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Glossary of Accounting Terms

A – C

A
AccountA formal record that represents a single aspect of business such as money, assets and resources.
Accounts PayableThe amount owed to suppliers for goods or services.
Accounting PeriodThe time period of whenfinancial statements are prepared. Most accounting periods are calculated on a monthly, quarterly or yearly basis.
AccountingThe process of recording and reporting financial transactions.
Accounts ReceivableThe amount due from debtors, usually after a sale or service has been completed.
Accrual MethodA system used to record revenue and expenses when a transaction occurs as opposed to when cash exchanges hands. When invoices are issued on credit they are subject to tax whether it has been paid or not. The accrual method is used by most businesses.
AccrualsExpenses that have been incurred but not paid, such as salaries or the interest payable on a loan. Estimates of these items should be included in profit and loss accounts and adjusted when the invoice is received.
AgingWhen accounts receivable are sorted by age. Aging is often used to focus on accounts that are overdue.
AmortizationA regular repayment of an asset over a fixed time period. For example, if a $12,000 loan is amortized over one year without any interest, the monthly repayments will be $1,000.
Annual ReportA report for shareholders that includes a breakdown of a company’s annual statements, shareholders and equity cash flows, and any other important financial information.
AppreciationWhen an asset increases in value. For example, if a piece of machinery was purchased for £1,000, but goes up in value to £1,100 the next year, the appreciation is £100. Appreciation is the opposite of depreciation.
ArrearsBills that haven’t been paid. For example, rent that is three months late is considered three months in arrears.
AssetsThings of value that a business either owns or is due, such as physical property, money, vehicles, stocks and certain rights.
Fixed Assets include land, buildings, machinery, vehicles and long-term investments that can’t be turned into cash without affecting the day-to-day operation of a business.
Current Assets include cash, accounts receivable and inventory that can be turned into cash quickly.
Intangible or Non-Current Assets include patients, copyright, trademarks, licenses or anything that has value but can’t be touched physically.
AuditThe process of reviewing financial records to verify their accuracy and completeness. Internal auditing is performed by accountants within an organization while independent auditing is performed by an outside party.
B
Bad DebtAmounts owed to a company that is recognized, but cannot be paid. Sometimes bad debts can be deducted as an expense.
Balance SheetA statement that discloses the financial position of a business with a summary of the entity’s assets and liabilities. Balance sheets are usually prepared at the end of each financial year
BankruptWhen an individual or company has greater liabilities than it does assets they can be declared bankrupt by creditors. With regards to a limited liability company, the term “insolvent”is used.
C
CapitalMoney invested by business owners in order to acquire assets and begin operation.
Capital AllowancesTo claim for depreciation against profits, HMRC provide a proportion of fixed assets to be claimed before the tax bill is calculated. This is usually a certain percentage of their value.
Capital Gains TaxWhen a fixed price asset is sold for a profit, the profit may be subject to capital gains tax; however, when determining the final amount, allowances, inflation and other aspects relating to the age of the asset must be taken into account.
Cash AccountingAn accounting method where only paid invoices are accounted for. In Australia, the Australian Tax Office (ATO) consider any invoice, whether paid or not, as revenue; GST is the exception. ATO usually require GST on an accrual basis; however, businesses that conduct most of their sales using credit may benefit from using the cash accounting scheme.
Cash FlowThe amount of money that is generated by the business throughout a specific accounting period.
Cash Flow ForecastThe predicted cash flow of an upcoming financial period.
Chart of AccountsA list of all of the accounts that are held in which business transactions are classified and recorded.
Charge BackWhen a cardholder cancels a credit or debit card transaction before it has been processed. When a chargeback occurs many banks charge the seller a fee.
CIF (Cost, Insurance and Flight)A contract for the sale of international goods when the seller agrees to pay the shipping, insurance and freight charges before the item is delivered. Once in the hands of the buyer the seller is no longer liable for damages.
Circulating AssetsAssets that turn from cash to goods, and then back to cash again. Examples include purchasing materials to build a product; manufacturing the product (which results in stock); and selling the stock for cash.
Closing the BooksA term used to describe making the final entries, and balancing the profit and loss account at the end of the financial year.
Compensating ErrorA mistake that has been cancelled out by another mistake.
Compound InterestWhen interest is applied to capital and accrued up until that particular date. For example, a $1,000 loan with 20% interest will have a balance of $1,200 after the first year, then $1,440 at the end of the second year.
Consolidated Financial StatementsCombined financial statements of a parent company and all of its subsidiaries.
ConsolidationCombining assets, liabilities, equity and operating accounts into one single parent company and financial statement.
CostThe price of making a non-current asset ready to use.
Cost-Based PricingA pricing method where companies base their fees on the price of manufacturing.
Cost CentreWhen companies split up expense accounts into separate departments to determine which department is spending the most money.
Creative AccountingA questionable way of making the accounts appear more or less appealing to shareholders than they actually are.
CreditBookkeeping credit represents decreasing an asset or expense account or increasing capital or liability.
Business credit is when a supplier agrees to allow the buyer to pay after (typically 30 to 60 days) receiving the goods.
Credit NoteA document that is sent to a customer which cancel’s their debt. Usually issued for defective goods or poor service.
CreditorsSuppliers that a business owes money to.
Current AssetsAssets than can be turned into cash quickly. Examples include money in the bank, money owed, petty cash, raw materials and stock.
Current Cost AccountingWhen the valuation of assets are calculated at their current market value as opposed to their historical value.
Current LiabilitiesObligations that must be settled within a year or are essential to the day-to-day operation of a business. Examples include bank overdrafts, short-term loans and credit owed to suppliers.
Customers’ Collection PeriodThe average amount of time it takes for a company to pay off purchases.
Cut-off ProceduresProcesses that ensure any transactions for particular accounting period are isolated and recorded, and transactions that are not relevant excluded.

