximum number of share capital that the company is authorized by its constitutional documents to issue or allocate to shareholders. It can be changed with shareholders’ approval. The company doesn’t make full use of it, some parts of the authorized capital can remain unissued.
The average cost is also known as the weighted average cost. It is a method for valuing inventory. To find the average cost, you need to divide the sum of variable costs and fixed costs by the number of units produced.
Bad debt is such an amount that is with the customer but not willing to pay. This is occasionally called an uncollectible expense.
Balance B/D is called Balance brought down. In accounting, the balance at the beginning of a new period is the same as the balance at the end of the previous period.
Balance B/F is called balance brought forward. It is the term showing the opening balance of the account on a certain date. It is the balance that has been brought forward to the current period from the previous period.
Balance C/D is called balance carried down. In accounting, the balance at the end of a period is the amount that you use to begin a new period.
Balance C/F is called balance carried Forward. It is used to calculate the closing balance of the account – which will be carried forward to the next period.
A balance sheet is a summary of the financial balances of an individual or organization. It is also known as the statement of financial position or statement of financial condition. It is a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.
Bank Reconciliation Statement
A bank reconciliation statement is a statement prepared by the business to match the records of bank transactions in the books of accounts with the bank statement. It helps to check the correctness of the entries recorded in the books of accounts and the accuracy of bank balances.
Bill of Exchange
The bill of exchange is a negotiable financial instrument consisting agreement by one party to pay a fixed amount of cash to another party as of a predetermined date or on-demand.
Bills payable is known as the short-term borrowing of banks from other banks, where the lender is often the country’s central bank. Banks will borrow money from the central bank or other banks in order to maintain reserve requirements and adequate liquidity.
A bill receivable serves as proof of debt. It is a bill of exchange drawn by a vendor on its customer/buyer. Bill receivable is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers.
A bond is a fixed-income instrument that represents a loan made by an investor to a borrower. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations.
Bonus share is a free additional share that is given as a bonus to the shareholders. Shares are offered at no additional cost based on the number of shares already held by the investors. Bonus shares are always declared in a specific ratio and as a result, the share price of the company decreases with the same ratio value.
A bookkeeper is a person who records the accounts or transactions of a business. Bookkeepers are responsible for providing accurate, up-to-date financial information about a business.
Book Keeping is the activity or occupation of keeping records of the financial affairs of a business. It is the process of recording your company’s financial transactions into organized accounts on a daily basis.
Book value is the value of a security or asset as entered in a firm’s books. The book value of a company is the net difference between a company’s total assets and total liabilities, where book value reflects the total value of a company’s assets that shareholders of that company would receive if the company were to be liquidated.
Books of Accounts
A Book of account is the place where all financial information for a person or business is collected. It may be a journal, ledger, and supporting vouchers included in a system of accounts. books of account, the original records, and books used in recording business transactions.
Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. IAS 23 provides guidance on how to measure borrowing costs, particularly when the costs of acquisition, construction, or production are funded by an entity’s general borrowings.
A business is an organization or entity that sells goods or services for a profit. The important part of this definition is that a business is something that operates in order to make a profit.
Called up share capital
Called-up share capital is shares issued to investors under the understanding that the shares will be paid for at a later date or in installments. Shares may be issued in this manner in order to sell shares on relaxed terms to investors, which may increase the total amount of equity that a business can obtain.
Capital means the assets and cash in a business. It may either be cash, machinery, receivable accounts, property, or houses. Capital may also reflect the capital gained in a business or the assets of the owner in a company.
A capital asset is a property that is expected to generate value over a long period of time. It includes all kinds of property, movable or immovable, tangible or intangible, fixed or circulating. Thus, land and building, plant and machinery, motorcar, furniture, jewelry, route permits, goodwill, tenancy rights, patents, trademarks, shares, debentures, securities, units, mutual funds, zero-coupon bonds, etc. are capital assets.
Capital commitment is the projected capital expenditure a company will spend on long-term assets over a period of time. It is the agreed capital a General Partner can request from a Limited Partner.
Capital employed is the total amount of capital used for the acquisition of profits by a firm or project. It can also refer to the value of all the assets used by a company to generate earnings.
Capital expenditure or capital expense (CapEx) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. CapEx is often used to undertake new projects or investments by a company.
A capital loss is the loss incurred when a capital asset decreases in value. This loss is not realized until the asset is sold for a price that is lower than the original purchase price.
Capital profit is the amount of profit earned by the business from the sale of its assets, shares, and debentures.
Capital receipts are funds received by a business that are not revenue in nature & lead to an overall increase in the total capital of a company. These are funds generated from non-operating activities of a business hence are not shown inside the income statement instead they are shown inside a balance sheet.
A capital reserve is the type of reserve that is created from capital profits. The purpose for which a capital reserve is created is for preparing the company for sudden events like inflation, business expansion, funds for a new project.
The carrying amount is the cost of an asset less accumulated depreciation. The carrying amount is usually not included on the balance sheet, as it must be calculated. However, the carrying amount is generally always lower than the current market value.
Cash is legal tender – currency or coins – that can be used for the exchange of goods, loans, or services. Sometimes it also includes the value of assets that can easily be converted into cash immediately, as reported by a company.
