10 Useful Accounting Terms and What They Mean
You’ve heard most of them a few times, and maybe now you have got to the point where you don’t think you can ask. So to save any blushes, below are 10 ten common accounting terms and what they mean.
- Provision – an accounting estimate used for a liability of uncertain timing or amount.
2. Depreciation – a figure representing the reduction in value of a fixed asset through use/time, due in particular to wear and tear. Depreciation involves estimates of useful life and left over (residual) value. Most assets will decrease in value and this is a way of accounting for this cost within the accounts over the life of the asset.
3. Net Book Value (NBV) – the net value of an asset. This is equal to the original cost minus depreciation.
4. Drawings – cash or goods taken from the business for the owner’s personal use. Drawings do not count as an expense in the profit & loss and are included in the balance sheet in the financed by section.
5. Bad Debt – A bad debt is where a person or company is not expected to pay the debt (e.g. a company has gone into liquidation), this must be charged to the profit & loss in order to reduce profits. A debt becomes a bad debt when a business decides the money is unlikely to be recoverable, records must be kept and this decision can be made based on past experience.
6. Accrued Expense – this relates to an expense where the benefit has been received, but an invoice has not been received (for example electricity bills that are billed quarterly).
7. Prepayment – a payment for goods or services before they are received (e.g. an insurance premium for 12 months that straddles the year end of the accounts).
8. Directors Loan Account (DLA) – An account held by companies for use by the company’s directors. Where any monies introduced to/or taken from the company are recorded by the directors.
9. Closing Balance – the balance of an account at the end (or close) of an accounting period. This figure is then carried forward in the next accounting period as an opening balance.
10. Going Concern – The assumption that a business will continue trading for the foreseeable future.