Accounting Glossary

Accounting

Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities.

Accounting is one of the key functions for almost any business. It may be handled by a bookkeeper or an accountant at a small firm, or by sizable finance departments with dozens of employees at larger companies. The reports generated by various streams of accounting, such as cost accounting and managerial accounting, are invaluable in helping management make informed business decisions

Asset

Things that are resources owned by a company and which have future economic value that can be measured and can be expressed in dollars. Assets also include costs paid in advance that have not yet expired, such as prepaid advertising, prepaid insurance, prepaid legal fees, and prepaid rent.

Examples:

cash,investments, accounts receivable, inventory, supplies, land, buildings, equipment, and vehicles.

Amortisation

Amortization is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. It also refers to the repayment of loan principal over time.

Example

Let’s assume Company XYZ owns the patent on a piece of technology, and that patent lasts 15 years. If the company spent $15 million to develop the technology, then it would record $1 million each year for 15 years as an amortization expense on its income statement.

Alternatively, let’s assume Company XYZ has a $10 million loan outstanding. If Company XYZ repays $500,000 of that principal every year, we would say that $500,000 of the loan has amortized each year.

Accounts Receivable

Accounts receivable are legally enforceable claims for payment held by a business for goods supplied or services rendered that customers or clients have ordered but not paid for. These are generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed time frame. Accounts receivable is shown in a balance sheet as an asset.

Accounts receivable represents money owed by entities to the firm on the sale of products or services on credit. In most business entities, accounts receivable is typically executed by generating an invoice and either mailing or electronically delivering it to the customer, who, in turn, must pay it within an established timeframe.

Accrued Income

Accrued income is income which has been earned but not yet received. It is the income which the company has earned in the ordinary course of business after selling the good or after the provision of the services to the third party but the payment for which has been not been received and is shown as an asset in the balance sheet of the company.

Income must be recorded in the accounting period in which it is earned. Therefore, accrued income must be recognized in the accounting period in which it arises rather than in the subsequent period in which it will be received.

Advertising Expenses

This is the expenses which is use to promote the product and services and it is recorded under the head selling expenses. Its refers to cost incurred in promoting a business, such as publications in periodicals (newspapers and magazines), television, radio, the internet, billboards, fliers, and others

Bills

An invoice or other document received from a vendor, supplier, etc. usually for goods or services received.A bill is a written statement of money that you owe for goods or services. They couldn’t afford to pay the bills. If you bill someone for goods or services you have provided them with, you give or send them a bill stating how much money they owe you for these goods or services.

Examples of a bill Payable payable include a monthly telephone bill, the monthly bill for the electricity used, a bill for repairs that were completed, the bill for merchandise purchased by a retailer on credit, etc Examples of Bills Receivable A business might remit bill receivables to a debtor financing company to access the cash before the customer has paid.

Balance Sheet Statement

A balance sheet is a statement of the financial position of a business that lists the assets, liabilities, and owner’s equity at a particular point in time. In other words, the balance sheet illustrates your business’s net worth.

Assets = Liabilities + Shareholders’ Equity The balance sheet may also have details from previous years so you can do a back-to-back comparison of two consecutive years. This data will help you track your performance and will identify ways to build up your finances and see where you need to improve.

Bill Discounting

Bill discounting is nothing but an arrangement, the initial owner of the invoices that are sold on is still in control of its own sales ledger and will chase payment in the usual way.It as the advance selling of a bill to an intermediary (an invoice discounting business) before it is due to be paid. This results in less administrative charges, fees and interest. The interest and fee are calculated based on the risk of non-payment from the buyer, and so a funder will look at the creditworthiness and trading history of the customer rather than the business it is funding for payment.

Bill discounting, or invoice discounting is the act of sourcing working capital from future payables. Furthermore, the seller recovers an amount of sales from the financial intermediaries before the due date. Following are the advances of bill discounting –

Can be good for new startups
The borrower only pays on the amount of money used, unlike a business loan
Risk of bad debt or non-payment can be passed on to the financier
Quick to access – funds can be released within 24 hour
Improved cash flow and working capital

Bad Debts

Bad debt is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible. Bad debt is a contingency that must be accounted for by all businesses who extend credit to customers, as there is always a risk that payment will not be received.