Cash at Bank
Cash at Bank means the total amount of money held at the bank by a person or company, either in current or deposit accounts. It is included in the balance sheet under current assets.
A cash book is an accounting book that records all of a business’s cash transactions. It is a subsidiary of the general ledger in which all cash transactions during a period are recorded. The cash book is recorded in chronological order, and the balance is updated and verified on a continuous basis.
Cash Discount is a discount granted in consideration of immediate payment or payment within a prescribed time. These discounts are deductions that aim to motivate customers to pay their bills within a certain time frame.
Cash flow is the total amount of money being transferred into and out of a business, especially as affecting liquidity. It is a real or virtual movement of money. The cash flow statement is a financial statement that reports on a company’s sources and usage of cash over some time.
Cash in hand
Cash in hand is referred to as the cash or cash equivalent that is available to a business after paying all its costs at a given point in time.
A cash transaction refers to a transaction that involves an immediate payment of cash towards the purchase of any goods, services.
Cash sales are sales in which the company receives immediate payment after selling goods or services. Buyers fulfill the payment obligation right after receiving goods or services.
Classifying means separating accounts into different categories like real, nominal, personal according to the rules of debit and credit.
Closing entries are the journal entries made at the end of an accounting period to shift the balances in temporary accounts on the income statement to permanent accounts on the balance sheet.
Collateral security refers to the safety that a particular asset gives a lender in case a borrower fails to fulfill his or her obligation of making payments. It is an item of value used to secure a loan. Collateral minimizes the risk for lenders.
The conservatism principle in accounting is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but only recognizing revenues and assets when they are assured of being received.
Consistency in accounting refers to a company’s use of accounting principles over time. When accounting principles allow a choice between multiple methods, a company should apply the same accounting method over time or disclose its change in accounting method in the footnotes to the financial statements.
A contingency is the likely occurrence of a negative event in the future, such as an economic recession, natural disaster, fraudulent activity, terrorist attack, or a pandemic. Contingency accounting is necessary to recognize only those losses that are probable and for which the amount of the loss can be reasonably estimated.
A contingent asset is a possible asset that may arise because of a gain that is contingent on future events. These are not under a company’s control. A contingent asset is only valuable if certain events or conditions that are independent of a company’s own actions come to pass in the future. It can be recorded on a firm’s balance sheet only when the realization of cash flows associated with it becomes relatively certain.
Contingent liability is a liability that may arise from an event that has not yet occurred. It may be incurred by an entity depending on the outcome of an uncertain future event such as the outcome of a pending lawsuit. If the liability is likely to occur and the amount can be reasonably estimated, the liability should be recorded in the accounting records of a firm.
A contra account is an account used in a general ledger to reduce the value of a related account. They are useful to preserve the historical value in the main account while presenting a decrease or write-down in a separate contra account that nets to the current book value.
Conversion costs are those production costs required to convert raw materials into completed products. It includes direct labor and overhead expenses incurred as a result of the transformation of raw materials into finished products.
A convertible debenture is a kind of long-term debt that can be transformed into stock after a specific period of time. It is usually an unsecured bond or a loan as in there is no primary collateral interlinked to the debt. Convertible debentures are hybrid financial products that have some features of both debt and equity investments.
Cost is the expenditure required to create and sell products and services, or to acquire assets.
Cost of disposal
Costs of disposal are incremental costs directly attributed to the disposal of an asset, contract, or cash-generating entity. It is oftentimes a future liability that flows as an expense to the income statement as it is incurred.
Cost of Goods Sold
Cost of goods sold refers to the direct costs of producing the goods sold by an entity. The cost includes all costs of purchase, labour cost, and other indirect expenses that are incurred in bringing the inventories to their present location and condition.
Credit is defined as a contract agreement in which a borrower receives a sum of money or something of value and repays the lender at a later date, generally with interest. In accounting, a credit is an entry that records a decrease in assets or an increase in liability as well as a decrease in expenses or an increase in revenue.
A credit balance is the sum of borrowed funds, usually from the broker, deposited in the customer’s margin account following the successful execution of a short sale order.
A credit note or credit memo is a commercial document issued by a seller to a buyer. It acts as a source document for the sales return journal. The credit note is evidence of the reduction in sales. A credit memo, a contraction of the term “credit memorandum”, is evidence of a reduction in the amount that a buyer owes a seller under the terms of an earlier invoice.
When buying something on credit, you acquire the item immediately, but you pay for it at a later date. If you want to purchase something, then you need to promise that you will pay in the future.
Credit sales refer to a transfer of ownership of goods and services to a customer in which the amount owed will be paid at a later date. These are those purchases made by the customers who do not render payment in full at the time of purchase.
Cumulative dividends are required dividend payments made by a firm to its preferred shareholders. It must be paid, even if they are paid at a later date than originally stated. If a firm is unable to pay the dividend on time, it must accumulate sufficient funds until it can make the payment. Cumulative dividends must be paid-in-full before any dividends are paid to holders of common stock.
