A Glossary Of Common Accounting And Financial Terms
Every industry has its language and terms. These words and phrases can be confusing to anyone who is not part of the daily operations of a specific sector, and the accounting industry is no exception.
To help you understand the terms, acronyms, and phrases regularly used when dealing with accounting solutions, JT Comptabilité CPA et Consultation has created this handy reference guide. Here you’ll find valuable information allowing you to comprehend and communicate your accounting, tax, and business needs effectively.
An accrued expense, also known as accrued liabilities, is an accounting term that refers to an expense recognized on the books before it has been paid. For example, when a company purchases supplies from a vendor but has not yet received an invoice or paid for the purchase.
As an asset depreciates, it loses value. The book value of an asset shows the asset’s original value, less any accumulated depreciation.
Equity denotes the value left over after liabilities have been removed. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. 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.
Gross Margin is the amount of money a company retains after incurring the direct costs associated with producing the goods it sells and the services it provides. It is calculated by taking gross profit and dividing it by revenue for the same period. It represents a company’s profitability after deducting the cost of goods sold.
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.
Net income is the dollar amount earned in profits. It is calculated by taking revenue and subtracting all expenses in a given period, including the cost of goods sold, overheads, depreciation, and taxes.
The term cash flow refers to the net amount of cash and cash equivalents transferred in and out of a company. Cash received represents inflows, while money spent represents outflows.
A credit is an increase in a liability or equity account or a decrease in an asset or expense account.
A debit is an increase in an asset or expense account or a decrease in a liability or equity account.
A fixed cost is one that does not change with the volume of sales. For example, rent and salaries won’t vary if a company sells more. The opposite of a fixed cost is a variable cost.
These are costs that change with the volume of sales. Variable costs increase with more sales because they are an expense that is incurred in order to deliver the sale. For example, if a company produces a product and sells more of that product, they will require more raw materials to meet the increase in demand.
A general ledger is the complete record of a company’s financial transactions. The general ledger is used in order to prepare all financial statements.
Journal entries are how updates and changes are made to a company’s books. Every journal entry must consist of a unique identifier (to record the entry), a date, debit or credit amount, and an account code that determines which account is altered.
Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. Cash is the most liquid of assets, while tangible items are less liquid. For example, stocks are more liquid than a house since you can sell stocks, turning it into cash more quickly than real estate.
Overhead refers to the ongoing business expenses not directly attributed to creating a product or service. For example, overheads often include rent and executive salaries.
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