Accounting Terms: Definition of Accounting, Bookkeeping and Audit

Revenue

Revenue is the inflow of assets from the sale of goods or services. This is also source of income for company. Sales revenue, service fees, rental income, and interest earned from investments are examples of revenue. Regardless of when payment is received, revenue is recognized when it is earned.

Expense

This is the money spent or cost by a company to generate revenue . It is the outflow of assets or occurrence of liabilities. Expenses include salaries, rent, utilities, advertising, and raw materials. Net income or net loss is determined by expenses being deducted from revenue.

Depreciation

 Depreciation  is  the process of estimating  the  cost  of an  asset  over time. Over time, it recognizes the decrease in value and wear and tear of the asset. Example: A company depreciates the cost of a delivery truck over a period of five years.

Accounts Payable

Accounts payable is the amount of money a business owes to its suppliers or other people. It is a liability until the payment is made. Example: Invoices for supplies purchased on credit are not paid.

Accounts Receivable

The  amount of  money  owed  to  a  company  is called accounts receivable. The money that is yet to be collected is an asset on the company’s balance sheet. Maintaining healthy cash flow is dependent on effective management of accounts receivable.

Balance Sheet

Balance  sheet  is  a  financial  statement  that  provides  a  snapshot  of  a  company’s  financial  position  at  a particular  point  in  time. The summary shows assets, liabilities and shareholders’ equity. The company’s financial health, solvency, and ability to meet its obligations are assessed on the balance sheet.

Income Statement

A  profit  and  loss statement  is  a  financial  statement  that  summarizes  a  company’s  revenues,  expenses,  and  net  income  over  a  specific period. It shows the company’s profitability by comparing its revenues earned against the expenses incurred during that period, providing valuable insights into its financial performance.

Cash Flow Statement

A cash flow statement is a financial statement that shows the flow of cash into and out of a company. Cash movement from operating activities, investing activities, and financing activities is tracked. The cash flow statement is used to assess a company’s cash management capabilities.

Statement of Retained Earnings

Changes in retained earnings are shown in  the  statement  of  retained earnings. The retained earnings account is affected by net income or loss, dividends, and other adjustments. 

General Ledger

The general ledger contains individual accounts for each type of asset, liability, equity, revenue, and expense in a company. A detailed record of all financial transactions is provided.

Trial Balance

A trial balance is a list of the balances in the general ledger accounts. It helps identify any discrepancies in the accounting records and ensures that the total debits equal the total credits. 

Journal Entry

A  journal  entry  is  a  record  of  a transaction. The date, accounts affected, amounts, and a brief description of the transaction are included. The effects of transactions are documented in journal entries. 

Accrual Accounting

Accrual accounting recognizes revenues when earned and expenses when incurred, regardless of when the cash is received or paid. Matching revenues and expenses to the period in which they occur provides a more accurate representation of a company’s financial position.

Cash Accounting

Cash accounting recognizes revenues and expenses when cash is paid or received. The timing of revenue generation or expense occurrence is not the focus. 

Cost of Goods Sold (COGS)

Cost of goods sold(COGS) is the direct costs incurred in producing or acquiring goods. The cost of materials, direct labor, and manufacturing overhead are related to the production of goods. 

Gross Profit

The gross profit is the difference between net sales revenue and the cost of goods sold. It shows the profit before taxes and operating expenses.

Net Profit

Net profit, Net income, or net earnings is the total profit earned by a company after deducting all expenses, including COGS, operating expenses, interest, and taxes, from its total revenue. 

Gross Margin

The gross profit to net sales revenue ratio is called the gross margin. The percentage of revenue remaining after deducting the cost of goods sold is a measure of a company’s profitability. 

Net Margin

The net profit to net sales revenue ratio is called the net margin. It is the percentage of revenue that remains as profit after all expenses. A  company’s net  margin  is its  profitability.

Chart of Accounts

A chart of accounts is a listing of accounts used in the company’s accounting system. The accounts are categorized into assets, liabilities, equity, revenue, and expense. 

Audit

An audit is an independent examination of a company’s financial records. It makes sure that accounting principles, regulations, and standards are followed. 

Financial Statements

Financial statements give a summary of a company’s financial activities and performance. They include the balance sheet, income statement, statement of cash flows, and statement of retained earnings.

