Key accounting definitions

A defining moment – some key terms of accounting explained

Remember to apply your knowledge to questions & quote figures, details from the questions or give examples to fully demonstrate your knowledge. 

Sales Revenue - The amount of income from selling goods and/or services usually calculated by multiplying quantity sold x selling price

Cost of Sales - The cost of goods actually sold in the current accounting period after adjusting purchases with opening and closing inventory, returns and carriage in

Gross Profit - The amount of profit after taking any direct expenses away from (primary) income of a business

Accrued Expenses - Business costs which are due but unpaid at the end of the current accounting period even though they have been used/consumed.  These will increase expenses in the income statement and increase current liabilities in the balance sheet

Prepaid Expenses - An expense paid for in this accounting period even though it will not be used/consumed until the next accounting period.  Will reduce expenses in the income statement and increase current assets in the balance sheet

Depreciation - Writing off the expense of a non-current asset over its expected lifetime in line with the accruals concept

Non-Current Assets - An asset purchased which is not for resale and was bought to generate future profits for a business.  Usually kept for over 12 months e.g. Buildings

Current Assets - An asset which is expected to be turned into cash within the next 12 months e.g. Inventory

Current Liabilities - The amount of liabilities which need to be paid within the next 12 months e.g. Trade Payables

Non-Current Liabilities - The amount of liabilities which need to be paid back in the long term (i.e. over 12 months) for example Mortgage

Net Current Assets - This shows how much funds a firm has after using its short term assets (Current Assets) to pay off its short term debts (Current Liabilities). A negative figure indicates cash flow problems.

Capital – the amount of the owner’s investment which will be equal to assets minus liabilities

Unpresented Cheques - A cheque written and entered in the cash book that has not yet been processed by the bank and therefore not shown on the bank statement

Outstanding Lodgement - Funds that have been debited in the cash book but have not yet been added to our bank account and therefore not shown on the bank statement

Dishonoured Cheque - A cheque on which payment has been refused payment by the bank usually due to insufficient funds.

Standing Order - A business instructs their bank to make a regular and fixed payment usually in exchange for goods/services provided

Direct Debit – Where authority has been given to a 3^rd party to take funds from their account.  The amount may vary or be fixed and dates which may vary or be fixed

Cheque – A cheque (quote number if possible) is given to a party (you/them) who will then present this to the bank for payment. 

Credit Transfer – Funds have been transferred electronically from one party (name them) into our bank account

Bad Debt – a receivable account which is not expected to be paid.  We therefore reduce the trade receivables and write it off as a bad debt expense.

Remember to apply it to the question wherever possible!