Bad debt expense is an unfortunate cost of doing business with customers on credit, as there is always a default risk inherent to extending credit.

To comply with the matching principle, bad debt expense must be estimated using the allowance method in the same period in which the sale occurs.
There are two main ways to estimate an allowance for bad debts: the percentage sales method and the accounts receivable aging method.
Bad debts can be written-off on both business and individual tax returns.

Example

let’s say Company XYZ manufactures bicycles and sells them through retail stores. Once the retailer receives the bicycles it has 90 days to pay Company XYZ. Company XYZ records the amount due as “accounts receivable” on the balance sheet and recognizes the revenue. However, as the 90 day due date passes, Company XYZ realizes the retailer is not ever going to make its payment.

Once it determines that it’s a bad debt and won’t be repaid, XYZ must make adjustments to its financial statements. Under accrual accounting, since revenue was already credited for the sale of the bicycles, Company XYZ must adjust its income statement for the bad debt. Therefore, Company XYZ has accounts for both allowance for doubtful accounts (ADA) and bad debt expense, which reduces the amount of net income reported by Company XYZ.

Bills payable

A bill payable is a document which shows the amount owed for goods or services received on credit (meaning not paid at the time that the goods or services were received). The provider of the goods or services is referred to as the supplier or vendor. It is also known as an unpaid vendor invoice.

Example
Examples of a bill payable include a monthly telephone bill, the monthly bill for the electricity used, a bill for repairs that were completed, the bill for merchandise purchased by a retailer on credit, etc.

COGS

The cost of goods sold is the cost of the products that a retailer, distributor, or manufacturer has sold. The cost of goods sold is reported on the income statement and should be viewed as an expense of the accounting period. In essence, the cost of goods sold is being matched with the revenues from the goods sold, thereby achieving the matching principle of accounting.

Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.Cost of goods sold is also referred to as “cost of sales.”

Example As a historical example, let’s calculate the cost of goods sold for J.C. Penney (NYSE: JCP) for fiscal year (FY) ended 2016. The first step is to find the beginning and ending inventory on the company’s balance sheet:

Beginning inventory: Inventory recorded on the fiscal year ended 2015 = $2.72 billion
Ending inventory: Inventory recorded on the fiscal year ended 2016 = $2.85 billion
Purchases during 2016: Using the information above = $8.2 billion

Cash Flow Statement

A cash flow statement (CFS) is a report that summarizes the amount of cash that is coming into and leaving a company. The CFS is set in place to determine how well a company is managing its debts as well as incoming funds

This is a statement which includes all cash outflows that pay for business activities and investments during a given period of time.A cash flow statement breaks in to three categories i.e cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.

Creditors

A creditor is a person or institution) that extends credit by giving another entity permission to borrow money intended to be repaid in the future. A business who provides supplies or services to a company or an individual and does not demand payment immediately is also considered a creditor, based on the fact that the client owes the business money for services already rendered.

Creditors can be classified as either personal or real. People who loan money to friends or family are personal creditors. Real creditors such as banks or finance companies have legal contracts with the borrower, sometimes granting the lender the right to claim any of the debtor’s real assets (e.g., real estate or cars) if they fail to pay back the loan.

Credit Purchase

To purchase something with the promise that you will pay in the future. When buying something on credit, you acquire the item immediately, but you pay for it at a later date. Another name for credit purchases is to purchase something on account.

As Credit Purchases is a direct expense, so it has no balance. However, when it incurs, we debit it and when we close it to the Income Statement, then we credit it.

Example
Let say that Mr. A purchased 2 tables from Mr. B for Rs. 10000 (Each Rs. 5000) on Account, then Mr. A is the buyer and he is liable to pay Mr. B, Rs. 10000 on Due Date or Before due date.

Cost Concept

The concept means all the assets needed for expansion has to be recorded and retained at actual cost value in the books of accounts.

Commission

Commissions are a form of variable-pay remuneration for services rendered or products sold. It is a common way to motivate and reward salespeople. And also we can say it is the fee that a business pays to a salesperson in exchange for his or her services in either facilitating, supervising, or completing a sale. The commission may be based on a flat fee arrangement, or (more commonly) as a percentage of the revenue generated.

Current Account

A current account is also known as a financial account is a type of deposit account maintained by individuals who carry out a significantly higher number of transactions with banks on a regular basis. Current accounts also allow payments to creditors through the cheque facility offered by the bank.

