Glossary of Accounting Terms
A
Above the line: This term can be applied to many
aspects of accounting. It means transactions, assets etc., that are associated
with the everyday running of a business. See below
the line .
Account: A section in a ledger devoted to a
single aspect of a business (e.g. a Bank account, Wages account, Office
expenses account).
Accounting cycle: This covers everything from opening
the books at the start of the year to closing them at the end. In other words,
everything you need to do in one accounting year accounting wise.
Accounts Payable: An account in the nominal
ledger which contains the overall balance of the Purchase Ledger.
Accounts Payable Ledger: A subsidiary ledger which holds the
accounts of a business's suppliers. A single control account is held in the nominal
ledger which shows the total balance of all the accounts in the purchase
ledger.
Accounts Receivable: An account in the nominal
ledger which contains the overall balance of the Sales Ledger.
Accounts Receivable Ledger: A subsidiary ledger which holds the
accounts of a business's customers. A single control account is held in the nominal
ledger which shows the total balance of all the accounts in the sales ledger.
Accretive: If a company acquires another and says
the deal is 'accretive to earnings', it means that the resulting PE
ratio (price/earnings) of the acquired company is less than the
acquiring company. Example: Company 'A' has an earnings per share (EPS) of $1.
The current share price is $10. This gives a P/E ratio of 10 (current share
price is 10 times the EPS). Company 'B' has made a net profit for the year of
$20,000. If company 'A' values 'B' at, say, $180,000 (P/E ratio=9 [180,000
valuation/20,000 profit]) then the deal is accretive because company 'A' is
effectively increasing its EPS (because it now has more shares and it paid less
for them compared with its own share price). (see dilutive
)
Accruals: If during the course of a business
certain charges are incurred but no invoice is received then these charges are
referred to as accruals (they 'accrue' or increase in value). A typical example
is interest payable on a loan where you have not yet received a bank statement.
These items (or an estimate of their value) should still be included in the
profit & loss account. When the real invoice is received, an adjustment can
be made to correct the estimate. Accruals can also apply to the income side.
Accrual method of accounting: Most businesses use the accrual method
of accounting (because it is usually required by law). When you issue an
invoice on credit (i.e. regardless of whether it is paid or not), it is treated
as a taxable supply on the date it was issued for income tax purposes (or
corporation tax for limited companies). The same applies to bills received from
suppliers. (This does not mean you pay income tax immediately, just that it
must be included in that year's profit and loss account).
Accumulated Depreciation Account: This is an account held in the nominal
ledger which holds the depreciation of a fixed asset until the end of the
asset's useful life (either because it has been scrapped or sold). It is
credited each year with that year's depreciation, hence the balance increases
(i.e. accumulates) over a period of time. Each fixed asset will have its own
accumulated depreciation account.
Advanced Corporation Tax (ACT - UK only
- no longer in use): This
is corporation tax paid in advance when a limited company issues a dividend.
ACT is then deducted from the total corporation tax due when it has been
calculated at year end. ACT was abolished in April 1999. See Corporation
Tax .
Amortization: The depreciation (or repayment) of an
(usually) intangible asset (e.g. loan, mortgage) over a fixed period of time.
Example: if a loan of 12,000 is amortized over 1 year with no interest, the
monthly payments would be 1000 a month.
Annualize: To convert anything into a yearly
figure. E.g. if profits are reported as running at £10k a quarter, then they
would be £40k if annualized. If a credit card interest rate was quoted as 1% a
month, it would be annualized as 12%.
Appropriation Account: An account in the nominal
ledger which shows how the net profits of a business (usually a partnership,
limited company or corporation) have been used.
Arrears: Bills which should have been paid. For
example, if you have forgotten to pay your last 3 months rent, then you are
said to be 3 months in arrears on your rent.
Assets: Assets represent what a business owns
or is due. Equipment, vehicles, buildings, creditors, money in the bank, cash
are all examples of the assets of a business. Typical breakdown includes 'Fixed
assets', 'Current assets' and 'non-current assets'. Fixed refers to equipment,
buildings, plant, vehicles etc. Current refers to cash, money in the bank,
debtors etc. Non-current refers to any assets which do not easily fit into the
previous categories (such as Deferred
expenditure ).
At cost: The 'at cost' price usually refers to
the price originally paid for something, as opposed to, say, the retail price.
Audit: The process of checking every entry in a set of books to
make sure they agree with the original paperwork (e.g. checking a journal's
entries against the original purchase and sales invoices).
Audit Trail: A list of transactions in the order
they occurred.
Bad Debts Account: An account in the nominal
ledger to record the value of un-recoverable debts from customers. Real bad
debts or those that are likely to happen can be deducted as expenses against
tax liability (provided they refer specifically to a customer).
Bad Debts Reserve Account: An account used to record an estimate
of bad debts for the year (usually as a percentage of sales). This cannot be
deducted as an expense against tax liability.
