Fundamental Accounting Principles and Accounting Terms

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Accounting, financial analysis and financial modeling are integrated disciplines which a good financial analyst should be familiar with. In particular, it is important that a sound knowledge of fundamental accounting principles and accounting terms is had to ensure a common basis and language for understanding, intepretating and analyzing financial statements and financial model results. We provide here a long list of the most common accounting terms that a financial analyst may come across: Absorption: the sharing out of the costs of a cost center amongst the products which use the cost center. Account: a record in a double entry system that is kept for each (or each class) of asset, liability, revenue and expense. Accounting equation: an expression of the equivalence, in total, of assets = liabilities + equity. Accounting period: that time period, typically one year, to which financial statements are related. Accounting policies: the specific accounting bases selected and followed by a business enterprise (e.g. straight line or reducing balance depreciation). Accounting rate of return: a ratio sometimes used in investment appraisal but based on profits not cash flows. Accounting standards: Prescribed methods of accounting by the accounting standards or financial reporting standards regulation body in your jurisdiction. Accruals: (that which has accrued, accumulated, grown) expenses which have been consumed or enjoyed but which have not been paid for at the accounting date. Accruals convention: the convention that revenues and costs are matched with one the other and dealt with in the Profit and Loss (P&L) Account of the period to which they relate irrespective of the period of receipt or payment. Accumulated depreciation: that part of the original cost of a fixed asset which has been regarded as a depreciation expense in successive Profit and Loss (P&L) Accounts: cost less accumulated depreciation = net book value. Acid test: The ratio of current assets (excluding stock) to current liabilities. Acquisitions: operations of a reporting entity that are acquired in a period. Separate disclosure of turnover, profits, etc must be made. Activity based costing: cost attribution to cost units on the basis of benefit received Irons indirect activities. The idea is that overhead costs are driven by activities (e.g. setting up a machine) not products. Allocation: the charging of discrete, identifiable costs to cost centers or cost units. A cost is allocated when it is unique to a particular cost center. Amortization: another word for depreciation: commonly used for depreciation of the capital cost of acquiring leasehold property. Apportionment: the division of costs among two or more cost centers in proportion to estimated benefit on some sensible basis. Apportionment is for shared costs. Assets: resources of value owned by a business entity.

Assets utilization ratio: a ratio which purports to measure the intensity of use of business assets. Calculated as sales over net operating assets. Can be expressed as sales as a percentage of net operating assets. Asset value: a term which expresses the money amount of assets less liabilities of a company attributable to one ordinary share. Avoidable costs: the specific costs of an activity or sector of a business which would be avoided if that activity or sector did not exist. Auditing: the independent examination of, and expression of an opinion on, the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation. AVCO (average cost): a method of valuing fungible assets (notably stock) at average (simple or weighted) input prices. Bad debts: debts known to be irrecoverable and therefore treated as losses by inclusion in the Profit and Loss (P&L) Account as an expense. Balance Sheet: a financial statement showing the financial position of a business entity in terms of assets, liabilities and...
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