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What are the most practical financial accounting terms and what do they mean?

Study guide

You may have heard terms such as book value, balance sheet, current debt, etc., but you do not know the exact meaning. Like many disciplines, accounting has its own vocabulary. Even if you are not familiar with the principles of accounting, stay with us. The How How website helps you find your way around financial accounting by compiling a collection of the most practical accounting words and terms.

1. Accounts Receivable

Accounts receivable are current assets that are to be converted to liquidity in the short term; That is, the customer has received the goods or services, but has not yet paid for them, but will soon clear his debt. Businesses that buy from you record these items in their books as “accounts payable.”

۲. Accounts payable

This is a current debt and shows the money you owe to the creditors. When you make a purchase and pay at another time, you must pay what is recorded as a debt on the balance sheet. Other businesses record these as “receivables” when they buy something from them.

3. Property

Anything valuable that an organization has that it can use to generate revenue in the future is called an asset. Assets can be tangible, such as office or equipment (which is a fixed asset), or intangible, such as licenses or trademarks. Another term used for assets is “economic resource”.

4. Balance sheet

A financial statement that shows the value of the organization (assets) and what it owes (to creditors and investors) at any given time. The organization’s daily transactions change the balance sheet financial balance. For example, when you sell one of your products, your liquidity increases and your stored goods decrease. That is why “time” plays a very important role in the balance sheet. The balance sheet is also known as the “statement of financial position” and the “statement of financial position”.

5. Book value

Book value is the impaired (depreciated) value of an asset at any time between its acquisition and the point at which its value is reduced to zero. Note that the book value of an asset is not necessarily what you might get if you sell it.

6. Cost of goods sold (COGS)

Expenses that are directly related to the production and sale of goods sold. For example, the price of the ingredients or the sellers’ commission and قیمت

7. Creditor

The person or organization that provided the goods or services to you while you have not yet paid for them.

8. Current assets

Assets that you expect to become liquid in a period of operation (usually one year). Current assets usually include liquidity, cash equivalents (currency, gold, securities, etc.), accounts receivable, and manufactured goods.

9. Current liabilities

Debt is said to have a maturity of less than one year and is repaid from available resources or through the creation of another current debt, such as a short-term bank loan.

10. Debtor

An individual or organization for which you have provided goods or services but have not yet paid for them.

۱۱. Depreciation

How to spread the initial cost of buying a tangible asset over the period in which that asset is useful and has acceptable performance. Tax officials usually set an acceptable depreciation period for each asset. When depreciation is calculated on a straight-line basis, the purchase price is spread evenly over a period of depreciation. Thus, depreciation is recorded in the balance sheet as a liability that reduces the value of the asset. (For example, a truck that costs 100 million tomans and has a depreciation period of 20 years is worn out for 5 million tomans annually and its value is reduced.)

۱۲. EBIT (Loan and Tax Prepayment Income)

Calculations that show the net income of the organization before deducting taxes and interest on loans. These calculations are useful for determining a company’s profitability; Because the revenue from activities and production operations matches the costs associated with it. (And does not include non-production costs.)

13. EBITDA (Loan interest, tax, depreciation and amortization income)

Measuring an organization’s ability to make a profit from productive activities without the effect of non-cash costs is affected by depreciation. (Although the entity records depreciation as an expense, there is no cash payment in the transaction.)

۱۴. take stock

Shares, the value of assets and net assets belong to the owner of the organization. If the company is liquidated in a controlled manner, the creditors have the first claim against the assets. When debts are paid, the balance remains with the owner (s). This is the share of the owners of the organization.

۱۵. Cost

The requirements that a business owner always incurs to succeed in the monetization process. Purchasing equipment, raw materials, rent, and employee salaries are examples of common business expenses.

