June 30, 2022

Pakistan Accounting Glossary for Small Businesses

Naveen Shayan

LedgerMax specialist

Like any other industry, business accounting too has an exclusive vocabulary and being a business person it is essential to get yourself familiar with the basic terminologies and abbreviations used in this field. So, here we have compiled an accounting glossary for you which will help you understand the most commonly used terms in the accounting world specifically pertaining to small businesses in Pakistan.

A

Account

It is defined as a record that monitors the financial actions of a particular asset, equity, liability, expense or revenue. Thus, the account increases and decreases with respect to the business proceedings taking place during the accounting period. In Pakistan, all businesses are required to publish their particular accounts, audit reports and financials once a year.

Account Payable or AP

It is the amount which the business has to pay to its suppliers or vendors against the goods or services bought on credit. Account payable is considered as a short term liability and is required to be paid back in the given time. In Pakistan, majority of businesses purchase goods from their vendors on credit with payback time limit up to hundred days.

Account Receivable or AR

It is the amount that the customers owe to a business for the services or goods delivered to them. Whenever a customer buys something from a business on credit, the owed amount is placed in the accounts receivable or AR. 

Assets

These are defined as the financially valuable items or resources owned by the business. Assets include cash, real estate, inventory, office equipment, investments etc. SMEs in Pakistan generally own assets worth twenty million to hundred million rupees.

B

Balance Sheet

It is defined as a report that sums up the assets owned by a business, the liabilities on a business together with the equity of the shareholder or owner in the business at a particular point of time. All listed businesses in Pakistan are required to share their balance sheet and profit and loss declarations with its shareholders at the end of every quarter.

C

Capital or CAP

Capital is defined as a financial asset of a business or the worth of that financial asset; for instance the value of the goods or cash owned by a business. In Pakistan, a minimum capital of Rs.100,000 is required to start a business.

Cash Flow or CF

It is the income or expenditure projected to be generated by means of business happenings and events such as manufacturing and sales over a time period.

Current Assets or CA

These are defined as those valuable items or resources that are most likely to be converted into money or cash within a year. In Pakistan, account receivable and inventory typically lies under this category.

Credit or CR

It is an accounting record that shows a rise in liabilities or decline of assets. A credit is actually the functional converse of debit and is placed on the right side of the accounts.

Debit or DR

It is an accounting record that shows a rise in assets or decline in liabilities. It is the functional converse of credit and is placed on the left side of the accounts.

Deficit

A deficit is defined as a financial shortfall or deficiency that takes place when liabilities go beyond the assets. It is an extremely unfavorable situation for a business in Pakistan to come across financial deficit.

E

Equity

It is described as the entire assets of the business minus the entire liabilities on the business. Equity is used to figure out the business value when liquidation of its complete assets has been carried out and all remaining debts are settled.

Expense

It is defined as the price paid for the business operations that are incurred in order to generate income. In Pakistan, the most common business expenses are salaries of the employees, suppliers’ payments, factory rent or lease, and depreciation of the equipment etc.

F

Fiscal Year

It is the consecutive twelve months accounting period which is used by a business for reporting its finances and taxes. In Pakistan, a fiscal year generally starts from 1July and ends on 30June.

Fixed Assets or FA

These are generally permanent assets of a business that are expected to provide advantages in the long-run. Fixed Assets in Pakistan generally includes land, real estate and machineries etc. 

G

General Ledger

It is defined as an accounting log that gathers all financial transactions of a business to state valid records for financial statements.

Gross Income

It is the sum of the total earnings and income of a business before deducting any expenses. Expenses are deducted from gross income to compute net profit and gross profit.

I

Income Statement

It is a document generated by the businesses to state the total proceeds made by the business minus the expenditures in a given time period. The Federal Board of Revenue (FBR) requires all listed businesses in Pakistan to declare their income statements once in a fiscal year.

Income Tax

This is a tax paid by businesses to the government against their annual income. In Pakistan, income tax is collected by the FBR every twelve months.

Inventory

It denotes each and every good, item, material and merchandise in possession of a business for trading in the market in order to generate profits. For instance, retail businesses in Pakistan have raw materials, packing materials, work in progress or WIP, maintenance goods and finished goods in their inventory.

Invoice

It is a legally effectual document that is sent by the supplier to the purchaser after providing the goods or services. An invoice is sent after both the buyer and seller have approved the payment and delivery terms etc.

L

Liability

These are financial compulsions which a business is obliged to pay to other businesses or individuals. There are two types of liabilities; short term and long term. A short term liability is required to be paid off within a year, whereas a long term obligation is required to be paid off in a year or more. 

Liquidation

It is the practice of selling all the assets owned by the business, paying off its liabilities, allocating any residual resources to shareholders and winding up as a company.

N

Net Profit

It is defined as the profit available after entirely all the expenditures have been subtracted from the total revenue. A net profit is an evaluation of the profitability of a business within a given time period.

P

Payroll

It is the payment or compensation given to the employees/workers by the business. Payroll is also referred to as the list of employees a business has employed and the compensation amount due to all of them. In Pakistan, payroll includes wages, salaries, commissions and bonuses compensated to the employees. 

Present Value

It is defined as the existing value of cash owned by a business to be received in the years to come through single or multiple payments provided a particular rate of return.

Purchase Order or PO

A PO is a written approval from the purchaser to purchase goods or services from a certain vendor or supplier. After receiving the purchase order, the supplier is required to deliver the said goods or services to the purchaser at the price, delivery date, quantity and quality agreed upon by both sides.

R

Return on Investment or ROI

It is a measurement of business performance which evaluates the revenues earned through an investment. ROI computes the profits generated after an investment in comparison to the investment cost. In Pakistan, real estate investment is considered to have the best ROI.

Revenue

It is the money earned by a company through different business activities. In Pakistan, these activities include selling of merchandise, goods, and services along with incomes from rents, dividends and interest.

S

Sales

Sales is defined as the income generated after selling the products, goods, merchandise or services offered by a business.

Sales Tax

It is the tax which a business is obligated to pay to the governing body against the sales of products and services. In Pakistan, businesses are required to pay monthly sales tax to FBR.

Share Capital

It is defined as the total cash amount contributed by the shareholders to the business.

T

Tax

It is the imposition of mandatory levies on businesses or individuals by the government of Pakistan.

Trial Balance

In this document, all records are accumulated into credit and debit columns so as to make sure that the accounting system of a business is precisely accurate.

V

Variable Cost

It is the cost that can be changed subject to the capacity and size of goods sold or produced by a business. Common examples of variable cost in Pakistan are raw materials, labor rates, commissions, production supplies, packaging supplies, delivery expense etc.

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