Glossary

A

Account

A formal record that represents a single aspect of business such as money, assets and resources.

Accounts Payable

The amount owed to suppliers for goods or services.

Accounting Period

The time period of whenfinancial statements are prepared. Most accounting periods are calculated on a monthly, quarterly or yearly basis.

Accounting

The process of recording and reporting financial transactions.

Accounts Receivable

The amount due from debtors, usually after a sale or service has been completed.

Accrual Method

A 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.

Accruals

Expenses 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.

Aging

When accounts receivable are sorted by age. Aging is often used to focus on accounts that are overdue.

Amortization

A 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 Report

A report for shareholders that includes a breakdown of a company’s annual statements, shareholders and equity cash flows, and any other important financial information.

Appreciation

When 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.

Arrears

Bills that haven’t been paid. For example, rent that is three months late is considered three months in arrears.

Assets

Things 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.

Audit

The 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 Debt

Amounts owed to a company that is recognized, but cannot be paid. Sometimes bad debts can be deducted as an expense.

Balance Sheet

A 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

Bankrupt

When 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

Capital

Money invested by business owners in order to acquire assets and begin operation.

Capital Allowances

To 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 Tax

When 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 Accounting

An accounting method where only paid invoices are accounted for. In the UK HMRC consider any invoice, whether paid or not, as revenue; VAT is the exception. HMRC usually require VAT on an accrual basis; however, businesses that conduct most of their sales using credit may benefit from using the cash accounting scheme.

Cash Flow

The amount of money that is generated by the business throughout a specific accounting period.

Cash Flow Forecast

The predicted cash flow of an upcoming financial period.

Chart of Accounts

A list of all of the accounts that are held in which business transactions are classified and recorded.

Charge Back

When 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 Assets

Assets 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 Books

A term used to describe making the final entries, and balancing the profit and loss account at the end of the financial year.

Companies House

A UK government department that collects and stores information regarding limited companies. Registered businesses must provide a statement at the end of each financial year.

Compensating Error

A mistake that has been cancelled out by another mistake.

Compound Interest

When 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 Statements

Combined financial statements of a parent company and all of its subsidiaries.

Consolidation

Combining assets, liabilities, equity and operating accounts into one single parent company and financial statement.

Cost

The price of making a non-current asset ready to use.

Cost-Based Pricing

A pricing method where companies base their fees on the price of manufacturing.

Cost Centre

When companies split up expense accounts into separate departments to determine which department is spending the most money.

Creative Accounting

A questionable way of making the accounts appear more or less appealing to shareholders than they actually are.

Credit

Bookkeeping 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 Note

A document that is sent to a customer which cancel’s their debt. Usually issued for defective goods or poor service.

Creditors

Suppliers that a business owes money to.

Current Assets

Assets than can be turned into cash quickly. Examples include money in the bank, money owed, petty cash, raw materials and stock.

Current Cost Accounting

When the valuation of assets are calculated at their current market value as opposed to their historical value.

Current Liabilities

Obligations 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 Period

The average amount of time it takes for a company to pay off purchases.

Cut-off Procedures

Processes that ensure any transactions for particular accounting period are isolated and recorded, and transactions that are not relevant excluded.

D

Debenture

A 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.

Debtors

Customers who owe money to a business.

Default

When a company is unable to meet a financial obligation to a creditor.

Deferred Expenditure

Expenses 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 Income

Income that is received or recorded before it is earned.

Deficit

When income or liabilities exceed assets.

Depreciation

When the value of an asset decreases with time. Depreciation is usually a percentage and calculated at the end of each financial year.

Derivatives

Financial instruments that vary in value according to an underlying asset, such as a stock or currency.

Dilutive

When 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).

Disclosure

Divulging accounting information in good faith so financial statements are understood.

Discounted Cash Flow

A method of assessing investments which could reduce the value of cash flow.

Dividend

After 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-keeping

A system of accounting where every aspect of a transaction is recorded twice; as a debit and credit.

Drawings

Money that is taken by a company owner for their own personal use. Not to be confused with wages.

E

Earned Income

The amount of wages, salary or service fees earned as compensation for products or services.

Earnings Per Share

A businesses net profit for a specific accounting period, divided by their shares outstanding.

EBIT

An abbreviation for “earnings before interest and tax.”

EBITA

An abbreviation for “interest, tax and amortization.”

EBITDA

An abbreviation for “earnings before interest, tax, depreciation and amortization.”

Encumbrance

Money that is reserved for any purpose.

Entry

An aspect of a transaction that’s recorded in a journal or ledger.

Equity

The 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.

Escrow

Money that is held by a third party until the fulfilment of specified conditions have been met.

Exclusions

Items which are excluded from a taxpayer’s gross income. Examples include gifts and inheritances. Exclusions are also known as excluded income.

