Accounting Methods & Principles Glossary

Accounting

Accounting is the systematic process of recording, classifying, summarizing, and interpreting financial transactions of a business. It provides accurate financial information to management, investors, regulators, and stakeholders for decision-making, compliance, and performance evaluation.

Accounting Principles

Accounting principles are standardized rules and guidelines that govern financial reporting. They ensure consistency, accuracy, and transparency in financial statements, enabling users to compare financial information across periods and organizations.

Accounting Methods

Accounting methods define how revenues and expenses are recognized and recorded. Common methods include cash basis and accrual basis accounting, each impacting financial statements differently and influencing tax reporting and financial analysis.

Accrual Accounting

Accrual accounting records income and expenses when they are earned or incurred, regardless of cash flow. It provides a more accurate picture of financial performance and is required under IFRS and UAE regulatory frameworks.

Cash Basis Accounting

Cash basis accounting recognizes revenues and expenses only when cash is received or paid. It is simple to maintain but may not reflect the true financial position of a business over time.

Consistency Principle

The consistency principle requires businesses to apply the same accounting methods and policies across periods. Consistent reporting improves comparability, reliability, and credibility of financial statements.

Going Concern Principle

This principle assumes a business will continue operating in the foreseeable future. Financial statements are prepared based on this assumption unless there is evidence of financial distress or potential closure.

Matching Principle

The matching principle requires expenses to be recorded in the same period as the revenues they help generate. This principle ensures accurate profit measurement and financial reporting.

Revenue Recognition Principle

This principle governs when revenue should be recorded. Under IFRS, revenue is recognized when control of goods or services transfers to the customer, ensuring accurate and compliant reporting.

Cost Principle

The cost principle requires assets to be recorded at their original purchase cost. This provides objective and verifiable accounting records, even if market values change over time.

Prudence Principle

The prudence principle emphasizes caution in financial reporting. Potential losses are recognized promptly, while gains are recorded only when realized, reducing the risk of overstated profits.

Materiality Principle

The materiality principle allows flexibility in accounting treatment for insignificant items. Information is considered material if its omission or misstatement could influence financial decisions.

Full Disclosure Principle

This principle requires businesses to disclose all relevant financial information in financial statements or notes. Full disclosure ensures transparency and informed decision-making by stakeholders.

Double-Entry Accounting

Double-entry accounting records each transaction with equal debit and credit entries. This system maintains balance in accounting records and improves accuracy and error detection.

Chart of Accounts

A chart of accounts is an organized listing of all accounts used in accounting records. It provides a structured framework for recording transactions and preparing financial statements.

Financial Statements

Financial statements include the balance sheet, income statement, cash flow statement, and notes. They summarize financial performance and position for internal and external users.

Balance Sheet

Financial statements include the balance sheet, income statement, cash flow statement, and notes. They summarize financial performance and position for internal and external users.

Income Statement

The income statement reports revenues, expenses, and profits over a period. It helps evaluate business performance and profitability.

Cash Flow Statement

The cash flow statement shows cash inflows and outflows from operating, investing, and financing activities, highlighting liquidity and cash management efficiency.

Equity

Equity represents the owner’s residual interest after liabilities are deducted from assets. It includes share capital, retained earnings, and reserves.

Assets

Assets are resources owned or controlled by a business that provide future economic benefits. They may be current or non-current.

Liabilities

Liabilities are obligations a business must settle in the future, including loans, payables, and accrued expenses.

Current Assets

Current assets are short-term resources expected to be converted into cash within one year, such as receivables and inventory.

Non-Current Assets

Non-current assets are long-term investments like property, equipment, and intangible assets used in business operations.

Depreciation

Depreciation allocates the cost of tangible assets over their useful life, reflecting wear and usage in financial records.

Amortization

Amortization spreads the cost of intangible assets over their useful life, ensuring systematic expense recognition.

Accrued Expenses

Accrued expenses are costs incurred but not yet paid. They ensure expenses are recorded in the correct accounting period.

Prepaid Expenses

Prepaid expenses are payments made in advance for future benefits, recorded as assets until consumed.

Accounts Receivable

Accounts receivable represent amounts owed by customers for goods or services delivered on credit.

Accounts Payable

Accounts payable are short-term obligations to suppliers for purchases made on credit.

Inventory Valuation

Inventory valuation determines the cost assigned to inventory items, commonly using FIFO or weighted average methods.

FIFO Method

FIFO assumes the first inventory purchased is sold first, often resulting in higher profits during inflation.

Weighted Average Method

This method averages inventory costs to determine the cost of goods sold and ending inventory.

