Accounting glossary

A mechanism in which the simplified invoice is delivered directly to the customer and then sent to FATOORA within 24 hours of issue.

A reserve set aside from net profit as required by the Companies Law or the business's articles of association and bylaws, and presented within equity.

Accumulated profits the business has earned since inception that have not been distributed to the owners or transferred to reserves.

A measure of operating profitability calculated by adding finance costs, Zakat or tax, depreciation and amortization to net profit.

Recognizing revenue when earned and expenses when incurred, regardless of when cash is received or paid. It is the basis required by international standards.

A document issued by the seller to reduce the value of a previous invoice due to a return or a later discount, reducing the corresponding output VAT.

A document issued by the seller to increase the value of a previous invoice due to a pricing error or a later addition, increasing the corresponding output VAT.

A resource controlled by the business as a result of past events and expected to generate future economic benefits for it, such as cash, inventory and equipment.

A Phase 2 e-invoicing mechanism in which the tax invoice is sent to FATOORA for clearance before it is delivered to the buyer.

A periodic form in which the business discloses its sales, purchases and VAT due. It is filed and paid by the end of the month following the end of the period.

A present obligation of the business arising from past events, whose settlement is expected to result in an outflow of resources, such as amounts due to suppliers and loans.

The difference between the actual amount and the budgeted amount, classified as favorable or unfavorable according to its effect on profit.

Allocating the cost of a tangible asset, such as vehicles and equipment, over its useful life (also called istihlak in Arabic).

An amount the business has received in advance for goods or services it has not yet provided. It is recorded as a liability and becomes revenue when delivered.

Supplementary information to the financial statements that explains accounting policies, details of line items and significant estimates. It is an integral part of the statements.

Cash related to buying and selling long-term assets, such as equipment, buildings and investments.

Cash flowing in and out of the business's core activities, such as collections from customers and payments to suppliers and employees.

Cash related to sources of financing, such as capital increases, borrowing and repaying loans, and dividends paid to owners.

Registering the business with the Zakat, Tax and Customs Authority (ZATCA). It is mandatory if annual taxable supplies exceed 375,000 SAR and optional above 187,500 SAR.

The cost of the items actually sold during the period, deducted from net sales to arrive at gross profit.

A system in which the inventory balance is not updated with each transaction but is determined by a physical count at the end of the period, from which cost of sales is derived.

A system in which the inventory balance and cost of sales are updated immediately with each purchase or sale, and periodically reconciled with a physical count.

What remains for the owners in the business's assets after deducting all its liabilities, including capital, reserves and retained earnings.

The passage of a full Hijri year on Zakatable wealth, a condition for Zakat to be due. The rate is adjusted when the calculation is based on a Gregorian year.

The right side of an entry or account in English layout (the left side in Arabic); it increases liabilities, equity and revenue and decreases assets and expenses.

The set of accounts to which entries are posted from the journal, showing each account's debit and credit movements and its balance.

The record in which financial transactions are entered as they occur, in chronological order, showing the debit and credit accounts and a brief description of each entry.

An organized list of all the business's accounts and their numbers in a tree structure, starting with the main groups and ending with the detail accounts.

Amounts the business owes its suppliers for purchases or services obtained on credit.

Amounts owed to the business by its customers for goods or services sold to them on credit.

The difference between current assets and current liabilities; it measures the business's ability to finance its day-to-day operations.

A code printed on the e-invoice, encoded in TLV format, containing data such as the seller's VAT number, the signature and the invoice hash. It can be scanned for verification.

The business's ability to pay its short-term obligations on time from cash or from assets that are easily converted to cash.

A digital certificate issued by ZATCA for each invoicing unit after the one-time password (OTP) from the FATOORA portal is entered, used to cryptographically stamp invoices.

The expected selling price of an item less the costs of completion and sale. Inventory is measured at the lower of cost and this value.

