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Here are some words that you should understand

 

The Balance Sheet Words



Accounting Equation
Assets - Liabilities =Capital
Fixed Assets + Current Assets
-Current Liabilities - Long term Liabilities = Capital + profit - drawings
Accounting ratios
Used to help make sense of the figures and include the following categories:
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Accrual
An amount unaccounted for, yet still owed at the year end. The amount needs to be estimated     and then added to the expenses deducted from the profit in the Profit and Loss  account.  The same amount also needs to be added to Trade Creditors in the Current  Liabilities  section of the Balance sheet Learn more about this
Asset
An item of value owned by the business
Balance Sheet
A financial statement that shows what the business is worth. This is a very simple definition as the valuation of a business is a very complex topic. It shows the business assets and liabilities at one point in time and is sometimes referred to as the "snap shot".

 
Bank & Cash
Amounts held in the bank and in cash. Found in the Current Assets section of the Balance Sheet.
If  the amounts are in deficit, then  the bank account is said to be an overdraft and will not appear in  current assets but will be found in the Current Liabilities section of the balance sheet.
Capital
Items, usually cash or other assets introduced into the business by the owners. Sometimes referred to as Capital Introduced. For companies this is referred to as share capital and Capital Employed is the term given to the total of:
 
Cash
Money. Can be in the petty cash tin in the office or at the bank.home

 
Current Asset
Assets which are expected to be used up and replaced within one year. Sometimes referred to as short term assets.They can be :
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Current Liability
Amounts owed (within one year) for goods and services purchased on credit terms. This means payment for goods and services is due at a date later than the date of sale. Current liabilities can be:
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Depreciation
Drawings
Assets withdrawn from the business by the owners. These assets are usually cash but can be any asset withdrawn. In company accounts the withdrawal of assets by the owners is either called :
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Fixed Assets
Assets used within the business and not acquired for the purposes of resale. Examples include:
  • Land and buildings
  • Plant and machinery, such as knitting machines and cup making machinery
  • Fixtures and fittings, such as light fittings and shelving
  • Motor vehicles, such as vans and cars.
  • Fixed assets must be shown at original cost(purchase price) or valuation. Valuation is preferred in the case of assets which have changed significantly in value since original purchase. For example the current value of land and buildings can be quite different from the original cost.
    Accumulated Depreciation must also be shown, which is deducted from cost (or valuation) to give  net book value
    Goodwill
    comes in two flavours:
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    Legal framework
    The law controls what kinds of books, records and systems of internal controls that must be maintained by companies which are subject to an annual examination by external auditors. You will learn much more about these in your studies.
    Long term Liability
    Amounts owed to someone else which are payable after one year. Examples include:
     
    Net current assets
    Sometimes referred to as working capital, this is the difference between total current assets and total current liabilities and is what finances the business on a day to basis.
    Net Assets
    Is the difference between the total assets and total liabilities.
    Profit
    There are many types of profit:
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    Reserves
    amounts retained in the business and not distributed to owners. Reserves can be:
     
    Shares
    Amounts invested in a company by its owners. Owners of companies are called shareholders

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    The profit and loss account words


    Accounting Period
    Is the period under examination and usually refers to a year. We therefore refer to a Profit and loss Account for the year ended so and so or a Balance Sheet as at so and so.
    Accruals or Matching concept
    Is the reason why net profit made is not the same as the cash surplus generated. This is a critical concept for you to understand. It is a fundamental concept upon which the accounts are prepared. You will learn in your studies that profit is not cash for a number of reasons:
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    Expenses
    Referred to as expenditure and including examples such as:
  • advertising
  • rent and rates
  • wages and salaries
  • travelling expenses
  • light and heat
  • Office Expenses
  • Miscellaneous Expenses
  • bank interest
  • loan interest
  • depreciation
  • Provision for doubtful debts . This represents an estimate of amounts customers have difficulty paying due to their cash flow problems. This figure will be deducted from the profit in the Profit and loss Account and will also be deducted from the Debtors figure in the Balance Sheet.
  • bad debts written off

  • Amounts owed by customers that cannot afford to pay because they have gone into liquidation. These amounts need to be deducted from the profit in the Profit and Loss Account and also from the Debtors figure which is found in the Current Assets section of   the Balance Sheet.
  • accruals and prepayments.

  • Accruals are amounts unaccounted for yet still owing at the year end . Estimates need to be made and then added to the expenses deducted in the Profit and Loss account. This amount also needs to be added to Trade Creditors in the Current liabilities section of the Balance Sheet . Prepayments are amounts paid for by the business in advance of goods and services received. These amounts need to be deducted from expenses in the Profit and Loss account and will also appear in the Current Asset section of the Balance Sheet along with Debtors.
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    Gross Profit
    Is calculated by deducting Cost of Sales(sometimes referred to as Cost of goods sold) from sales. Cost Of Sales is calculated by taking:
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    Historic cost
    The method used for preparing accounts which estimates the actual purchase price of all items purchased. This is as opposed to the alternatives which could be to use instead the:
     Net Profit
    Sales less cost of sales less expenses = net profit.
    Sales less cost of sales = gross profit.
    Therefore Net Profit = gross profit less expenses.
    In other words Net Profit represents the surplus of sales made over expenditure during the accounting period. If a deficit is made(i.e if expenditure is greater than sales) then this results in a net loss and not a net profit.
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    Profit and Loss Account
    Shows what net profit or loss the business has made within an accounting period after deducting all expenditure from the income. A net profit is earned if total expenditure is less than the sales figure. A net loss is made if it is greater. Comes underneath the Trading Account
    Sales
    Income received or receivable for the accounting period. Sometimes referred to as Turnover.It represents the sales value of goods and services made to customers during the year.

    Trading account
    Shows what Gross Profit the business has made within an accounting period It comes on top of the Profit and Loss Account

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