Exemption

The amount of non-taxable income.

Expenditure

Anything that is purchased for a business –stock, payment of salaries, etc. Expenditure affects income and profits and usually involves cash transactions.

F

Fair Market Value

The 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 Statements

Documents that present financial data such as balance sheets, income statements and cash flow.

Fiscal Year

A period of 12 consecutive months chosen by a business as their accounting year. A fiscal year can begin on any date.

Fixed Asset

An asset with a lifespan that exceeds one year, such as vehicles, property, machinery and other long-term investments.

Fixed Cost

A cost that remains the same, such as salaries and rental agreements.

Forecast

An estimate of the future finances of a company based on assumptions of past performance. A forecast usually includes a quantified amount.

Fraud

The deliberate misuse or application of a company’s resources or assets.

Flow of Funds

A report that shows how a company’s balance sheet data has progressed from one accounting period to the next.

G

GAAP

An abbreviation for “generally accepted accounting principles.”

Gearing

When money is borrowed with fixed interest with the purpose of leveraging that money for further financial gain. Also known as leveraging.

General Ledger

A 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.

Goodwill

The 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.

Gross

The profit margin before making any deductions or discounts.

Gross Margin

The 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 Acquisition

A 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

Historical Cost

The 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

IAS

An abbreviation for “International Accounting Standard.”

Impairment

A reduction in the carrying value of an asset that has exceeded its depreciation period.

Impersonal Accounts

Accounts that are not held in the name of a person that’s associated with customers or suppliers.

Imprest System

An accounting method used to restore petty cash to its original value when it starts running out. Also known as restoring the imprest.

Income

The money a business receives for its commercial activities.

Income Statement

A financial statement that summarizes revenue, expenses and profit. Also known as a profit and loss account.

Incorporation

The date in which a business is legally established.

Interest

A payment to the lender of money. Usually calculated by percentage.

Inventory

The supply of stock or goods that a business has for sale.

Inventory Obsolescence

Inventory that can no longer be sold. For example, clothing that has gone out of fashion or too much stock.

Inventory Shrinkage

When there is a reduction of stock from reasons other than selling, such as theft.

Investment

The purchase of products or services that could increase profit.

Investors

People or businesses who have invested money into a business for a share of ownership.

J

Journal

A book or set of books used to record chronological business transactions.

Joint Venture

When 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 Indicators

A quantified measurement used to calculate the performance of a business.

L

Leasing

A rental agreement that grants a person or business the use of an asset for a certain amount of time.

Ledger

A financial record that keeps track of business transactions. Journal entries are posted to be re-organized into accounts.

Liabilities

Debts 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 Company

A company that has shares available to buy and sell on the Stock Exchange.

Listing Requirements

Rules that are imposed by the Stock Exchange to companies whose shares are available to buy and sell.

Long-term Liabilities

Financial obligations that aren’t due for more than one year. Examples include mortgages and long-term loans.

Loss

When expenditure exceeds revenue.

M

Management Accounting

When 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.

Margin

The difference between revenue and expenses.

Matching

Analysing sales and expenses for a certain accounting period in order to determine how much profit was made.

Maturity

The repayment date of a liability.

Merger

When two organizations absorb into one entity and share assets and liabilities, yet no new entity is created.

Money Laundering

The process of disguising illegally obtained funds so they seem legal.

Moving Average

A 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

Negligence

Failure to exhibit care that one ought to exhibit.

Net

The 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 Assets

The value of cash and assets minus company liabilities.

Nominal Value

The named value of a share when it is issued.

Non-current Assets

Assets 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 Organization

A company that exists for charitable reasons. Trustees and shareholders receive no financial benefits.

O

Opening the Books

When a business closes their books at the end of the year and a new set is opened.

Operating Activities

The principal non-investment activities that keep a business operational.

Operating and Financial Review

A section within a company’s financial documents that explains the most important elements of the financial statements.

Operating Cycle

The period of time between the purchase of goods or services and the final delivery.

Operating Gearing

The ratio of the fixed operating costs to the variable operating costs.

Operating Risk

When the cost of fixed operating costs is high and could cause a fluctuation in profits.

Option

Buying 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 Shares

A 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.

Overheads

The 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 Company

A company that controls one or more subsidiaries.

Partnership

An 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 Deed

A written agreement that outlines the logistics of a partnership, such as the profit shares.

Partnership Law

Legislation which governs a partnership agreement when a partnership deed has not been written.

P.A.Y.E

An 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 Delivery

When a buyer pays for goods or services only after they have been received.

PE Ratio

An 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 Inventory

When the inventory balance is updated after every transaction.

Petty Cash

A 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 Firms

A firm that is close to insolvency, but has been repackaged, restructured and sold back to management.

