Commerce Vocab

Accounting

The systematic process of identifying, measuring and communicating financial information about an entity to interested parties so they can make informed decisions.

Revenue

The income that a business earns from its normal business activities, usually from the sale of goods and services to customers.

Expenses

The economic costs the business incurs through its operations to earn revenue.

Cost of Goods Sold

The direct costs of producing the goods sold by a business. Includes cost of materials and labour directly used. Formula: Opening Inventory + Purchases – Closing Inventory.

Profit

Revenue / income received is greater than the expenses.

Loss

Expenses are greater than revenue / income.

Income Statement

Shows the income (revenue) and expenses of a business over a certain period of time e.g. a year. Calculates Net Profit or Net Loss.

Service Business

Provides intangible products e.g. services such as banking, insurance, transport, lawn mowing, advice.

Trading Business

Sells physical products (tangible products) e.g. retail stores or dairy.

Assets

Resources the business owns that are expected to earn future economic benefit e.g. vehicles / machines.

Current Assets

Short-term assets such as cash or cash equivalents, bank, cash on hand, trade receivables, inventory – that can be turned into cash within a year or during an accounting period.

Non-Current Assets

Also known as fixed assets. Assets that your business holds for longer than 12 months and uses as a source of long-term revenue generation e.g. Land and Buildings.

Liabilities

Money the business owes to other people / firms e.g. loans.

Current Liabilities

A company’s short-term liabilities that are expected to be paid within one year or during an accounting period e.g. trade payables, bank overdraft.

Non-Current Liabilities

The debts a business owes that are not due to be paid for at least 12 months. Also called long-term liabilities e.g. Mortgage.

Owner’s Equity

The owner’s contribution to set up the business i.e. what the business owes to the owner. = Assets – Liabilities.

Gross Profit

Sales – Cost of Goods Sold. Only calculated by trading businesses.

Net Profit

The final profit after all expenses have been deducted. (Service: Revenue – Expenses; Trading: Gross Profit – Expenses).

Drawings

Money or goods taken out of the business by the owner for personal use. Reduces Owner’s Equity.

Trade Receivables

Money owed to the business by customers who bought on credit (also called Debtors).

Trade Payables

Money the business owes to suppliers who sold goods on credit (also called Creditors).

Inventory / Stock

Goods the business has for sale (or raw materials). Appears as a Current Asset on the SOFP and is used in COGS calculation.

Trial Balance

A list of all ledger account balances at a particular date, shown in Debit and Credit columns that must equal. Used to prepare financial statements.

Accounting Equation

Assets = Liabilities + Owner’s Equity. The foundation of the Statement of Financial Position.

Capital

The owner’s investment in the business. Opening Capital + Net Profit – Drawings = Closing Capital.

Goodwill

An intangible non-current asset representing the value of a business’s reputation and customer base.

Bank Overdraft

A current liability – the business has taken more money out of its bank account than it has in it.

Mortgage

A long-term (non-current) liability secured against property / land and buildings.