A current asset is any asset that can be expected to be sold, consumed, or exhausted through the normal operations of a business within the current fiscal year or operating cycle or financial year whichever period is longer. These types of assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.
The current cost is the cost that would be required to replace an asset in the current period. The cost includes manufacturing a product with the work methods, materials, and specifications currently in use. This concept is used to generate financial statements that are comparable across multiple reporting periods.
Current liabilities are a company’s short-term financial obligations that are due within one year or within a normal operating cycle. These are typically settled using current assets or by the creation of new current liabilities
A debenture is a type of bond or debt instrument that is unsecured by collateral. In corporate finance, a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest.
A debit is an accounting entry that either increases an asset or expense account or decreases a liability or equity account. It is positioned to the left in an accounting entry.
The debit balance in a margin account is the total amount of money owed by the customer to a broker or other lender for funds borrowed to purchase securities. It is the amount of cash the customer must have in the account following the execution of a security purchase order so that the transaction can be settled properly.
A debit note is a document used by a vendor to inform the buyer of current debt obligations, or a document created by a buyer when returning goods received on credit. It is also a document created by a buyer when returning goods received on credit.
Deferral refers to the delay in recognition of an accounting transaction. This can arise with either a revenue or expense transaction.
Deferred revenue refers to advance payments a company receives for products or services that are to be delivered or performed in the future. It is also known as unearned revenue. The company that receives the prepayment records the amount as deferred revenue, a liability, on its balance sheet.
Deficiency is the numerical difference between the amount of tax that a taxpayer, or taxpaying entity, reports on a tax return and the amount that the Internal Revenue Service (IRS) determines is actually owed.
A deficit is a negative balance in retained earnings that results from a cumulative loss exceeding the amount of equity. This can result in a large number of startup costs for a new business, which will be offset by profits in future reporting periods. A deficit can also be the result of a more established organization’s continued inability to generate profit on an ongoing basis.
Depletion is an accrual accounting technique used to allocate the cost of extracting natural resources such as timber, minerals, and oil from the earth. It is a non-cash expense. It incrementally lowers an asset’s cost value through scheduled income charges.
A depreciable asset is a property that provides an economic benefit for more than one reporting period. A capitalization limit may also be applied to keep lower-cost purchases from being classified as depreciable assets. A qualifying asset is initially classified as an asset, after which its cost is gradually depreciated over time to reduce its book value.
Depreciable cost is the amount of cost that can be depreciated on an asset over time. This is equal to the asset’s acquisition cost, minus its estimated salvage value at the end of its useful life.
Depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life. The depreciation value affects your company’s balance sheets and can also affect the net income.
Diminishing Balance Method
The diminishing balance method is a method of calculating depreciation at a certain percentage each year on the balance of the asset which is brought from the previous year. It is also known as the reducing balance method. The amount of depreciation imposed for each period is not fixed but it goes on decreasing moderately as the opening balance of the asset in each year will minimize. Hence, the amount of depreciation becomes higher at the beginning and gradually becomes slower in the subsequent period, while the charges of repairs and maintenance increase.
A discount is allowed when the seller of goods or services gives a payment discount to the buyer. This discount is often an early payment discount on credit sales, but it can also occur for other reasons, such as a discount for paying cash upfront, for high-volume purchases, or for purchases during promotional periods when goods or services are offered at a low price.
Diversification is a risk management strategy that combines different types of investments within a portfolio. A diversified portfolio consists of a mix of different asset types and investment vehicles in an effort to limit exposure to a single asset or risk.
A dividend is a distribution of profits by a corporation to its shareholders. It is determined by the company’s board of directors. Dividends are payments made by publicly listed companies to reward investors for putting their money into the venture.
Double-entry bookkeeping means that for every business transaction, amounts must be recorded in a minimum of two accounts. The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.
The amount of money or money’s worth drawn from a business by an owner for personal use is called Drawings. A drawing account is an accounting record maintained to track money withdrawn from a business by its owners. It is used primarily for businesses that are taxed as sole proprietorships or partnerships.
The dual aspect concept states that every business transaction needs to be recorded in two separate accounts. This concept is the basis of double-entry accounting, which is essential for all accounting frameworks to produce reliable financial statements. The concept is derived from the accounting equation, which states that: Assets = Liabilities + Equity.
Economic activities are those steps related to the consumption of goods and services and activities in which money is exchanged for a product or service. These types of activities are performed for the purpose of making money, gaining wealth, and creating and producing items that can be offered to the public for sale.
An enrolled agent is a tax professional who has passed an Internal Revenue Service test covering all aspects of taxation and a scrupulous background check. The designation is the highest tax credential recognized by the IRS.
Equity is referred to as shareholders’ equity. It is the amount of capital invested or owned by the owner of a company. The equity is evaluated by the difference between liabilities and assets recorded on the balance sheet of a company.
An accounting event is a transaction that is recognized in the financial statements of an accounting entity. A company must record in its accounting records any economic event that impacts the company’s finances
An exchange is a market where securities, commodities, derivatives, and other financial instruments are traded. The main function of an exchange is to ensure fair and orderly trading and efficient dissemination of price information for any securities trade on that exchange.
