A technique for allocating costs to a product, service, customer, etc. The premise is that activities cause an organization to incur costs. Once the costs of the activities have been identified and each activity's cost has been determined, the cost of the activities is then allocated to the(...)
- ABC Inventory System
The ABC inventory system
is different from activity-based costing. The ABC inventory system
is used in order to focus on the most important items in inventory. Usually a relatively few items will account
for a very significant value. These relatively few items with great importance are(...)
- Abnormal Losses
Losses arising in business that should have been avoided.
- Absorption Costing
Part of the double entry
records containing details of transactions for a specific item.
- Accountant’s Report
A report by a firm of accountants confirming that the annual accounts
have been properly prepared. This is an alternative to an audit.
The process of identifying, measuring and communicating financial information to enable informed judgements and decisions.
- Accounting Cycle
The sequence in which data is recorded and processed until it becomes part of the financial statements
at the end of the period.
- Accounting Equation
The formula that is the basis of double-entry bookkeeping. Assets
= Source of Funds – Liabilities
- Accounting Periods
The period of time used by the business to process it's accounts
to produce reports such as the Profit
report and the balance sheet
. For example, a company may run its accounts
on a monthly basis, and produce 12 sets of reports in one year.
- Accounting Policies
Those principles, conventions, rules and practices applied by a business that specify how the effects of transactions and other events are to be reflected in its financial statements
- Accounts payable
A record of money owed by a business for goods and services.
- Accounts receivable
A record of money owed to the business for goods and services that have been provided to its customers.
The accruals process allows a business to adjust the monthly accounts
for payments made in arrears. This process is the reverse of prepayments.
- Accrual Accounting
method that tries to match the recognition of revenues earned with the expenses
incurred in generating those revenues. It ignores the timing of the cash
flows associated with revenues and expenses
- Accrual basis accounting
records financial events based on events that change your net worth
(the amount owed to you less the amount you owe others). Standard practice is to record expenses
with the incomes they are associated with. For example, your landlord would record an income event on(...)
- Accruals Concept
- Accrued Expense
This is an expense for which the benefit has been received, but has not been paid for by the end of the period. Examples are electricity or telephone use which are billed quarterly It is included in the balance sheet
under current liabilities as 'accruals'.
- Accrued Income
is normally from a source of income, outside of the main source of business income, such as rent receivable on an unused office that was due to be received by the end of the period, but which has not been received by that date. It is added to debtors
in the balance sheet
- Accumulated Depreciation Account
- Acid Test Ratio
This shows that, provided creditors and debtors
are paid at approximately the same time, a view might be made as to whether the business has sufficient liquid resources to meet its current liabilities. Also referred to as the Quick Ratio.
- Adverse Variance
A difference arising that is apparently 'bad' from the perspective of the organisation. For example, when the total actual materials cost exceeds the total standard cost
due to more materials having been used than anticipated. Whether it is indeed 'bad' will be revealed only when the cause of(...)
Stands for Annual Equivalent Rate. See What is AER
, EAR Interest
for detailed information.
- Aged Debtors
who have owed money to the business for a defined period of time.
- Aged Debtors Analysis
A report that analyses amounts owed by customers according to the length of time that those amounts have remained unpaid. For example, all customers who have outstanding invoices that are over a month old.
Spreading the cost of an intangible asset, such as a lease, over the years in which it is used. It is usual to divide the cost of the lease by the number of years that the lease is held for, and then use that figure as the annual charge. This is similar to depreciation
except that depreciation
A breakdown or summary of what is included in a figure in the accounts
- Annual Report and Accounts
An income-generating investment whereby, in return for the payment of a single lump sum, the annuitant receives regular amounts of income over a predefined period.
Cancellation usually of a bankruptcy.
- Appropriation Accounts
These show the way that net profit
is distributed (usually in the form of cash
dividends) between partners in a partnership or between shareholders and reserve funds in a company.
Stands for Annual Percentage Rate. Please see What is AER
, EAR Interest
for detailed information.
an independent third party considers both sides in a dispute, and makes a decision to resolve it. The arbitrator is impartial, means he or she does not take sides. In most cases the arbitrator's decision is legally binding on both sides, so it is not possible to go to court if(...)
Rate of Return. The amount of profit
, or return, that an individual can expect based on an investment made. Accounting
rate of return divides the average profit
by the initial investment in order to get the ratio or return that can be expected. This allows an investor or business(...)
- Articles of Association:
For UK limited companies. This is the document that arranges the internal relationships, for example, between members of the company, and the duties of directors. The Companies Act 1985 gives a model known as Table A.
