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Accounting Terminology Explained (Briefly)

Updated: Jun 24, 2023

General Ledger was not a military officer and a Trial Balance has nothing to do with a court case.

We've created an 'Accounting Glossary' to clarify some of the profession's buzz words.

 
Accounting Glossary
 

Accounts Payable (Creditors)

Money or other obligations owed to creditors for services and materials, a Liability on the Balance Sheet.

Accounts Receivable (Debtors)
Money or other obligations due for services rendered or items sold on terms, an Asset on the Balance Sheet.

Accrual Based Accounting
Represents a method of recording accounting transactions when they occur, whether or not cash has changed hands.

Accrued Liabilities
Represents expenses that are incurred prior to being paid. For example, salaries earned by your employees and paid in a subsequent month are accrued as a liability until they are paid.

Accrued Revenue
Represents revenue that is earned and recorded but not yet received in the form of cash.

Asset
Anything that has current or future economic value to a business, seen on the Balance Sheet.

Balance Sheet
The primary financial statement that shows detailed assets, liabilities and equity at a point in time.

BAS (Business Activity Statement)

Businesses registered for GST with the Australian Taxation Office need to periodically lodge a business activity statement (BAS) to report and pay your: goods and services tax (GST) and pay as you go (PAYG) instalments.


Cash Based Accounting
Represents a method of recording accounting transactions most easily described as accounting for cash transactions. Entries do not affect your financial statements until cash changes hands. In this environment, you do not track receivables and payables. Cash received is recorded as income when received and expenses are recorded when paid.

Cash Flow
The total amount of money being transferred into and out of a business, especially as affecting liquidity.

Chart of Accounts
A list of categories or accounts where transactions are recorded.

Cost of Goods Sold (COGS or COS)
Represents the cost of items or services sold to customers. These costs are kept in the Inventory asset account until they are sold. Then they are passed over to the COGS expense account seen on the Profit and Loss Statement.

Credit
A credit is the ‘right hand’ side of an account.

Current Year Earnings
This account represents year to date earnings, not yet recorded into the Retained Earnings account.

Debit

A debit is the ‘left hand’ side of an account.

Deferred Revenue
Represents income received, but not yet earned. This is typically a liability account.

Double Entry Accounting
Every accounting transaction is comprised of debits that equal credits.

Equity (Capital)
The owner’s interest in the business, which is the total assets minus the total liabilities of a company, seen on the balance sheet.

Expenses
Costs incurred in the business used to generate revenue, seen on the Profit and Loss report.

General Ledger
An accounting record where all of your accounts are maintained.

Gross Profit
Represents your revenue from sales of inventory or services, less Cost of Goods Sold (sometimes called Cost of Sales), before overhead expenses.

GST (Goods and Services Tax)
A consumer based tax included in the final price and paid by consumers at point of sale and passed to the government by the seller. The GST is usually taxed as a single rate of 10% across Australia.

Journals
Account ledgers where entries are recorded. Type of journals include General, Disbursements, Receipts, Sales, Purchases, and Purchases journals. Every transaction creates a corresponding set of debit and credit entries in a specific journal.

Liability
The things a company owes in cash or other resources. These are claims against assets. Shown on the Balance Sheet.

Net Profit/Loss
Total Income minus Total Expenses. The bottom line!

Operating Profit
Profit before Other Income is added and Other Expenses are subtracted.

Overhead Expenses
Represents the expenses of a business independent of how much revenue is generated. Can also be considered Fixed Costs, things like rent, salaries, and utilities.

PAYG (Pay As You Go)
Regular prepayments of the tax on your business and investment income. There are two types of PAYG: Instalments & Withholding
  • Instalments This system allows an individual and a business to meet income tax obligations by making payments at the end of each quarter of the year.

  • Withholding A system of withholding income tax from an employee or contractor’s salary or wages.

Profit and Loss Statement (a.k.a. P&L and Income Statement)
The primary financial statement that shows detailed revenues and expenses for a period of time.

Prepaid Expenses
Represents expenses that are paid in advance of incurring them. For example, you might pay a year’s worth of insurance and accrue 1/12 of it each month. This is typically an asset account.

Retained Earnings
Represents the cumulative net income or loss of a business since its inception.

Subsidiary Ledgers
Customer and supplier balances that equal the amount of the Accounts Receivable and Accounts Payable General Ledger accounts.

Trial Balance
A list of all your General Ledger accounts and their current balances.

VAT (Value Added Tax)

A consumption tax assessed on the value added in each production stage of a good or service. Every business along the value chain receives a tax credit for the VAT already paid. The end consumer does not, making it a tax on final consumption. Does not apply in Australia - see GST.


 

Philip Seigel CPA FFIN, Comdex Training, July 2022


 

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