Understanding accounting terminology is essential for every business owner. Whether you are reviewing financial statements, talking with your accountant, or setting up business software, knowing what terms mean helps you make better decisions. This glossary covers the most important accounting terms that Pakistani business owners need to know.
A
Accounts Payable: Money your business owes to suppliers for goods or services purchased on credit. Also called trade payables or creditors. Managing accounts payable affects your cash flow and supplier relationships.
Accounts Receivable: Money owed to your business by customers for goods or services sold on credit. Also called trade receivables or debtors. Effective credit management keeps receivables under control.
Accrual Accounting: Recording revenue when earned and expenses when incurred, regardless of when cash changes hands. This provides a more accurate picture of business performance than cash accounting.
Assets: Everything of value that your business owns. Includes cash, inventory, equipment, property, and amounts owed to you. Assets appear on the balance sheet.
B
Balance Sheet: A financial statement showing what your business owns (assets), what it owes (liabilities), and the owner’s interest (equity) at a specific point in time. Assets always equal liabilities plus equity.
Bad Debt: Receivables that cannot be collected. When customers fail to pay, the uncollectible amount is written off as bad debt expense.
Book Value: The value of an asset according to accounting records. For depreciable assets, book value equals original cost minus accumulated depreciation.
C
Capital: Money invested in a business by owners. Also refers to long-term funds used for major investments like equipment or property.
Cash Flow: The movement of money into and out of your business. Positive cash flow means more money coming in than going out. Critical for business survival regardless of profitability.
Chart of Accounts: The complete list of accounts used to record business transactions. Organized into categories: assets, liabilities, equity, revenue, and expenses. Proper chart of accounts setup is foundational for good accounting.
Cost of Goods Sold (COGS): The direct cost of products sold during a period. For a trader, this is the purchase cost of inventory sold. For a manufacturer, it includes materials, labor, and production overhead.
Credit: In double-entry bookkeeping, credits increase liability, equity, and revenue accounts while decreasing asset and expense accounts. Every transaction has equal debits and credits.
D
Debit: In double-entry bookkeeping, debits increase asset and expense accounts while decreasing liability, equity, and revenue accounts.
Depreciation: The systematic allocation of a fixed asset’s cost over its useful life. Recognizes that assets lose value over time. Understanding depreciation is important for tax and financial reporting.
Double-Entry Bookkeeping: The accounting method where every transaction affects at least two accounts with equal debits and credits. This creates built-in error checking and provides complete financial records.
E
Equity: The owner’s claim on business assets after all liabilities are paid. Calculated as assets minus liabilities. Also called owner’s equity, net worth, or shareholder’s equity for companies.
Expense: Costs incurred to generate revenue. Includes rent, salaries, utilities, and supplies. Expenses reduce profit and are recorded in the income statement.
F-G
FIFO (First In, First Out): An inventory valuation method assuming oldest inventory is sold first. Results in ending inventory valued at recent costs.
Fixed Assets: Long-term tangible assets used in business operations like land, buildings, equipment, and vehicles. Also called property, plant, and equipment (PPE).
GST (General Sales Tax): The consumption tax charged on goods and services in Pakistan. Registered businesses collect GST on sales and can claim input tax on purchases.
Gross Profit: Revenue minus cost of goods sold. Shows profit before operating expenses. Gross profit margin indicates pricing and cost efficiency.
I-L
Income Statement: A financial statement showing revenue, expenses, and profit over a period of time. Also called profit and loss statement (P&L).
Inventory: Goods held for sale or materials used in production. A current asset on the balance sheet. Proper inventory management is critical for trading and manufacturing businesses.
Journal Entry: The recording of a transaction showing accounts affected with their debit and credit amounts. The foundation of double-entry bookkeeping.
Ledger: A collection of accounts where transactions are posted. Shows the complete history of each account. The general ledger contains all accounts.
Liabilities: What your business owes to others. Includes accounts payable, loans, and accrued expenses. Current liabilities are due within one year; long-term liabilities are due later.
N-P
Net Profit: The final profit after all expenses including taxes. Also called net income or bottom line. What remains for the owner after all business costs.
NTN (National Tax Number): The tax identification number issued by FBR to Pakistani taxpayers. Required for business registration and tax compliance.
Profit Margin: Profit expressed as a percentage of revenue. Shows how much of each rupee in sales becomes profit. Key measure of business performance.
R-T
Reconciliation: The process of comparing two sets of records to verify they match. Bank reconciliation compares your records to bank statements.
Retained Earnings: Accumulated profits that have been reinvested in the business rather than distributed to owners. Part of equity on the balance sheet.
Revenue: Income earned from selling goods or services. Also called sales or turnover. The starting point for measuring profitability.
Trial Balance: A report listing all accounts with their debit or credit balances. Total debits should equal total credits, verifying that books are in balance.
W
Working Capital: Current assets minus current liabilities. Measures the funds available for day-to-day operations. Positive working capital indicates ability to meet short-term obligations.
Withholding Tax: Tax deducted at source from certain payments. Pakistani businesses must withhold tax on specified payments and remit to FBR.
Write-Off: Removing an asset from the books when it has no value. Common for bad debts or obsolete inventory. Results in an expense recognition.
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