An expenditure is a payment or the incurrence of liability in exchange for goods or services. It is the use of a resource in the operations of a business.
An expired cost is a cost that has been recognized as an expense. This happens when an entity fully consumes or receives benefits from a cost. This cost may also be construed as the total loss in value of an asset.
Fair Market Value
Fair market value is the price that an asset would sell for in the open market if certain conditions were met. Fair market value has come to represent the price of an asset under certain general conditions: the potential buyer and seller are reasonably knowledgeable about the asset, are acting in their own best interest, are free from undue pressure to trade, and have a reasonable period is given for it. completing the transaction.
Financial accounting is the field of accounting concerned with the summary, analysis, and reporting of financial transactions related to a business. It involves preparing financial statements available for its users such as shareholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders. Such information will be useful for decision-making purposes for those users.
Financial information is data about the monetary transactions of a person or business. This information is used to derive estimates of credit risk by creditors and lenders.
Financial instruments are monetary contracts between parties. They can either be created, traded, settled, or modified as per the involved parties’ requirements. In simple words, any asset which holds capital and can be traded in the market is referred to as a financial instrument.
Financial position is the current balance of an organization’s recorded assets, liabilities, and equity. This information is recorded in the balance sheet, which is one of the financial statements. The financial position of an organization is reported in the balance sheet as on the date mentioned in the head of the report.
Financial statements are formal records of the financial activities and position of a business, person, or other entity. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. Financial statements include Balance sheet, Income statement, Cash flow statement.
First in First Out (FIFO)
First In, First Out, also known as FIFO. It is a method for the valuation of assets or inventories. Under the method, the goods that are produced first are disposed of first. This method is used for inventory valuation. From a tax perspective, under FIFO, the cost of goods sold consists of the goods produced first and so on.
Fixed assets are items that a company plans to use over the long term to help generate income. These are most commonly referred to as property, plant, and equipment. Fixed assets are different from current assets, such as cash or bank accounts, because the latter are liquid assets. In most cases, only tangible assets are referred to as fixed.
A fixed fee is a recurring and predictable expense incurred by a firm. Unlike a variable fee, the fixed fee remains the same regardless of the trade volume. Fixed charges are often associated with lease or loan payments, but can also include regular bills such as utilities or insurance payments.
A fixed cost is an expense that a company must pay independently of any specific business activities. These costs are fixed over a specified period of time and do not change with production levels. Fixed costs can be direct or indirect and can affect profitability at various points on the income statement.
A fixed deposit, also known as an FD, is an investment instrument offered by banks, as well as non-banking financial companies (NBFC) to their customers to help them save money. With an FD account, you can invest a sizeable amount of money at a predetermined rate of interest for a fixed period.
A floating charge is a security interest over a fund of changing assets of a company or other legal person. It is used as a means to secure a loan for a company. The assets used in a floating charge are usually short-term current assets that the company consumes within one year.
Forecasting in accounting refers to the process of using current and historic cost data to predict future costs. Businesses utilize forecasting to determine how to allocate their budgets or plan for anticipated expenses for an upcoming period of time.
A forfeited share is an equity share investment that is canceled by the issuing company. A share is forfeited when the shareholder fails to pay the subscription money called upon by the issuing company.
Free reserves are the reserves a bank holds in excess of required reserves, minus reserves borrowed from the central bank. More free reserves can mean more available bank credit, which in theory lowers the cost of borrowing and leads to inflationary pressures.
A fund is a pool of money set aside for a specific purpose. The pool of money in a fund is often invested and professionally managed. Some common types of funds include pension funds, insurance funds, foundations, and endowments. Individuals, businesses, and governments all use funds to set aside money.
A gain is an increase in the value of an asset. It is considered to be realized if the asset is sold to a third party, resulting in a profit. A gain is considered to be unrealized if the asset has not yet been sold.
A general ledger is a bookkeeping ledger in which accounting data is posted from journals and aggregated from sub-ledgers, such as accounts payable, accounts receivable, cash management, fixed assets, purchasing, and projects. A ledger account is created for each account in the chart of accounts for an organization, are classified into account categories, such as income, expense, assets, liabilities, and equity, and the collection of all these accounts is known as the general ledger.
General reserve is referred to as the reserve fund that is created by keeping aside a part of the profit earned by the business during the course of an accounting period for fulfilling various business needs. The needs such as meeting contingencies, offsetting future losses, enhancing the working capital, paying dividends to the shareholders, etc.
Going Concern Concept
A going concern is a business that is financially stable enough to meet its obligations and continue its business for the foreseeable future. Certain expenses and assets may be deferred in financial reports if a company is assumed to be a going concern. If a company is no longer a going concern, it must start reporting certain information on its financial statements.
Goodwill is the established reputation of a business regarded as a quantifiable asset and calculated as part of its value when it is sold. It is an intangible asset that accounts for the excess purchase price of another company.
A government grant is a financial award given by a federal, state, or local government to fund some type of for-profit project. Because government grants are funded by tax dollars, they include stringent compliance and reporting measures to ensure that money is well spent.
Gross loss is the total amount of a company’s losses from its different activities in a particular period, even if it makes a profit on some of these activities.
