For those not associated with the world of business, some terms can sound intimidating and difficult to comprehend. Often people tend to use some in the wrong contexts. For individuals associated with the business world, as either a businessperson, entrepreneur, accountant, or a mere client, it is essential to be well aware of certain accounting terms in UAE to understand their business.
1 Accounts Payable
Accounts Payable is defined as the amount due by the business to its vendor or supplier for any goods purchased or services taken. For example, a florist purchases flowers from its supplier in bulk quantity. The transaction amounts to AED 10,000. The AED 10,000 is the account payable by the florist business to its supplier of flowers.
2 Accounts Receivable
Accounts Receivable are the opposite of Accounts Payable. Here the company collects the amount from a vendor or supplier, or even from a client. In the example of a florist business, in the case of Accounts Receivable, the flowers supplier must pay the amount to the business.
3 Assertions
By definition, assertion means declaration or affirmation of a statement made by an individual. An assertion in auditing means statements by management or companies that are added to their financial claims. Auditors investigate to identify any falsehood or discrepancies upon these statements.
In auditing, assertions are a significant procedure, as they constitute a major part of an investigation. Assertions can be made on financial transactions, assets, taxes, and a lot more.
4 Assets
Simply put, assets are anything of financial value. A car, a house, valuable jewelry, these are all personal assets. In business, assets are goods of financial benefit in the present or near, or far future. They may be machinery, equipment, an investment, or a product/technology patent.
Assets may be tangible or intangible. Tangible assets are physical and include cash, equipment, machinery, property, or more. Intangible assets are the ones that cannot be calculated in monetary terms, such as skills, licenses, patents, etc.
5 Balance Sheet
A balance sheet contains the capital, investments, liabilities, accounts payable, accounts received, revenues, and more. It is generated for a specific period. A balance sheet can provide valuable insight into how a company or performing and helps accountants formulate successful business strategies.
6 Break-even Analysis
Every company has a fixed cost, which includes rents, bills, and more. Variable costs are also there. Companies are in profit when their sales or services are more than their costs. Break-even analysis calculates the minimum sales and/or services needed to cover the fixed and variable costs. The break-even point is a safe margin within which a company or business is safe from loss.
7 Capital
Capital is the total amount available or already used in investing in a business. Capital may be financial, human, or natural. Financial capital is the one usually used when making business budgets. Human capital is the human intelligence, talent, or skill that is an asset for the company.
Capital is the foundation of a business. It is essential to establish and maintain a business or company.
8 Cash Flow
As the name suggests, cash flow is the flow of cash in and out of the company. A cash flow explains the time and source of money and the time and reason of finances consumed. Accountants and auditors pay special attention to cash flows to look for any discrepancies r misinformation.
9 Depreciation
When compiling a complete business plan, accountants bear in mind several aspects often overlooked by people. Accountants keep track of assets and also determine long those assets will be of use. This analysis is called Depreciation.
Depreciation is the systematic reduction in the value of an asset that gives an estimate of the time for which it will be useable for the company. For example, machinery bought by a manufacturing plant costs AED 10million with an expected life of 10 years. The company calculates the depreciation of the machinery and reduces its value every year till the estimated time.
10 Equity
Equity is the company’s total ownership or asset after eliminating any liabilities. It is of great importance when determining a company’s financial value. The process of calculation is by subtracting total liabilities from total assets. In cases of company liquidation, the equity is divided among all shareholders.
11 General Ledger
The difference between a balance sheet and a general ledger is the detail and duration of financial details. While a balance sheet provides financial assets, liabilities, debts, and collectibles over a specified period, the general ledger provides a detailed financial report from the first day of the business.
There are five categories of general ledgers: assets, liabilities, equity, revenues, and expenses. Accountants identify Errors, losses, or any misinformation through the general ledger.
12 Liability
Liabilities, usually monetary, are the amounts a company has to pay to its supplier or vendor for goods or services taken. Liabilities are of two types namely current and long-term. The current liabilities are short-term ones, which are due to be cleared in a short time. The long-term liabilities are the ones to be paid after over a year.
13 Liquidity
In simple terms, liquidity is the ability of an asset to be converted to cash without affecting its market value. The better its ability to convert to cash, the more liquid the asset. Tangible assets such as equipment or property are less liquid assets, while cash is the liquid asset. The liquidity of a company determines its value.
14 Take-Home Message
Accounting may seem puzzling. However, a good accountant can make it seem like a cup of tea. Among many others, this is the reason to look for an accounting firm that not only understands these terms but also is good at making them equally understandable for their clients.
At Bader Saleh Auditing of Accounts, our knowledge and skill of the field are essential. However, our client’s understanding is even more significant. For this purpose, our staff is skilled and trained for clear yet effective communication and comprehending our clients’ requirements.
Feel free to reach out to us:
- Office # 0641, Tamani Arts Offices, Business Bay, P.O. Box 111390, Dubai, UAE
- +971 4 570 7357
- +971 58 108 5690
- info@bsauditing.com