Balance Sheet: A summary of all the accounts of a
business. Usually prepared at the end of each financial year. The term 'balance
sheet' implies that the combined balances of assets exactly equals the
liabilities and equity (aka net worth).
Balancing Charge: When a fixed asset is sold or disposed
of, any loss or gain on the asset can be reclaimed against (or added to) any
profits for income tax purposes. This is called a balancing charge.
Bankrupt: If an individual or unincorporated
company has greater liabilities than it has assets, the person or business can
petition for, or be declared by its creditors, bankrupt. In the case of a
limited company or corporation in the same position, the term used is insolvent
.
Below the line: This term is applied to items within a
business which would not normally be associated with the everyday running of a
business. See above the line .
Bill: A term typically used to describe a purchase invoice (e.g.
an invoice from a supplier).
Bought Ledger: See Purchase
Ledger .
Burn Rate: The rate at which a company spends its
money. Example: if a company had cash reserves of $120m and it was currently
spending $10m a month, then you could say that at the current 'burn rate' the
company will run out of cash in 1 year.
C
CAGR: (Compound Annual Growth Rate) The year on year growth rate
required to show the change in value (of an investment) from its initial value
to its final value. If a $1 investment was worth $1.52 over three years, the
CAGR would be 15% [(1 x 1.15) x 1.15 x 1.15]
Called-up Share capital: The value of unpaid (but issued
shares) which a company has requested payment for. See Paid-up
Share capital .
Capital: An amount of money put into the
business (often by way of a loan) as opposed to money earned by the business.
Capital account: A term usually applied to the owners equity
in the business.
Capital Allowances (UK specific): The depreciation on a fixed asset is
shown in the Profit and Loss account, but is added back again for income tax
purposes. In order to be able to claim the depreciation against any profits the
Inland Revenue allow a proportion of the value of fixed assets to be claimed
before working out the tax bill. These proportions (usually calculated as a
percentage of the value of the fixed assets) are called Capital Allowances.
Capital Assets: See Fixed
Assets .
Capital Employed (CE): Gross CE=Total assets, Net
CE=Fixed assets plus (current assets less current liabilities).
Capital Gains Tax: When a fixed asset is sold at a
profit, the profit may be liable to a tax called Capital Gains Tax. Calculating
the tax can be a complicated affair (capital gains allowances, adjustments for
inflation and different computations depending on the age of the asset are all
considerations you will need to take on board).
Cash Accounting: This term describes an accounting
method whereby only invoices and bills which have been paid are accounted for.
However, for most types of business in the UK, as far as the Inland Revenue are
concerned as soon as you issue an invoice (paid or not), it is treated as
revenue and must be accounted for. An exception is VAT
: Customs & Excise normally require you to account for VAT on an accrual
basis, however there is an option called 'Cash Accounting' whereby only paid
items are included as far as VAT is concerned (e.g. if most of your sales are
on credit, you may benefit from this scheme - contact your local Customs &
Excise office for the current rules and turnover limits).
Cash Book: A journal where a business's cash
sales and purchases are entered. A cash book can also be used to record the
transactions of a bank account. The side of the cash book which refers to the
cash or bank account can be used as a part of the nominal
ledger (rather than posting the entries to cash or bank accounts held directly
in the nominal ledger - see 'Three column cash book').
Cash Flow: A report which shows the flow of money
in and out of the business over a period of time.
Cash Flow Forecast: A report which estimates the cash flow
in the future (usually required by a bank before it will lend you money, or
take on your account).
Cash in Hand: See Undeposited
funds account .
Charge Back: Refers to a
credit card order which has been processed and is subsequently cancelled by the
cardholder contacting the credit card company directly (rather than through the
seller). This results in the amount being 'charged back' to the seller (often
incurs a small penalty or administration fee to the seller).
Chart of Accounts: A list of all the accounts held in the nominal
ledger.
CIF (Cost, Insurance, Freight
[c.i.f.]): A contract
(international) for the sale of goods where the seller agrees to supply the
goods, pay the insurance, and pay the freight charges until the goods reach the
destination (usually a port - rather than the actual buyers address). After
that point, the responsibility for the goods passes to the buyer.
Circulating assets: The opposite to Fixed
assets . Circulating assets describe those assets that turn from
cash to goods and back again (hence the term circulating). Typically, you buy
some raw materials, start to manufacture a product (the asset is called work
in progress at this point), produce a product (it is now stock
), sell it (it is now back to cash again).
Closing the books: A term used to describe the journal
entries necessary to close the sales and expense accounts of a business at year
end by posting their balances to the profit and loss account, and ultimately to
close the profit & loss account too by posting its balance to a capital or
other account.
Companies House (UK only): The title given to the government
department which collects and stores information supplied by limited companies.
