Page 84 - March 2023

line method or the reducing balance method. Both methods use a fixed percentage to calculate the value an asset has lost over a year, which is then recorded in the income statement as an expense. This is a non-cash expense, which is why it does not have an almost immediate impact on the financial standing of the organization.
Gross Profit
The Gross Profit measures the direct profitability of an organization in dollars, without taking into account the other overhead expenses incurred by the business. The Gross Profit is calculated by subtracting the total cost of goods sold from the revenue generated during the same period.
Gross Margin
Gross margin or GM is a percentage ratio calculated by taking your gross profit for a period and dividing it by the revenue for the same period. The Gross Profit Margin represents the profitability that a company has achieved through revenue.
Net Income or Net Profit
The net income or net profit of a business is also earned in dollars and is usually the final profit that the owner keeps to themselves, is shared among partners or is paid as dividends to shareholders – based on the structure of the organization. The net profit is calculated by taking the gross profit (calculated by subtracting COGS from total sales) and subtracting all expenses recorded during the given period, including overheads, wages, energy costs, depreciation, and taxes. A net income is reported if the resulting profit is a positive value, while a loss is reported if
the final figure is negative. A loss means that the organization has failed to generate any profit during the period and that expenses are more than the sales generated.
Net Loss
The net loss of a business is usually the final loss that the owner bears by themselves or shares among partners– based on the structure of the organization. The net loss is calculated by taking the gross profit (calculated by subtracting COGS from total sales) and subtracting all expenses recorded during the given period, including overheads, wages, energy costs, depreciation, and taxes. A net income is reported if the resulting profit is a positive value, while a loss is reported if the final figure is negative. A loss means that the organization has failed to generate any profit during the period and that expenses are more than the sales generated.
Net Margin
The net margin is the percentage amount of the net profit in relation to its revenue or sales figure. The net margin is calculated by dividing the net income for a period by the net sales for the same period and multiplying it by 100. The final percentage will display the profitability of a business in relation to its sales.
in all financial statements – balance sheet, statement of profit and loss, and the statement of cash flows. The accounting period is usually used to communicate to stakeholders and other readers the period to which the financial statement relates.
Allocation
The term allocation is used to describe the process followed while assigning funds and investments to different financial periods and accounts. For instance, a cost can be allocated across a number of periods or multiple departments. An expense like insurance has to be allocated over multiple months, while administrative costs have to be assigned across all departments in a multi-department firm.
Business Entity
A business entity is a legal term used to refer to a business. Business entities can come in all shapes and sizes and feature different legal structures, types, and profit- sharing structures. Common company formations followed in organizations today include partnership, sole proprietorship, S-Corp, C-Corp, and Limited Liability Corporation or LLC. Every one of these entities carries a unique set of laws, requirements, and tax implications.
Cash Flow
Cash flow is the term used to describe the inflow and outflow of money within a business. The net cash flow for a given period of time can be calculated by taking the beginning cash balance for a year and subtracting it from the balance reported at the end of the year. A positive cash balance indicates that more cash has flown across
General Terms
There are a number of other general terms used in accounting, besides the ones mentioned in the two most important financial statements. Some of these important general terms include:
Accounting Period
An accounting period is mentioned
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