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Accounting Terms

Account: An account is a summarized record of transactions relating to a particular item of asset, liability, owner’s equity, revenue or expense. Any account has two sides, the debit on the left side and the credit on the right side. Each entry on one side will have a corresponding entry on the opposite side. All accounts are housed in ledgers, and each account is used to collect and store similar information for a specific item. For example, all transactions involving cash are recorded in the cash account.

Accounts payable: See Creditor (below).

Accounts receivable: See Debtor (below).

Asset: Assets are things of commercial or exchange value owned by a business. Assets are balance sheet accounts. Examples are machinery, copyright, accounts receivable, and goodwill.

Balance sheet: Balance sheet is an itemized statement at a given date in time that lists a company's assets, liabilities, and the difference between the two, which is the company's equity, or net worth.

Balancing the account: This involves finding the difference between the two sides of an account and entering the difference on the lesser side so that the two sides of the account are equal in total.

Bank charges: Bank charges are those charges and fees levied on account holders mostly of current accounts or checking accounts for a variety of services provided by the banks. These services include interest on overdraft, charges for exceeding the overdraft limits even if approved by the bank, transactions as specified by the customers such as stopping payment on a cheque, standing orders, buying foreign currencies, etc.

When an account is overdrawn without prior agreement with the bank, the banks usually impose charges. Sometimes these accounts are overdrawn due to a direct debit, standing order, cheque issued, etc when there isn’t sufficient money in the accounts to meet these payments as the accounts have only a small credit balance. Bank charges also occur when customers fail to maintain a minimum balance in their accounts.

Bank charges are not invoiced items. They are known only when the banks’ customers receive their periodic bank account statements. These charges are credit entries in the bank column of the cash book.

Bank overdraft: A negative balance in a bank account resulting from funds withdrawn exceeding funds deposited. An overdraft is granted when a bank allows its account holder to withdraw up to a limit more than what the account holder has in his or her account. There is a service charge for the borrowing. Excessive bank charges are incurred if the borrowing exceeds the limit that has been agreed with the bank.

Book value: Book value refers to the historical cost of a business’s assets less the accumulated depreciation of the assets as shown on the balance sheet. The historical cost is the cost at the time the asset is purchased. At the end of each accounting period, an asset owned by a business is shown at its cost and its accumulated depreciation is shown separately as a deduction of the asset to indicate its book value. The amount for depreciation for each accounting year is charged against the income and the accumulated depreciation account is increased by this amount.

Capital: Capital is one's own or borrowed money invested in a business generate future income. It is the net value of a business at a specified date after subtracting liabilities from assets. Also known as Owner's Equity, it is the amount subscribed and paid by stockholders.

Credit: Credit is an entry on the right-hand side of an account in the double entry bookkeeping system. Credits decrease assets and increase liabilities and equity on the balance sheet, and increase revenue and decrease cost and expenses on the income statement or profit and loss statement.

Creditor: Creditor is an entity to which a debt is owed by another entity for goods or services supplied. It is also termed as accounts payable.

Current account: A current account with a bank allows the account holder to issue cheques against the funds in the account and to make regular payments in and out of the bank without having to give notice. It is a non interest-bearing account. But some banks pay interest to their current account holders but such interest is not as high as that paid to savings accounts. Standing orders and direct debits are usually found with such account. Current accounts are known as checking accounts in the US.

Debit: Debit is an entry on the left-hand side of an account in the double-entry bookkeeping system. Debits increase assets and decrease liabilities and equity on the balance sheet, and decrease sales, revenue and increase cost and expenses on the income statement or profit and loss statement.

Debtor: Debtor is one who owes money to a business for goods delivered or service rendered. It is also termed as accounts receivable.

Direct costs: Direct costs are costs that can be traced directly to a product being manufactured or a department. If the costs cannot be easily traced to the product being manufactured, then they are not an indirect expense. There are three types of direct cost:

Direct materials
Direct labour
Direct expenses

Direct materials are those that are needed to manufacture a product. If a manufacturer makes furniture, the cost of wood used is an obvious direct cost.  The wages of a machine operator making the furniture parts are direct labour. The expenses incurred in checking or repairing the machines are direct expenses.