D – G

D
DebentureA type of share issued by a limited company. A debenture is the safest form of share and is usually tied to an asset; therefore, if a company should fail the holder would own the particular asset.
DebtorsCustomers who owe money to a business.
DefaultWhen a company is unable to meet a financial obligation to a creditor.
Deferred ExpenditureExpenses that aren’t relevant or included in the present accounting period are declared deferred expenditure as non-current assets. They are transferred to a profit and loss account only when they become current assets.
Deferred IncomeIncome that is received or recorded before it is earned.
DeficitWhen income or liabilities exceed assets.
Some examples:
• Paintings or mirrors that are not bolted but hung or screwed to a wall
• Carpets
• Curtains and curtain rails
• Free-standing ovens, refrigerators and washing machines
• Beds/sofas and other freestanding items of furniture
• Lampshades
• Television aerials and satellite dishes
DepreciationWhen the value of an asset decreases with time. Depreciation is usually a percentage and calculated at the end of each financial year.
• Light fitments
• Central-heating boilers and radiators
• Built-in wardrobes/cupboards (e.g. if they use a wall to form one of their sides and would thus be incomplete if they were removed)
• Bathroom suites (sinks/baths/toilets)
• Plugs
• Kitchen units
• Wall paintings
DerivativesFinancial instruments that vary in value according to an underlying asset, such as a stock or currency.
DilutiveWhen a company takes over another company with a greater price/earning ratio than they currently have the deal is called dilutive to earnings. Companies that conduct such deals reduce their earnings per share (EPS).
DisclosureDivulging accounting information in good faith so financial statements are understood.
Discounted Cash FlowA method of assessing investments which could reduce the value of cash flow.
DividendAfter tax profits which are distributed to shareholders. Most small companies distribute dividends at the end of each financial year; however, larger companies usually distribute on a quarterly basis.
Double-entry Book-keepingA system of accounting where every aspect of a transaction is recorded twice; as a debit and credit.
DrawingsMoney that is taken by a company owner for their own personal use. Not to be confused with wages.
E
Earned IncomeThe amount of wages, salary or service fees earned as compensation for products or services.
Earnings Per ShareA businesses net profit for a specific accounting period, divided by their shares outstanding.
EBITAn abbreviation for “earnings before interest and tax.”
EBITAAn abbreviation for “interest, tax and amortization.”
EBITDAAn abbreviation for “earnings before interest, tax, depreciation and amortization.”
EncumbranceMoney that is reserved for any purpose.
EntryAn aspect of a transaction that’s recorded in a journal or ledger.
EquityThe owners’ share of a company. On a balance sheet equity represents the stockholders’ investment and retained earnings or losses. Or it represents the net worth of a company or person minus the total liabilities.
EscrowMoney that is held by a third party until the fulfilment of specified conditions have been met.
ExclusionsItems which are excluded from a taxpayer’s gross income. Examples include gifts and inheritances. Exclusions are also known as excluded income.
ExemptionThe amount of non-taxable income.
ExpenditureAnything that is purchased for a business –stock, payment of salaries, etc. Expenditure affects income and profits and usually involves cash transactions.
F
Fair Market ValueThe price at which a willing buyer will pay a willing seller when both parties know the relevant facts about the supplied product or service.
Financial StatementsDocuments that present financial data such as balance sheets, income statements and cash flow.
Fiscal YearA period of 12 consecutive months chosen by a business as their accounting year. A fiscal year can begin on any date.
Fixed AssetAn asset with a lifespan that exceeds one year, such as vehicles, property, machinery and other long-term investments.
Fixed CostA cost that remains the same, such as salaries and rental agreements.
ForecastAn estimate of the future finances of a company based on assumptions of past performance. A forecast usually includes a quantified amount.
FraudThe deliberate misuse or application of a company’s resources or assets.
Flow of FundsA report that shows how a company’s balance sheet data has progressed from one accounting period to the next.
G
GAAPAn abbreviation for “generally accepted accounting principles.”
GearingWhen money is borrowed with fixed interest with the purpose of leveraging that money for further financial gain. Also known as leveraging.
General LedgerA repository for compiling all of a company’s accounting information. Also known as the book of entry, it provides all of the required data for preparing financial statements.
GoodwillThe difference between the fair value and book value of an asset. Examples of goodwill involve overpayment by way of upholding a company’s reputation or rewarding customers for their loyalty.
GrossThe profit margin before making any deductions or discounts.
Gross MarginThe difference between the cost of a product or service and the selling price. For example, if a product is sold for $100, but costs $70 for manufacture the gross margin would be 30%.
Growth and AcquisitionA method with which a business can grow. Growth explains how a company can grow and expand its operations. Acquisition is growth by buying other companies.