Point of Sale

The place where a transaction is conducted.

Preference Shares

A 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.

Premium

The excess amount that is paid above face value.

Pre-payments

An 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 Value

The 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 Information

Information that would change the price of a share if known to the public.

Private Limited Company

A limited liability company that doesn’t have to offer shares to the public.

Profit

The overall revenue of a business minus expenses.

Profit and Loss Account

A financial statement which shows the revenue, expenses and profit for a certain financial period. Also known as an income statement.

Profit Margin

The 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.

Projection

Hypothetical assumptions used to estimate future financial statements.

Prospectus

A document used when offering shares to an investor. A prospectus will usually contain financial statements, along with detailed supporting information.

Provisions

An account that is set up to accommodate a future payment, such as a bill that is yet to be received.

Public Limited Company

A company that opens its shares to the public.

Q

Qualified Audit Opinion

A report issued by an auditor when accounts are fairly presented, but do not comply with generally accepted accounting practices.

Quality of Earnings

The opinion of investors regarding profit. Quality is considered poor during times of high inflation.

R

Raw Materials

Materials purchased in order to manufacture products.

Refinancing Agreement

An arrangement to replace existing financing with funding from elsewhere.

Realization Principle

When revenue can only be recognized when the goods or services that generated that revenue have been delivered.

Rebate

A 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.

Receipt

A confirmation of payment, usually in written form.

Registrar of Companies

A government official responsible for maintaining financial information and ensuring it doesn’t breach legal policies.

Replacement Cost

A measure used to calculate the cost of replacing an asset or liability.

Reserve Account

An 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 Earnings

Net 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.

Revenue

The income of a business. Examples include sales from goods or services, and earnings from interest and dividends.

Risk

The possibility of financial loss. High risk investments require a higher return than low risk investments.

S

Sales

The total income received from selling goods or services.

Secured Loan

A loan where the borrower pledges a particular asset in exchange for a loan. The lender then uses this asset as collateral.

Segmental Reporting

A form of accounting used to separate divisions of a business for individual reporting.

Self Assessment

A 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-employed

Working for ones self as either a freelancer or business owner.

Shareholder

The owner of shares in a limited company or corporation.

Shares

A part of a company. After purchasing shares the buyer will receive a document stating what percentage of the company they own.

Simple Interest

Interest 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 Fund

A fund used to set aside money over time in order to repay a debt or replace a wasting asset.

SME

An abbreviation for “Small and Medium Enterprises.”

Sole Trader

An individual who is a self-employed owner of a business.

Start-up Costs

The up-front capital that’s required to start a new business.

Statement of Cash Flows

A 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.

Stock

Goods that are manufactured for sale or purchased for re-sale. Stock can also refer to shares within a limited company.

Stock Exchange

An organization that sets the legal legislations for buying and selling shares. Also known as the stock market.

Stock Holding Period

The average number of days in which inventory is held before a sale.

Stockholders

An alternative term for shareholders.

Straight-Line Depreciation

A 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 Debt

The amount of money that is owed to unsecured creditors after a company is liquidated.

Subsidiary Company

A company that is controlled by a parent company.

Subtotal

The total of smaller items that are grouped together.

Sunk Costs

Money that has already been spent and cannot be recovered.

Suspense Account

A 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

Tangible Assets

An asset of a physical nature, such as buildings, vehicles and machinery.

Tax

A compulsory contribution to state revenue based on income and business profits, etc.

Taxation

The 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.

Turnover

The income of a business over a particular period of time.

U

UK ASB System

A reporting systemfor companies in the UK that don’t report under the IASB system.

Undeposited Funds Account

An 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 Company

A limited liability company that is not listed on a stock exchange.

Unsecured Creditor

A 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 Loan

A debt without any collateral attached to it.

V

Valuation

A process which involves determining the worth of a company’s assets.

Variance

The 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.

VAT

An abbreviation for “Value Added Tax” – the sales tax used to increase the price of goods.

Valuation

A process which involves determining the worth of a company’s assets.

W

Wages

Payments made to employees for their services. Wages are classified as business expenses.

Withholdings

The 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 Capital

The 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 Cycle

The total stock holding and customer collection period, minus the supplier payment period.

Work-in-progress

Partially completed goods or services that will be recorded as an asset upon completion.

Write-down

A partial value reduction of an asset. A write-down is a non cash expense that affects profits.

Write-off

The total value reduction of an asset. A write-off is a non cash expense that affects profits.

X

Y

Z

ZBA

An abbreviation for “zero based account” – a bank account that’s always kept as close to zero as possible.

ZBB

An abbreviation for “zero based budget” – when a business starts with zero budget and must justify every cost that could result in a budget increase.