ACR: Accrual accounting relies on the following two
principles: cash accounting and the revenue recognition
principle. The revenue recognition principle states that
revenues are recognized when they are realized or
realizable, and are earned, no matter when the payment
is received. Also review Cash Accounting.
FA and CA: Fixed assets are longer-term and will likely
provide benefits to a company for more than one year,
such as a building, land or equip- ment. Current assets
are those that will be used within one year. Typically
this could be cash, inventory or accounts receivable.
CAS: Cash Accounting is an accounting method where
receipts are recorded during the period they are
received, and expenses are recorded in the period in
which they are actually paid. Small businesses often use
cash accounting because it is simpler and more
straightforward, and it provides a clear picture of how
much money the business actually has on hand. Also
review Accrual Accounting.
CF: The revenue or expense expected to be generated
through business activities (sales, manufacturing, etc.)
over a period of time. Maintaining positive cash flow is
essential in order for businesses to survive.
CR: An accounting entry that may either decrease assets
or increase liabilities and equity on the company's
balance sheet, depending on the transaction. When using
the double-entry accounting method there will be two
recorded entries for every transaction: a credit and a
GAAP: A set of rules and guidelines devel- oped by the
accounting industry for companies to follow when
reporting financial data. Following these rules is
especially critical for all publicly traded companies.
GP: Gross Profit refers to what is left after you
subtract the cost of goods sold from the sales. It is
also called gross margin. For example, if an
organization buys in an item for $50 and sells it for
$75, then the gross profit will be $25. Gross Profit
calculations do not include or consider taxes.
CL and LTL: A company's debts or financial obligations
it incurred during business operations. Current
liabilities are those debts that are payable within a
year, such as a debt to suppliers. Long-term liabilities
are typically payable over a period of time greater than
one year. An example of a long-term liability would be a
LM: Liquidity is the ability to meet current obligations
with cash or other assets that can be quickly converted
into cash in order to pay bills as they become due. In
other words the organization has enough cash or assets
that will become cash so that it is able to write checks
without running out of money.
The modified cash basis is an accounting method that
combines elements of the two major accounting methods:
the cash method and the accrual method. The cash method
recognizes income when it is received and expenses when
they are paid for. The accrual method recognizes income
when it is earned (for example, when the terms of a
contract are fulfilled) and expenses when they are
incurred. The modified cash basis method uses accruals
for long-term balance sheet elements and the cash basis
for short-term ones.
OE: An owner’s equity is typically explained in terms of
the percentage amount of stock a person has ownership
interest in the company. The owners of the stock are
commonly referred to as the shareholders.
P&L: A financial statement that is used to summarize a
company’s performance and financial position by
reviewing revenues, costs and expenses during a specific
period of time; such as monthly, quarterly or annually.
ROI: A measure used to evaluate the financial
performance relative to the amount of money that was
invested. The ROI is calculated by dividing the net
profit by the cost of the investment. The result is
often expressed as a percentage.
Sales or REV: Sales or Revenue is the income that flows
into an organization, and it is often used almost
synonymously with sales. In government and nonprofit
organizations it includes taxes and grants. Don't
confuse revenues with receipts. Under the accrual basis
of accounting, revenues are shown in the period they are
earned, not in the period when the cash is collected.
Revenues occur when money is earned; receipts occur when
cash is received.
WC: Working Capital is the difference between current
assets and current liabilities. An organization without
sufficient working capital cannot pay its debts as they
fall due. Poor financial management practices can lead
even a profitable company to close due to Working