Bank Reconciliation

Bank reconciliation is the process of comparing a company’s recorded transactions with the bank statement to resolve any discrepancies. It helps detect errors, missing transactions, and fraudulent activities by ensuring the accuracy of cash balances. 

Payroll

The total amount of wages, salaries, bonuses, and other compensation paid by a company to its employees is referred to as payroll. Ensuring compliance with employment laws and regulations is part of managing payroll.

Fixed Assets

Long-term tangible assets are used in the production or operation of a business. Buildings, machinery, vehicles, and equipment are examples. They aren’t intended for sale and provide long-term value to the company. 

Intangible Assets

Non-physical assets have value to a company. Intellectual property includes patents, copyrights, trademarks, and goodwill. They can still contribute to the company’s value and competitive advantage because they lack physical substance. 

Current Assets

Current assets are assets that are expected to be converted into cash or used up within a year. Cash, accounts receivable, inventory, and pre-paid expenses are examples. They are the company’s short-term solvency.

Current Liabilities

Current liabilities are obligations that are due to be settled within a year. Accounts payable, accrued expenses, short-term loans, and taxes are examples. They are the company’s short-term financial obligations. 

Long-term Liabilities

Long-term liabilities are obligations that are due to be settled in the future. Long-term loans, bonds, mortgages, and lease payments are examples. They are the company’s long-term financial obligations. 

Working Capital

Working capital is the amount of money that can be spent. The difference between a company’s current assets and current liabilities is called working capital. It shows the funds available for day-to-day operations and measures the company’s short-term financial health.

Capital Expenditure

Capital expenditure is the funds used to acquire, upgrade, or improve long-term assets such as property, plant, and equipment. It is a significant investment made by a company to generate future benefits and is recorded as a fixed asset on the balance sheet. 

Revenue Recognition

Revenue recognition is the process of recording revenue in a company’s financial statements. It involves determining when revenue is earned and can be recognized.

Bad Debt

Customer accounts that are unlikely to be collected and considered uncollectible are referred to as bad debt. It happens when a customer fails to pay their debt and the company doesn’t want to recover it. Bad debt is an expense on the income statement.

Inventory

The goods or products that a company holds for sale or use in its normal course of business are referred to as inventory. raw materials, work-in-progress, and finished goods are included. An important asset for companies in manufacturing, distribution, or retail operations is inventory.

Prepaid Expenses

Future expenses that have been paid in advance are called pre-paid expenses. As the benefit is consumed, they are recorded as assets on the balance sheet. 

Accrued Expenses

Accrued expenses are expenses that have not yet been paid. They are recognized in the accounting records to ensure accurate reporting. 

Depreciation Expense

The allocation of the cost of a tangible asset over its useful life is called depreciation expense. The decrease in value or wear and tear of the asset is recorded as an expense on the income statement.

Amortization Expense

There is a systematic allocation of the cost of intangible assets. Assets include patents, copyrights, and trademarks. 

Return on Investment (ROI)

Return on investment is the amount of money spent on something. Return on investment is a financial metric used to measure the profitability of an investment. The percentage is the return generated from an investment relative to its cost. 

Earnings per Share (EPS)

The portion of a company’s profit allocated to each outstanding share of common stock is called earnings per share. Profitability is an important factor for investors. 

Dividend

A company distributes its profits to its shareholders. It is usually paid in the form of cash or additional shares of stock.

Break-even Point

The break-even point is the level of sales or revenue at which a company’s total costs are equal to its total revenue. It shows the minimum sales volume needed to cover all costs and make a profit. 

Cost Allocation

Cost allocation is the process of assigning indirect costs to specific cost objects. Sharing costs helps determine the true cost of producing goods or services.

Cost-Volume-Profit (CVP) Analysis

The relationships between costs, volume, and profit are analyzed using CVP analysis. Businesses can understand how changes in sales volume, prices, and costs affect profitability. 

Return on Assets (ROA)

A company’s profitability is measured by its total assets. It shows how effectively a company uses its assets to make money.

Return on Equity (ROE)

Return on Equity is a measure of a company’s profitability. A financial ratio that measures the return earned by shareholders on their investment in a company is called ROE. It shows how effective a company is in generating profits from the equity invested by shareholders. 

Tax Deduction

A tax deduction is an expense that reduces a taxpayer’s income. It is a benefit provided by tax laws.

These terms cover a broad range of concepts and principles within the field of accounting. Familiarity with these terms will help you navigate financial reports, discussions, and analyses with confidence.