Other examples of direct costs are the carriage inwards on raw materials, hire of additional machines for the production process, and a sum paid for the use of a patent.

Direct debits: Direct debits are usually used for making payments on a regular basis from your bank account. The payments are for bills that have to be paid such as rent, rates, insurance premiums, etc. By having direct debits, you are instructing your bank to allow your creditor to obtain payments directly from your bank account. It is not necessary that the regular payments are fixed amounts. They could vary and it is your creditor, and it need be you, who will notify your bank to change the payments. However, you must be notified beforehand the dates and new amounts to be paid to your creditor.

Equity: Equity is the net worth of a company after deducting its liabilities from its assets. It is also known as capital for a sole proprietorship and for partnerships. Equity includes capital contributions by a sole proprietorship and capital contributions by a partnership. It also includes common stock issued by a corporation. It is a claim which can be enforced against the assets of the firm.

Factory overhead: Factory overhead costs are all those costs associated with production which is being done in the factory with the exception of direct materials and direct labour, and cannot easily be identified with the items being manufactured. Examples are:

Wages of factory personnel such as forklift drivers, cleaners, etc.
Rent and rates of the factory
Factory power and lighting
Property and personal insurance premiums
Depreciation of plant and machinery

Gross loss: Gross loss results where the cost of goods sold exceeds the sales figure.

Gross profit: The Gross profit is the company’s profit earned from sales before deducting operating expenses such as salaries, rent, and other expenses. It is the amount by which the net sales exceed the cost of goods sold.

Narrative: An explanation or a remark entered below each entry in the general journal. The purpose of a narrative is to have clear details recorded in connection with each and every transaction entered in the general journal so that at any future time the exact nature of the transactions can be recalled.

Net loss: Net loss is the excess of the total amount of cost of goods sold, operating expenses and losses over the total of revenues and gains in an accounting period.

Net profit: Net profit is the company’s total earnings less costs of doing business such as depreciation, interest and other expenses. Net profit is also known as net income.

Net realizable value: The value of an asset calculated as the selling price less the costs associated with the disposal of the asset such as bringing the asset to the saleable state and expenses of sale.

Production cost: In a manufacturing firm, cost of production is the combination of prime cost plus factory overhead costs. Prime cost is the total of three different types of cost which are direct materials, direct labour and direct expenses.

Standing order: Standing order is an instruction to a bank by an account holder to make regular fixed payments from his or her current account or savings account to someone or a firm at a stated date and when to discontinue with the payment. If the amount of payment is ever to be changed then the account holder has to inform the bank which is not the case with direct debit as it is the creditor who informs the bank. Standing order is very convenient and useful for making regular payments such as repaying a mortgage.


Unpresented cheque: An unpresented cheque that has been sent to the payee has not been presented to the bank on which it is drawn for clearance. As it has not yet gone through the bank account of the payee, it is sometimes referred to as an outstanding cheque. Such outstanding cheque is deducted from the closing bank account balance as shown on the bank statement in order to arrive at the corrected balance. It however does not in any way affect the company’s cash account as it would have been credited with the cheque amount.

Bank charges: Bank charges are those charges and fees levied on account holders mostly of current accounts or checking accounts for a variety of services provided by the banks. These services include interest on overdraft, charges for exceeding the overdraft limits even if approved by the bank, transactions as specified by the customers such as stopping payment on a cheque, standing orders, buying foreign currencies, etc.

 

When an account is overdrawn without prior agreement with the bank, the banks usually impose charges. Sometimes these accounts are overdrawn due to a direct debit, standing order, cheque issued, etc when there isn’t sufficient money in the accounts to meet these payments as the accounts have only a small credit balance. Bank charges also occur when customers fail to maintain a minimum balance in their accounts.

 

Bank charges are not invoiced items. They are known only when the banks’ customers receive their periodic bank account statements. These charges are credit entries in the bank column of the cash book.

Last Updated (Sunday, 31 October 2010 23:54)