A to Z of Accounting Terms
A key part of our role as accountants is to help our clients understand their numbers, so they can make the best decisions for their businesses.
Therefore, we kick off our blogs in 2024 with a glossary of some of the key accounting terms you should be aware of to help you navigate the financial landscape like a pro.
A: Accounts Payable (AP)
Accounts Payable refers to the amounts a company owes its suppliers for goods or services received but not yet paid for. It’s recorded as a liability on the balance sheet. Think of it as your short-term debts or bills waiting to be settled.
B: Balance Sheet
A Balance Sheet is one of the core financial statements that provides a snapshot of a company's financial position at a specific point in time. It summarises assets, liabilities, and equity to show the net worth of the company.
C: Cash Flow
Cash Flow represents the movement of money into and out of a business. Positive cash flow indicates more money is coming in than going out, while negative cash flow means the opposite. Cash flow is critical for maintaining liquidity and keeping the business running smoothly.
D: Depreciation
Depreciation refers to the reduction in value of an asset over time due to wear and tear. Businesses spread the cost of an asset over its useful life to reflect its decreasing value. This is important for accounting and tax purposes.
E: Equity
Equity is the portion of the business that belongs to its owners or shareholders. It’s calculated as total assets minus total liabilities and is also known as "owners' equity" or "shareholders' equity."
F: Financial Statements
Financial Statements are formal records of a company’s financial activities and condition. The three main types include the balance sheet, income statement (profit & loss), and cash flow statement. They are essential for investors, creditors, and management to assess financial health.
G: General Ledger (GL)
The General Ledger is the complete record of all the financial transactions of a company. It contains all accounts needed to prepare the financial statements, including assets, liabilities, revenues, and expenses.
H: Historical Cost
Historical Cost is the original monetary value of an asset at the time of acquisition. Accounting often uses historical cost rather than the current market value to report assets on the balance sheet, ensuring consistency over time.
I: Income Statement
An Income Statement, also known as a profit and loss statement, shows the company's revenues and expenses over a specific period, revealing whether the business is profitable or operating at a loss.
J: Journal Entries
Journal Entries are the records of all business transactions in the accounting system. Each entry consists of a debit and a credit, following the double-entry accounting method to keep the books balanced.
K: Key Performance Indicators (KPIs)
KPIs are financial metrics used to measure and track a company's performance against its goals. Common accounting KPIs include gross profit margin, net profit margin, and working capital ratios.
L: Liabilities
Liabilities are financial obligations a company owes to external parties, such as loans, accounts payable, or mortgages. They are classified as current (due within a year) or long-term (due after more than a year).
M: Marginal Cost
Marginal Cost refers to the cost of producing one additional unit of a good or service. This concept helps businesses determine the most efficient level of production and pricing.
N: Net Income
Net Income is the total earnings or profit of a company after all expenses, taxes, and costs have been deducted from revenue. It’s also referred to as the "bottom line" on the income statement.
O: Operating Expenses (OPEX)
Operating Expenses are the day-to-day expenses incurred in the normal course of business operations, such as rent, utilities, payroll, and marketing. Reducing OPEX can help boost profitability.
P: Profit and Loss (P&L) Statement
A Profit and Loss Statement is another term for an income statement. It summarises revenues, costs, and expenses for a specific period, showing the company’s ability to generate profit.
Q: Quick Ratio
The Quick Ratio, also known as the acid-test ratio, measures a company’s ability to meet short-term liabilities with its most liquid assets. It’s calculated by dividing quick assets (cash, receivables) by current liabilities.
R: Revenue
Revenue is the total amount of money generated by a company from its business activities before any expenses are deducted. It’s the top line of the income statement, also referred to as sales or turnover.
S: Statement of Cash Flows
The Statement of Cash Flows is a financial report that shows the cash inflows and outflows from operating, investing, and financing activities over a period. It helps assess the liquidity and financial flexibility of a business.
T: Trial Balance
A Trial Balance is a report that lists the balances of all general ledger accounts at a specific point in time. It’s used to ensure that the debits equal the credits and that the books are balanced before preparing financial statements.
U: Unearned Revenue
Unearned Revenue refers to payments received by a company for goods or services not yet delivered. It’s recorded as a liability because the company owes the customer the service or product.
V: Variable Costs
Variable Costs are expenses that change in proportion to production output, such as raw materials and direct labour costs. They increase as production increases and decrease when production declines.
W: Working Capital
Working Capital is the difference between a company’s current assets and current liabilities. It’s a measure of a company’s short-term financial health and its ability to cover immediate debts.
X: XBRL (eXtensible Business Reporting Language)
XBRL is a standard for exchanging financial and business information. It’s used for the digital reporting of financial data and is widely adopted for filing reports with regulatory authorities.
Y: Year End Closing
Year End Closing refers to the process of reviewing, adjusting, and finalising the accounts at the end of a financial year. It includes posting final journal entries, reconciling accounts, and preparing the year end financial statements.
Z: Zero-Based Budgeting (ZBB)
Zero-Based Budgeting is a method of budgeting where each expense must be justified for each new period. Unlike traditional budgeting, where past budgets are adjusted, ZBB starts from scratch each time.
And there you have it—an A to Z guide to some of the key accounting terms! Whether you’re managing your own business or simply looking to boost your financial literacy, these terms will help you navigate the world of financials with confidence.
If you're curious to learn more or have any accounting-related questions get in touch.
