ACCOUNTING TERMS AND THEIR MEANING

Hello folks, trust you have been having an insightful time in recent times by following my blogs on various topics in relation to different aspects of life, from class experience to Real-life experience. Tonight, we shall be looking at a few accounting terms and their meanings following my class in Corporate Financial Accounting (CFA) class.

TimePeriod Assumption (TPA): It is also known as an artificial time period or periodicity. It is the cut-off point of the economic life of a business which could be monthly, quarterly, or yearly. If you are interested in knowing the progress of a business, you need a Time Period Assumption and the Purpose of TPA is to give clarity to a financial report, to determine the performance of a business. TPA is for the purpose of convenient reporting for accessing financial conditions.

Fiscal Year: This is usually 12months which could start from any month of the year e.g. (from 1^st June 2021 to 31^st May 2022). This is different from a calendar year.

Calendar Year: This is usually 12months which starts at the beginning of the year (1^st January) to the end of the year (31^st December).

InterimPeriod: Interim periods are usually shorter than a fiscal year. They are monthly or quarterly reports.

Accrual Basis: Accrual basis is recognizing a transaction as they occur. For instance, if a payment was made into the business in the year 2012 for a service to be rendered in 2013, an accrual basis will record such transactions in the book. The sales of the goods on credit, where sales will be recorded in the books of account on the date of sale irrespective of whether it is on credit or cash.

Cash Basis: Cash Basis is recognizing a transaction when money changes hands. If you ask me what I call it, I will say “pay as you go”. i.e. cash basis only recognize service rendered and money earned for it. This means that it recognizes revenues and expenses at the time cash is received or paid out.

Net Income: Net income is calculated as Revenue minus Expenses (R-E). It is what the business has left over after all expenses, including salary and wages, cost of goods or raw materials and taxes etc.

Depreciation: It is a non-cash item that recognizes diminishing in assets. Put differently, depreciation simply means a decrease in the value of assets. To calculate Depreciation per month, (cost – salvage value/number of months).

Salvage Value: The amount one is willing to save on the cost of an asset after depreciation has occurred.

Please folk, let us get ourselves acquainted with these few accounting terms till we connect again.

Motunrayo Awoolo

M.A.