Vocabulary for Accounting: Exercise
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Vocabulary for Accounting
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A statement: A formal document summarizing financial transactions or other relevant information.
Example: The monthly bank statement shows all deposits, withdrawals, and fees for the account.
To issue: To release or distribute something officially, such as invoices, shares, or financial statements.
Example: The finance department will issue invoices to customers at the end of each month.
Balance sheet: A financial statement that provides a snapshot of a company's financial position at a specific point in time, showing assets, liabilities, and equity.
Example: The balance sheet reveals that the company's total assets exceed its liabilities, resulting in a strong equity position.
A debit: An entry that represents an increase in an asset or expense account and a decrease in a liability or equity account in double-entry accounting.
Example: To record the purchase of equipment, you would make a debit entry to the equipment account.
A credit: An entry that represents a decrease in an asset or expense account and an increase in a liability or equity account in double-entry accounting.
Example: When a customer pays an invoice, you would make a credit entry to the accounts receivable account.
Fixed assets: Long-term assets, such as buildings and machinery, that are not intended for sale in the normal course of business.
Example: The company's fixed assets include a factory, vehicles, and office equipment.
Liabilities: Debts or obligations a company owes to external parties, including loans, accounts payable, and bonds.
Example: The company's current liabilities include outstanding vendor invoices and short-term loans.
Tangible: Physical assets or items that have a material existence and can be touched or seen.
Example: Machinery, equipment, and inventory are examples of tangible assets.
Intangible: Assets that do not have a physical presence but represent value, such as patents or copyrights.
Example: Patents, trademarks, copyrights, software licences or customer lists are examples of tangible assets.
Income statement: Also known as a profit and loss statement, it summarizes a company's revenues, expenses, and profits over a specific period.
Example: According to the income statement, the company achieved a net profit of $500,000 in the last quarter.
Cash flow statement: A financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents.
Example: The cash flow statement indicates that the company had a positive cash flow of $100,000 for the year.
Net cash flow: The difference between cash inflows (incomings) and cash outflows (outgoings) during a specific period.
Example: Positive net cash flow indicates that a company is generating more cash than it is spending.
Amortization: The gradual reduction of an intangible asset's value over time, similar to depreciation for tangible assets.
Example: The software development costs are amortized over five years to reflect their ongoing benefit to the company.
Depreciation expense: The annual allocation of a tangible asset's cost to reflect its declining value over time.
Example: The depreciation expense for the building was $10,000 for the year, in line with the asset's expected lifespan.
To wear out: To become unusable or lose value over time due to wear and tear.
Example: The machinery has started to wear out and requires regular maintenance.
Cash Equivalents: Highly liquid assets that are easily convertible to cash and have a short-term maturity of typically three months or less.
Example: Treasury bills and money market funds are common examples of cash equivalents that provide quick access to funds for short-term needs.
Equity: The portion of a company's value that belongs to its owners (shareholders), calculated as assets minus liabilities.
Example: Shareholders' equity increased significantly after a successful round of funding.
Dividend: A payment made by a corporation to its shareholders, typically from its earnings.
Example: The company's board of directors approved a dividend payment of $0.50 per share to be distributed to shareholders.
Retained earnings: The portion of a company's profits that are reinvested in the business rather than distributed to shareholders as dividends.
Example: The board of directors decided to allocate a portion of the profits to retained earnings for future expansion.
Audit: An independent examination of a company's financial statements and internal controls by an external auditor to ensure accuracy and compliance.
Example: The annual audit revealed no material discrepancies in the company's financial records.
GAAP (Generally Accepted Accounting Principles): A set of standardized accounting principles, standards, and procedures used in the United States.
Example: Adhering to GAAP ensures consistency and comparability in financial reporting among U.S. companies.
IFRS (International Financial Reporting Standards): A set of accounting standards developed by the International Accounting Standards Board (IASB) used globally in many countries.
Example: The company follows IFRS for its international subsidiaries to maintain uniform financial reporting practices.
Cost accounting: The process of tracking and analyzing the costs associated with producing goods or services.
Example: Cost accounting helps the company determine the most cost-effective way to manufacture its products.
Incomings: Refers to money received by a business, such as revenue, sales, or other sources of income.
Example: The incomings from the new product launch exceeded our expectations.
Outgoings: Refers to money spent or expenses incurred by a business.
Example: It's essential to monitor outgoings to ensure the company remains profitable.
Accounts Payable: Money owed by a company to its suppliers for goods or services.
Example: The company had $10,000 in accounts payable to various vendors at the end of the month
Accounts Receivable: Money owed to a company by customers or clients for goods or services provided on credit.
Example: The accounts receivable balance of $15,000 represents outstanding invoices that are expected to be collected from customers within the next 30 days.
Revenue recognition: The process of determining when and how to record revenue from sales of goods or services.
Example: Revenue recognition policies dictate that subscription revenue is recognized monthly over the subscription period.
Debt-to-equity ratio: A financial ratio that measures a company's relative proportion of debt and equity in its capital structure.
Example: The debt-to-equity ratio indicates that the company relies more on equity financing than debt to fund its operations.
Fiscal year: The financial year of a company, which may not necessarily follow the calendar year.