A limited company must supply Companies House with a statement of its final
accounts every year (e.g. trading and profit and loss accounts, and balance
sheet).
Compensating error: A double-entry term applied to a
mistake which has cancelled out another mistake.
Compound interest: Apply interest on the capital plus all
interest accrued to date. E.g. A loan with an annually applied rate of 10% for
1000 over two years would yield a gross total of 1210 at the end of the period
(year 1 interest=100, year two interest=110). The same loan with simple
interest applied would yield 1200 (interest on both years is 100 per
year).
Contra account: An account created to offset another
account. E.g: a Sales contra account would be Sales Discounts. They are
accounts included in the same section of a set of books, which when compared
together, give the net balance. Example: Sales=10,000 Sales Discounts=1,000
therefore Net Sales=9,000. This example, affecting the revenue side of a
business, is also referred to as Contra revenue . The
tell-tale sign of a contra account is that it has the opposite balance to that
expected for an account in that section (in the above example, the Sales
Discounts balance would be shown in brackets – e.g. it has a debit balance
where Sales has a credit balance).
Control Account: An account held in a ledger which
summarizes the balance of all the accounts in the same or another ledger.
Typically each subsidiary ledger will have a control account which will be
mirrored by another control account in the nominal
ledger (see 'Self-balancing ledgers').
Cook the books: Falsify a set of accounts. See also creative
accounting .
Corporation Tax (CT - UK only): The tax paid by a limited company on
its profits. At present this is calculated at year end and due within 9 months
of that date. From April 1999 Advanced
Corporation Tax was abolished and large (UK) companies now pay CT in
installments. Small and medium-sized companies are exempted from the
installment plan.
Cost accounting: An area of management
accounting which deals with the costs of a business in terms of
enabling the management to manage the business more effectively.
Cost-based pricing: Where a company bases its pricing
policy solely on the costs of manufacturing rather than current market
conditions.
Cost-benefit: Calculating not only the financial
costs of a project, but also the cost of the effects it will have from a social
point of view. This is not easy to do since it requires valuations of
intangible items like the cost of job losses or the effects on the environment.
Genetically modified crops are a good example of where cost-benefits would be
calculated - and also impossible to answer with any degree of certainty!
Cost centre: Splitting up your expenses by
department. E.g. rather than having one account to handle all power costs for a
company, a power account would be opened for each department. You can then
analyze which department is using the most power, and hopefully find of way of
reducing those costs.
Cost of finished goods: The value (at cost) of newly
manufactured goods shown in a business's manufacturing account. The valuation
is based on the opening raw materials balance, less direct costs involved in
manufacturing, less the closing raw materials balance, and less any other
overheads. This balance is subsequently transferred to the trading account.
Cost of Goods Sold (COGS): A formula for working out the direct
costs of your stock sold over a particular period. The result represents the
gross profit. The formula is: Opening stock + purchases - closing stock.
Cost of Sales: A formula for working out the direct
costs of your sales (including stock) over a particular period. The result
represents the gross profit. The formula is: Opening stock + purchases + direct
expenses - closing stock. Also, see Cost
of Goods Sold .
Creative accounting: A questionable! means of making a
companies figures appear more (or less) appealing to shareholders etc. An
example is 'branding' where the 'value' of a brand name is added to intangible
assets which increases shareholders funds (and therefore decreases the gearing
). Capitalizing expenses is another method (i.e. moving them to the assets
section rather than declaring them in the Profit & Loss account).
Credit: A column in a journal or ledger to
record the 'From' side of a transaction (e.g. if you buy some petrol using a
cheque then the money is paid from the bank to the petrol account, you would
therefore credit the bank when making the journal entry).
Credit Note: A sales invoice in reverse. A typical
example is where you issue an invoice for £100, the customer then returns £25
worth of the goods, so you issue the customer with a credit note to say that
you owe the customer £25.
Creditors: A list of suppliers to whom the
business owes money.
Creditors (control account): An account in the nominal
ledger which contains the overall balance of the Purchase Ledger.
Current Assets: These include money in the bank, petty
cash, money received but not yet banked (see 'cash in hand'), money owed to the
business by its customers, raw materials for manufacturing, and stock bought
for re-sale. They are termed 'current' because they are active accounts. Money
flows in and out of them each financial year and we will need frequent reports
of their balances if the business is to survive (e.g. 'do we need more stock
and have we got enough money in the bank to buy it?').
Current cost accounting: The valuing of assets, stock, raw
materials etc. at current market value as opposed to its historical
cost .
Current Liabilities: These include bank overdrafts, short
term loans (less than a year), and what the business owes its suppliers. They
are termed 'current' for the same reasons outlined under 'current assets' in
the previous paragraph.
Customs and Excise: The government department usually
responsible for collecting sales tax (e.g. VAT
in the UK).
