Accounting terminologies including terms Used in Computerised Accounting

Accounting terminology is the language used by accounting professionals such as income, expenses, assets and liabilities, etc.  A computerised accounting system is a platform that processes financial transactions and events according to the GAAP (Generally Accepted Accounting Principles) a set of accounting rules, standards, and procedures prescribed by the Institute of Chartered Accountants of India, (ICAI). The ICAI is the regulatory body for the standardization of accounting policies of the country. It has issued Accounting Standards that are expected to be uniformly adhered to, to bring consistency in the accounting profession. It is important to understand the meanings of accounting terminology and basic accounting terms when reading financial reports or using accounting software. Some of the common accounting definitions of terms are as follows:

Account: An account is a detailed record of all the money a business or a person receives and spends.

Accounting: Accounting is the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results.

Accountant’s Equation: The accounting equation states that a company’s total assets are equal to the sum of its liabilities and its shareholders’ equity (i.e. Assets = Liabilities + Owners’ Equity)

Accounts Payable: Accounts payable (AP) is money a business owes to its suppliers shown as a liability on a company’s balance sheet.

Accounts receivable (AR): Accounts receivable (AR) is the amount of money that a business’s customers owe for goods or services that were purchased on credit.

Accounts Receivable Turnover (ART):  It is the measurement of a business’s average collection period for receivables.

Accrual Accounting: Accrual accounting is a financial accounting method that allows a business to record revenue earned before receiving payment for goods or services sold and expenses that have been incurred but not yet paid.

Aging Schedule: A schedule that lists the length of time an invoice has been outstanding or held.

Amortization: Amortization is known as an accounting technique used to periodically reduce the book value of a loan or intangible asset across a set period. Amortization also refers to a technique used to periodically lower the book value of a loan over a set time.

Annual Percentage Rate (APR): Annual percentage rate (APR) is a yearly interest rate that includes all fees associated with borrowing money or paid to investors. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment.

Annual Report: An annual report is a document that provides a comprehensive overview of a company’s financial performance and activities over the previous year.

Arm’s-Length Transaction: An arm’s length transaction refers to a business deal in which buyers and sellers act independently without one party influencing the other. Arm’s length transactions assert that both parties act in their own self-interest and are not subject to pressure from the other party.

Assets: The economic resources or anything of value to which the person or company owns or claims.

Auditing: Auditing means the process of examining a company’s financial statements to ensure they accurately reflect the organization’s financial position. Audits are typically performed by an independent third party, but can also be done by internal employees or government entities. It also refers to the result of an independent professional accountant examining the financial statements to determine fairness and compliance with generally accepted accounting principles (GAAP).

Audit Opinion: An audit opinion is a formal statement that certifies whether an enterprise’s financial statements are free of material misstatements. It’s based on an audit of the company’s financial records and procedures.

Automatic bank feeds: Some accounting software lets you track receivables and payables, connect bank feeds, track time to create invoices for clients, and more. 

Automated processes: Processes are automated to reduce manual work, increase efficiency, and reduce errors.

Bad Debt: Accounting terminology for an uncollectible debt or account receivable.

Balance Sheet: A balance sheet is a financial statement that shows the assets, liabilities, and equity of a business or organization at a specific point in time

Bank Reconciliation: Bank reconciliation is an accounting process that compares an establishment’s financial records to its bank statement to ensure that all money is accurately reflected in both places. This process is also known as closing the books.

Bankruptcy: Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts.

Board of Directors: The group of individuals elected by the stockholders to manage a company.

Bond: A bond is a fixed-income investment that represents a loan made by an investor to a borrower, usually corporate or governmental.  A bond also refers to a formal contract between a borrower and a lender where the borrower promises to pay a specific rate of interest for each period that the bond is outstanding and also to repay the principal amount when the bond reaches the maturity date.

Bookkeeping: The process of recording the financial transactions of a business systematically.

Book Value: The net amount which is the original value plus or minus any adjustments such as depreciation of an asset, liability, or equity item in the books of accounts.

Break-Even Point: The break-even point (BEP) is the point at which a business’s total costs and total revenue are equal, meaning there is no profit or loss.

Budget: A budget is a financial plan that outlines the expected income and expenses for a defined period. In a business context, t budget can be a roadmap guiding resource allocation to achieve organizational goals and objectives efficiently.

Business: An organization that is created to make a profit from the sale of goods or services.

Business Failure: Business failure occurs when a business enterprise is unable to generate enough revenue to cover its expenses or make a profit.

Calendar Year: A calendar year is a 12-month period that typically starts on January 1st and ends on December 31st.

Capital: The property or money that is used and owned by a business and used to acquire future income or benefits. Capital is known as the money used to build, run, or grow a business. It can also refer to the net worth (or book value) of a business.

Capital Account: A capital account is a financial statement reflecting the net change in a company’s or nation’s assets and liabilities over a specific period.

Capital Gain or Loss: The difference between the market and book value of a capital asset at purchase and the value realized at its sale.

Capital Expense: A capital expenditure, or CapEx, is the purchase of long-term physical or fixed assets used in a business’s operations. It is charged to the asset account.