H – M

H
Historical CostThe original price of an asset, stock or material – often used in price change accounting to replace current prices.
HM Revenue and Customs (HMRC)The government tax authority for the United Kingdom. HM Revenue and Customs was previously known as the Inland Revenue
I
IASAn abbreviation for “International Accounting Standard.”
ImpairmentA reduction in the carrying value of an asset that has exceeded its depreciation period.
Impersonal AccountsAccounts that are not held in the name of a person that’s associated with customers or suppliers.
Imprest SystemAn accounting method used to restore petty cash to its original value when it starts running out. Also known as restoring the imprest.
• Light fitments
• Central-heating boilers and radiators
• Built-in wardrobes/cupboards (e.g. if they use a wall to form one of their sides and would thus be incomplete if they were removed)
• Bathroom suites (sinks/baths/toilets)
• Plugs
• Kitchen units
• Wall paintings
IncomeThe money a business receives for its commercial activities.
Income StatementA financial statement that summarizes revenue, expenses and profit. Also known as a profit and loss account.
IncorporationThe date in which a business is legally established.
InterestA payment to the lender of money. Usually calculated by percentage.
InventoryThe supply of stock or goods that a business has for sale.
Inventory ObsolescenceInventory that can no longer be sold. For example, clothing that has gone out of fashion or too much stock.
Inventory ShrinkageWhen there is a reduction of stock from reasons other than selling, such as theft.
InvestmentThe purchase of products or services that could increase profit.
InvestorsPeople or businesses who have invested money into a business for a share of ownership.
J
JournalA book or set of books used to record chronological business transactions.
Joint VentureWhen persons or businesses gather capital to provide products or services. Most joint ventures are carried out as business partnerships and make both parties responsible for the whole operation.
K
Key Performance IndicatorsA quantified measurement used to calculate the performance of a business.
L
LeasingA rental agreement that grants a person or business the use of an asset for a certain amount of time.
LedgerA financial record that keeps track of business transactions. Journal entries are posted to be re-organized into accounts.
LiabilitiesDebts or obligations that are owed from one entity to another for money, goods or services.
Current liabilities are amounts that are due within one year and usually include loans and taxes, etc.
Long-term liabilities are obligations that aren’t due for more than one year such as mortgages and bonds.
Limited Liability Company (LTD)A company where the liabilities of its owners are limited by how much they have contributed.
Limited Liability Partnership (LLP)A general partnership where all of the partners have limited liability status.
Listed CompanyA company that has shares available to buy and sell on the Stock Exchange.
Listing RequirementsRules that are imposed by the Stock Exchange to companies whose shares are available to buy and sell.
Long-term LiabilitiesFinancial obligations that aren’t due for more than one year. Examples include mortgages and long-term loans.
LossWhen expenditure exceeds revenue.
M
Management AccountingWhen reports are tailored to suit the needs of company managers or directors instead of organizations that are not directly associated with the business. The purpose of management accounting is to help management make better decisions.
MarginThe difference between revenue and expenses.
MatchingAnalysing sales and expenses for a certain accounting period in order to determine how much profit was made.
MaturityThe repayment date of a liability.
MergerWhen two organizations absorb into one entity and share assets and liabilities, yet no new entity is created.
Money LaunderingThe process of disguising illegally obtained funds so they seem legal.
Moving AverageA method of presenting data on graphs. For example, rather than having single figures at specific points of a graph, the figures are added together and divided; this results in a graph that moves smoothly. Moving average is often used to clearly display trends.

N – P

N
NegligenceFailure to exhibit care that one ought to exhibit.
NetThe financial status of a company after expenses and deductions have been taken into account. Also known as the net worth, net income and net profit. Fundamentally, the net represents the true value of a company.
Net AssetsThe value of cash and assets minus company liabilities.
