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Accounting Terminologies

The document defines basic terminology used in financial statements including accounting period, accounts payable, accounts receivable, accrued expense, asset, balance sheet, business entity, cash flow, cost of goods sold, depreciation, equity, expense, generally accepted accounting principles, gross profit, income statement, interest, inventory, liability, net income, and revenue.

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8 views

Accounting Terminologies

The document defines basic terminology used in financial statements including accounting period, accounts payable, accounts receivable, accrued expense, asset, balance sheet, business entity, cash flow, cost of goods sold, depreciation, equity, expense, generally accepted accounting principles, gross profit, income statement, interest, inventory, liability, net income, and revenue.

Uploaded by

elitesquad9432
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Basic Terminologies used in financial statements.

Accounting Period - An Accounting Period is designated in all Financial Statements (Income


Statement, Balance Sheet, and Statement of Cash Flows). The period communicates the span of
time that is reported in the statements.

Accounts Payable (AP) - Accounts Payable include all the expenses that a business has incurred
but has not yet paid. This account is recorded as a liability on the Balance Sheet as it is a debt
owed by the company.

Accounts Receivable (AR) - Accounts Receivable include all of the revenue (sales) that a
company has provided but has not yet collected payment on. This account is on the Balance
Sheet, recorded as an asset that will likely convert to cash in the short-term.

Accrued Expense - An expense that been incurred but hasn’t been paid is described by the term
Accrued Expense.

Asset (A) - Anything the company owns that has monetary value. These are listed in order of
liquidity, from cash (the most liquid) to land (least liquid).

Balance Sheet (BS) - A financial statement that reports on all of a company’s assets, liabilities,
and equity. As suggested by its name, a balance sheet abides by the equation <Assets = Liabilities
+ Equity>.

Business (or Legal) Entity - This is the legal structure, or type, of a business. Common company
formations include Sole Proprietor, Partnership, Limited Liability Corp (LLC), S-Corp and C-
Corp. Each entity has a unique set of requirements, laws, and tax implications.

Cash Flow (CF) - Cash Flow is the term that describes the inflow and outflow of cash in a
business. The Net Cash Flow for a period of time is found by taking the Beginning Cash Balance
and subtracting the Ending Cash Balance. A positive number indicates that more cash flowed into
the business than out, where a negative number indicates the opposite.

Cost of Goods Sold (COGS) - Cost of Goods Sold are the expenses that directly relate to the
creation of a product or service. Not included in this category are those costs that are needed to
run the business. An example of COGS would be the cost of Materials, or the Direct Labor to
provide a service.

Depreciation (Dep) - Depreciation is the term that accounts for the loss of value in an asset over
time. Generally, an asset has to have substantial value in order to warrant depreciating it.
Common assets to be depreciated are automobiles and equipment. Depreciation appears on the
Income Statement as an expense and is often categorized as a “Non-Cash Expense” since it
doesn’t have a direct impact on a company’s cash position.

Equity - Equity denotes the value left over after liabilities have been removed. Recall the
equation Assets = Liabilities + Equity. If you take your Assets and subtract your Liabilities, you
are left with Equity, which is the portion of the company that is owned by the investors and
owners.

Expense (Cost) - An Expense is any cost incurred by the business.

Generally Accepted Accounting Principles (GAAP) - These are the rules that all accountants
abide by when performing the act of accounting. These general rules were established so that it is
easier to compare ‘apples to apples’ when looking at a business’s financial reports.

Gross Profit (GP) - Gross Profit indicates the profitability of a company in dollars, without
taking overhead expenses into account. It is calculated by subtracting the Cost of Goods Sold
from Revenue for the same period.

Income Statement (Profit and Loss) (IS or P&L) - The Income Statement (often referred to as a
Profit and Loss, or P&L) is the financial statement that shows the revenues, expenses, and profits
over a given time period. Revenue earned is shown at the top of the report and various costs
(expenses) are subtracted from it until all costs are accounted for; the result being Net Income.

Interest - Interest is the amount paid on a loan or line of credit that exceeds the repayment of the
principal balance.

Inventory / Stocks - Inventory is the term used to classify the assets that a company has
purchased to sell to its customers that remain unsold. As these items are sold to customers, the
inventory account will lower.

Liability - All debts that a company has yet to pay are referred to as Liabilities. Common
liabilities include Accounts Payable, Payroll, and Loans.

Net Income (NI) - Net Income is the amount that is earned in profits. It is calculated by taking
Revenue and subtracting all the Expenses in a given period, including COGS, Overhead,
Depreciation, and Taxes.

Revenue (Sales) (Rev) - Revenue is any money earned by the business.

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