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All of the following accounting terms have precise denitions when used in

business:

Sales or revenue

Cost of goods sold

Expenses

Gross prot

Fixed assets

Current assets

Current liabilities

or!ing capital

"i#uidit$

%ebtor

Creditor

&ad %ebt

%epreciation

Accrual Accounting

Even though $ou ma$ be familiar with some of them' it is important to !now

their exact meanings otherwise $ou ma$ nd $ourself becoming confused(

For example' $ou ma$ hear the terms )revenues) and )receipts) used

interchangeabl$ in casual o*ce conversation( +owever' as far as business

accounting is concerned the$ are di,erent things and $ou need to appreciate the

di,erence( -ead the following denitions carefull$ and ma!e sure that $ou

understand exactl$ what is meant b$ each of these accounting terms( .his

Accounting .erminolog$ Chec!list outlines the terminolog$' concepts and

conventions that are accepted within the accounting profession(

Sales or Revenue

-evenue is the income that /ows into an organi0ation' and it is often used almost

s$non$mousl$ with sales( 1n government and nonprot organi0ations it includes

taxes and grants( %on)t confuse revenues with receipts( 2nder the accrual basis

of accounting' revenues are shown in the period the$ are earned' not in the

period when the cash is collected( -evenues occur when mone$ is earned3

receipts occur when cash is received(

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Cost of Goods Sold

.his is the purchase cost of the merchandise that was subse#uentl$ sold to

customers(

Expenses

-efers to the other costs that are not matched with sales as part of the cost of

goods sold( .he$ ma$ be matched with a specic time' usuall$ monthl$'

#uarterl$' or annuall$ or the$ ma$ also be one4o, pa$ments( Expenses include:

sta, wages' rent' utilit$ bills' insurance' e#uipment' etc(

Gross Prot

-efers to what is left after $ou subtract the cost of goods sold from the sales( 1t is

also called gross margin( For example' if an organi0ation bu$s in an item for 567

and sells it for 586 9plus sales tax' then the gross prot will be 5;6(

Fixed Assets

.his refers to all of those things that the business owns which will have a value

to the business over a long period( .his is usuall$ understood to be an$ time

longer than one $ear( 1t includes freehold propert$' plant' machiner$' computers'

motor vehicles' and so on(

Current Assets

.his refers to assets with the value available entirel$ in the short term( .his is

usuall$ understood to be a period of less than a $ear( .his is either because the$are what the business sells or because the$ are mone$ or can #uic!l$ be turned

into mone$( Examples of assets include inventor$

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A debtor is a person owing mone$ to the business' for example a customer for

goods delivered(

Creditor

A creditor is a person to whom the business owes mone$' for example a

supplier' landlord' or utilit$ organi0ation(

"ad !ebt

All reasonable means to collect a debt have been tried and have failed so the

amount owed is written o, as a loss and becomes categori0ed as an expense on

an income statement( .his results in net income being reduced(

!epre#iation

Assets have a certain length of time in which the$ operate e*cientl$' referred to

as )an asset)s useful life() %uring this period the value of that asset depreciates

due to age' wear and tear' or obsolescence( .he loss in value is recorded in

accounts as a non4cash expense' which reduces earnings whilst raising cash /ow(

A##rual A##ounting

Accrual accounting relies on two principles' which have alread$ been alluded to:

$%e revenue re#ognition prin#iplestates that revenues are recogni0ed when

the$ are reali0ed or reali0able' and are earned 9usuall$ when goods aretransferred or services rendered' no matter when the pa$ment is received(

$%e &at#%ing prin#iplestates that expenses are recogni0ed when goods are

transferred or services rendered' and o,set against recogni0ed revenues' which

were generated from those expenses' no matter when the cash is paid out(

.hese two principles are absolutel$ central to understanding how accrual

accounting wor!s and are described in detail in the next sections(