Accounting and finance is a popular course taken at educational institutions because it is a highly useful discipline for people who want to go into business.
Financial reports and the accounting processes which create these figures are filled with jargon and this is why most senior accountants at RSM Global, BDO and other accountancy practices hold a postgraduate qualification such as the ACA qualification.
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In this article, we’ll help you tackle the topic of accounting by explaining 10 accounting terms in easy to understand language.
Turnover is an odd accounting term which often causes confusion. When stated on its own, turnover has the same definition as revenue. It represents any sales income generated by a company delivering products or services. These are completely interchangeable words, with one being used instead of another to follow local practice.
Overheads are often misunderstood to mean the costs of running a business. In fact, the term ‘overheads’ refers to a specific group of costs known as ‘indirect’ costs. That are, costs which are not directly linked to each additional unit of product or service.
How can you tell if a cost is an overhead? Ask yourself this simple question: if I were to produce one extra product or service, would I need to incur more of this cost? If the answer is no, then it’s probably an overhead.
Examples of overheads are; rent, property taxes and entire administrative functions such as finance & human resources.
Consolidation is an advanced accounting topic, but it’s easy to explain the objective to a layperson. When you want to measure the revenues, costs and profits of an entire group of companies you’ll need to combine them together. McDonald’s Corporation, for example, will want to present their global results to investors.
However, in addition to simply summing up the results of all locations, careful adjustments need to be made.
Let’s consider what happens when a group of companies act like a supply chain; selling a product from one group company (such as the factory) to another (such as a retail business unit) before that store finally sells it to an end customer. How should these be presented?
The big picture view is that the group of companies has only made one sale to an end user.
Yet, if we were to simply add up the revenue of all group companies, we may count the same sale many times over, as each entity would record a sale each time it ships the item onward to the next business in the supply chain.
For this reason, an adjustment for intra-group trading is made to avoid such transactions inflating the revenues of the consolidated figure.
Fixed assets definition
Fixed assets are physical things, such as vehicles, buildings, machinery or furniture, which a company owns and puts to use to generate income over a multi-year period.
Think of a factory and the many fixed assets which reside in it. The machinery which forms the production line, the fork-lift trucks in the warehouse, the building which houses it!
Fixed assets are expensive, but because a business uses them over a long period, it does not report the whole cost as an expense in the period it made the purchase. Which brings us to our next definition: depreciation.
Rent Expense Definition
Rent expense is essentially the cost a business incurs to occupy a premises, storage warehouse, property, retail space etc. Usually rent expense is calculated on a straight line basis, by where the revenue recorded for a given period of time is allocated evenly among the actual reporting periods, regardless of the fact payments vary over the term. The straight-line method is used in the recognition of rent revenue and rent expense, each businesses rent expense will naturally differ. Usual accounting guidelines state rent expense should reside in the selling, general and administrative accounts category. It can sometimes be complicated to calculate rent expense on a straight line basis but once you’ve done it once its easier for it to fall into place year after year, especially if you continue with the same rent expense going forward.
Depreciation is the accounting method of recognising a part of the cost of a fixed asset in the financial reports of a company each period.
Methods can vary, but the simplest and most common approach is the ‘straight-line’ method. Under this method, a business makes an assessment of how many months a fixed asset will be productive. It then divides the total cost of the fixed asset over that number of months, to calculate a flat monthly charge to recognise in the accounts.
Most businesses assess that the useful life of a vehicle is 3 – 5 years. Therefore the depreciation expense will be recorded each year which takes ⅓ or ⅕ of the total vehicle cost into the profit & loss account as an expense.
We hope that you have found these accounting definitions useful, and they have piqued your interest in this vast and useful topic.