Nominal ValueThe named value of a share when it is issued.
Non-current AssetsAssets that don’t meet the criteria of a fixed or current asset. Non-current assets can’t be touched. Examples include trademarks and copyrights, etc.
Not-for-profit OrganizationA company that exists for charitable reasons. Trustees and shareholders receive no financial benefits.
O
Opening the BooksWhen a business closes their books at the end of the year and a new set is opened.
Operating ActivitiesThe principal non-investment activities that keep a business operational.
Operating and Financial ReviewA section within a company’s financial documents that explains the most important elements of the financial statements.
Operating CycleThe period of time between the purchase of goods or services and the final delivery.
Operating GearingThe ratio of the fixed operating costs to the variable operating costs.
Operating RiskWhen the cost of fixed operating costs is high and could cause a fluctuation in profits.
OptionBuying the rights to purchase an asset for a certain period of time. For example, a business may option an asset for 6 months for 10% of the sale cost. During this time they do not own the asset; however, the company that does own it is not allowed to sell it during this period.
Ordinary SharesA share of a limited company that entitles owners to a share of the dividend. Ordinary shares usually carry the highest risk, but offer the biggest rewards.
OverheadsThe cost of running a business. Costs associated with production or sales are not included in overheads, only costs that consist of expense accounts, such as salary and rent.
P
Parent CompanyA company that controls one or more subsidiaries.
PartnershipAn agreement between two or more people whereby they agree to conduct business together for profit. Unlike shareholders, partners are usually liable for the debts of a company.
Partnership DeedA written agreement that outlines the logistics of a partnership, such as the profit shares.
Partnership LawLegislation which governs a partnership agreement when a partnership deed has not been written.
P.A.Y.EAn abbreviation for “pay as you earn.” P.A.Y.E is an income tax system where employee taxes and National Insurance contributions are deducted prior to payment.
Pay on DeliveryWhen a buyer pays for goods or services only after they have been received.
PE RatioAn equation used to determine how much confidence there is in a company’s shares: share price multiplied by net profit and divided by shares.
Perpetual InventoryWhen the inventory balance is updated after every transaction.
Current liabilities are amounts that are due within one year and usually include loans and taxes, etc.
Long-term liabilities are obligations that aren’t due for more than one year such as mortgages and bonds.
Petty CashA small sum of money that’s held in reserve. Petty cash is usually used for items of small value when another form of payment wouldn’t be suitable.
Phoenix FirmsA firm that is close to insolvency, but has been repackaged, restructured and sold back to management.
Point of SaleThe place where a transaction is conducted.
Preference SharesA type of share that’s issued by a limited company and allows the holder to have preference to receive a dividend before an ordinary share is declared.
PremiumThe excess amount that is paid above face value.
Pre-paymentsAn amount paid for in advance, such as insurance or rent for the forthcoming year. Pre-payments usually last for a certain period of time and will expire on a fixed date.
Present ValueThe present value of a sum of money in comparison its future value. Present value is used to analyse investment opportunities to determine whether they will provide a future payoff.
Price Sensitive InformationInformation that would change the price of a share if known to the public.
Private Limited CompanyA limited liability company that doesn’t have to offer shares to the public.
ProfitThe overall revenue of a business minus expenses.
Profit and Loss AccountA financial statement which shows the revenue, expenses and profit for a certain financial period. Also known as an income statement.
Profit MarginThe percentage difference between the cost of a product or service and the price it’s sold for. The profit margin is also known as the mark up.
ProjectionHypothetical assumptions used to estimate future financial statements.
ProspectusProspectus
ProvisionsAn account that is set up to accommodate a future payment, such as a bill that is yet to be received.
Public Limited CompanyA company that opens its shares to the public.

