Here you will come across some generic accounting related terms that are essential to know.
Balance Sheet Formula
Liquidity
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To convert an asset into cash
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Most Liquid
- Cash
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Least Liquid
- Land
Asset
Anything the company owns that has monetary (financial) value. These can include cash, machinery and land etc.
Liability
Any debt that a company owes and promises to return in the future. These can include rental bills, mortgages, loans, payroll.
Equity / Net Worth
The amount of capital invested or owned by the owner(s) of the company.
It is is the value left over after liabilities have been removed.
Asset - Liability - Equity Chain
Paid Up Capital
The amount of money a company has received from shareholders in exchange for shares.
Inventory
The assets a company has purchased to sell to the customers that remain unsold. When sold the inventory account will lower.
Gross Income
Total income or revenue derived from sales of goods and services
Net Income
The amount or profit left after deducting total expenses, taxes etc. from gross income.
Net Margin
How much net income or profit is generated as a percentage of revenue.
Over Head
Those expenses that run the business or company. It can include rent, exec salaries etc.
FBR
Federal Board of Revenue Agency of Pakistan that makes regulations for collection of tax and investigates tax crimes.
NTN
National Tax Number Unique id issued by FBR
SECP
Securities and Exchange Commission of Pakistan Regulates and develops the corporate sector and the non-bank financial markets. Concerned with corporate sector, capital market, insurance companies, private pensions etc.
ERP
Enterprise Resource Planning A software used by enterprises to manage day-to-day business activities such as accounting, project management, risk management, supply chain operations etc.
Fiscal Year
A 12 month period of time that a company or government uses for accounting purposes to measure it’s financial performance.
The fiscal year of Pakistan is 30th of June.
Thus a fiscal year of 2016 would be from 1 July, 2015 to 30th June, 2016.
GoodWill
An intangible asset created when the purchase price is higher than the fair market value. Goodwill are things such as a company’s good reputation, a solid (loyal) customer or client base, brand identity and recognition, an especially talented workforce, proprietary technology etc.
GAAP
Generally Accepted Accounting Principles Commonly followed accounting rules and standards for financial reporting.
IFRS
International Financial Reporting Standards Set of accounting standards that govern how particular types of transactions and events should be reported in financial statements. Setup by IASB
IASB
International Accounting Standards Board
An accounting standards body.
The ones who setup IFRS
Current Asset (CA)
The asset to be consumed within 12 months. Cash, Securities, Inventory, Accounts Receivable etc.
Non-Current Asset (NCA)
The asset not be consumed within 12 months. Long-term investments, land, property, good will, plant, trademarks etc.
Marketable Securities
Investments that can easily be bought, sold, or traded on public exchanges i.e., Debt Securities, Equity Securities etc.
Preferred Stock / Premium Share
Form of corporate equity ownership. A security that represents ownership in a corporation but
- No voting rights are given to the shareholders
- They have priority over a company’s income or assets
Common Stock / Ordinary Share
Form of corporate equity ownership. A security that represents ownership in a corporation but
- Shareholders are given voting rights
- They are last in line when it comes to company assets
Par Value
Stated value per share. Value of one share of common stock or preferred stock. Par value is used to calculate dividend payments and is unrelated to preferred stock’s trading share price.
Retained Earnings
The cumulative net income earned by a company since inception less any dividends.
Additional Paid-In Capital on Common Stock
The amount invested in a company per share of common stock minus the par value per share. If a company’s stock has no par value, then the entire amount paid to the company in exchange for the shares of stock is considered additional paid in capital also the common stock.
NRV
Net Realizable Value The estimated selling price of an asset less the cost of completion and disposal
Residual Value
Salvage Value Estimated value of an asset at the end of it’s useful life.
Depreciation
An accounting method used to allocate the cost of a tangible or physical asset over it’s useful life.
UsefulLife is in year(s)
Dividend
A portion of a company’s profit paid to shareholders. These payments are not mandatory. The board of directors may decide whether to invest the company’s profits back into the company or the pay them out in dividends.
Companies that don’t pay dividends on stocks are typically reinvesting the money that might otherwise go to dividend payments into the expansion and overall growth of the company. This means that, over time, their share prices are likely to appreciate in value
Contra Account
Contra Account is an opposite entry passed to offset the balances of related original accounts in the ledger and helps the organisation retrieve the original amount and the amount of decrease in the value, thereby presenting the net balances of the account.
Accumulated Depreciation used to calculate the net value of fixed assets.
Trial Balance
Trial balances are used to prepare balance sheets and other financial statements and are an important document for auditors. A trial balance is done to check that the debit and credit column totals of the general ledger accounts match each other, which helps spot any accounting errors.