Accounting Terms You Should Be Familiar With – Part 3
Following on from Part 1 and Part 2 here are more terms that you should be familiar with to enable you to understand your accounts and run your business efficiently.
Liquidity is the ease with which your business can convert your assets into cash. Cash itself is the most liquid of all assets.. In accounting terms liquidity is a measure of how swiftly you can pay for goods and services using your liquid assets. Marketing liquidity is slightly different and refers to the ease with which a market performs the buying and selling at a stable price of any non-liquid assets.
31 Net Income
Net income is the amount earned by a business after all deductions, such as costs and taxes, from gross income. It is what is left over after all debts are paid. Net Income, or net profit is nearly always shown as the last item or ‘bottom line’ in an Income statement and is the measure of a company’s health. It is a guide to the stability and potential longevity of a business.
32 On Account / On Credit
On Account and On Credit are interchangeable terms used to describe good and services that have been provided by the company but have yet to be paid for. Depending on your terms of business on credit items may attract interest if not paid for promptly. On Credit sales are an asset of the business.
33 Operational Expenses
Operational expenses are those expenses that are not specifically related to the manufacture of good or provision of services. They cover things such as Insurance, advertising, maintenance and support costs.
Overheads are the costs of running your business. They are are the ongoing cost of running a business excluding anything relating to the provision of services or the manufacturing of products. Overheads need to be factored into the sale price of your products and services or you will not make a profit. Details of overheads should always appear in a profit and loss statement.
Payroll is the amount you pay your staff to do their job. You are responsible for deducting tax and national insurance from the amount paid to your staff and passing it on to the government. You may also be responsible for pension and other deductions. You also have to provide your staff with a detailed breakdown of whatyou are paying them and what deductions are made.
36 Profit and Loss Statement
Your profit and loss statement is one of the key accounting reports that will tell you how your business is performing. It may also be referred to as an Income statement. It shows all the revenue, costs and expenses for your business that occurred over a specific time period. They are generally prepared monthly, quarterly half yearly or annually. Together with your cash flow and balance sheet they give a complete picture of how your business is performing.
There are two meanings associated with receipts. One is the written/printed receipt that you are given when you purchase something on behalf of the business and records that you have spent assets of the business in return for goods or services.
The second meaning is the income received in one day from sales of goods or services by the business.
38 Retained Earnings
Also known as Earning Surplus, Retained Earnings relates to the funds left over after the payment of dividends to the shareholders or owners of the business. These funds are available to the business to spend in the future for development, expansion or general running costs.
39 Return on Investment
Often referred to as ROI, return on investment is a measure of how efficiently an investment performs relative to it’s cost. ROI is calculated by taking the original cost from the current value of the investment and then dividing it by that original cost.
Revenue is one of the most basic accounting terms. Simply put it is the total amount of money a business has generated over a specified period of time. Cash accounting and accrual accounting calculate revenue slightly differently as accrual accounting includes sales made on credit, whereas cash accounting only counts it at the point when it is paid.
41 Single-Entry Bookkeeping
Single EntryBookkeeping is the accounting system used when only one record is made of a transaction going in or out of a business.
42 Trial Balance
A trial balance is a method of checking the bookkeeping entries for mathematical accuracy. If an account does not balance then something has not been entered correctly and the entries in an account need to be double checked.
43 Variable Costs
Variable Costs are those which may change over time such as materials or wages. Fixed costs do not change, or change rarely such as rent.
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