21 accounting terms you need to know

  Accounting   May 6, 2024   311  Add to Reading List
21 accounting terms you need to know

The realm of finance and concerns requires an understanding of accounting terms. Whether you're a chaser of enterprising dreams, a long-time business proprietor or a curious person in the finance world, being gripped of accounting vocabulary is a must for one to make it in the sector. Here in this blog post, we are explaining to you how important is it to know about 20 basic accounting terms for accounting professionals.

 

  1. Balance Sheet 

A balance sheet is generally productive as it reflects the state of affairs of a company's financial situation on a certain date. It refers to basic balances, such as assets, liabilities, and shareholders equity, thus providing many important details about a company's financial strength and stability.

 

  1. Income Statement 

The statement of earnings, which is the contraction of the profit and loss statement, displays what a company has gained and spent to achieve this gain for a specific duration of time. It is a crucial lever for determining profitability and measuring financial outputs.

 

  1. Cash Flow Statement 

With a record of incoming and outgoing cash, a company can extract information that is vital to the company's ability to finance its operations and hierarchy. It functions as a comprehensive breakdown of all the cash categories charged to the operating, investing, and financial activity classes, enabling stakeholders to make observations on cash movements from this wide perspective.

 

       4. Accounts Payable 

Accounts payable stand for the debt a firm has towards its suppliers and creditors which is linked to a purchase on credit. Efficiency in the collection of accounts payable is a basic requisite for reducing the liabilities with vendors and improving cash conversion.

Accounts payable stand for the debt a firm has towards its suppliers and creditors which is linked to a purchase on credit. Efficiency in the collection of accounts payable is a basic requisite for reducing the liabilities with vendors and improving cash conversion.

 

      5. Accounts Receivable 

On the other hand, accounts receivable indicates the money which a company has lent to its customers on the precondition of repayment of the amount and the provision of the goods or services in the future period. Owing to its paramount importance in managing good cash flow and eliminating bad debts, the effective collection of accounts receivable is a must.

 

       6. Depreciation 

It, depreciation, is the decay of the values of assets with tangible nature because of various factors: wear, obsolescence, or usage. Knowing the concept of depreciation is in fact the appropriate way of recording deferral revenues and asset utilization. 

 

  1. Accrual Accounting 

In accrual accounting bottom line is accumulated based upon the fact that revenue and expenses are recognised when they are incurred or earned regardless of when money changes hands. A clean financial report that zeros in on the company's performance trends over the given time period can be obtained with this type of view.

 

  1. GAAP(Generally Accepted Accounting Practices) 

GAAP is the acronym for generally accepted accounting principles (GAAP) which includes standard accounting principles, standards, and guidelines. Accounting departments of companies follow these technical requirements to prepare and furnish financial statements. Compliance with GAAP within a country is via the standardization of the financial reporting process, and this will aid consistency, transparency and comparability in financial reporting.

 

  1. FIFO (With Drawing is First, Output is First), and LIFO (Putting in Last, Output is first) 

The reporting method for stock valuation is FIFO and LIFO. The newest stock or a new contributing inventory is to be sold first under LIFO while the oldest stocks or the oldest inventory items which are supposed to be sold first occur under FIFO. Every system comes with its importance of valuation and customs sold. 

 

  1. EBITDA i.e. Earnings Before Interest, Taxation, Depreciation, and Amortization. 

EBITDA is a measure that is useful for a company's operating performance. It shows just their daily duties without the impact of their financial or accounting choices. It provides evidence of whether it makes money from its operations with the purchase of necessary funds as well.

 

  1. Gross Margin 

The gross profit margin, which stands at a percentage level attributed to the entire difference between revenue and the expense of the cost of goods sold, represents this percentage. This display of profit or loss, before considering many other costs, represents the core business operations of a company.

 

  1. Net Income 

Net income is the total amount of cash left after all costs, taxes, and funds used are subtracted from your revenue. It is one of the most substantial and reliable indicators of a company’s liquidity and financial performance.

 

  1. Equity 

Equity, which is often associated with stocks, represents the ownership stake in a business (either common or preferred). The latter depicts the securities worth as they qualify to be deducted from liabilities and is the fundamental component of the balance sheet.

  1. Return on Investment (ROI) 

Profit or loss is the earnings accrued after the costs have been paid off. It is calculated as a return on investment. This ratio, which is obtained by dividing the net profit generated by the investment by the initial investment cost, is a key measure to determine whether the investment has returned satisfactory earnings.

 

  1. Liquidity 

Liquidity, in the narrower sense, is defined as the capability of a company to convert its assets into cash that will allow it to meet its short-term financial obligations. It is a crucial factor that helps to keep financial order and generate profits for shareholders and other stakeholders.

 

  1. Solvency 

The charge that is borne in a business by the sale of goods or services, the cost of goods sold, is a type of direct expense. It is calculated by considering the sum of assets and debt. So, this parameter is most important in determining the financial condition and viability of the company.

 

  1. COGS Price of Goods Sold (COGS) 

The costs that lead to the making of products or the providing of special services sold by a business are included in this category of cost of goods sold. It is a mix of components with the header representing costs like materials wages and manufacturing overhead and is vital to having gross profit margins.

  1. Operating Expenses 

Operating costs include all the spending which is done on activities that are directly necessary for a business to do its main job. This is the operating cost. Operating costs do not include cost involved in the sale of goods, as well as taxes and interest. Managing the operating expenses is a key aspect of the business management process which typically means maintaining expenses within reasonable limits and maximizing profits.

 

  1. Break-Even Point 

A company's solvency is the ability to gather profits, which is the revenue level equating total revenue and total cost. This is called the break-even point. meet their long-term obligations relating to debt service. My life is marked by countless ups and downs, successes and failures, adversity and comfort – to say that it is a turbulent balance would be an understatement. That is one of the milestones for the businesses and it contains data about the minimum level of sales which will lead to the covering costs.

 

  1. Audit 

The audit is a thorough review, which consists of examining a company's financial records, operating processes and controls independently by third-party standards. It thereby maintains compliance with the IAS, identifies areas for corrective actions and strengthens financial reportability.

 

  1. Financial Ratios 

Financial ratios are qualitative indicators employed in the evaluation of corporate financial results, liquidity, debt coverage and willpower. The typical ratios include the debt-to-equity ratio, return on equity, and current ratio and summarize the changes in the financial health and liquidity of the organization. Consideration of these ratios is beneficial to the stakeholders.

This learning process is not an easy thing for every manager in the strict world of finance and business. Starting from interpreting financial statements, which include income statements and cash flow, to calculating the profitability and liquidity of a company, one cannot achieve that without knowing the terminology of accounting. Through this acquaintance with such notions, you can make informed decisions, influence economic activities, and communicate effectively with all the concerned partners.