Words Used In Financial Accounting

As with most specialist fields, accounting has
its own vocabulary of terms and phrases that have very particular
meanings. Unfortunately, these definitions are often far from
intuitive, and they can often seem confusing or even intimidating!
This Mind Tools "Words" page is designed to
help you navigate your way through the minefield of financial
accounting 'speak': It provides a quick reference glossary of
words and phrases commonly used in the accounting departments of
organizations.
This "Words" page covers the following terms:
Balance Sheet Items

Accounts Payable
Accounts Receivable
Amortization
Asset
Balance Sheet
Book Value
Creditor
Current Asset
Current Liability
Debtor
Depreciation
Equity
FIFO Fixed Asset
Goodwill
Liabilities
LIFO
Liquid Assets
Reserves/Reserve Account
Retained Earnings

Income Statement Items

Accrual
Cost of Goods Sold
EBIT
EBITDA
Expense
Fixed Cost
Gross Profit
Income Statement
Net Income
Profit and Loss Account – see Income Statement
Revenue
Statement of Cash Flows
Variable Cost

Terms are defined below:

Accounts Receivable
Money owed to an organization by its customers
for goods or services that they have already received, or that
they have agreed you can invoice. When you extend a customer credit,
you no longer have the asset they purchased. If they don't pay you
right away, then the amount due is an account receivable. Accounts
receivable are current assets as they are expected to be converted
to cash in the short term. The business that purchased the item
from you records an account payable in their books.
Accounts Payable
This is a current liability that represents the cash
you owe to your creditors. When you make a purchase and pay for it
at a later time, you have an obligation to pay that is recorded as
a liability on your Balance Sheet . The business you purchased the
item from records an account receivable in their books.
Accrual
An expense which is accounted for in one accounting period but
which is not actually paid for until the next. Accruals allow a
business to reflect when its expenses are incurred. Typical
accruals include utility bills which only arrive at the end of a
quarter but which are accounted for monthly. When the reverse
happens, and suppliers charge for services up front that are not
used until a later accounting period, the cost is accounted for in
the later period as a prepayment.
Amortization
The depreciation of an intangible asset .
Asset
Anything of value that the organization owns and that can be used
to generate revenue in the future. Assets can be tangible –
inventory or equipment (which is a fixed asset) – or intangible –
such as patents or trademarks. Another term for asset is "economic
resource".
Balance Sheet
A financial report showing the things of value that the
organization owns (assets) and what it owes (to creditors and
investors) at any one point in time. The daily transactions of the
organization cause the balances of these items to change. For
example, when you sell an item, your cash on hand (or another
asset) will increase and your inventory will decrease. This is why
it is a "point in time" statement. It's also known as a Statement
of Financial Position and Statement of Financial Condition.
Book Value
The depreciated value of an asset at any time between its purchase
and the point where it is depreciated to zero. The book value does
not necessarily reflect what you would get for the asset if you
sold it at that time.
Cost of Goods Sold (COGS)
The costs directly associated with the production and selling of
the merchandise sold, for example, materials or sales commission.
Creditor
A person or organization who has supplied you with goods or
services for which you have not yet paid.
Current Asset
Assets that you can be expect to convert into cash in one
operating cycle, typically one year. Current assets typically
include cash, cash equivalents, accounts receivable, and
inventory.
Current Liability
An obligation to pay a creditor within one year, using an existing
resource or by creating another current liability (for example, a
short term bank loan).
Debtor
A person or organization to whom you have supplied goods or
services, but which has not yet paid you for these.
Depreciation
A method of spreading the initial purchase cost of a tangible asset over the period for which it remains useful. Tax authorities
generally stipulate an acceptable depreciation period for certain
items. When "straight line" depreciation is used, the purchase
cost is spread equally over the depreciation period. Depreciation
is recorded as a liability offsetting the original value of the
asset on your balance sheet .
EBIT (Earnings Before Interest and Taxes)
A calculation that shows an organization's net income before
applying tax and interest payments. It is useful for determining
how profitable a company is because it matches revenue from
operations with expenses from operations.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and
Amortization)
A measure of an organization's ability to earn a profit from its
operations and other incomes, without the effect of the non-cash
expenses of deprecation and amortization (while an organization
records depreciation as an expense, there is no cash paid out in
the transaction.)
Equity
The value of net assets owing to the owner of the organization. If
a company were to dissolve (in a controlled way), creditors have
the first claim against the assets. Once all the liabilities are
paid, the balance that remains is the owner's share. This is the
equity that the owners are owed by the organization.
Expense
Assets or obligations incurred in the process of generating
revenue. Buying inventory, paying rent and paying salaries are
examples of common expenses incurred in the course of doing
business.
FIFO (First in, first out)
This is an inventory valuation method where the first item brought
into inventory is the first one taken out of inventory. The
assumption is that the first items purchased are the first ones
sold. For example, you purchase 100 dresses for resale at a cost
of $50 each and then purchase another batch for $60 each. For the
first 100 dresses you sell, you remove $50 from your inventory
account. For the 101st dress you sell, you take $60 out of
inventory. FIFO approximates replacement cost of inventory items
and is a more accurate depiction of the actual flow of goods in
and out of an organization. Many jurisdictions require FIFO
inventory valuation for income tax purposes.

