Common Accounting Terms

There are some business key terms that you should know well if you are an entrepreneur or even an experienced businessman. If you are planning to manage your business and your finances properly, it is very important to clearly understand the meaning of each of these key terms. 

Out of dozens of business key terms, mentioned below are a few important terms along with their meaning.

Accounting

A systematic way of recording and reporting financial transactions for a business or organization.

Assets

Anything the company owns that has monetary value. 

Current assets (CA) are those that will be converted to cash in the next 12 months. This could be cash, inventory, or accounts receivable in most cases.

Fixed assets, such as real estate, land, and major machinery, are long-term investments that will likely benefit a company for more than a year.

Balance Sheet

Balance Sheet is a financial report that summarizes a company’s assets, liabilities and owner or shareholder equity, at a given time.

Cash Flow

Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time. Cash flow can be positive or negative. Positive cash flow indicates that a company has more money moving into it than out of it

Cost of Goods Sold

The total cost of producing the goods sold by a business.

Double entry bookkeeping

Double-entry bookkeeping is a system of documenting transactions in which each company transaction is entered as a debit or credit in at least two accounts. The amounts entered as debits must equal the amounts recorded as credits in a double-entry system.

Expenses

Expenses refer to the costs of conducting business. 

The types of expenses include fixed, variable, accrued, and operation expenses.

Fixed Expenses: Rent, salary, and insurance payments are all fixed expenses that do not change month to month.

Variable Expenses: Expenses that may fluctuate over time, such as labor costs.

Accrued Expenses: an unpaid expense that has been incurred.

Operation Expenses: Expenses incurred by a company that is not directly related to the production of goods or services. For example, advertising cost.

Inventory

The term Inventory refers to the assets that a business has purchased to sell to its clients but has yet to sell. The inventory account will decrease as these things are sold to customers.

Liabilities

Liability is when someone owes someone else money.

Current liabilities (CL) are those debts that are payable within a year, such as a debt to suppliers. 

Long-term liabilities (LTL) are typically payable over a period of time greater than one year. An example of a long-term liability would be a multi-year mortgage for office space.

Loss

A loss occurs when a service or product sells for less than what it cost to produce or create it, or when an asset’s expenses exceed its income.

Net Income

The amount earned in profits is referred to as net income. It is computed by deducting all the expenses in a given period, including COGS (Cost of Goods Sold), Overhead, Depreciation, and Taxes, from Revenue.

Profit

Profit is a term used to represent the financial gain made by a company when revenue exceeds costs and expenses.

Profit = total revenue – total expenses

Revenue

Revenue is any money earned by the business.

The gross income a company earns from normal business activities is referred to as revenue or sales. Multiply the sale price by the number of units sold to get the sales revenue. Revenue is calculated differently by accrual accounting and cash accounting. Accountants consider sales made on credit when utilizing the accrual accounting method to compute revenue. Cash accounting counts sales as revenue only after the company has been paid.

KLOUDAC Accounting Firm Dubai, UAE

KLOUDAC is a recognized accounting firm in Dubai, UAE with 15 years of service experience. We have built connections with over 500 customers. It has also won the certification of Xero Payroll and certification of Xero advisor from the world leading online accounting software – XERO. Moreover, KLOUDAC is a golden champion partner of Xero.  Accounting and Bookkeeping is more convenient for the SMEs via KLOUDAC since they provide their clients with a whole package of services such as Financial Consultancy, Business setup, Audit and assurance services, Taxation services, Recognized accounting software and more.

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