DECODING ACCOUNTING JARGON: A GUIDE TO 40 KEY TERMS

Here’s our A-Z guide for graduates to understand key accounting terms you may encounter in interviews, assessments, or at work.

Break-Even Point

The level of revenue at which a company’s total costs equal its total revenue, resulting in neither profit nor loss.

AAccrual Accounting

The method of recording revenues and expenses when they are earned or incurred, regardless of when the cash is received or paid.

Example: A company records revenue for services provided in the current month, even if the payment will only be received in the following month.

Accrued Expenses

Expenses that have been incurred but not yet paid or formally recorded.

Example: At the end of the month, a company may accrue wage expenses for employees who have worked but have not been paid yet.

Auditing

The examination and verification of a company’s financial records and statements by an independent external accountant.

Example: Auditors review a company’s financial statements, internal controls, and supporting documentation to ensure their financial reports are accurate and in compliance with local laws.

Example: Company A’s fixed and variable costs amount to RM20,000 each month. If they only close RM20,000 in sales this month, they will have just hit a break-even point.

BBookkeeping

The process of recording financial transactions and maintaining financial records.

Example: Bookkeeping involves tasks such as recording sales, purchases, expenses, and payments in the general ledger.

CCapital Expenditure

Expenses incurred to acquire or upgrade long-term assets, such as property, facilities, and equipment.

Example: The purchase of machinery or the construction of a new company building would be considered a capital expenditure.

Cash Flow Statement

A financial statement that shows the inflows and outflows of cash during a specific period.

Example: A monthly cash flow statement will show a company’s bank account balance and which of their clients will pay them this month. Then what suppliers the company must pay this month, how much they must pay for fixed monthly expenses like rent, utilities, and staff salaries; and how much money will be left in the bank account by month-end after all of the above is done.

Contingent Liability

A potential obligation that may arise from past events but is not yet confirmed and depends on future events.

Example: A company faces a contingent liability if it is being sued for damages, and the outcome of the lawsuit is uncertain.

Cost Accounting

A sub-field of accounting that focuses on the allocation and analysis of costs for the purpose of management decision-making.

Example: Cost accountants determine the potential cost of producing a product, including direct materials, labour, and overheads. Management can then use this information to set variable product pricing over a period of time.

Cost Behaviour

The relationship between costs and the volume of business activity within a company.

Example: Variable costs increase or decrease in direct proportion to changes in production or sales volume, while fixed costs remain constant.

Cost of Capital

The required rate of return that a company must earn on its investments to maintain or increase its shareholder value.

Example: The cost of capital incorporates the cost of debt and equity financing and is used to evaluate the profitability of investment projects.

Cost of Goods and Services (COGS)

The direct costs associated with producing or acquiring goods or services that are sold by a company.

Example: COGS includes the cost of raw materials, direct labor, and manufacturing overheads used to produce the goods sold by a retailer.

DDebtors Ledger

A subsidiary ledger that records the detailed information of a company’s accounts receivable. It includes individual customer accounts and the amounts owed by each customer for goods or services provided on credit.

Example: ABC Company maintains a debtors ledger to keep track of its customers’ outstanding balances. The ledger shows Customer A owes RM10,000 and is due for payment in full this month, while Customer B owes RM50,000 and will pay in installments over the next 3 months.

Depreciation

The estimated decrease in value of a tangible asset — such as equipment or vehicles — over its useful life, reflected as a recorded cost.

Example: A company purchases machinery for RM50,000 and depreciates it over 5 years, resulting in an annual depreciation expense of RM10,000.

Disposals

The removal or sale of assets from a company’s books. It involves eliminating the asset’s carrying value and recognising any gain or loss resulting from the disposal.

Example: XYZ Company decides to dispose of an outdated piece of equipment. The company sells the equipment for RM5,000, which is lower than its carrying value of RM8,000. As a result, the company records a loss on disposal of RM3,000 (RM8,000 - RM5,000) in its financial records. The equipment is then removed from the company’s asset accounts, reflecting the disposal.

Double-entry Accounting

A system in which every financial transaction is recorded with equal and opposite debits and credits.

Example: When a company receives cash from a customer, it debits the cash account and credits the accounts receivable account.

EEarnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA)

A measure of a company’s net profits excluding interest, taxes, depreciation, and amortisation expenses.

Example: EBITDA is commonly used by investors and analysts to assess a company’s operating performance without the influence of nonoperating factors.

Equity

The residual interest in the assets of a company after deducting liabilities.

Example: Equity represents the ownership interest of shareholders and is calculated as total assets minus total liabilities.

F

Financial Analysis

The process of assessing a company’s financial performance and evaluating its financial health.

