Accounting Equation A mathematical expression of the relationship between assets and claims represented by liabilities and owner’s equity or the owner’s personal stake in the firm.
Acceleration Instead of recording transactions individualy, these are added together for the whole period and registered on 31st December.
Accrual accounting Income is recognised in a company’s books at the time the revenue is earned (but not necessarily received) and records expenses when liabilities are incurred (but not necessarily paid for).
Asset An economic resource that is expected to yield a stream of benefits to the owner.
Adjustments in the Financial Statements Transactions that flow continously and cannot be kept up to date, such as use of inventory, which is more efficient to accumulate and enter the total value at the end of the period when the statements are prepared. Same with non monetary transactions that flow continously as depreciation. Also revenue from unearned interest at bank or unpaid interest on credits, which value is known only when the statements from the bank are received.
I. Unadjusted Operating Entries
Transactions that are of a monetary nature which are incurred and paid during the reported period such as debtors, inventory, prepayments and current expenses such as salaries, consultants, marketing, rent, electricity, etc.
II. Unadjusted Operating Entries
Transactions that can be recorded when they occur and which do not “flow” continuously by are recorded on a ‘‘spot’’ basis, meaning, when they occur, such as, sales, salaries, rent, accounting and legal fees, purchase of fixed assets like cars, equipment, furniture.
Balance Sheet A representation of the accounting equation, Assets = Claims. It is used in accounting to clearly see the state of a company’s finances.
Break-even Identifies the point where total revenue is just sufficient to cover total cost. In accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has “broken even”.
Cash accounting Recognises revenues and expenses at the time physical cash is actually received or paid out.
Current Assets Change periodically as they are used to produce goods or services or stock items are resold.
Current Liabilities Claims payable almost immediately or within the year, such as creditors for goods or services bought by the firm.
Cash Flow When you are managing your cash flow you are in effect managing the movement of money in and out of the business.
Cash Inflow Is the series of payments coming in to the company from sales, interest from the bank, securities. Also investment from shareholders, sales of assets. Generally cash inflows occur before cash out flows. This creates a cash flow gap, which necessitates the constant management of your cash flow. The cash flow equation is as follows. Beginning cash balance + estimated revenue + estimated capital – estimated current/fixed assets purchases – estimated expenses = ending cash balance.
Cash Outflow Is the money going out of the firm to pay for overhead expenses, dividends, loan to the bank, purchase of current and fixed assets,
Cash Flow Management Identifies future cashflow problems. Main objectives are: to reduce the amount of time between inflows and outflows and to implement actions to eliminate risk of not being solvent to pay obligations of the firm. The purpose of cash flow planning is to ensure that the cash balance is enough to meet current and future financial requirements. If the business does not have enough money it may be forced to close, even if it is an otherwise profitable business.
Depreciation It refers to the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle). It affects net income. Generally the cost is allocated, as depreciation expense, among the periods in which the asset is expected to be used. Such expense is recognised by businesses for financial reporting and tax purposes. Methods of computing depreciation may vary by asset for the same business. Methods and lives of the assets may be specified in accounting and/or tax rules in a country. Several standard methods of computing depreciation expense may be used, including fixed percentage, straight line, and declining balance methods. Depreciation expense generally begins when the asset is placed in service.
Debit and Credit Formal bookkeeping and accounting terms. They are the most fundamental concepts in accounting, representing the two sides of each individual transaction recorded in any accounting system.· A debit transaction indicates an asset or an expense transaction, a credit indicates a transaction that will cause a liability or a gain. A debit transaction can also be used to reduce a credit balance or increase a debit balance. A credit transaction can be used to decrease a debit balance or increase a credit balance.
Double Entry The dual entry principle applies when recording transactions in order to maintain the equality of the accounting equation. This practice is known as the double-entry bookkeeping system. In order to maintain the equality of the accounting equation two entries are made in the accounting equation for each transaction, one a debit entry and one a credit entry.
Equity or Capital Defined as the amount of capital provided by the company’s owner(s). Providing new equity (an “issuance” of new equity) gives the firm new capital and increases owners’ equity by the same amount and time needed. An issuance of new shares, to raise new capital, increases shareholders’ equity. Formally, owners’ equity is also a form of liability, but is deemed separate and different from other liabilities since it is a residual interest, ranked last in the series of claims on assets. It represents the ownership of claims on assets by the Owners net of liabilities. Equity = Assets less Liabilities
Expenses Represent the costs of operating the business, such as selling and administrative expenses. Expense accounts are of a debit nature as per the basic accounting assumptions.