Cash Basis:  Cash basis is a bookkeeping method that records the revenue and expenses when the cash is received or paid.

Cash Flow: Cash flow is the money that moves in and out of a business over a period of time. It’s a measure of a company’s liquidity, flexibility, and financial performance.

Common Stock: A type of stock that gives the holder a voting right as opposed to preferred stock in dividend and liquidation rights.

Company Charter: A company charter, also known as a Memorandum of Association (MOA) or articles of incorporation, is a legal document that establishes a company’s structure and objectives

Compounding Period: Compounding periods are the time intervals between when interest is converted to principal and added to the account. Interest can be compounded annually, semi-annually, quarterly, monthly, daily, etc.

Consignment accounting: Consignment accounting is a type of business arrangement in which one person sends goods to another person for sale on his behalf, the person who sends goods is called the consignor, and another person who receives the goods is called a consignee, where the consignee sells the goods on behalf of consignor on consideration of certain percentage on sale.

Corporation or Company: A type of business that has legal rights as a separate entity and where ownership is represented by transferable shares of stock.

Cost of Goods Sold: COGS: The amount calculated by subtracting the value of the ending inventory from the sum of the beginning inventory and the net purchases for the fiscal period.

Credit: Credit is an agreement between a lender and a borrower that allows the borrower to receive funds, goods, or services now in exchange for repayment later.

Current Assets: The assets of a company are cash or cash equivalent that is usually converted to cash such as accounts receivable, short-term investments, and inventory.

Current Liabilities: Liabilities that are expected to be paid within one year of the balance sheet date.

Current Ratio or Working Capital Ratio: Current Ratio is the ratio between current assets and current liabilities. The current ratio is calculated as current assets divided by current liabilities which should be above 1 which signify the liquidity of the company.

Data entry: Users can enter data into the system using a keyboard, mouse, barcode scanner, or interactive screen.

Data validation: The system uses programs to validate the data entered by the user.

Data processing: The system processes the data based on the user’s commands.

Data storage: The system stores the processed data in short-term or long-term memory.

Debit: In accounting, debit (amount owed) is an entry made on the left side of an account that increases assets or decreases liabilities. In double-entry bookkeeping, debits must be offset by credits on the right side of the ledger.

Depreciation: Depreciation is a term used to expense the gradual decrease in value of a physical asset throughout its useful life. These tangible or fixed assets include real estate property, buildings, plants, machinery, equipment, vehicles, furniture, and other tangible items that the company owns. It can be calculated by straight line (SL), sum-of-the-years digits (SYD), and double-declining balance (DDB) methods.

Dividend: That share of a corporation’s earnings that are paid to the stockholders.

Drawings: The amount that is given to the owner(s) of a sole proprietorship or partnership.

Drawings Account: A drawing account is a financial record that tracks when a business owner or partner withdraws assets from a business for personal use.

Earnings per Share: Earnings per share (EPS) is a financial metric that measures a company’s profitability by dividing its net profit by the number of outstanding shares

Embezzlement: The act of an employee committing fraud and stealing money or assets of the company.

Factor: The sale of accounts receivable at a discount before they are due.

Fair Market Value: Fair market value (FMV) is the price at which an asset would sell in an open market under certain conditions.

FIFO: First In First Out inventory valuation where the first goods purchased are taken as the first goods sold.

Fiscal Year: A fiscal year is a period of twelve months (not always January 1st to December 31st) for which a government or business plans its management of money. India’s fiscal year, also known as the financial year, is a 12-month period that runs from April 1 to March 31. The fiscal year is used for financial reporting, budgeting, and calculating taxes and duties.

Fixed Assets: Fixed assets are the permanent assets of a company that will not be converted into cash during the next year such as the land, building, equipment and furniture.

Fixed Cost: The fixed operating expenses required for the necessities with no relation to the volume of production and sales such as rent, property taxes, and interest.

Franchise: A business that has obtained a license to sell a product or particular service for a company in a given area.

GAAP: Generally Accepting Accounting Principles.

General Journal: A general journal is the first place where data is recorded in a double-entry system that includes all transactions except those in specialized journals such as cash receipts, cash disbursements, and other common transactions. Some organizations keep specialized journals, such as purchase journals or sales journals that only record specific types of transactions.

General Ledger: (GL): General Ledger is a book in which financial transactions are posted (in the form of debits and credits) from a journal. It is the primary record from which financial statements are prepared.

Goodwill: When the purchase price of a company is more than the calculated value due to its intangible assets, this is called goodwill. Goodwill is usually to intangible assets such as reputation, customer relations, etc.

Gross Profit: The amount by which the net sales exceed the cost of goods sold.

Gross Sales: The total recorded sales before deducting any sales discounts or sales returns and allowances.

Interest: The cost incurred for the use of money.

Interest Rate: An interest rate is the amount of interest charged by a lender to a borrower for a debt, or the amount of interest earned on a deposit. It’s usually expressed as a percentage of the principal amount.

Inventory: Goods held by the company for sale or resale.