۱۶. FIFO (first input, first output)

This is a property valuation method in which the first entry into the property office is the first exit from the property office. It is assumed that the first items purchased (produced) are the first items sold. For example, you buy 100 clothes for resale at a price of 50,000 Tomans each, and then you buy another 100 clothes, each at a price of 60,000 Tomans. For the sale of each of the first 100 shirts, you remove 50,000 Tomans from the office account. For the one hundred and first clothes that you sell, you remove 60,000 Tomans from the office. FIFO approximates the cost of replacing stored goods and gives us an accurate picture of the actual flow of goods in and out of the organization. For this reason, many jurisdictions require FIFO assessments to be mandatory in order to obtain income tax.

۱۷. Fixed assets

Assets that are used over more than one accounting period (usually more than one year) such as land and property, computers and office equipment, production machinery, transportation, and so on. These are also known as capital assets.

۱۸. right of business

Value added to an organization’s ability to generate more revenue than its competitors. Usually one of the ways to earn goodwill is branding. Goodwill is an intangible asset and its value is determined only when the entity is acquired. This is the additional amount that the buyer pays in addition to the difference between the tangible assets and liabilities of the company (book value).

19. Gross profit

The difference between the income and the cost of goods sold during an accounting period. This shows the amount of revenue that the organization leaves to cover its operating and production costs. Gross profit is often expressed as a percentage of sales so that one period can be compared with another to control costs.

20. Profit and Loss Statement

A financial report summarizes the activities of an organization over a specific period of time. This report summarizes the revenue and expenses incurred and records the difference as net income for the period. This report is a guide to how to effectively manage the activities in the organization.

۲۱. debts

It is an obligation to pay for the purchase of an asset or the provision of a good or service to a creditor in the future. The creditor will claim the assets of that company until the organization fulfills its obligation to pay its debts. Common debts include bank loans and accounts payable.

۲۲. LIFO (last input, first output)

This is a method of evaluating a property statement in which the last item that enters the property book will be the first item to be removed from the property book. It is assumed that the last items purchased are the first items sold. For example, you buy 100 clothes at a price of 50,000 Tomans each to sell again, and then you buy another package of 100 pieces, each of which costs 60,000 Tomans. For the first dress that you sell (up to 100’s), you remove 60,000 Tomans from the first office. For the one hundred and first clothes, you remove 50,000 Tomans from the property office (assuming that no other clothes are bought during this period). In times of rising prices, LIFO generates higher warehousing costs and consequently lower revenue. This leads to lower income taxes. Therefore, many jurisdictions do not allow LIFO evaluation. (Due to income tax objectives)

23. Current assets

Assets that can be converted into cash quickly, without causing a significant reduction in value or causing the company to incur a loss. Cash in the organization’s bank accounts and securities (stocks and bonds) have high liquidity.

۲۴. net income

If we subtract the total expenses from the total income in an accounting period, we get net income. If the figure is negative, it is known as “net loss”. Note that net income does not equate to liquidity or money available to the organization. Net income is also called “net profit”.

۲۵. Reserve account or save

Part of the capital that is not available for normal commercial applications. It is often used for calculations to cover debts or major planned future expenses.

۲۶. Accumulated profit

Accumulated revenues of the company that have not yet been distributed among the owners. These assets are reserved for future use of the organization (such as investment) or for distribution to future company owners.

۲۷. Income

The inflow of assets (cash and accounts receivable) to the organization is in exchange for goods and services. Revenue is sometimes called sales volume or the volume of equations.

۲۸. Cash flow statement

It is a financial statement that shows cash flows in and out of the organization in each accounting period. This invoice identifies the sources and uses of liquidity and classifies it as liquidity from activities, finance, and investment. The main purpose of an invoice is to determine whether the organization has sufficient liquidity to cover its short-term liabilities. This term is also known as “changes in financial status”.

۲۹. Fixed cost

Costs that are imposed on the company regardless of the amount of production. Items such as rent, equipment insurance and staff salaries are always fixed, whether 100 units are produced or 10,000 units.

30. Variable cost

A cost is said to depend on the number of products produced by the organization. The more products you produce, the higher the cost of consumables; As things like transportation, wages and energy consumption increase. Some costs may be completely variable, but others have a fixed part and a variable part. For example, regardless of the volume of production, you will incur the minimum wage cost.


What are the most practical financial accounting terms and what do they mean?

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