Debit and Credit

Debits and credits are terms used by bookkeepers and accountants when recording transactions in the accounting records. The amount in every transaction must be entered in one account as a debit (left side of the account) and in another account as a credit (right side of the account). This double-entry system provides accuracy in the accounting records and financial statements The initial challenge is understanding which account will have the debit entry and which account will have the credit entry. Before we explain and illustrate the debits and credits in accounting and bookkeeping, we will discuss the accounts in which the debits and credits will be entered or posted.After you have identified the two or more accounts involved in a business transaction, you must debit at least one account and credit at least one account.

Double Entry Book-keeping system

Double-entry bookkeeping, in accounting, is a system of bookkeeping where every entry to an account requires a corresponding and opposite entry to a different account. The double-entry has two equal and corresponding sides known as debit and credit. The left-hand side is debit and the right-hand side is credit.In a normally debited account, such as an asset account or an expense account, a debit increases the total quantity of money or financial value, and a credit decreases the amount or value.

In double-entry bookkeeping, a transaction always affects at least two accounts, always includes at least one debit and one credit, and always has total debits and total credits that are equal. This is to keep the accounting equation (below) in balance.

For example, if your business takes out a bank loan for $10,000, recording the transaction would require a debit of $10,000 to an asset account called “Cash”, as well as a credit of $10,000 to a liability account called “Notes Payable”.

Depreciation

Depreciation is the process of deducting the total cost of something expensive you bought for your business. But instead of doing it all in one tax year, you write off parts of it over time. When you depreciate assets, you can plan how much money is written off each year, giving you more control over your finances.

The number of years over which you depreciate something is determined by its useful life (e.g., a laptop is useful for about five years). For tax depreciation, different assets are sorted into different classes, and each class has its own useful life. If your business uses a different method of depreciation for your financial statements, you can decide on the asset’s useful life based on how long you expect to use the asset in your business.

For example, the IRS might require that a piece of computer equipment be depreciated for five years, but if you know it will be useless in three years, you can depreciate the equipment over a shorter time.

Direct Expenses

Direct expenses are those expenses that are paid only for the business part of your home. For example, if you pay for painting or repairs only in the area used for business, this would be a direct expense.

Direct Labour

Direct labour refers to the employees and temporary staff who work directly on a manufacturer’s products. (People working in the production area, but not directly on the products, are referred to as indirect labour.)

The direct labour cost includes the wages and fringe benefits of the direct labour employees and the cost of the temporary staff that are working directly on the manufacturer’s products.

Deficit Financing

Deficit financing, practice in which a government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds.The interest paid to the Reserve Bank actually comes back to the Government in the form of profits. Through deficit financing, resources are used much earlier than they can be otherwise. The development is accelerated.

Expenses

Costs that are matched with revenues on the income statement. An expense is the cost of an asset used by a company in its operations to produce revenues.Expenses are created when an asset is used up, not when cash is paid out. Take depreciation expense for

Example–
For example, Cost of Goods Sold is an expense caused by Sales. Insurance Expense, Wages Expense, Advertising Expense,Interest Expense are expenses matched with the period of time in the heading of the income statement.

Error of omission

When some transactions are completely omitted from the books of accounts or entered but not posted, they are treated as errors of omission.Its having two types Partial omission and Complete omission.

The partial omission is easy to locate, but it is not the case with complete omission. A businessman will come to know about such errors only when the statement of accounts are received from or sent to creditors or debtors as the case may be. And in the case of complete omission, the transaction is completely omitted to be recorded in the books. For example, a transaction relating to the receipt of cash is not recorded in the cash book.

Example –
A copywriter buys a new business laptop but forgets to enter the purchase in the books.

Error of Commission

An error of commission occurs when an amount is entered right and in the correct account but the value is wrong–i.e. it’s subtracted instead of added.

For example, a payment is applied to the wrong invoice. The amount owing by the client will still be correct in the trial balance, obscuring the mistake.

Gross Profit

Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit will appear on a company’s income statement and can be calculated by subtracting the cost of goods sold (COGS) from revenue (sales).

Sales – Cost of Goods Sold = GrossProfit.

Example:
For example, if a company had $10,000 in revenue and $4,000 in COGS, the gross profit would be $6,000.