D
Days Sales Outstanding (DSO): How long on average it takes a company
to collect the money owed to it.
Debenture: This is a type of share issued by a
limited company. It is the safest type of share in that it is really a loan to
the company and is usually tied to some of the company's assets so should the
company fail, the debenture holder will have first call on any assets left
after the company has been wound up.
Debit: A column in a journal or ledger to record the 'To' side of
a transaction (e.g. if you are paying money into your bank account you would
debit the bank when making the journal entry).
Debtors: A list of customers who owe money to
the business.
Debtors (control account): An account in the nominal
ledger which contains the overall balance of the Sales Ledger.
Deferred expenditure: Expenses incurred which do not apply to
the current accounting period. Instead, they are debited to a 'Deferred
expenditure' account in the non-current
assets area of your chart
of accounts . When they become current, they can then be transferred
to the profit and loss account as normal.
Depreciation: The value of assets usually decreases
as time goes by. The amount or percentage it decreases by is called
depreciation. This is normally calculated at the end of every accounting period
(usually a year) at a typical rate of 25% of its last value. It is shown in
both the profit & loss account and balance sheet of a business. See straight-line
depreciation .
Dilutive: If a company acquires another and says
the deal is 'dilutive to earnings', it means that the resulting P/E
(price/earnings) ratio of the acquired company is greater than the acquiring
company. Example: Company 'A' has an earnings per share (EPS) of $1. The
current share price is $10. This gives a P/E ratio of 10 (current share price
is 10 times the EPS). Company 'B' has made a net profit for the year of
$20,000. If company 'A' values 'B' at, say, $220,000 (P/E ratio=11 [220,000
valuation/20,000 profit]) then the deal is dilutive because company 'A' is
effectively decreasing its EPS (because it now has more shares and it paid more
for them in comparison with its own share price). (see Accretive
)
Dividends: These are payments to the shareholders
of a limited company.
Double-entry book-keeping: A system which accounts for every
aspect of a transaction - where it came from and where it went to. This from
and to aspect of a transaction (called crediting and
debiting) is what the term double-entry means. Modern double-entry was first
mentioned by G Cotrugli, then expanded upon by L Paccioli in the 15th century.
Drawings: The money taken out of a business by
its owner(s) for personal use. This is entirely different to wages paid to a
business's employees or the wages or remuneration of a limited company's
directors (see 'Wages').
EBIT: Earnings before interest and tax (profit before any interest
or taxes have been deducted).
EBITA: Earnings before interest, tax and amortization (profit
before any interest, taxes or amortization
have been deducted).
EBITDA: Earnings before interest, tax,
depreciation and amortization (profit before any interest, taxes, depreciation
or amortization have been deducted).
Encumbrance: A liability (e.g. a mortgage is an
encumbrance on a property). Also, any money set aside (i.e. reserved) for any
purpose.
Entry: Part of a transaction recorded in a journal or posted to a
ledger.
Equity: The value of the business to the owner
of the business (which is the difference between the business's assets and
liabilities).
Error of Commission: A double-entry term which means that
one or both sides of a double-entry has been posted to the wrong account (but
is within the same class of account). Example: Petrol expense posted to Vehicle
maintenance expense.
Error of Omission: A double-entry term which means that a
transaction has been omitted from the books entirely.
Error of Original Entry: A double-entry term which means that a
transaction has been entered with the wrong amount.
Error of Principle: A double-entry term which means that
one or both sides of a double-entry has been posted to the wrong account (which
is also a different class of account). Example: Petrol expense posted to
Fixtures and Fittings.
Expenses: Goods or services purchased directly
for the running of the business. This does not include goods bought for re-sale
or any items of a capital nature (see Stock
and Fixed Assets ).
F
Fiscal year: The term used for a business's
accounting year. The period is usually twelve months which can begin during any
month of the calendar year (e.g. 1st April 2001 to 31st March 2002).
Fixed Assets: These consist of anything which a
business owns or buys for use within the business and which still retains a
value at year end. They usually consist of major items like land, buildings,
equipment and vehicles but can include smaller items like tools. (see Depreciation
)
Fixtures & Fittings: This is a class of fixed asset which
includes office furniture, filing cabinets, display cases, warehouse shelving
and the like.
Flash earnings: A news release issued by a company
that shows its latest quarterly results.
Flow of Funds: This is a report which shows how a
balance sheet has changed from one period to the next.
FOB: An abbreviation of Free On Board. It generally forms part
of an export contract where the seller pays all the costs and insurance of
sending the goods to the port of shipment. After that, the buyer then takes
full responsibility. If the goods are to travel by train, it's called FOR (Free
On Rail).
Freight collect: The buyer pays the shipping costs.
Gearing (AKA: leverage): The comparison of a company's long
term fixed interest loans compared to its assets. In general two different
methods are used: 1. Balance sheet gearing is calculated by dividing long term
loans with the equity (or proprietor's net worth). 2. Profit and Loss gearing:
Fixed interest payments for the period divided by the profit for the period.
