A List of 20 Less Known Accounting Terms Explained
- Carrie Gajda
- Jun 2
- 6 min read
Account Reconciliation:
At the conclusion of a specific accounting period, it is essential to conduct a thorough comparison of two sets of financial records. This process is a fundamental aspect of ensuring the integrity and accuracy of the financial statements that will be presented to stakeholders, including management, investors, and regulatory bodies. The comparison typically involves the examination of internal records, such as the general ledger, against external documents, which may include bank statements, invoices, or financial reports from subsidiary entities.
Accounts receivable aging report:
The accounts receivable aging report is a periodic document that classifies a company's accounts receivable based on the duration an invoice has been outstanding. It serves as an indicator to assess the financial stability and dependability of a company's customers.
Accumulated Depreciation:
Serves to reduce the book value of fixed assets, such as machinery or buildings, reflecting the wear and tear or obsolescence these assets experience over time. This account is essential for aligning the asset's recorded value with its actual market value, thereby providing stakeholders with a clearer understanding of the company's asset base.
Contra asset:
A contra asset account plays a crucial role in the accounting framework by providing a mechanism to offset the balance of its associated asset account on the balance sheet. This type of account is essential for maintaining accurate financial records and presenting a true picture of a company's financial health. The natural balance of a contra asset account is typically either a zero balance or a credit balance, which signifies a negative value in relation to the asset it offsets. Their presence allows for a more nuanced understanding of asset valuation, ultimately aiding stakeholders in making informed decisions based on the financial health of the organization.
Cost of goods sold (COGS):
Cost of goods sold (COGS), also known as cost of sales, represents the total expenditure associated with manufacturing a company's product or the total cost of a purchased product that is subsequently sold. This encompasses all direct costs and expenses related to the production of goods, including items for resale, raw materials, components used in product assembly, labor costs, supplies necessary for production or sales, overhead expenses such as utilities, and shipping or freight charges.
Deferred revenue (unearned revenue):
Unearned revenue, also referred to as deferred revenue, represents a situation where a company collects payment in advance for goods or services that it is obligated to provide in the future. This could occur in various industries, such as subscription services, insurance, and construction. For instance, when a customer pays for a one-year subscription to a magazine, the company records the payment as unearned revenue because it has yet to deliver the magazines over the subscription period.
Financial ratios:
The relationships between various accounting figures extracted from financial statements provide significant insights into a company's operational efficiency, financial stability, and overall performance. By evaluating metrics such as net profit margin, debt-to-equity ratio, and return on assets, stakeholders can achieve a clearer understanding of a company's performance and identify areas for potential improvement. These relationships are crucial for making informed decisions that foster growth and enhance value in the competitive business environment.
First-in, first-out (FIFO):
A a specific inventory management approach known as the First In, First Out (FIFO) method. This strategy is grounded in the principle that the first units of inventory acquired by the company are deemed to be the first ones sold to customers. In practical terms, this means that when a sale occurs, the cost associated with the oldest inventory items is recognized first in the accounting records.
Gross profit margin:
A crucial financial metric that reflects the earnings a business makes per item sold, serving as an indicator of the efficiency and profitability of a company's core activities. It is calculated by taking the difference between sales revenue and the cost of goods sold (COGS), then dividing that figure by the sales revenue. This calculation provides a percentage that illustrates how much of each dollar earned is retained as gross profit after accounting for the costs directly associated with producing the goods sold
Historical cost placeholder:
Historical cost is a fundamental concept in accounting that serves as a measure of value for assets recorded on a company's balance sheet. This accounting principle dictates that the value of an asset is documented at its original cost at the time it was acquired by the business, rather than its current market value or any potential future value. This approach provides a consistent and objective basis for financial reporting, ensuring that all transactions are recorded based on actual cash outflows or expenditures made during the acquisition process.
Inventory reconciliation:
Inventory reconciliation is a critical process in inventory management that involves a thorough comparison of purchase orders and physical inventory counts against the recorded numbers in the accounting books. This meticulous procedure ensures that the financial records accurately reflect the actual inventory on hand, which is essential for effective business operations.
Liquidity:
Liquidity is a crucial financial metric that reflects a business’s ability to meet its short-term obligations, such as paying off debts and other liabilities that are due within a year. It signifies the ease with which assets can be converted into cash without significantly affecting their market value. In essence, liquidity is a measure of the financial health of a company and its capacity to maintain operations and fulfill commitments in a timely manner.
Natural balance:
Natural balance In financial accounting systems, we expect certain types of accounts to have a normal debit or credit balance, which is illustrated in the Trial Balance. This expected balance is referred to as their “natural balance.” Understanding the concept of natural balance is crucial for anyone involved in accounting, as it forms the foundation for how transactions are recorded and how financial statements are prepared.
Periodicity assumption
The periodicity assumption, also known as the time period assumption, is a fundamental principle in accounting that allows businesses to divide their financial activities into distinct and manageable time intervals. This practice facilitates the timely reporting of financial results, enabling stakeholders to assess the performance and financial health of the business within specific periods. Typically, businesses choose to report their financial results and cash flows on a regular basis, which can be monthly, quarterly, or annually, depending on their operational needs and the requirements of external stakeholders such as investors, creditors, and regulatory agencies.
Petty cash:
Petty cash is a modest amount of money maintained by a business to cover unforeseen minor expenses that arise during routine operations. This amount typically ranges from $30 to several hundred dollars and is kept in a cash box within the office. Petty cash facilitates small purchases without the need for a receipt through the expense reporting system, thereby reducing the bookkeeping time for minor items. Additionally, it provides businesses with an easily accessible source of funds.
Retained earnings:
This figure represents the total net income that a company has earned over its operational history, accumulated over the years, and retained within the business rather than being distributed to shareholders in the form of dividends. Accumulated net income is essentially the sum of all profits that have been generated by the company since its inception, minus any dividends that have been paid out to shareholders. This retained earnings figure is vital for understanding how much profit the company has reinvested back into its operations, which can be used for various purposes such as funding new projects, expanding business operations, or strengthening the company's financial position
Service life:
The useful life of an asset, also known as economic life or service life, is an estimate of how long you can reasonably expect to use an asset for your business. This period is crucial for businesses as it directly impacts financial planning, budgeting, and investment decisions. Understanding the service life of an asset allows organizations to allocate resources more effectively and to schedule maintenance, upgrades, or replacements in a timely manner.
Shareholder equity:
The net assets owned by shareholders in a company, representing the residual interest in the assets of the entity after deducting liabilities. It is a crucial financial metric that provides insight into the financial health and stability of a business. Essentially, shareholder equity can be understood as the dollar amount that would be returned to shareholders if the business were to undergo liquidation. In such a scenario, all outstanding debts and obligations would need to be settled before any distribution of assets to shareholders could occur.
Source documents:
Source documents serve as the original records validating the occurrence of a specific transaction. For reconciliation purposes, these documents must contain the names of the businesses or individuals involved, a reference number, transaction details (including date, description, and amount due), and, where applicable, an authorizing signature.
Variance analysis:
Variance analysis is a crucial financial management tool that involves a systematic evaluation of the differences between budgeted costs and actual costs incurred within your business operations. This practice is essential for understanding financial performance, as it allows organizations to identify discrepancies that can significantly impact profitability and operational efficiency.
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