Gross margin is the difference between revenue and cost of goods sold, divided by revenue. Gross margin is expressed as a percentage. It is calculated as the selling price of an item, minus the cost of goods sold, then divided by that same selling price. Gross margin may also be called gross profit margin, which is gross profit divided by net sales.
Gross profit is net sales minus the cost of goods sold. It shows the earnings of a business from the sale of its goods and services before the application of sales and administrative expenses. Gross profit is usually reported at the bottom of the income statement before sales, general, and administrative expenses are listed.
Gross sales are the grand total of all sale transactions reported in a period, without any deductions included within the figure. The formula for gross sales is Gross sales =Sum of all sales receipts.
Historical cost is a measure of the value used in the accounting process, in which the asset’s value on the balance sheet is reported at its original cost as purchased by the corporation.
Accounts which are not held in the name of a person are known as impersonal accounts.
Income is the earnings gained from the provision of services or goods, or from the use of assets. Income can be generated in a number of ways, including Income from Rent, Income from Wages, Income from Appreciation, and Income from selling Goods and Services, etc.
Income and Expenditure Statement
An income and expense statement is a type of financial document designed to identify all types of income expected to be received within a given period, while also documenting all payments or expenses relating to the same period.
An income statement is one of the financial statements of a company and shows the company’s revenues and expenses during a particular period. It may be called a profit and loss statement, revenue statement, or operating statement.
An intangible asset is an asset that is not physical in nature, such as a patent, brand, trademark, or copyright. Businesses can create or receive intangible assets. It can be considered indefinite (eg a brand name) or fixed, like a legal agreement or contract. Intangible assets created by a company do not appear on the balance sheet and have no recorded book value.
An interpretation is a statement issued by an accounting board clarifying how accounting standards should be applied. Interpretations are generally not requirements, but rather outline best practices and provide further explanation.
Inventory is the raw materials used to produce goods as well as the goods that are available for sale. It is classified as a current asset on a company’s balance sheet. There are three types of inventory including raw materials, work-in-progress, and finished goods.
Investment is the process of investing money for profit. An investment in accounting involves putting capital to use today in order to increase its value over time.
An investor is a person or organization that puts money into financial schemes, property, etc. with the expectation of achieving a profit. Investment securities include stocks, bonds, mutual funds, derivatives, commodities, and real estate.
An invoice or bill is a written document that indicates the sale or supply by a seller to a buyer. It contains information about the particular sale transaction, such as buyer’s details, quantity, value, tax, and payment terms.
Issued Share Capital
Issued shares are shares held and sold to investors of a company. These investors may include large institutions or individual retail investors.
A joint venture is a business arrangement in which two or more parties contribute resources in order to achieve a goal. Joint ventures are business ventures that two or more people or entities undertake for a certain period of time. They are created keeping specific and pre-determined purposes in mind.
A journal is a detailed record of all the transactions done by a business. a journal has been defined as the book of original entry.
A journal entry is the act of keeping or making records of any transactions either economic or non-economic. It is usually recorded in the general ledger; alternatively, it may be recorded in a subsidiary ledger that is then summarized and rolled forward into the general ledger. The general ledger is then used to create financial statements for the business.
Last In First Out
Last in, first-out (LIFO) is an accounting method used to account for inventory that records the most recently produced items as sold first. Under LIFO, the costs of the most recent products purchased are the first to be expensed.
A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance and would record each transaction as either a debit or credit in separate columns and the ending or closing balance.
A liability is something that is owed to somebody else. It can also mean a legal or regulatory risk or obligation. In accounting, companies book liabilities in opposition to assets. Current liabilities are a company’s short-term financial obligations that are due within one year or a normal operating cycle.
Lien is a right to keep possession of property belonging to another person until a debt owed by that person is discharged. The owner of the property, who grants the lien, is referred to as the lienee and the person who has the benefit of the lien is referred to as the lienor or lien holder.
Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market value. Cash is the most liquid of assets, while tangible goods are the least liquid.
Long-term liabilities are also called non-current liabilities which are obligations or debts of an organization or a business that is due in over a year’s time, in other words, these are liabilities that need not be payable in the current accounting period.
Loss is the amount of money lost by a business or organization.
Materiality is an accounting principle that states the impact of an omission or misstatement of information in a company’s financial statements on the user of those statements.
Money is a current medium of exchange in the form of coins and banknotes; coins and banknotes collectively.
Mortgages are loans that are used to buy homes and other types of real estate. These are available in a variety of types, including fixed-rate and adjustable-rate.
Net assets is defined as the total assets of an entity, minus its total liabilities. The amount of net assets exactly matches the stockholders’ equity of a business. In a nonprofit entity, net assets are subdivided into unrestricted and restricted net assets.
Net income is an entity’s income minus the cost of goods sold, expenses, depreciation and amortization, interest, and taxes for an accounting period.
A net loss occurs when the sum of total expenses exceeds the total income or revenue generated from a business, project, transaction, or investment.
Net profit is the result after all expenses have been subtracted from revenues. This figure is the aggregate result of all operating and financing activities of an organization.