Q – S

Q
Qualified Audit OpinionA report issued by an auditor when accounts are fairly presented, but do not comply with generally accepted accounting practices.
Quality of EarningsThe opinion of investors regarding profit. Quality is considered poor during times of high inflation.
R
Raw MaterialsMaterials purchased in order to manufacture products.
Refinancing AgreementAn arrangement to replace existing financing with funding from elsewhere.
Realization PrincipleWhen revenue can only be recognized when the goods or services that generated that revenue have been delivered.
RebateA partial refund for overpayment or services that have been cancelled before they have ended. For example, if a 1 year insurance policy is cancelled after 3 months, the buyer may be entitled to a 9 month rebate; or if a business pays too much tax, they should get a rebate for overpayment.
ReceiptA confirmation of payment, usually in written form.
Registrar of CompaniesA government official responsible for maintaining financial information and ensuring it doesn’t breach legal policies.
Replacement CostA measure used to calculate the cost of replacing an asset or liability.
Reserve AccountAn account that is set up to retain earnings. They are usually used to make balance sheets clearer, or if a company wants to reserve money against future purchases or liabilities.
Retained EarningsNet income that is retained by a company rather than distributed to shareholders as dividends. Retained earnings are not spendable.
Return on Investment (ROI)A profitability ratio most frequently calculated by dividing the gain from the investment by the cost of the investment. ROI is a very popular metric due to its simplicity. If an investment doesn’t have a positive ROI, it should not be undertaken.
RevenueThe income of a business. Examples include sales from goods or services, and earnings from interest and dividends.
RiskThe possibility of financial loss. High risk investments require a higher return than low risk investments.
S
SalesThe total income received from selling goods or services.
Secured LoanA loan where the borrower pledges a particular asset in exchange for a loan. The lender then uses this asset as collateral.
Segmental ReportingA form of accounting used to separate divisions of a business for individual reporting.
Self AssessmentA process that allows self-employed individuals from the UK to calculate their own income tax from un-taxed revenue. In order to qualify for self assessment registration with HM Revenue and Customs is required.
Self-employedWorking for ones self as either a freelancer or business owner.
ShareholderThe owner of shares in a limited company or corporation.
SharesA part of a company. After purchasing shares the buyer will receive a document stating what percentage of the company they own.
Simple InterestInterest that is applied to the original sum. For example, $1,000 invested over a three year period with 10% will result in $1,300.
Sinking FundA fund used to set aside money over time in order to repay a debt or replace a wasting asset.
Current liabilities are amounts that are due within one year and usually include loans and taxes, etc.
Long-term liabilities are obligations that aren’t due for more than one year such as mortgages and bonds.
SMEAn abbreviation for “Small and Medium Enterprises.”
Sole TraderAn individual who is a self-employed owner of a business.
Start-up CostsThe up-front capital that’s required to start a new business.
Statement of Cash FlowsA basic financial statement that shows how changes in the balance sheet affects cash. The statement of cash flows is used to break down operating, investing and other financial activities.
StockGoods that are manufactured for sale or purchased for re-sale. Stock can also refer to shares within a limited company.
Stock ExchangeAn organization that sets the legal legislations for buying and selling shares. Also known as the stock market.
Stock Holding PeriodThe average number of days in which inventory is held before a sale.
StockholdersAn alternative term for shareholders.
Straight-Line DepreciationA method of estimating the financial wear-and-tear of an asset based on its expected use. The amount of straight-line depreciation is the asset price divided by the estimated number of useful years remaining. For example, the straight-line depreciation of an asset worth $5,000 that is expected to last five years is $1,000.
Subordinated DebtThe amount of money that is owed to unsecured creditors after a company is liquidated.
Subsidiary CompanyA company that is controlled by a parent company.
SubtotalThe total of smaller items that are grouped together.
Sunk CostsMoney that has already been spent and cannot be recovered.
Suspense AccountA temporary account with which funds are deposited before allocation to the correct place. For example, if there is too much money in one account, it will be transferred to a suspense account until its correct location is discovered.

