If you are an aspiring entrepreneur or an existing business owner, it's essential that you understand accounting terminology.
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In this article, we look at accounting terms starting with the letters P-Z.
This is the last article in our Accounting Terminology for Entrepreneurs series, which we created to introduce entrepreneurs to some of the most commonly used terminologies in accounting.
A profit or benefit earned by a person because of their position. Examples of prerequisites are company paid vacations, use of company automobiles, excess compensation for services rendered to the business in excess of the amount that would be considered reasonable for the position, etc. Although most financial statements do not specifically identify prerequisites, they are recognized as expenses and are included on the income statement.
Prepaid expenses are costs of goods and services that are paid for in advance of their delivery to the business. Examples of prepaid expenses are insurance, retainer fee, etc. Prepaid expenses are recognized as an asset and appear in the balance sheet. This asset is reduced as the prepaid goods and services are delivered.
Proprietary income is the total pre-tax personal income collected from the business by the owner. Proprietary income may include salary, bonus, and value of perquisites. Understanding proprietary income is important when you are looking to buy a small business.
Redundant assets, also referred to as non operating assets¸ are assets that are not used and not essential for the operation of a business. Examples of redundant assets are excess capital, non-essential investments, etc. Redundant assets could be found on the balance sheet and sometimes are not separated from operating assets. Redundant assets may arise for many reasons; for example, a redundant asset may arise when a business operation is discontinued or sold. Redundant assets may also be strategically developed to reduce operational risk through diversification.
Tangible assets are assets that have a physical or financial existence such as cash, accounts receivable, inventory, land, etc.
Working capital = current assets – current liabilities. Working capital, also referred to as net working capital, is liquid in nature and is used to finance ongoing operations. Deteriorating working capital is a sign for deteriorating financial health. When working capital is negative, this means that the company cannot meet its current obligations using current assets and may have to sell illiquid assets to finance obligations. If the negative number is extreme, then the company faces possible bankruptcy.