Net realizable value
Net realizable value is the estimated selling price of the goods, less the cost of their sale or disposal. It is used in determining the low cost or market for on-hand inventory items. Deductions from the estimated selling price are any reasonably estimated costs of completing, transporting, and disposing of the inventory.
Obsolescence is a notable reduction in the utility of an inventory item or fixed asset. The determination of obsolescence typically results in a write-down of the inventory item or asset to reflect its reduced value. Obsolescence can arise when there are less expensive alternatives in the marketplace, or when customer preferences change.
Opening balance refers to the debit or credit balance of a ledger account brought forward from the old accounting period to the new accounting period. This will be the first entry in a ledger account at the beginning of an accounting period. In other words, the closing balance of your previous accounting period will become the opening balance for the new accounting period.
An opening entry is an initial entry used to record the transactions occurring at the start of an organization. The contents of the opening entry typically include the initial funding for the firm, as well as any initial debts incurred and assets acquired.
An operating expense is an ongoing expense for running a product, business, or system. Operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research and development.
Operating income is an accounting figure that measures the amount of profit realized from a business’s operations, after deducting various operating expenses such as wages, depreciation, and cost of goods sold. It is also called income from operations. Operating income is calculated by subtracting operating expenses from a company’s gross income.
Operating profit is the income earned from the core operations of a business, excluding any financing or tax-related issues. The concept is used to investigate the profit-making potential of a business, excluding all extraneous factors.
Outstanding liabilities are those liabilities that have not been paid at the date of the balance sheet.
Overhead is those costs required to run a business, but which cannot be directly attributed to any specific business activity, product, or service. It can be fixed, variable, or a hybrid of both.
Paid-up Share Capital
Paid-up capital is the amount of money received by the company when it sells its shares to the shareholders and investors directly through the primary market. It is the money that the investors give to the company on buying a share in that company.
Payroll is the compensation a business must pay to its employees for a set period and on a given date. The payroll process can include tracking hours worked for employees, calculating pay, and distributing payments via direct deposit or check.
The periodicity assumption states that an organization can report its financial results within a given period of time. This usually means that an entity continuously reports its results and cash flows on a monthly, quarterly, or annual basis.
A personal account is an account for use by an individual for that person’s own needs.
Petty cash is a small amount of cash that is preserved in hand to cover minor expenses, such as reimbursements or other office-related expenses. A petty cash fund can be used for office supplies, cards for customers, flowers, paying for a catered lunch for employees, or reimbursing employees for expenses. Petty cash’s main advantages are that it’s quick, convenient, and easy to understand and use.
Preference shares are referred to as preferred stock. These are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders.
Preliminary expenses are those expenses that the promoters of a company incur at the time of incorporation of the company. Generally, Preliminary expenses are disallowable on the grounds that they are of a capital nature or are incurred prior to the establishment of a business.
Prepaid expenses are future expenses that have been paid in advance. In other words, prepaid expenses are costs that have been paid but are not yet used up or have not yet expired.
Present value (PV) is the present value of a future amount or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of future cash flows.
Prime costs are the costs directly incurred to create a product or service. These costs are useful for determining the contribution margin of a product or service, as well as for calculating the absolute minimum price at which a product should be sold.
Prior Period Item
Prior period items refer only to income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. The term does not include other adjustments necessitated by circumstances, which though related to prior periods, are determined in the current period, e.g., arrears payable to workers as a result of the revision of wages with retrospective effect during the current period.
Profit is the financial benefit realized when the revenue generated from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity in question.
Profit and Loss Account
The profit and loss statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period. The P&L statement is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash flow statement.
A promissory note is a debt instrument that contains a written promise by one party (the note’s issuer or maker) to pay another party (the note’s payee) a definite sum of money, either on-demand or at a specified future date. A promissory note typically contains all the terms pertaining to the indebtedness, such as the principal amount, interest rate, maturity date, date and place of issuance, and issuer’s signature.
A provision is the amount of an expense that an entity elects to recognize now, before it has precise information about the exact amount of the expense.
Provision for Doubtful Debts
Provision for doubtful debts is the estimated amount of bad debts that will arise from accounts receivable that have been issued but not yet collected. Provision is used under accrual basis accounting to identify an expense for potential bad debts as soon as invoices are issued to customers, rather than waiting several months to find out which invoices are uncollectible.
Prudence concept states that do not overestimate the number of revenues recognized or underestimate the number of expenses. Also, one should be conservative in recording the number of assets, and not underestimate liabilities. The result should be conservatively-stated financial statements.
A purchase return occurs when a buyer returns merchandise that it had purchased from a supplier.
Realization is the point in time when revenue has been generated. Realization is a key concept in revenue recognition. Realization occurs when a customer gains control over the good or service transferred from a seller.
Reconciliation is the accounting process of comparing a bank statement with the bank ledger entries to check figures in the book of accounts are correct or not. All the companies perform reconciliation to ensure that the accounting is in line with the actuals.
The recording is a basic phase of accounting that is also known as bookkeeping. In this phase, all financial transactions are recorded in a systematic and chronological manner in the appropriate books or databases.
Rectification of Errors
Rectification of errors is referred to as the procedure of revising mistakes made in recording transactions. These mistakes can occur while posting entries to ledger accounts, classifying accounts, carrying a balance forward.