Financial Reporting

Financial reporting is the disclosure of financial results and related information to management and external stakeholders (e.g., investors, customers, regulators) It is a broader concept than financial statements. In addition to the financial statements, financial reporting includes the company’s annual report to stockholders, its annual report to the Securities and Exchange Commission (Form 10-K), its proxy statement, and other financial information reported by the company.

Financial reporting includes the following: External financial statements (income statement, statement of comprehensive income, balance sheet, statement of cash flows, and statement of stockholders’ equity) The notes to the financial statements. … Quarterly and annual reports to stockholders.

Fixed Assets

It’s also known as tangible assets or property, plant, and equipment (PP&E)—is an accounting term for assets and property that cannot be easily converted into cash. The word fixed indicates that these assets will not be used up, consumed, or sold in the current accounting year. Yet there still can be confusion surrounding the accounting for fixed assets. fixed assets represent a significant capital investment, so it is critical that the accounting be applied correctly. Here are some key facts to understand and insights to keep in mind:

Fixed assets are capitalized. That’s because the benefit of the asset extends beyond the year of purchase, unlike other costs, which are period costs benefitting only the period incurred.

Fixed assets should be recorded at cost of acquisition. Cost includes all expenditures directly related to the acquisition or construction of and the preparations for its intended use. Such costs as freight, sales tax, transportation, and installation should be capitalized..
Businesses should adopt a capitalization policy establishing a dollar amount threshold. Fixed assets that cost less than the threshold amount should be expensed.
Assets constructed by the entity should include all components of cost, including materials, labor, overhead, and interest expense, if applicable.

Fixed Cost

In accounting, fixed costs are expenses that remain constant for a period of time irrespective of the level of outputs and Even if the output is nil, fixed costs are incurred. Fixed costs are also known as overhead costs, period costs or supplementary costs.

Example- Depreciation, interest paid on capital, rent, salary, property taxes, insurance premium, etc.

Goodwill

Goodwill is created when one company acquires another for a price higher than the fair market value of its assets; for example, if Company A buys Company B for more than the fair value of Company B’s assets and debts, the amount left over is listed on Company ‘s balance sheet as goodwill

The account for goodwill is located in the assets section of a company’s balance sheet. It is an intangible asset, as opposed to physical assets like buildings and equipment.

Inventory

Inventory is the term for the goods available for sale and raw materials used to produce goods available for sale. Inventory represents one of the most important assets of a business because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company’s shareholders.

A company’s inventory typically involves goods in three stages of production: raw goods, in-progress goods, and finished goods that are ready for sale. Inventory is the goods available for sale and raw materials used to produce goods available for sale.

Indirect Expenses

Indirect Expenses are those expenses that are paid for keeping up and running your entire home. Examples of indirect expenses generally include insurance, utilities, and general home repairs. Since these are expenses you would pay for the entire home, these are considered indirect expenses.

Income received in advance

If a business has already received a payment for a service, which it has not rendered by the year-end, then such an income received in advance should be excluded from that year’s Profit & Loss Account. This adjustment resembles, in principle, to prepaid expense adjustment.

When income is received in advance, for the work not done yet, the trader is liable that is such income though received is not the income for the current trading period, but services will be rendered in the next year.

Intangible Assets

An intangible asset is an asset that is not physical in nature.

Example
Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets.

Liabilities

Liabilities are any debts your company has,whether it’s bank loans, mortgages, unpaid bills, IOUs (a written promise to pay back money owed), or any other sum of money that you owe someone else.If you’ve promised to pay someone a sum of money in the future and haven’t paid them yet, that’s a liability.

Example–
salaries payable, Wages Payable, Interest Payable, Other Accrued Expenses Payable, Income Taxes Payable, Customer Deposits, etc.

Loss

A loss is an unrecoverable and unanticipated decrease in a resource or asset outside of normal business operations. Various businesses experience losses in different forms. They may be the result of a sale of an asset below its carrying amount, from a lawsuit, or a write-down of an asset. Losses from the sale of an asset are reported as non operating items since the loss is not from the main business activity.

Material costing

Material is the first and most important element of cost. Material simply means any commodity or substance which is processed in a factory in order to be converted into finished product. It involves Raw Material, Components, Tools spare parts, Consumable stores, etc.