Inventory management: Accounting software can track inventory levels and notify businesses when they are overstocked or understocked.

Inventory Turnover Ratio: Inventory turnover is the rate at inventory stock is sold, or used, and replaced. The inventory turnover ratio is calculated by dividing the cost of goods by the average inventory for the same period. A higher ratio tends to point to strong sales and a lower one to weak sales.

Invoice: A document that lists goods sold or service rendered, and gives their cost, and asks for payment.

Journal: A book or original entry used in a double-entry bookkeeping system with details of all transactions and the accounts to which they are posted.

Journal Entry: A transaction record where debits equal credits.

Just-in-time Inventory: Just-in-time (JIT) inventory management is a strategy that aims to reduce inventory waste by producing goods only when they are needed. The system minimizes the cost of storing and handling inventory by planning supplies to be delivered just before they are needed.

Lease: Acquiring the right to use a property that is owned by the lessor.

LIFO: Last In First Out method of inventory valuation that presumes that the latest goods to arrive are the first sold.

Liquidation: The process of closing a business and distributing its assets to claimants, such as creditors and shareholders. Liquidation can be voluntary or involuntary and usually happens when a business can’t pay its debts. Liquidation involves selling assets, paying their debts, and distributing the remaining equity if any to the owners.

Liquidity: How quickly cash can be obtained by the company which is also used to determine debt repayment ability.

Long-term Liabilities: The liabilities that are due in the long term.

Modified Accrual: Modified accrual accounting is a bookkeeping method that combines cash basis and accrual basis accounting. It recognizes revenue when it becomes available and measurable, and records expenses when they incur liabilities.

Multiple user access: Multiple users can access the system.

Net Assets Value: Net assets are the value of a company’s assets minus its liabilities. They are also known as book value or shareholders’ equity. The formula for calculating net asset value (NAV) is: Total Assets – Total Liabilities = Net Asset Value (NAV):

Net Income: An important number that indicates the difference between total revenues and total expenses. It is usually found on the Income Statement.

Net Operating Loss: A net operating loss happens when expenses exceed income for the operating period.

Operating Lease: An operating lease is a contract that allows a business to use an asset for a set period of time without taking ownership of it.

Operating Performance Ratio: Operating performance ratios are a way to measure how efficiently a company uses its assets to generate revenue and sales. They also measure how well a company converts assets into cash.

Owners’ Equity: The owner’s interest in the assets which is calculated as total assets minus total liabilities.

Petty Cash Fund: A small amount of cash that is kept on hand for miscellaneous payments.

Prepaid Expenses: Prepaid expenses are the expense amounts that are paid in advance to a creditor or supplier for goods or services. They are a current asset. Businesses record prepaid expenses as assets on their balance sheet because they represent future economic benefits. However, as the goods or services are used up, the prepaid expense is recognized as an expense on the income statement.

Profitability: The ability to generate revenues in excess of the costs incurred to generate the revenues.

Profit and Loss Statement: A profit and loss (P&L) statement, also known as an income statement or statement of operations, is a financial report that summarizes a company’s revenues, expenses, and profits or losses over a specific period of time. It’s used to track a business’s ability to generate sales, manage expenses, and create profits.

Proprietorship: A business owned by one person.

Public Companies: Companies whose stock is publicly traded.

Qualified Opinion: A qualified opinion is a statement in an auditor’s report that indicates a company’s financial statements are fairly presented but with some exceptions. The auditor may issue a qualified opinion for a number of reasons, like ‘Limited audit scope’ that is the auditor was unable to obtain enough evidence to verify certain aspects of the financial statements like Non-compliance with GAAP etc.

Reconciliation: Reconciliation is an accounting procedure that compares two sets of records to check that the figures are correct and in agreement.

Retained Earnings: The Retained Earnings (RE) are the accumulated portion of a business’s profits that are not distributed as dividends to shareholders but instead are reserved for reinvestment back into the business.

Return: The reward for investing in something.

Return on Investment: ROI: Return on investment (ROI) is a financial metric that measures the profitability of an investment by comparing its gain or loss to its cost. It’s a percentage that’s calculated by dividing the net profit from an investment by its cost, and then multiplying that number by 100.

The formula for ROI is=(NetIncome/TotalCost)x100

Revenues: The incoming increase in resources generated from the sale of goods or services.

Salvage or Residual Value: The estimated value (or actual price) of an asset when it reaches the end of its useful life after subtracting the disposal costs.

Shareholders or Stockholders: The individuals or entities that own shares of stock.

Solvency: The long-term ability of a company to meet all financial obligations.

Sole Proprietorship: A business owned by one person.

Time tracking: Time tracking software is just what its name says — a tool that helps accountants track the time they spend on specific tasks or projects.

Transactions: Any exchange or even that has a financial impact on a business.

Trial Balance: The trial listing of all account balances to check if total debits equal total credits.

Unearned Revenue: Money that is received by a business before it is earned which is listed as a liability.

Value: The worth of an item or service.

Working Capital: The Current Assets minus Current Liabilities.

Yield: The return on investment received by an investor from dividends or interest expressed as a percentage of the current market price or price paid of the security.