Thursday, April 15, 2010

Financial terms defined - A

Accounts payable (A/P). Money owed by the firm to agencies and suppliers.

Accounts receivable (A/R). Money owed to a company for goods or services sold. The figure is important in determining a business's ability to meet its financial obligations.

Accrual accounting. An accounting method whereby income and expenses are booked when they are incurred, regardless of when they are actually received or paid. Revenues are recognized during the period in which the sales activity occurred; expenses are recognized in the same period as their associated revenues.

Accruals. An amount incurred as an expense in a given accounting period—but not paid by the end of that period. An example would be the electricity bill for a given quarter.

Activity-based costing (ABC). An approach to cost accounting that focuses on the activities or cost drivers required to produce each product or provide each service. ABC assumes that most overhead costs are related to activities within the firm and that they vary with respect to the drivers of those activities.

Allocation. The process of spreading costs from one expense category to several others, typically based on usage. For example, such corporate overhead expenses as rent and utilities may be charged to departmental units based on square feet.

Amortized expenses. The costs for assets such as buildings and computers, which are depreciated (expensed) over time to reflect their usable life.

Assets. The economic resources of a company. Assets commonly include cash, accounts receivable, notes receivable, inventories, land, buildings, machinery, equipment, and other investments.

Asset turnover. A measure of how efficiently a company uses its assets. To calculate asset turnover, divide sales by assets. The higher the number, the better.

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