Important Financial Terminology
Accounting Period
An accounting period is the time interval reflected by the data in a financial statement. An accounting period is a discrete and uniform length of time which serves as a basis for reporting and analyzing companies' financial performance. The uniformity of accounting periods also allows for comparative analysis between companies.Firms prepare financial statements for publication and tax reporting based on an accounting period. Financial statements comprise data generated by a company's operations during the accounting period. The accounting period for publishing financial statements is usually a quarter (e.g. January 1st, 2009 through March 31st, 2009), while the accounting period for tax reporting is usually a year (e.g. January 1st, 2009 – December 31st, 2009).
Accounts Payable
Accounts payable are amounts owed to suppliers and other creditors for goods and services bought on credit. A/P is a current liability, and as such, it appears on the liability side of balance sheet. As it is current liability it is expected to be paid within the next 12 months. Accounts payable is an important factor in a company's working capital. If it's too high, the company may soon be struggling to find the cash to pay the bills; if it's too low, the company may be unwisely directing its cash toward paying the bills too soon rather than enjoying the full grace period and investing that cash in the business instead. The level of accounts payable also affects several important financial-performance measures, including working capital, days payable, the current ratio, and others.Assume that Company XYZ orders Rs. 1,000,000 in mechanical parts from its supplier and has 60 days to pay for those parts. Once Company XYZ places its order and/or receives the parts, it will increase its inventory account by $1,000,000 and increase its accounts payable by $1,000,000. When 60 days has passed and Company XYZ pays the invoice, it will reduce cash by $1,000,000 and reduce its accounts payable by $1,000,000.
Accounts Receivable
Accounts receivable (A/R) are amounts owed by customers for goods and services a company allowed the customer to purchase on credit. A/R is a current asset, and as such, it appears on the assets side of the balance sheet. As it is current asset it is expected to be received within the next 12 months. Accounts receivable is an important factor in a company's working capital. If it's too high, the company may be lax in collecting what's owed too it and may soon be struggling to find the cash to pay the bills; if it's too low, the company may be unwisely harming customer relationships or not offering competitive payment terms. In general, accounts receivable correspond to changes in sales levels.Assume that Company XYZ sells $1,000,000 of mechanical parts to a manufacturer and gives that customer 60 days to pay for those parts. Once Company XYZ receives the order and/or sends the parts and/or sends the customer an invoice, it will decrease its inventory account by $1,000,000 and increase its accounts receivable by $1,000,000.When 60 days has passed and Company XYZ is paid, it will increase cash by $1,000,000 and reduce its accounts receivable by $1,000,000.
Accrued Expense
An accrued expense refers to any expense incurred and reported during an accounting period but for which payment has not yet been made.
Example: There are certain expenses which a company may incur over the course of an accounting period (usually a quarter), but which may not actually be paid until a later time. Such expenses are accounted for as short-term liabilities on a company's balance sheet and may include utilities, wages and salaries, rents, and periodic interest on outstanding loans.
Amortization
Amortization is the process of decreasing or accounting for, an amount over a period. In finance it usually deals with repayment of an installment loan by means of equal installments at periodic intervals.An amortization schedule would show the payment that goes into the principal component and payment that goes into interest component, together with the outstanding loan balance after the payment is made
Annuity
A series of payments of equal amounts occurring at fixed intervals for a specified number of periods. Annuities are classified by the frequency of payment dates. The payments(deposits) may be made weekly, monthly, quarterly, yearly, or at any other interval of time.