Generally, an asset is something that is of value to a company. An asset can then be broken down further into Tangible and Intangible assets
- Audit Trail
A register of the details of all accounting
transactions. This register shows how a transaction was dealt with from start to finish.
A person qualified to inspect, correct and verify business accounts
- Authorised (Or Licensed) Insolvency Practitioner
The person (usually an accountant or solicitor) or a recognised professional body formally authorised to act as trustee, nominee, supervisor, liquidator, administrative receiver or administrator.
- Authorised Share Capital
The total value of shares
that the company could issue, as distinct from the up and paid up share capital
Bankers Automated Clearling System
- Bad Debt
A Bad Debt
arises when a person or company is not expected to pay the debt
. For example, because the company has gone into liquidation
. Bad debts must be written-off and therefore they will reduce profit
- Balance Brought Down
The difference between both sides of an account
that is entered below the totals on the opposite side to the one on which the balance carried down
was entered. (This is normally abbreviated to 'balance b/d'.)
- Balance Carried Down
The difference between both sides of an account
that is entered above the totals and makes both sides equal to each other. (This is normally abbreviated to 'balance c/d'.)
- Balance Sheet
A report that details the various assets
and liabilities of a business at a point in time, usually the end of an accounting
period. A Balance Sheet
must always balance, i.e. debits must always equal the credits.
- Bank Cash Book
A cash book
that only contains entries relating to payments into and out of the bank.
- Bank Giro Credit
An amount paid by someone directly into someone else's bank account
- Bank Loan
An amount of money advanced by a bank that has a fixed rate of interest
that is charged on the full amount, and is repayable by a specified future date.
- Bank Reconciliation
The process of matching transaction from accounting
records against those presented on a bank statement. The accounting
ledger should reconcile (match) to the balance of the bank statement. Bank reconciliation will reveal any possible discrepancies.
- Bank Reconciliation Statement
A calculation comparing the Cash Book
balance with the bank statement balance.
- Bank Statement
A record of bank account
transactions issued by a bank to a customer
A person, firm, or corporation that has been declared insolvent through a court proceeding and is relieved from the payment of all debts after the surrender of all assets
to a court-appointed trustee.
- Bankruptcy Order
The court order making an individual bankrupt.
- Bankruptcy Petition
A written application to Court by either a debtor or his creditors applying for an order to be made for the debtor to be made bankrupt.
- Bonus Issue
A bonus share is a free share of stock given to current/existing shareholders in a company, based upon the number of shares
that the shareholder
already owns at the time of announcement of the bonus. While the issue of bonus shares
increases the total number of shares
issued and owned, it does(...)
- Bonus Shares
issued to existing shareholders free of charge. (Also known as scrip issues.) Book Keeping The process of recording the day to day accounting
transactions of a business.
- Book value
The book value
of an asset or group of assets
is the price at which they were originally acquired (usually the purchase price). Book value
forms the basis of various calculations e.g. of nominal capital
gains (current value divided by book value
), of amortized value (book value
- Bought Ledger
Another name for Purchase Ledger
. This is where the individual accounts
of creditors for goods and services are kept in a single ledger.
Point The level of activity at which total gross profit
equals total costs.
A forecast of expected income or expenditure over a specified period of time.
- Budget Variance
The difference between the expected and actual amount for income or expenditure.
- Business Entity Concept
Assumption that only transactions that affect the business and not the owner's private transactions will be recorded.
- Business-To-Business (B2B)
Businesses purchase from other businesses and/or sell their goods and services to other businesses.
- Business-To-Customer (B2C)
Businesses which sell to consumers.
Cradle to Grave
are issued only part of their cost is usually paid at the time of application and allotment. A "call" is a demand by the company for part or all of the outstanding sums to be paid.
- Called Up Share Capital
The face value of shares
for which payment has been requested ("called up"). These payments may not necessarily be made.
- Capital employed
- Capital Expenditure
Money spent on the acquisition of an asset, such as premises, motor vehicles, plant or machinery that will be used within the business over a period of years.
- Capital Gain
made on selling an asset for more than its original purchase price.
- Capital Gains Tax (CGT)
Tax paid on the profit
made on selling an asset for more than its original purchase price, i.e. the capital
- Capital Redemption Reserve
A 'non-distributable' reserve created when shares
are redeemed or purchased other than from the proceeds of a fresh issue of shares
- Capital Reserve
that can be used by sole traders and partnerships to place the amount by which the total purchase price paid for a business is less than the valuation of the net assets
acquired. Limited companies cannot use capital reserve
for this purpose. Sole traders and partnerships can(...)
- Cash Accounting
A scheme where VAT is paid on payments and receipts
rather than the invoices that you raise. This scheme is available for small companies with a turnover below a given threshold. The cash
method is the most simple in that the books are kept based on the actual flow of cash
in and out of the(...)