A tax that a resident business withholds from amounts it pays to non-residents for services, royalties and the like, at rates between 5% and 20% depending on the type of payment.

The VAT the business charges on its taxable sales and collects from customers on behalf of ZATCA.

The VAT the business pays on its taxable purchases and expenses, which it may deduct from output VAT subject to conditions.

An invoice issued in business-to-business (B2B) transactions that includes the buyer's tax details and, in Phase 2, requires prior clearance by ZATCA.

An invoice issued to individual consumers (B2C) with fewer details. It is given to the customer immediately and reported to ZATCA within 24 hours in Phase 2.

A statement showing the sources and uses of cash during the period, divided into operating, investing and financing activities.

A statement showing the business's revenue and expenses for a period, ending with net profit or loss.

A statement showing the business's assets, liabilities and equity at a specific date, also known as the balance sheet.

An entry recorded at the start of the new period that reverses a prior adjusting entry, making it easier to record the actual invoice when it arrives without duplication.

The principle that every transaction is recorded in at least two accounts, one debited and the other credited, in equal amounts so the trial balance stays balanced.

Entries recorded at year-end to zero out revenue and expense accounts and transfer net profit or loss to equity.

A standardized XML format for exchanging business documents, adopted by ZATCA as the mandatory e-invoice structure in Phase 2.

An inventory costing method in which unit cost is calculated by dividing the total cost of the available quantities by their number, and is recalculated with each purchase under the perpetual inventory system.

A reserve quantity kept above expected consumption to cover supplier delays or sudden spikes in demand.

A liability recognized at year-end for the estimated Zakat on the Zakat base, paid when the return is filed within 120 days of the fiscal year-end.

Liabilities of uncertain timing or amount, recognized at the best available estimate, such as the end-of-service benefit provision and the Zakat provision.

The left side of an entry or account in English layout (the right side in Arabic); it increases assets and expenses and decreases liabilities, equity and revenue.

An independent certified public accountant licensed by the Saudi Organization for Chartered and Professional Accountants (SOCPA) who examines the financial statements and expresses a professional opinion on whether they are fairly presented.

An organizational unit, such as a branch, department or warehouse, to which costs are assigned to measure its performance and control its spending.

An expense paid in cash before its benefit is received, such as a year's rent paid in advance. It is recorded as an asset and then charged to expenses gradually.

Comparing the bank balance in the books with the bank statement and explaining the differences, such as outstanding checks and unrecorded fees.

Cost of goods sold divided by average inventory. It shows how many times inventory is sold and replenished during the period.

A fixed place of business through which a non-resident carries on its activity in the Kingdom, such as a branch or office, so the income attributable to it is taxed locally.

A numerical financial plan for the coming period that includes expected revenue, expenses and cash flows, used as a tool for planning and control.

A list of the balances of all ledger accounts at a given date, used to confirm that total debit balances equal total credit balances before the financial statements are prepared.

The percentage added to an item's cost to arrive at the selling price. Unlike profit margin, it is calculated on cost, not on the selling price.

Current assets divided by current liabilities. It gives a quick indication of the business's ability to meet its short-term obligations.

The minimum amount of wealth on which Zakat is due, equal to the value of 85 grams of 24-karat gold or 595 grams of silver.

The inventory level at which a new purchase order should be placed. It equals average daily consumption × lead time + safety stock.

The sales volume at which revenue equals total costs, so there is neither profit nor loss. It is calculated by dividing fixed costs by the contribution margin.

Gross profit (sales minus cost of sales) divided by net sales. It measures pricing and purchasing efficiency.

Selling price minus unit variable cost: what each item contributes toward covering fixed costs and then generating profit.

Net profit divided by net sales. It shows what remains of each SAR of sales after all expenses.

An inventory costing method that assumes the oldest quantities purchased are sold first, so ending inventory is valued at the most recent prices.

The amount on which Zakat is calculated. In simplified terms, it consists of funding sources such as capital, reserves and retained earnings, less fixed assets and similar items.