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Common Financial and Accounting Terms

In this video, I explain some common financial and accounting terms in English – and remember, this is not just for accountants and those working in finance – I think it’s important that everyone in business understands these terms.

Here is the full transcript:

Paul Urwin: Hi, I’m Paul from Don’t forget to subscribe, and please give me a thumbs up on this video if you like it. In this video I’m going to be talking about some common financial and accounting terms coming right up.

Paul Urwin: Number one, assets. What is an asset? Well, an asset is an economic resource that can be used to generate value in the future for a company. It might be a fixed asset or a tangible asset, something like a piece of machinery, or it might be something that is an intangible asset, like a trademark, which is not something physical but nevertheless can be used to generate value for the company in the future. That’s number one, assets.

Paul Urwin: Number two, liabilities. A liability is a company’s debt. It’s what the company owes. It could owe salary to employees, or the company might have taken out a loan. Both of those would be examples of liabilities. Essentially anything that the company owes. Importantly here, assets minus liabilities gives us shareholder’s equity. Assets minus liabilities gives us shareholder’s equity, the part or the value of the company that corresponds to the shareholders. That’s number two, liabilities.

Paul Urwin: Number three, income. Income is money received by an individual or a business in exchange for providing a good product or a service, or through investing. So, a manufacturing firm would receive income from the sale of its finished product, but it might also receive income from investing in a mutual fund or a certificate of deposit, for example. That’s number three, income.

Paul Urwin: Number four, expenses. Well in the case of a business, an expense is any cost, any cost, incurred in the production of a good or the provision of a service. Any cost that was incurred in the process of earning revenue. Let me give you a couple of examples. It could be the cost of buying raw materials, production costs including salaries, or even advertising costs. Expenses are any costs associated with the production of a product or the provision of a service. That’s number four, expenses.

Paul Urwin: Number five, balance sheet. A balance sheet is a financial statement summarizing assets, liabilities, and shareholder’s equity. Remember, assets minus liabilities gives us shareholder’s equity. The balance sheet is the statement, the financial statement, that shows us that relationship. That’s number five, balance sheet.

Paul Urwin: Number six, a profit and loss statement. What is a profit and loss statement? Well it’s a financial statement, normally corresponding to a particular period, which would often be one year, and for that period it will show all of the income received by a particular business less all of the expenses paid. That will leave us with net profit. It’s income less expenses will give us net profit. That’s number six, the profit and loss statement.

Paul Urwin: Number seven, the bottom line. Well in financial accounting terms the bottom line is that net income that I’ve just discussed after the expenses have been taken off. So it’s income minus expenses will give us the net income. That is known as the bottom line in financial accounting terms. In more general terms, it’s regarded as, or defined as, the most important factor. It’s not always financial. I can say something like the bottom line is that you need to be in that meeting. The bottom line is that you need to be in that meeting. That’s not really in financial terms. That’s in more general terms. That’s number seven, the bottom line.

Paul Urwin: Number eight, cashflow. Well this is a really, really interesting one because often within accounting we talk about assets and liabilities, we talk about profit and loss, but so the saying goes, cash is king. Why is that? Why is cashflow so important? It’s so important because a company might actually be profitable, however if it hasn’t received that money, it might have sold lots of its services, but not yet been paid for those services. A very profitable company, but a company that is low on cashflow. Well that compony could go into bankruptcy because they have no cash. That’s number eight, very important, cashflow.

Paul Urwin: Number nine, accounts receivable. Any money owed to a company by its debtors. For example, you might have delivered a service and issued an invoice, but not yet have been paid for that service. That amount would go into accounts receivable. That’s number nine, accounts receivable.

Paul Urwin: Finally, number ten, depreciation. In accounting, depreciation is a method of allocating the cost of a tangible asset over the course of its useful life. Let me give you an example. If a company buys an expensive machine, the cost of that machine would normally be spread out over a period of let’s say five or 10 years. It wouldn’t all be allocated during the year of its purchase. That’s called depreciation. That leads to more realistic, or more representative accounts. That’s number ten, depreciation.

Paul Urwin: Thanks very much for watching. I’m Paul Urwin. You can find me at Don’t forget to subscribe, and please give me a thumbs up. All the best.

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