- Cash Book
A book used to record details of cash
moving in and out of the bank current account
- Cash Equivalents
Temporary investments of cash
not required at present by the business, such as funds put on short-term deposit with a bank. Such investments must be readily convertible into cash
or available as cash
within three months.
- Cash Flow
The movement of cash
in and out of a business. Profitable businesses can still fail if customers pay more slowly than the business pays its suppliers, so cash flow
should always be measured.
- 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
). A cash flow forecast
is often used as part of a business plan.
- Cash Flow Statement
A cash flow statement
is a financial report that shows incoming and outgoing money during a particular period (often monthly or quarterly). It does not include non-cash
items such as depreciation
. This makes it useful for determining the short-term viability of a company, particularly its(...)
- Cash Receipt
A transaction that reflects the receipt
of money for goods or a service where either no invoice has been raised (e.g. selling goods over the counter and the money is handed over immediately the goods have been received) or the invoice is paid as soon as it is received thereby removing the need(...)
- Charge Card
A payment card that requires the cardholder to settle the account
in full at the end of the specified period; e.g. American Express and Dinners cards. Holders usually have to pay an annual fee for the card.
- Chart of Accounts
A list of all the nominal accounts
used by a business. It is used to analyse income, expenditure, assets
, liabilities and capital
, together with the way such categories are assigned to the Balance Sheet
- Cheque Book
Book containing forms (cheques) used to pay money out of a current account
See Construction Industry Scheme
- CIS (Construction Industry Scheme)
The Construction Industry Scheme (CIS) sets out the rules for how payments to subcontractors for construction work must be handled by contractors in the construction industry.
The process by which amounts paid by cheque from an account
in one bank are transferred to the bank account
of the payee
- Closing Balance
The balance of an account
at the end (or close),of an accounting
period. This figure is then carried forward to the next accounting
Close of Business: 17:00
- Company Voluntary Arrangement
- Compound Interest
- Consolidation Accounting
- Contra Entry
An adjustment made to balance transactions in one ledger with another. The most common type of contra entry
is balancing outstanding purchase ledger
transactions against outstanding sales ledger transactions where you both sell to and buy from the same company.
The difference between sales income and marginal cost. It can also be defined as sales income minus variable cost.
- Control Account
to which single balances analysed elsewhere in the accounting
system are posted. Often the balances are posted from other ledgers. For example, the debtors control account
records the amount of sales recorded in the sales ledger. It is reduced by receipts
from customers also posted(...)
- Corporate Governance
The exercise of power and responsibility for corporate entities.
- Corporation Tax
A tax levied on the profits of UK companies annually.
- Cost of goods sold (COGS)
The directly attributable costs of products or services sold, (usually materials, labour, and direct production costs). Sales less COGS = gross profit
. Effectively the same as cost of sales (COS) see below for fuller explanation.
- Cost Of Sales
The direct costs
incurred as a result of making sales. For a retail company, this may mean the cost of purchasing goods, net of carriage and purchasing discounts, less the movement in the value of the stock. For a manufacturing company, it may mean the cost of producing the goods sold.
One side of the double-entry bookkeeping process, representing negative figures on the Balance Sheet
(reductions in assets
; increases in liabilities and capital
), and income on the Profit
- Credit Card
A card enabling the holder to make purchases
and to draw cash
up to a pre-arranged limit. The credit granted in a period can be settled in full or in part by the end of a specified period. Many credit cards carry no annual fee.
- Credit Note
Sent from the seller to the customer in order to cancel or reverse all or part of an invoice.
- Creditor / Purchases Ratio
A ratio assessing how long a business takes to pay creditors.
People and businesses who are owed money by the business.
- Current Account
A bank account
used for regular payments in and out of the bank.
- Current Asset
A current asset is an asset where the worth can be easily realised converted into cash
within twelve months of the balance sheet
date. It can also be termed a liquid asset. For example, money in the bank or in petty cash
, prepayments, or stock.
- Current Liability
A current liability is a debt
owed by the company, for example, creditors, accruals or an overdraft that are due within the fiscal year.
- Current Ratio
This compares assets
, which will become liquid within approximately twelve months (i.e. total current assets
) with liabilities which will be due for payment in the same period (i.e. total current liabilities) as is intended to indicate whether there are sufficient short-term assets
to meet the(...)
- CVA (Company Voluntary Arrangement)
The CVA is a form of composition, similar to the personal IVA (Individual Voluntary Arrangement), where an insolvency procedure allows a company with debt
problems or insolvent to reach a voluntary agreement with its business creditors to repay all or part of its corporate debts over an agreed(...)