Redeemable Preference Share
Redeemable Preferences shares are those types of preference shares issued to shareholders which have a callable option embedded, meaning they can be redeemed later by the company.
The term redemption has different uses in the finance and business world. In finance, redemption refers to the repayment of any fixed-income security at or before the asset’s maturity date. Bonds are the most common type of fixed-income security, but others include certificates of deposit (CDs), Treasury notes (T-notes), and preferred shares.
A reserve is profits that have been appropriated for a particular purpose. Reserves are sometimes set up to purchase fixed assets, pay an expected legal settlement, pay bonuses, pay off debt, pay for repairs and maintenance, and so forth. This is done to keep funds from being used for other purposes, such as paying dividends or buying back shares.
Residual value is the salvage value of an asset. It represents the amount of value that the owner of an asset can expect to obtain when the asset is dispositioned. The residual value will influence the total depreciable amount a company uses in its depreciation schedule. Generally, the useful life or lease period is inversely related to the residual value of an asset.
Retained earnings refer to the historical profits earned by a company, minus any dividends it paid in the past.
Return on Investment
Return on Investment (ROI) is a popular profitability metric used to evaluate how well an investment has performed. ROI is expressed as a percentage and is calculated by dividing an investment’s net profit (or loss) by its initial cost or outlay. It can be used to make apples-to-apples comparisons and rank investments in different projects or assets.
Revaluation fund is the accounting term utilized when a business establishes a line item on the balance sheet for the purpose of maintaining a contingency account connected to other assets.
Revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business.
Revenue expenditures are short-term expenses that are also known as revenue expenses and operational expenses (OPEX). Revenue expenditure is generally spoken to in relation to fixed assets as it records the expenses which have occurred in connection to a fixed asset.
Revenue receipts are funds received by a business as a result of its core business activities. It leads to an overall increase in the total revenue of the company.
Revenue reserve is the type of reserve that is created from the net profit that a company makes during a financial year. This reserve is not distributed to shareholders in the form of dividends but is kept for meeting future requirements of the business.
The Right Shares refers to those issues of shares which a company offers to their existing shareholders at a discounted price. The company’s shareholders have rights to accept or reject the proposal and also there are minimum criteria for subscriptions of the share if the shareholder accepts the proposal.
A sales return is a buyer sent back by a buyer to the seller. The return is usually because an excess quantity was either ordered or shipped or due to defective goods.
Sales turnover is the total amount of revenue generated by a business during the calculation period. The concept is useful for tracking sales levels on a trend line through multiple measurement periods in order to spot meaningful changes in activity levels. The calculation period is usually one year. The revenue included in this calculation is from both cash sales and credit sales. The measurement can also be broken down by units sold, geographic region, subsidiary, and so forth.
Secured loans are business or personal loans that require some type of collateral as a condition of borrowing. A bank or lender can request collateral for large loans for which the money is being used to purchase a specific asset or in cases where your credit scores aren’t sufficient to qualify for an unsecured loan.
The securities premium is considered as a capital receipt on the part of the company. Capital receipts refer to funds received by the company which are not eligible to be considered as income.
Share capital is the money a company raises by issuing common or preferred stock. The amount of share capital or equity financing a company has can change over time with additional public offerings. Authorized share capital is the maximum amount a company has been approved to raise in a public offering.
A share discount occurs when the market value of a share falls below its par value. The par or nominal value of a share is an arbitrary figure which is set when a share is first sold or issued.
Share Issue Expenses
Share issue expenses are to be expensed out through the profit and loss account in the year in which the expenditure is incurred. But, if the issue is made to finance a project, the benefit out of the share issue expenditure is deferred to a reasonable period when the project is commissioned.
A Share Warrant is a document issued by the company under its common seal, stating that its bearer is entitled to the shares or stock specified therein. Share warrants are negotiable instruments. They are transferable by mere delivery without registration of transfer.
Shareholder Equity refers to a company’s net worth or the total dollar amount that will be returned to its shareholders if the company is liquidated after paying off all debts. You can calculate shareholder equity by adding together all assets and all liabilities from a company’s balance sheet.
Single-entry bookkeeping is also known as single-entry accounting. It is a method of bookkeeping where one-sided accounting entry is made to maintain financial information. The primary bookkeeping record in single-entry bookkeeping is the cash book.
A sinking fund is a fund established by an economic entity by setting aside revenue over a period of time to fund a future capital expense or repayment of long-term debt. Sinking funds may help pay off the debt at maturity or assist in buying back bonds on the open market.
Social Responsibility Accounting
Social accounting is the process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within society and to society at large. It is different from public interest accounting as well as from critical accounting.
Straight Line Method
The straight-line method is an accounting measurement of calculating depreciation and amortization, the process of expensing an asset over a longer period of time than when it was purchased. It is calculated by dividing the difference between an asset’s cost and its expected salvage value by the number of years it is expected to be used.
Subscribed Share Capital
Subscribed shares are shares that investors have promised to buy. These shares are usually subscribed as part of an initial public offering (IPO). When a company issues shares to raise funds, it may or may not find the investors for all of its shares. Thus, the part of issued share capital for which the company has successfully found the subscribers is known as subscribed share capital.