Example: Financial analysis involves comparing financial ratios, trends, and benchmarks to identify strengths, weaknesses, and opportunities.

Financial Forecasting

The process of estimating future financial outcomes based on historical data and projected trends.

Example: A company may create a financial forecast to predict its future sales, expenses, and cash flows for budgeting and planning purposes.

Financial Leverage

The use of borrowed funds (debt) to finance investments and operations, with the aim of increasing potential returns for shareholders.

Example: By taking out a bank loan to purchase assets, a company can amplify its profits if the return on those assets exceeds the cost of borrowing (i.e. interest due to the bank for the loan).

Financial Ratio

A quantitative analysis tool that compares different financial variables to assess a company’s financial health and performance.

Example: The debt-to-equity ratio compares a company’s total debt to its total equity and indicates its reliance on borrowed funds.

Financial Statement

A formal record of a company’s financial activities, including the income statement, balance sheet, and cash flow statement.

Example: Financial statements provide stakeholders or potential investors with key information about a company’s performance, financial position, and liquidity.

Fixed Assets

Long-term tangible assets that are not intended for sale and are used in the production or operation of a business.

Example: Buildings, land, vehicles, and machinery are examples of fixed assets that are essential for a company’s operations.

Fraud

Intentional misrepresentation or manipulation of financial information to deceive others for personal gain.

Example: Falsifying sales figures or creating fictitious expenses are forms of fraud that can lead to financial misstatements.

GGenerally Accepted Accounting Principles (GAAP)

A set of globally-recognised accounting standards and rules that govern how financial statements are prepared and presented.

Example: GAAP ensures consistency and comparability in financial reporting across different companies around the world.

Goodwill

An intangible asset that represents the value of a company’s reputation, customer relationships, and brand recognition.

Example: Goodwill is recognised when a company acquires another company for a price higher than the documented value of its identifiable assets.

LLiquidity

The ability of an asset to be converted into cash quickly without a significant loss of value.

Example: Cash is the most liquid asset, while inventory may take longer to convert into cash and is considered less liquid.

IIncome Statement

A financial statement that summarizes a company’s revenues, expenses, and net income or loss for a specific period.

Example: The quarterly income statement shows whether a company generated a profit or incurred a loss each financial quarter.

Inventory Valuation

The method used to determine the cost of physical inventory on a company’s balance sheet.

Example: Inventory can be valued using methods such as First-In, First-Out (FIFO), Last-In, First-Out (LIFO), or weighted average cost.

MMateriality

The concept that determines the significance or importance of an item or event in financial reporting.

Example: A handful of small sales deals being left out in financial statements may be considered immaterial and not require adjustment, while failing to record an entire shipment of product stock would be material and need correction.

NNet Present Value (NPV)

A method used to evaluate the profitability of an investment by calculating the present value of expected cash flows.

Example: If an investment has an NPV of RM10,000, it indicates that the present value of expected cash inflows will exceed the initial investment by RM10,000.

Return on Investment (ROI)

A measure of the profitability of an investment, calculated by dividing the net profit by the initial investment.

Example: If an investment generates RM5,000 in profit and the initial investment was RM50,000, the ROI would be 10% (RM5,000/ RM50,000).

Revenue Recognition

The process of recording and reporting revenue in the accounting records.

Tax Liability

Tax liability refers to the amount of tax that an individual or entity owes to the government based on their taxable income or transactions.

Example: John inherited a plot of land worth RM500,000. However, because Malaysia has no estate tax laws, John does not owe any tax to the government on this inheritance. As such, his inherited plot of land is considered to have zero tax liability.

Trial Balance

RReturn on Assets (ROA)

A financial ratio that measures a company’s profitability relative to its total assets.

Example: If a company has a net income of RM50,000 and total assets of RM500,000, the ROA would be 10% (RM50,000/RM500,000).

Example: Revenue should generally be recognised when it is earned and there is reasonable certainty of its collection, such as when goods have been delivered and the client has been invoiced.

An in-between financial statement that lists the balances of all general ledger accounts to ensure they are in balance. This is not included in official financial reports.

Example: The trial balance shows that the total debited transactions equal the total credited transactions, indicating that the books are in balance.

TTax Deduction

A reduction in taxable income allowed by the tax authorities to reduce tax liabilities.

Example: Business expenses, such as salaries, staff claims, rent, and utility bills are tax-deductible and can lower a company’s taxable income.

WWorking Capital

The difference between a company’s current assets and its current liabilities, representing its short-term liquidity.

Example: Working capital is calculated by subtracting current liabilities such as accounts payable and short-term debt, from current assets such as cash, accounts receivable, and inventory.