Fixed Asset
An asset that is used over more than one accounting period
(usually for longer than a year), such as computer and other
office equipment, production machinery and trucks. These are also
known as Capital Assets.
Fixed Cost
Expenses that are incurred regardless of sales. Items like salaries
and insurance can remain the same whether you sell 100 units or
10,000 units.
Goodwill
The value attached to an organization's ability to produce
superior earnings compared to its competitors. Branding results in
goodwill as does earning a great reputation for customer service.
Goodwill is an intangible asset that typically only appears on the
balance sheet if the organization is purchased. It often
represents the premium a purchaser pays for the company after the
difference between tangible assets and liabilities is accounted
for.
Gross Profit
The difference between the revenue and the cost of goods sold
during an accounting period. This represents the amount of revenue
an organization has left to cover the expenses of operating the
business. Gross profit is often expressed as a percentage of
sales, so that comparisons can be made from one period to another
to monitor costs.
Income Statement
A financial report summarizing the organization's progress during
a specified period of time. It summarizes revenue earned and
expenses incurred, and the difference is recorded at net income
for the period. It is used as a guide to how profitably the
organization conducts its activities. It's also known as a Profit
and Loss Sheet (P&L) or Account.
Liabilities
An obligation to pay for an asset or provide a good or service in
the future to a creditor. Until the organization fulfills its
obligation, the creditor has a claim against the assets of the
business. Common liabilities include bank loans and accounts
payable.
LIFO (Last in, first out)
This is an inventory valuation method where the last item brought
into inventory, is the first one taken out of inventory. The
assumption is that the last items purchased are the first ones
sold. For example, you purchase 100 dresses for resale at a cost
of $50 each and then purchase another batch of 100 for $60 each.
For the first 100 dresses you sell, you remove $60 from your
inventory account. For the 101st dress, you take $50 out of
inventory (assuming no other dresses have been purchased in the
interim). In a period of rising prices, LIFO would produce a
higher inventory cost and thus lower income. This would result in
lower income taxes paid so many jurisdictions do not allow LIFO
valuation for income tax purposes.
Liquid Assets
Assets that can be sold quickly for cash without any significant
loss in value. Cash in the bank, as well as marketable securities
(stocks and bonds) are highly liquid.
Net Income
The excess of revenues over expenses for an accounting period. If
the figure is negative, it is referred to as a Net Loss. It's
important to recognize that net income does not equal cash or the
amount of money brought in. This is also called Net Profit or "The
Bottom Line".
Reserves/ Reserve Account
A portion of equity that is not available for regular business
use. It is often allowed to accumulate to cover future liabilities
or other major expenditure planned.
Retained Earnings
The accumulated earnings of the company that are not distributed
to owners. These funds are retained for the organization's future
use or for distribution to the owners in the future.
Revenue
The inflow of assets (cash and accounts receivable) to the
organization in exchange for goods and services. Revenue is
sometimes called Sales or Turnover.
Statement of Cash Flows
A financial statement that shows the cash flows in and out of a
business for an accounting period. It identifies the sources and
uses of the cash, and categorizes these as cash from operations,
financing, and investing. The main purpose of the statement is to
determine whether the organization has enough cash to cover its
short-term obligations. It is also referred to as the Statement of
Changes in Financial Position.
Variable Cost
Expenses that vary with sales of the organization. As you sell
more, your material costs increase, as do things like
transportation, wages and utilities. Some of these may be strictly
variable and others have a fixed portion as well. For instance,
you incur a minimum wage cost regardless of production.