T – Z

T
Tangible AssetsAn asset of a physical nature, such as buildings, vehicles and machinery.
TaxA compulsory contribution to state revenue based on income and business profits, etc.
TaxationThe levying of tax by the government against a person or business.
Total Cost of Ownership (TCO)The real, total cost of an asset. For example, an asset may cost £1,000 up-front, but have an annual renewal fee of £200; therefore, assuming it’ll have a lifespan of five years, the TCO would be £2,000.
TurnoverThe income of a business over a particular period of time.
U
Undeposited Funds AccountAn account that shows the total of money that a company has received, but not banked or spent. Also known as a cash-in-hand account.
Unlisted CompanyA limited liability company that is not listed on a stock exchange.
Unsecured CreditorA creditor who doesn’t have a claim against a particular asset. If a company dissolves, an unsecured creditor must take their share of whatever is left.
Unsecured LoanA debt without any collateral attached to it.
V
ValuationA process which involves determining the worth of a company’s assets.
VarianceThe difference between the estimated cost and the actual cost. An adverse variance is when the actual cost exceeds the planned cost; while a favourable variance is when the actual cost is cheaper than the planned cost.
ValuationA process which involves determining the worth of a company’s assets.
W
WagesPayments made to employees for their services. Wages are classified as business expenses.
WithholdingsThe amount of money that’s withheld from an employees salary and paid (by the employer) to the correct authority. Such examples include pension schemes and national insurance.
Working CapitalThe excess of current assets minus current liabilities. In most circumstances working capital is defined as the cash, accounts receivable and stock, minus the accounts payable. As a business grows the need for more working capital is, therefore, increased.
Working Capital CycleThe total stock holding and customer collection period, minus the supplier payment period.
Work-in-progressPartially completed goods or services that will be recorded as an asset upon completion.
Write-downA partial value reduction of an asset. A write-down is a non cash expense that affects profits.
Write-offThe total value reduction of an asset. A write-off is a non cash expense that affects profits.
X
Y
Z
ZBAAn abbreviation for “zero based account” – a bank account that’s always kept as close to zero as possible.
ZBBAn abbreviation for “zero based budget” – when a business starts with zero budget and must justify every cost that could result in a budget increase.
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