Welcome to the latest installment of my accounting vocabulary series. In this series, I teach you some of of the words you need to know if you want to go into the field of accounting. Here are a few key accounting terms that begin with the letters O through R. You can read G-J here, D-F here, and A-C here.

 

Accounting can seem overwhelming when you’re faced with a bunch of jargon all at once. But if you get a firm grasp of the key vocabulary, you’ll see that accounting can be easy to understand. Once you know these words, you will be able to gain more knowledge in the field of accounting.

 

Opportunity cost – A concept used to evaluate alternative opportunities. It works in the following way: If you pick option A, you cannot pick options B, C, or D. What is the cost or loss of profit associated with not choosing B C, or D? This cost of loss of profit is called the opportunity cost of alternative A.

 

Overhead – A cost that is not directly involved with sales or production. This cost remains unaffected by the level of product or sales. A couple of examples of costs that are considered overhead are the chief executive salary and the rent.

 

Owner’s Equity – An owner’s investment in a business minus that owner’s withdrawals from the business plus the business’ net income since the start of the business. To calculate the owner’s equity, all you’ll need to do is subtract the amount of liabilities from the owner’s equity.

 

Post – The act of entering a business transaction into a ledger, journal or other financial record.

 

Prepaid expenses – Assets that have already been paid for, that are being used up, or that will expire. One common example of a prepaid expense is insurance paid for in advance.

 

Present value – a concept that compares the amount of money available in the future to the amount of money currently in hand. This concept exists to analyze investment opportunities that have a future payoff.

 

Price-earnings (p/e) ratio –  the market price of a share of stock divided by the earning (profit) per share. A price-earnings ratio often does not reflect a company’s true value.

 

Profit and Loss Statement – A financial statement that summarizes a company’s performance and financial position. This is created by reviewing costs, revenues and expenses during a specific period of time, such as once per quarter or once per year.

 

Retained Earnings – Profits that are not distributed to shareholders as dividends, but rather kept by the company to be reinvested in its core business.

 

Return on Investment (ROI) – a measure of how effectively and efficiency managers are using the resources available to them. To calculate this value, divide the net profit by the cost of the investment. The result is often expressed as a percentage.

 

Revenue – the amount of money that a business earns from providing services or selling goods to its customers.

 

Risk – the possibility of loss that is inherent in every business activity. Before making any business decision, one must consider the amount of risk involved.

 

Sunk Cost – money that has been spent and is not recoverable. A past, historical cost that cannot be changed. Decisions about the future should exclude sunk costs, as attempts to recoup sunk costs often lead to very bad decisions.
Stay tuned for my next installment of my accounting vocabulary series.