Material cost is the cost of materials used to manufacture a product or provide a service. Excluded from the material cost is all indirect materials , such as cleaning supplies used in the production process.

Net Profit

Net profit is: “The profit of a company after operating expenses and all other charges including taxes,interest and depreciation have been deducted from total revenue. Also called net earnings or net income.

Net Profit = Total Revenue – Total Expenses.

Example:
An ecommerce company has $350,000 in revenue with a cost of goods sold of $50,000. That leaves them with a gross profit of $300,000.

Operating Profit

Operating profit is the difference between not just sales revenue or cost of goods sold as Marketing, Rents and Rates. Sometimes it is called as Earning Before Interest Tax (i.e EBIT) Is a financial measurement that calculates how much profit a company makes from its business activities.

Profit & Loss Statement

The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year. These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs, or both.

Profit & Loss Statement for Company XYZ, Inc. for the year ended December 31, 2008 Total Revenue $100,000
Cost of Goods Sold ($ 20,000)
Gross Profit $80,000

Operating Expenses
Salaries $10,000
Rent $10,000
Utilities $ 5,000
Depreciation $ 5,000
Total Operating Expenses ($30,000)
Operating Profit (EBIT) $50,000
Interest Expense ($ 10,000)
Income before taxes (EBT) $40,000
Taxes ($ 10,000)
Net Income $ 30,000

Predictive and imperative approach towards software.

Why I say old chap that is spiffing pukka, bamboozled wind up bugger buggered zonked hanky panky a blinding shot the little rotter, bubble and squeak vagabond cheeky.!

Only a quid I dropped a clanger matie boy excuse my French hanky.
Only a quid I dropped a clanger matie boy excuse my French hanky.
Only a quid I dropped a clanger matie boy excuse my French hanky.

Purchase

Purchases can be made in cash or credit. A purchase means to take possession of a given asset, property, item or right by paying a predetermined amount of money for the transaction to be completed successfully. In other words, its’ an exchange of money for a particular good or service.Purchases may include buying of raw materials in the case of a manufacturing concern or finished goods in the case of a retail business.

In accounting, we have to differentiate between purchases as explained above and other purchases such as those involving the procurement of fixed assets (e.g. factory machine or building). Such purchases are capitalized in the statement of financial position of the entity (i.e. recognized as assets of the entity) rather than being expensed in the income statement.

Prepaid Expenses

Prepaid expenses are future expenses that have been paid in advance. In other words, prepaid expenses are costs that have been paid but are not yet used up or have not yet expired.

Prepaid expenses are initially recorded as assets, because they have future economic benefits, and are expensed at the time when the benefits are realized. The most common types of prepaid expenses are prepaid rent and prepaid insurance, which is frequently paid in advance for multiple future periods; an entity initially records this expenditure as a prepaid expense.

Purchase return

purchase return occurs when a buyer returns Goods that it had purchased from a supplier. Excessive purchase returns can interfere with the profitability of a business, so they should be closely monitored. A debit note is issued when there is a purchase return.

Purchases will normally have a debit balance since it represents additions to the inventory, an asset.

Partnership

partnership is a form of business where two or more people share ownership, as well as the responsibility for managing the company and the income or losses the business generates.It is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations.

There are three types of partnerships: General partnership. Limited partnership. Joint venture.

Pay-in-slip

It means a piece of paper that a person gives with a bank deposit to show how much money he or she is putting in an account.Pay-in slips encourage the sorting of cash and coins, are filled in and signed by the person who deposited the money, and some tear off from a record that is also filled in by the depositor.

Rent received in advance

It is also known as Unearned Income and is received before the related benefits are provided. This revenue is not related to the current accounting period, for example, Rent received in advance, Commission received in advance, etc. It is a personal account and shown on the liability side of a balance sheet.

Sales

Sales in accounting is a term that refers to any operating revenues that a company earns through its business activities, such as selling goods, services,products, etc. … With accrual accounting, revenue is recorded as sales if the goods or services have been delivered to the customer.Net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as Sales or Net sales.

Example–
When a company sells a product, it debits cash for the sale price and credits revenues for the same price. This journal entry increases the company’s assets and the company’s equity. Here is an example of a typical sales journal entry.

Sale ofMerchandise

January 1

Cash 1,000.00

-sales(Revenue ) 1,000.00

To record a $1,000 sale of Merchandise.