General Ledger: See Nominal
Ledger .
Goodwill: This is an extra value placed on a
business if the owner of a business decides it is worth more than the value of
its assets. It is usually included where the business is to be sold as a going
concern.
Gross loss: The balance of the trading account
assuming it has a debit balance.
Gross margin: The difference between the selling
price of a product or service and the cost of that product or service often
shown as a percentage. E.g. if a product sold for 100 and cost 60 to buy or
manufacture, the gross margin would be 40%. Gross margin can also be expressed
on a the total revenue and costs of producing that revenue as well as on an
item by item basis.
Growth and Acquisition (G & A): Describes a way a company can grow.
Growth means expanding through its normal operations, Acquisition means growth
through buying up other companies.
H / I
Historical Cost:
Assets, stock, raw materials etc. can
be valued at what they originally cost (which is what the term 'historical
cost' means), or what they would cost to replace at today's prices (see Price
change accounting ).
Impersonal Accounts: These are accounts not held in the
name of persons (i.e. they do not relate directly to a business's customers and
suppliers). There are two types, see Real
and Nominal .
Imprest System: A method of topping up petty cash. A
fixed sum of petty cash is placed in the petty cash box. When the petty cash
balance is nearing zero, it is topped up back to its original level again
(known as 'restoring the Imprest').
Income: Money received by a business from its
commercial activities. See 'Revenue'.
Inland Revenue: The government department usually
responsible for collecting your tax.
Insolvent: A company is insolvent if it has
insufficient funds (all of its assets) to pay its debts (all of its
liabilities). If a company's liabilities are greater than its assets and it
continues to trade, it is not only insolvent, but in the UK, is operating
illegally (Insolvency act 1986).
Intangible assets: Assets of a non-physical or financial
nature. An asset such as a loan or an endowment policy are good examples. See tangible
assets .
Integration Account: See Control
Account .
Inventory: A subsidiary ledger which is usually
used to record the details of individual items of stock. Inventories can also
be used to hold the details of other assets of a business. See Perpetual
, Periodic .
Invoice: A term describing an original document
either issued by a business for the sale of goods on credit (a sales invoice)
or received by the business for goods bought (a purchase invoice).
J
Journal Proper: A term used to describe the main or
general journal where other journals specific to subsidiary ledgers are also
used.
Landed Costs: The total costs involved when
importing goods. They include buying, shipping, insuring and associated taxes.
Ledger: A book in which entries posted from
the journals are re-organized into accounts.
Leverage: See Gearing
.
Liabilities: This includes bank overdrafts, loans
taken out for the business and money owed by the business to its suppliers.
Liabilities are included on the right hand side of the balance sheet and
normally consist of accounts which have a credit balance.
LIFO: Last In First Out. A method of valuing stock
.
LILO: Last In Last Out. A method of valuing stock
.
Long term liabilities: These usually refer to long term loans
(i.e. a loan which lasts for more than one year such as a mortgage).
Loss: See Net loss .
Management accounting: Accounts and reports are tailor made
for the use of the managers and directors of a business (in any form they see
fit - there are no rules) as opposed to financial accounts which are prepared
for the Inland Revenue and any other parties not directly connected with the
business. See Cost accounting .
Manufacturing account: An account used to show what it cost
to produce the finished goods made by a manufacturing business.
Matching principle: A method of analyzing the sales and
expenses which make up those sales to a particular period (e.g. if a builder
sells a house then the builder will tie in all the raw materials and expenses
incurred in building and selling the house to one period - usually in order to
see how much profit was made).
Maturity value: The (usually projected) value of an intangible
asset on the date it becomes due.
MD & A: Management Discussion and Analysis.
Usually seen in a financial report. The information disclosed has been derived
from analysis and discussions held by the management (and is presented usually
for the benefit of shareholders).
Memo billing (aka memo invoicing): Goods ordered and invoiced on
approval. There is no obligation to buy.
Memorandum accounts: A name for the accounts held in a
subsidiary ledger. E.g. the accounts in a sales
ledger .
Minority interest: A minority interest represents a
minority of shares not held by the holding company of a subsidiary. It means
that the subsidiary is not wholly owned by the holding company. The minority
shareholdings are shown in the holding company accounts as long
term liabilities .
Moving average: A way of smoothing out (i.e. removing
the highs and lows) of a series of figures (usually shown as a graph). If you
have, say, 12 months of sales figures and you decide on a moving average period
of 3 months, you would add three months together, divide that by three and end
up with an average for each month of the three month period. You would then
plot that single figure in place of the original monthly points on your graph.
A moving average is useful for displaying trends. See Normalize
.
