Every industry has its own set of jargon.
While some words and phrases can often be translated in simple terms by outsiders, other words may as well be a foreign language.
This is particularly true of accounting.
To make sure you’re speaking the same language as you accountant the next time you see them, here are 25 words accounting terms and their definitions that might help.
Acid test ratio
This ratio compares the amount of cash + marketable securities + accounts receivable to the amount of current liabilities. Basically it tells you how well a business could deal with a big shock, because it shows you how much money you have close to hand.
A situation in which an entrepreneur starts a company with little capital. You see this a lot in startups, where founders use personal finances, for example credit cards or income from other jobs, to get the company up and running.
Gains or losses included in a company’s financial statements, which are infrequent and unusual in nature. These are usually explained further in the “notes to the financial statements.”
It’s another term for what something’s worth. It can be anything – a truck, a building, or a whole company. But it’s also more precisely the price you could get on the market between knowledgeable parties in a straightforward transaction.
This is where a company starts getting rid of products without getting rid of the overhead costs at the same time. As a result, remaining products have increasing overheads. This is not good.
Stuff that needs to be replaced regularly because they wear out or are used up, like stationary.
A target rate that a company uses for financial decisions. For example, only projects that generate an internal rate of return above 12% might get approval. 12% is the hurdle rate.
What accountants call a cheque that bounces.
Rule of 72
A simple way of estimating the number of years or interest rate needed to double your money. Take 72 and divide it by the interest rate, and that’s the number of years needed to double your money. It’s a great maths hack and much easier than working out complex compounded rates. More details on it here.
Stuff that gets lost in the manufacturing of products.
UPE (Unpaid present entitlement)
This is a term in trust fund management for the amount of money that a beneficiary is currently entitled to, but has not yet been paid.
Fixing up the financial statements to make them presentable – usually referring to actions or decisions taken before the statements are released, to make sure the numbers look healthy.
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