This document defines 10 common accounting terms: provision, depreciation, net book value, drawings, bad debt, accrued expense, prepayment, directors loan account, closing balance, and going concern. It provides a brief definition or explanation of each term to help the reader understand basic accounting concepts and terminology.

1. Useful Accounting Terms
& What They Mean
10

2. You’ve heard most of them a few times, and
maybe now you have got to the point where you
don’t think you can ask. So to save any blushes,
below are 10 ten common accounting terms and
what they mean.

3. 1. Provision
 an accounting estimate used for a liability of uncertain
timing or amount.

4. 2. Depreciation
 a figure representing the reduction in value of a fixed
asset through use/time, due in particular to wear and
tear. Depreciation involves estimates of useful life and
left over (residual) value. Most assets will decrease in
value and this is a way of accounting for this cost within
the accounts over the life of the asset.

5. 3. Net Book Value (NBV)
 the net value of an asset. This is equal to the original
cost minus depreciation.

6. 4. Drawings
 cash or goods taken from the business for the owner’s
personal use. Drawings do not count as an expense in
the profit & loss and are included in the balance sheet in
the financed by section.

7. 5. Bad Debt
 a bad debt is where a person or company is not
expected to pay the debt (e.g. a company has gone into
liquidation), this must be charged to the profit & loss in
order to reduce profits. A debt becomes a bad debt
when a business decides the money is unlikely to be
recoverable, records must be kept and this decision can
be made based on past experience.

8. 6. Accrued Expense
 this relates to an expense where the benefit has been
received, but an invoice has not been received (for
example electricity bills that are billed quarterly).

9. 7. Prepayment
 a payment for goods or services before they are received
(e.g. an insurance premium for 12 months that straddles
the year end of the accounts).

10. 8. Directors Loan Account (DLA)
 an account held by companies for use by the company’s
directors. Where any monies introduced to/or taken from
the company are recorded by the directors.

11. 9. Closing Balance
 the balance of an account at the end (or close) of an
accounting period. This figure is then carried forward in
the next accounting period as an opening balance.

12. 10. Going Concern
 the assumption that a business will continue trading for
the foreseeable future.
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