Multiple-step income statement (aka
Multi-step): An
income statement (aka Profit and Loss ) which has had its revenue
section split up into sub-sections in order to give a more detailed view of its
sales operations. Example: a company sells services and goods. The statement
could show revenue from services and associated costs of those revenues at the
start of the revenue section, then show goods sold and cost of goods sold
underneath. The two sections totals can then be amalgamted at the end to show
overall sales (or gross profit). See Single-step
income statement .
Narrative: A comment appended to an entry in a
journal. It can be used to describe the nature of the transaction, and often in
particular, where the other side of the entry went to (or came from).
Net loss: The value of expenses less sales
assuming that the expenses are greater (i.e. if the profit and loss account
shows a debit balance).
Net of Tax: The price less any tax. E.g. if you
sold some goods for $12 inclusive of $2 sales tax, then the 'net of tax' price
would be $10
Net profit: The value of sales less expenses
assuming that the sales are greater (i.e. if the profit and loss account shows
a credit balance).
Net worth: See Equity
.
Nominal Accounts: A set of accounts held in the nominal
ledger. They are termed 'nominal' because they don't usually relate to an
individual person. The accounts which make up a Profit and Loss account are
nominal accounts (as is the Profit and Loss account itself), whereas an account
opened for a specific customer is usually held in a subsidiary ledger (the sales
ledger in this case) and these are referred to as personal
accounts.
Nominal Ledger: A ledger which holds all the nominal
accounts of a business. Where the business uses a subsidiary ledger like the
sales ledger to hold customer details, the nominal ledger will usually include
a control account to show the total balance of the subsidiary ledger (a control
account can be termed 'nominal' because it doesn't relate to a specific
person).
Normalize: This term can be applied to many
aspects of accounting. It means to average or smooth out a set of figures so
they are more consistent with the general trend of the business. This is
usually done using a Moving average .
O
Opening the books: Every time a business closes the books
for a year, it opens a new set. The new set of books will be empty, therefore
the balances from the last balance sheet must be copied into them (via journal
entries) so that the business is ready to start the new year.
Ordinary Share: This is a type of share issued by a
limited company. It carries the highest risk but usually attracts the highest
rewards.
Original book of entry: A book which contains the details of
the day to day transactions of a business (see Journal
).
Overheads: These are the costs involved in
running a business. They consist entirely of expense accounts (e.g. rent,
insurance, petrol, staff wages etc.).
P
P.A.Y.E (UK only): 'Pay as you earn'. The
name given to the income tax system where an employee's tax and national
insurance contributions are deducted before the wages are paid.
P&L: See Profit
and Loss Account
Paid-up Share capital: The value of issued shares which have
been paid for. See Called-up Share capital.
Pareto optimum: An economic theory by Vilfredo Pareto.
It states that the optimum allocation of a society's resources will not happen
whilst at least one person thinks he is better off and where others perceive
themselves to be no worse.
Pay on delivery: The buyer pays the cost of the goods
(to the carrier) on receipt of them.
Periodic inventory: A Periodic Inventory is one whose
balance is updated on a periodic basis, i.e. every week/month/year. See Inventory
.
PE ratio: An equation which gives you a very
rough estimate as to how much confidence there is in a company's shares (the
higher it is the more confidence). The equation is: current
share price multiplied by earnings
and divided by the number of shares .
'Earnings' means the last published net profit of the company.
Perpetual inventory: A Perpetual Inventory is one whose
balance is updated after each and every transaction. See Inventory
.
Personal Accounts: These are the accounts
of a business's customers and suppliers. They are usually held in the Sales and
Purchase Ledgers.
Petty Cash: A small amount of money held in
reserve (normally used to purchase items of small value where a cheque or other
form of payment is not suitable).
Petty Cash Slip: A document used to record petty cash
payments where an original receipt was not obtained (sometimes called a petty
cash voucher).
Point of Sale (POS): The place where a sale of goods takes
place, e.g. a shop counter.
Post Closing Trial Balance: This is a trial balance prepared after
the balance sheet has been drawn up, and only includes balance sheet accounts.
Posting: The copying of entries from the
journals to the ledgers.
Preference Shares: This is a type of share issued by a
limited company. It carries a medium risk but has the advantage over ordinary
shares in that preference shareholders get the first slice of the dividend
'pie' (but usually at a fixed rate).
Pre-payments: One or more accounts set up to account
for money paid in advance (e.g. insurance, where part of the premium applies to
the current financial year, and the remainder to the following year).
Price change accounting: Accounting for the value of assets,
stock, raw materials etc. by their current market value instead of the more
traditional Historic Cost .
Prime book of entry: See Original
book of entry .
Profit: See Gross
profit , Net profit , and Profit
and Loss Account .
Profit and Loss Account: An account made up of revenue and
expense accounts which shows the current profit or loss of a business (i.e.
whether a business has earned more than it has spent in the current year).
Often referred to as a P&L.