Subsidiary books are books of original entry. In the normal course of business, a majority of transactions are either related to sales, purchases, or cash. So we record transactions of the same or similar nature in one place, i.e. the subsidiary book. And we record these transactions in chronological order.
Substance Over form
Substance over form is an accounting principle used “to ensure that financial statements give a complete, relevant, and accurate picture of transactions and events”. Conversely, the information appearing in the financial statements should not merely comply with the legal form in which they appear.
A person who gives goods or services to the business in credit or does not receive the payment immediately from the business and is liable to receive the payment from the business in the future is called a Sundry Creditor. Businesses use an account to track these transactions and they are called Sundry Creditor accounts or Accounts Payable.
A person who receives goods or services from a business in credit or does not make the payment immediately and is liable to pay the business in the future is called a Sundry Debtor. Businesses use an account to track these transactions and they are called Sundry Debtor account or Accounts Receivable.
A surplus is the residual amount of resources remaining after a period of use. An inventory surplus occurs when products remain unsold. A budgetary surplus occurs when earned income exceeds expenses paid. In accounting, a surplus refers to the number of earnings recorded on an entity’s balance sheet. Here surplus is considered good as it implies that there are additional resources available that can be used in the future. In manufacturing, a surplus refers to excess quantities of goods that were produced but could not be sold. Here, a surplus can be bad, as excess goods tend to tie up working capital and may need to be written off if they become obsolete or wear out.
A suspense account is an account of a general ledger used temporarily to carry doubtful entries and discrepancies pending their analysis and permanent classification. Suspense accounts are routinely cleared out once the nature of the suspended amounts are resolved, and are subsequently shuffled to their correctly designated accounts.
A trade creditor is a supplier that provides goods and services to its customers on credit terms. A trade creditor typically analyzes the financial statements, credit reports, and payment histories of its customers when deciding how much credit to extend to them. If it no longer chooses to extend credit to a customer, then it is no longer a trade creditor in relation to that specific customer.
A trade debtor is a person who buys goods or services from a business in the normal course of trade and is allowed a period of credit before payment is due.
A trade discount is an amount by which a manufacturer reduces the retail price of a product when it sells to a reseller rather than an end customer. The reseller then charges its customers the full retail price in order to make a profit on the difference between the amount by which the manufacturer sold the product to him and the price at which he sold the product to the end customer.
A trade payable is an amount billed to a company by its suppliers for goods delivered to or services consumed by the company in the ordinary course of business.
Trade receivables are the amounts a business billed to its customers when it delivers goods or services to them in the normal course of business. These bills are typically documented on formal invoices, which are summarized in the accounts receivable aging report.
A trading account is an investment account that holds securities, cash, and other holdings like any brokerage account. These investors tend to buy and sell assets frequently, often within the same trading session, and their accounts are subject to special regulation as a result. The assets held in a trading account are separated from others that may be part of a long-term buy and hold strategy.
A transaction is a completed agreement between a buyer and a seller to exchange goods, services, or financial assets in return for money. It involves a monetary exchange for a good or service.
Transfer entries are known as transactions that involve cash as well as a bank account. These Entries are necessary to fix a classification mistake in the original accounts, to make daily modifications, to arrange payments of assistance grants or loans to state governments or the governments of union territories, etc.
A trial balance is a list of all the general ledger accounts contained in the ledger of a business. This list contains each nominal ledger account and the value of that nominal ledger balance. Each nominal ledger account will hold either a debit balance or a credit balance. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. Trial Balance is used to prepare the trading, profit and loss statement, balance sheet, and other financial reports.
Unexpired costs are the costs that are not yet moved into the income statement but stay in the balance sheet in form of residual value. This cost is frequently associated with revenue that has not yet been recognized; under the matching principle, an unexpired cost is maintained on the books as an asset until the associated revenue is recognized, at which point the asset is charged to expense.
Unissued stock is company shares that do not circulate, nor have they been put up for sale to either employees or the general public. The number of unissued shares can be calculated by subtracting the outstanding shares plus treasury stock shares from the total number of authorized shares.
An unpaid dividend is a dividend that is due to be paid to shareholders but has not yet been distributed. Unpaid dividends exist because there is a difference between the time when a company announces its dividend and the time when that dividend is paid. During this time, a company will record any unpaid dividends on its books, but this balance will be eliminated once the dividends are paid.
Useful life is the estimated lifetime of a depreciable fixed asset during which it can be expected to contribute to a company’s operations. This is an important concept in accounting because a fixed asset is depreciated over its useful life.
A voucher is a document used to gather and file all of the supporting documents needed to approve the payment of a liability. Governments may also issue vouchers redeemable for various programs such as for school choice, housing, or social welfare initiatives.
Working capital is the difference between a company’s current assets and its current liabilities. It is also known as Net working capital (NWC). NWC is a measure of a company’s liquidity and short-term financial health. A company has a negative NWC if its ratio of current assets to liabilities is less than one. Positive NWC indicates that a company can fund its current operations and invest in future activities and growth.