Example: The company's fiscal year runs from April 1st to March 31st to align with its industry's seasonality.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): A measure of a company's operating performance, often used to assess profitability.
Example: EBITDA provides a clearer picture of the company's core operating performance without the impact of non-operating expenses.
Accrual: The accounting method that records revenue and expenses when they are earned or incurred, regardless of when cash is exchanged.
Example: The company uses the accrual method to recognize revenue when it delivers products, even if the customer hasn't paid yet.
Cash basis accounting: An accounting method that records revenue and expenses when cash is actually received or paid.
Example: Small businesses often use cash basis accounting because it simplifies financial record-keeping by focusing on actual cash transactions.
Depreciation: The gradual reduction in the value of an asset over time due to wear and tear, obsolescence, or other factors.
Example: The company calculates depreciation on its machinery to account for its declining value on the balance sheet.
Accumulated depreciation: The total depreciation expense recorded against an asset since its acquisition.
Example: The accumulated depreciation for the machinery is $50,000, reflecting its decreasing value over the years.
Trial balance: A list of all general ledger accounts and their balances used to ensure that debits equal credits.
Example: The trial balance showed a discrepancy, prompting a thorough review of the accounting entries.
Ledger Accounts: Detailed records in an accounting system that track individual transactions for specific categories, such as assets, liabilities, income, or expenses.
Example: The Accounts Receivable ledger account keeps a record of all customer invoices and payments received by the company.
General ledger: A centralized accounting record that contains all financial transactions of a business, organized by accounts.
Example: The accountant updated the general ledger with the latest sales and expense data.
Cost of capital: The rate of return required by an investor or a company to invest in a particular project or asset.
Example: The company evaluated the cost of capital before deciding to undertake a significant expansion project.
Internal controls: Procedures and policies within a company to safeguard its assets, ensure accuracy in financial reporting, and prevent fraud.
Example: Implementing strong internal controls helps prevent unauthorized access to sensitive financial data.
Liquidity: The ability of a company to meet its short-term financial obligations with its current assets.
Example: Maintaining adequate liquidity is crucial to ensure the company can pay its suppliers and cover its operating expenses on time.
Reconciliation: The process of comparing two sets of records to ensure they are in agreement, such as bank statement reconciliation.
Example: The accountant performed a reconciliation of the bank statement and the company's cash ledger to identify any discrepancies.
Accounting period: A specific timeframe for which financial transactions and activities are recorded and reported, typically on a monthly, quarterly, or annual basis.
Example: The company's accounting period for the current fiscal year ends on December 31st.
Goodwill: In accounting, it represents the intangible value of a business, such as its reputation, customer base, and brand recognition.
Example: The acquisition of the competitor brought significant goodwill to our company due to their strong customer relationships.
Cost of goods sold: The direct expenses incurred in producing or purchasing the goods or services sold by a company.
Example: The cost of goods sold for the quarter increased due to rising raw material prices.
Operating profit: The profit a company generates from its core business operations, calculated by subtracting operating expenses from revenue.
Example: Despite increased competition, the company managed to achieve a healthy operating profit this year.
Total value: The overall sum or worth of an asset, investment, or financial item.
Example: The total value of the company's assets is estimated at $5 million.
To decline in value: To decrease in worth or market value over time.
Example: Real estate properties in that area have been declining in value due to economic downturns.
Double-entry bookkeeping: An accounting system that records each financial transaction with equal and opposite entries, ensuring that debits and credits are balanced.
Example: Double-entry bookkeeping helps maintain accuracy and integrity in financial records.
Advance / down payment: Money paid in advance by a customer to secure goods or services before delivery.
Example: The customer made an advance payment of 30% of the total project cost.
Bad debt: A debt that is unlikely to be collected because the debtor is unable or unwilling to pay.
Example: The company had to write off a significant amount of bad debt this year due to economic challenges.
Deferred tax: Income tax that is postponed and recognized on the balance sheet until a future period.
Example: Deferred tax assets and liabilities can have a significant impact on a company's financial statements.
Input tax: The value-added tax (VAT) paid by a business on its purchases of goods and services.
Example: The company can offset input tax against its output tax to calculate the net amount owed to the tax authorities.
Output tax: The VAT collected by a business on the sale of goods and services to customers.
Example: The business must remit the output tax to the tax authorities on a quarterly basis.
Actual basis: Accounting and financial reporting based on real transactions and events rather than estimates or projections.
Example: The financial statements are prepared on an actual basis, reflecting the company's true financial position.
To record: To document or make an official entry of a transaction or event.
Example: The accountant will record the sale of inventory in the ledger.
To keep a record: To maintain a documented history of transactions or events.
Example: It's essential to keep a record of all financial transactions for auditing purposes.
To be due: When an obligation or payment is expected or owed at a specified time.
Example: The rent for the office space is due on the first day of each month.
To pay off: To settle a debt or obligation by making a payment.
Example: The company plans to pay off its outstanding loans within the next five years.
To write off: To remove a non-collectible debt or asset from the financial records as a loss.
Example: The company had to write off a substantial amount of inventory that was damaged in a warehouse fire.
To run off: To quickly produce or print multiple copies of a document or report.
Example: The office staff needed to run off additional copies of the presentation for the meeting.
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