Profit margin: The percentage difference between the
costs of a product and the price you sell it for. E.g. if a product costs you
$10 to buy and you sell it for $20, then you have a 100% profit margin. This is
also known as your 'mark-up'.
Pro-forma accounts (pro-forma financial
statements): A
set of accounts prepared before the accounts have been officially audited.
Often done for internal purposes or to brief shareholders or the press.
Pro-forma invoice: An invoice sent that requires payment
before any goods or services have been dispatched.
Provisions: One or more accounts set up to account
for expected future payments (e.g. where a business is expecting a bill, but
hasn't yet received it).
Purchase Invoice: See Invoice
.
Purchase Ledger: A subsidiary ledger which holds the
accounts of a business's suppliers. A single control account is held in the nominal
ledger which shows the total balance of all the accounts in the purchase
ledger.
R
Raw Materials: This refers to the materials bought by
a manufacturing business in order to manufacture its products.
Real accounts: These are accounts which deal with
money such as bank and cash accounts. They also include those dealing with
property and investments. In the case of bank and cash accounts they can be
held in the nominal ledger, or balanced in a journal
(e.g. the cash book) where they can then be looked upon as a part of the
nominal ledger when compiling a balance sheet. Property and investments can be
held in subsidiary ledgers (with associated control accounts if necessary) or
directly in the nominal ledger itself.
Realization principle: The principle whereby the value of an
asset can only be determined when it is sold or otherwise disposed of, i.e. its
'real' (or realized) value.
Rebate: If you pay for a service, then cancel
it, you may receive a 'rebate'. That is, you may be refunded some of the money
you paid for the service. (e.g. if you cancel a 1 year insurance policy after 3
months, you may get a rebate for the remaining 9 months)
Receipt: A term typically used to describe
confirmation of a payment - if you buy some petrol you will normally ask for a
receipt to prove that the money was spent legitimately.
Reconciling: The procedure of checking entries made
in a business's books with those on a statement sent by a third person (e.g.
checking a bank statement against your own records).
Refund: If you return some goods you have just
bought (for whatever reason), the company you bought them from may give you
your money back. This is called a 'refund'.
Reserve accounts: Reserve accounts are usually set up to
make a balance sheet clearer by reserving or apportioning some of a business's
capital against future purchases or liabilities (such as the replacement of
capital equipment or estimates of bad debts).
A typical example is a company where they are used to hold
the residue of any profit after all the dividends have been paid. This balance
is then carried forward to the following year to be considered, together with
the profits for that year, for any further dividends.
Retail: A term usually applied to a shop which
re-sells other people's goods. This type of business will require a trading
account as well as a profit and loss account.
Retained earnings: This is the amount of money held in a
business after its owner(s) have taken their share of the profits.
Retainer: A sum of money paid in order to ensure
a person or company is available when required.
Retention ratio: The proportion of the profits retained
in a business after all the expenses (usually including tax and interest) are
taken into account. The algorithm is retained profits divided by profits
available for ordinary shareholders (or available for the proprietor/partners
in the case of unincorporated companies).
Revenue: The sales and any other taxable income
of a business (e.g. interest earned from money on deposit).
Run Rate: A forecast for the year based on the
current year to date figures. If a company's 1st quarter profits were, say,
$25m, they may announce that the run rate for the year is $100m.
S
Sales Invoice: See Invoice
.
Sales Ledger: A subsidiary ledger which holds the
accounts of a business's customers. A control account is held in the nominal
ledger (usually called a debtors' control account) which shows the total
balance of all the accounts in the sales ledger.
Self Assessment (UK only): A new style of income tax return
introduced for the 1996/1997 tax year. If you are self-employed, or receive an
income which is un-taxed at source, you will need to register with the Inland
Revenue so that the relevant self assessment forms can be sent to you. The idea
of self assessment is to allow you to calculate your own income tax.
Self-balancing ledgers: A system which makes use of control
accounts so that each ledger will balance on its own. A control account in a
subsidiary ledger will be mirrored with a control account in the nominal
ledger.
Self-employed: The owner (or partner) of a business
who is legally liable for all the debts of the business (i.e. the owner(s) of a
non-limited company).
Selling, General & Administrative
expense (SG & A): The
expenses involved in running a business.
Service: A term usually applied to a business
which sells a service rather than manufactures or sells goods (e.g. an
architect or a window cleaner).
Share premium: The extra paid above the face value of
a share. Example: if a company issues its shares at $10 each, and later on you
buy 1 share on the open market at $12, you will be paying a share premium of $2
Shares: These are documents issued by a company
to its owners (the shareholders) which state how many shares in the company
each shareholder has bought and what percentage of the company the shareholder
owns. Shares can also be called 'Stock'.
Shares issued (aka Shares outstanding): The number of shares a company has
issued to shareholders.