Shareholders Equity Statement

The statement of shareholders’ equity is a financial document a company issues as part of its balance sheet. It highlights the changes in value to stockholders’ or shareholders’ equity, or ownership interest in a company, from the beginning of a given accounting period to the end of that period.

Shareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. Shareholders’ Equity Statement on the balance sheet shows the details of the change in the value of shareholder’s equity during a particular accounting period from its beginning till the end.

Single Entry Book-keeping System

Single Entry Book-keeping is a method of bookkeeping relying on a one sided accounting entry to maintain financial information. It’s also known as an incomplete or unscientific method for recording transactions.

A single-entry system does not include equal debit and credit to the balance sheet and income statement accounts. It is not self-balancing this is a great advantage of this system and also a single-entry system may consist only of transactions posted in a notebook, daybook, or journal. However, it may include a complete set of journals and a ledger providing accounts for all important items.

Sales return

When the customer returns the good to the business which are not as per the requirement of the customer that transaction is called as sales return.

sales returns are recorded at the amount the item was previously sold. It is recorded by debiting “Sales Returns and Allowances”. This account is treated as a deduction from “Sales” in the financial statements.

Statement of Affairs:

The Statement of Affair is a summary of a Company’s assets and liabilities. It states the net book value and amount expected to realise at the date of Insolvency of the business. Accompanying the balance sheet is a list of creditors and shareholders.

It is a very important document in the insolvency and is lodged at the Company Registration Office so that the public have full visibility as to the position of the company at insolvency. It is often referred to by lenders that directors should get involved in new ventures before lending to the new company to understand how serious the previous insolvency was.

Suspense Account

A suspense account is an account used temporarily or permanently to carry doubtful entries and discrepancies pending their analysis and permanent lassification. It can be a repository for monetary transactions entered with invalid account numbers. The account specified may not exist, or it may be deleted.

A suspense account is used when the proper account cannot be determined at the time the transaction is recorded. When the proper account is determined, the amount will be moved from the suspense account to the proper account. It can also be used when there is a difference between the debit and credit side of a closing or trial balance, as a holding area until the reason for error is located and corrected.

Sole Proprietor

A sole proprietor is an individual who owns and operates their own business As the business owner, you are entitled to all the company’s revenue. But, you are also responsible for all the company’s debt. Because there is no legal separation between you and the business, all your personal assets are at risk.

In accounting, the balance sheet of the sole proprietorship reflects the accounting equation:

Assets = Liabilities + Owner’s Equity.

T-account

T-account uses accountants and bookkeepers as a visual aid to see the effect of a transaction or journal entry on the two or more accounts involved.

Here we can see two T-accounts: Cash and Notes Payable.

Variable cost

Variable costs are expenses that change directly and proportionally to the changes in business activity level or volume. The cost increases or decreases based on the company’s output. Variable costs are also referred to as prime costs or direct costs as it directly affects the output levels.

Example – Commission on sales, credit card fees, wages of part-time staff, etc.

Working Capital

Working Capital is basically an indicator of the short-term financial position of an organization and is also a measure of its overall efficiency. Working Capital is obtained by subtracting the current liabilities from the current assets. This ratio indicates whether the company possesses sufficient assets to cover its short-term debt

Working Capital indicates the liquidity levels of companies for managing day-to-day expenses and covers inventory, cash, accounts payable, accounts receivable and short-term debt that is due. Working capital is derived from several company operations such as debt and inventory management, supplier payments and collection of revenues.Working capital also provides a picture of the efficiency of the organization.

Working Capital = Current Assets – Current Liabilities

Work- In -Progress (WIP)

The term work-in-progress (WIP) is a production and supply-chain management term describing partially finished goods awaiting completion. WIP refers to the raw materials, labor, and overhead costs incurred for products that are at various stages of the production process. WIP is a component of the inventory asset account on the balance sheet. These costs are subsequently transferred to the finished goods account and eventually to the cost of sales.

The WIP figure reflects only the value of those products in some intermediate production stages. This excludes the value of raw materials not yet incorporated into an item for sale. The WIP figure also excludes the value of finished products being held as inventory in anticipation of future sales. It is the cost of unfinished goods in the manufacturing process including labor, raw materials, and overhead.WIPs are considered to be a current asset on the balance sheet.

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