Cost of Goods Sold (COGS)

COGS represents direct costs attributable to producing goods sold during a period.

Gross Profit

Gross profit is revenue minus COGS, indicating production efficiency.

Net Profit

Net profit is the remaining income after all expenses, taxes, and costs are deducted.

Trial Balance

A trial balance lists all ledger balances to verify arithmetic accuracy before preparing financial statements.

General Ledger

The general ledger records all financial transactions and serves as the primary accounting record.

Journal Entries

Journal entries record individual financial transactions in chronological order.

Adjusting Entries

Adjusting entries update accounts at period-end to reflect accruals and deferrals.

Accounting Cycle

The accounting cycle includes transaction recording, adjustments, and financial statement preparation.

Financial Year

A financial year is the accounting period used for reporting and compliance purposes.

IFRS

International Financial Reporting Standards govern financial reporting in the UAE and ensure global comparability.

IFRS

International Financial Reporting Standards govern financial reporting in the UAE and ensure global comparability.

Accounting Policies

Accounting policies define methods and principles adopted by a business for financial reporting.

Internal Controls

Internal controls safeguard assets, ensure accuracy, and prevent fraud.

Audit Trail

An audit trail tracks transactions from source documents to financial statements.

Reconciliation

Reconciliation matches accounting records with external statements to identify discrepancies.

Bank Reconciliation

Bank reconciliation aligns company cash records with bank statements.

Provision

A provision is a liability recognized for uncertain future obligations.

Contingent Liability

A contingent liability depends on uncertain future events and is disclosed, not recorded.

Fair Value

Fair value represents the market-based value of an asset or liability.

Impairment

Impairment occurs when an asset’s carrying value exceeds its recoverable amount.

Capital Expenditure

Capital expenditure relates to acquiring long-term assets.

Revenue

Revenue is income generated from core business activities.

Expense

Expenses are costs incurred to generate revenue.

Break-Even Analysis

Break-even analysis identifies the point where total revenue equals total costs.

Forecasting

Forecasting estimates future financial outcomes.

Financial Ratio Analysis

Ratio analysis evaluates financial performance and stability.

Liquidity

Liquidity measures a company’s ability to meet short-term obligations.

Solvency

Solvency assesses long-term financial sustainability.

Working Capital

Working capital is the difference between current assets and liabilities.

Capital Structure

Capital structure defines the mix of debt and equity financing.

Cost Accounting

Cost accounting tracks production and operational costs.

Management Accounting

Management accounting supports internal decision-making.

Financial Accounting

Financial accounting reports financial performance to external users.

Tax Accounting

Tax accounting focuses on tax compliance and planning.

Accounting Estimates

Accounting estimates involve judgment in financial reporting.

Substance Over Form

This principle prioritizes economic reality over legal form.

Historical Cost

Historical cost records assets at original purchase value.

Accruals

Accruals recognize income or expenses before cash movement.

Deferrals

Deferrals delay recognition until a future period.

Cost Allocation

Cost allocation distributes indirect costs to cost centers.

Segment Reporting

Segment reporting discloses performance of business segments.

Financial Transparency

Transparency ensures clear and honest financial reporting.

Accounting Standards

Accounting standards regulate financial reporting practices.

Compliance

Compliance ensures adherence to laws and standards.

Error Correction

Error correction adjusts misstated financial records.

Restatement

Restatement revises previously issued financial statements.

Professional Judgment

Professional judgment applies expertise in accounting decisions.

Ethics in Accounting

Ethics ensure integrity and objectivity in accounting.

Bookkeeping

Bookkeeping records daily financial transactions.

Financial Controls

Financial controls manage risks and accuracy.

Cloud Accounting

Cloud accounting provides real-time financial access.

Accounting Accuracy

Accuracy ensures reliable financial information.

Financial Integrity

Integrity ensures honest reporting.

Regulatory Reporting

Regulatory reporting meets authority requirements.

Financial Compliance

Financial compliance avoids penalties.

Cost Control

Cost control manages expenses.

Accounting Governance

Governance ensures accountability.

Financial Accountability

Accountability ensures responsible management.

Accounting Review

Review evaluates financial accuracy.

Accounting Audit

Audit verifies compliance and accuracy.

Accounting Transformation

Transformation modernizes accounting systems.

Accounting Framework

Framework defines reporting structure.

Accounting Policies Disclosure

Disclosure explains accounting choices.

Financial Reporting Quality

Quality ensures usefulness of reports.

Accounting Methods & Principles

Accounting methods and principles provide the foundation for accurate, compliant, and transparent financial reporting essential for business success.