Simple interest: Interest applied to the original sum
invested (as opposed to compound interest ). E.g. 1000 invested
over two years at 10% per year simple interest will yield a gross total of 1200
at the end of the period (10% of 1000=100 per year).
Single-step income statement: An income statement where all the
revenues are shown as a single total rather than being split up into different
types of revenue (this is the most common format for very small businesses).
See Profit and Loss , Multiple-step
income statement .
Sinking fund: An account set up to reduce another
account to zero over time (using the principles of amortization or straight
line depreciation). Once the sinking fund reaches the same value as the other
account, both can be removed from the balance sheet.
SME: Small and Medium Enterprises (i.e. small and medium size
businesses). The distinction between what is 'small' and what is 'medium'
varies depending on where you are and who you talk to.
Sole trader: See Sole-proprietor
.
Source document: An original invoice, bill or receipt
to which journal entries refer.
Stock: This can refer to the shares of a limited company (see Shares
) or goods manufactured or bought for re-sale by a business.
Stock control account: An account held in the nominal
ledger which holds the value of all the stock held in the inventory subsidiary
ledger.
Stockholders: See Shareholders
.
Stock Taking: Physically checking a business's stock
for total quantities and value.
Stock valuation: Valuing a stock of goods bought for
manufacturing or re-sale.
Straight-line depreciation: Depreciating something by the same
(i.e. fixed) amount every year rather than as a percentage of its previous
value. Example: a vehicle initially costs $10,000. If you depreciate it at a
rate of $2000 a year, it will depreciate to zero in exactly 5 years. See Depreciation
.
Subordinated debt: If a company is liquidated (i.e.
becomes insolvent ), the secured creditors are paid
first. If any money is left, the unsecured creditors are then paid. The amount
of money owed to the unsecured creditors is termed the 'subordinated debt' of
the company.
Subsidiary ledgers: Ledgers opened in addition to a
business's nominal ledger. They are used to keep
sections of a business separate from each other (e.g. a Sales
ledger for the customers, and a Purchase
ledger for the suppliers). (See Control
Accounts )
Suspense Account: A temporary account used to force a
trial balance to balance if there is only a small discrepancy (or if an
account's balance is simply wrong, and you don't know why). A typical example
would be a small error in petty cash. In this case a transfer would be made to
a suspense account to balance the cash account. Once the person knows what
happened to the money, a transfer entry will be made in the journal to credit
or debit the suspense account back to zero and debit or credit the correct
account.
T
T Account: A particular method of displaying an
account where the debits and associated information are shown on the left, and
credits and associated information on the right.
Tangible assets: Assets of a physical nature. Examples
include buildings, motor vehicles, plant and equipment, fixtures and fittings.
See Intangible assets .
Three column cash book: A journal which deals with the day to
day cash and bank transactions of a business. The side of a transaction which
relates directly to the cash or bank account is usually balanced within the
journal and used as a part of the nominal ledger when compiling a balance sheet
(i.e. only the side which details the sale or purchase needs to be posted to
the nominal ledger ).
Total Cost of Ownership (TCO): The real amount an asset will cost.
Example: An accounting application retails at $1000. Support - which is
mandatory, costs a further $200 per annum. Assuming the software will be in use
for 5 years, TCO will be $2000 (1000+5x200=2000).
Trading account: An account which shows the gross
profit or loss of a manufacturing or retail business, i.e. sales less the cost
of sales.
Transaction: Two or more entries made in a journal
which when looked at together reflect an original document such as a sales
invoice or purchase receipt.
Trial Balance: A statement showing all the accounts
used in a business and their balances.
Turnover: The income of a business over a period
of time (usually a year).
U / V
Undeposited
Funds Account: An
account used to show the current total of money received (i.e. not yet banked
or spent). The 'funds' can include money, cheques, credit card payments,
bankers drafts etc. This type of account is also commonly referred to as a
'cash in hand' account.
Value Added Tax (VAT - applies to many
countries): Value
Added Tax, or VAT as it is usually called is a sales tax which increases the
price of goods. At the time of writing the UK VAT standard rate is 17.5%, there
is also a rate for fuel which is 5% (this refers to heating fuels like coal,
electricity and gas and not 'road fuels' like petrol which is still rated at
17.5%).
VAT is added to the price of goods so in the UK, an item
that sells at £10 will be priced £11.75 when 17.5% VAT is added.
Wages: Payments made to the employees of a business for their work
on behalf of the business. These are classed as expense items and must not be
confused with 'drawings' taken by sole-proprietors and partnerships (see Drawings
).
Write-off: Depreciating
an asset to zero in one go.
Zero Based Account (ZBA): Usually applied to a personal account
(checking) where the balance is kept as close to zero as possible by
transferring money between that account and, say, a deposit account.
Zero Based Budget (ZBB): Starting a budget at zero and
justifying every cost that increases that budget.
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