A Glossary Of General Accounting Terms – Part 2

Following up from last week’s Part 1, here is Part 2 of our glossary of essential General Accounting terms.

Interest: Interest is the amount paid on a loan or line of credit that exceeds the repayment of the principal balance.

Journal Entry (JE): Journal Entries are how updates and changes are made to a company’s books. Every Journal Entry must consist of a unique identifier (to record the entry), a date, a debit/credit, an amount, and an account code (that determines which account is altered).

Liquidity: A term referencing how quickly something can be converted into cash. For example, stocks are more liquid than a house since you can sell stocks (turning it into cash) more quickly than real estate.

Material: Material is the term that refers to whether information influences decisions. For example, if a company has revenue in the millions of dollars, an amount of $0.50 is hardly material. GAAP requires that all Material considerations must be disclosed.

On Credit/On Account: A purchase that happens On Credit or On Account is a purchase that will be paid at a future time, but the buyer gets to enjoy the benefit of that purchase immediately. “Bartender, put it on my tab…”

Overhead: Overhead are those Expenses that relate to running the business. They do not include Expenses that make the product or deliver the service. For example, Overhead often includes Rent and Executive Salaries.

Payroll: Payroll is the account that shows payments to employee salaries, wages, bonuses, and deductions. Often this will appear on the Balance Sheet as a Liability that the company owes if there is accrued vacation pay or any unpaid wages.

Present Value (PV): This is a term that refers to the value of an Asset today, as opposed to a different point in time. It is based on the theory that cash today is more valuable than cash tomorrow, due to the concept of inflation.

Receipts: A Receipt is a document that proves payment was made. A business produces receipts when it provides its product or service and it receives receipts when it pays for goods and services from other businesses. Received Receipts should be saved and catalogued so that a company can prove that its incurred expenses are accurate.

Return on Investment (ROI): Originally, this term referred to the profit that a company was making (Return), divided by the Investment required. Today, the term is used more loosely to include returns on various projects and objectives. For example, if a company spent $1,000 on marketing, which produced $2,000 in profit, the company could state that its ROI on marketing spend is 50%.

Trial Balance (TB): Trial Balance is a listing of all accounts in the General Ledger with their balance amount (either debit or credit). The total debits must equal the total credits, hence the balance.

Variable Cost (VC): These are costs that change with the volume of sales and are the opposite of Fixed Costs. Variable costs increase with more sales because they are an expense that is incurred in order to deliver the sale. For example, if a company produces a product and sells more of that product, it will require more raw materials in order to meet the increase in demand.

Click here for Part 1 of our Glossary Series.     |     Click here for Part 3 of our Glossary Series.

To help you better understand these terms as well as others, reach out to the experts at Centrosome Inc. We are a small business bookkeeping and accounting company, based out of Ottawa, ON, that services clients across Canada and the US. View our full list of services here, read customer reviews here, or get in touch with us here.