- Day Book
A book that lists all transactions in the order that they arise. There is often a day book for different types of transaction, e.g. a sales day book
and a purchase day book.
The term debenture is used when a limited company
receives money on loan
, and certificates called debenture certificates are issued to the lender. Interest
will be paid to the holder, the rate of interest
being shown on the certificate. They are not always called debentures; they are often(...)
Debit is an accounting
and bookkeeping term that comes from the Latin word debere which means "to owe." The opposite of a debit is a credit. Debit is abbreviated Dr while credit is abbreviated Cr. A debit can be either a positive or negative entry to an account
depending on what type of(...)
- Debit Card
A card linked to a bank or building society account
and used to pay for goods and services by debiting the holders account
. Debit cards are usually combined with other facilities such as ATM and cheque guarantee card functions.
- Debit Note
A document sent to supplier showing allowance to be given for unsatisfactory goods.
is money that is owed.
- Debtor/Sales Ratio
A ratio assessing how long it takes debtors
to pay their debts.
People and businesses who owe your business money for goods or for services you have supplied.
- Deferred Taxation
is where more money has been spent than received by an organisation in a given period.
The wasting away of an asset as it is used up.
- Deposit Account
A figure representing the reduction in value of a fixed asset through use, obsolescence etc, in the calculation of Net profit
- Direct Costs
Costs that can be traced to the item being manufactured.
- Direct Debit
An instruction from a customer to their bank or building society authorising an organisation to collect money from their account
, as long as the customer has been given advance notice of the collection amounts and dates. The Direct Debit
Scheme also protects you and your money by means of the(...)
- Direct Expenses
that are incurred in the actual manufacture and sale of the product or the sale and provision of the service, i.e. the expenses
incurred by the business actually trading. For example, the wages of the machine operators, the power to run the machines, the wages and commission of(...)
The amount by which a bill is reduced. Discounts can be given for a variety of reasons, e.g. buying in bulk, spending large amounts, trade discount
, early settlement discount
- Dishonoured Cheque
A cheque which the drawer's bank has refused to allow payment.
When a partnership firm ceases operations and its assets
are disposed of. Distributable Profits In company accounts
these are the sums that are available for dividends to shareholders. While based on the net profit
, they may be increased by undistributed profits from the previous year or(...)
A dividend is the distribution of profits to a company's shareholders.
- Double Entry
A system of bookkeeping in which every transaction of a business is entered as a debit in one account
and as a credit in another.
or goods taken from the business for the owners’ personal use. Drawings only apply to sole traders and partnerships. Drawings do not count as an expense in the Profit
and Loss account
and must be included in the financed by section of the Balance Sheet
Stands for Effective Annual Rate. Please see What is AER
, EAR Interest
for detailed information.
- Economic Order Quantity (EOQ)
A calculation stating the amount of stock that should be ordered at a time, and how frequently to order it, so that the overall total of the costs of holding the stock and the costs of ordering the stock can be minimised.
- Economic Value Added (EVA)
is an estimate of a firm's economic profit
being the value created in excess of the required return of the company's investors (being shareholders and debt
holders). Quite simply, EVA is the profit
earned by the firm less the cost of financing the firms capital
. The idea is that value is(...)
The net assets
of a company after all creditors have been paid off.
are those items that the company buys which do not go to actually create that company’s product or service eg. stationery, petrol, promotional goods.
Selling the rights to the amounts owing by debtors
to a finance company for an agreed amount (which is less than the figure at which they are recorded in the accounting
books because the finance company needs to be paid for providing the service).
FIFO, or First In First Out, is an assumption that enables the cost of stock to be calculated. When sales are made the items sold are assumed to be the earliest purchased, so the cost of items in stock always reflect the most recent purchases
- Final Accounts
- Finance Lease
This is an agreement whereby the lessee enjoys substantially all the risks and rewards associated with ownership of an asset other than legal title.
- Financial modelling
- Financial Statements
- Fixed Assets
which the business intends to retain for the coming year rather than convert into cash
. Typical fixed assets
include property, office equipment and motor vehicles. Assets
which have a long life bought with the intention to use them in the business and not with the intention to simply(...)
- Fixed Capital
- Fixed Costs
which remain constant whether activity rises or falls, within a given range of activity.
The amount at which the petty cash
starts each period.
Taking present data and expected future trends, such as growth of a market and anticipated changes in price levels and demand, in order to arrive at a view of what the likely economic position of a business will be at some future date.
The General Data Protection Regulation 2016/679
The ratio of long-term loans and preference shares
shown as a percentage of total shareholders' funds, long-term loans, and preference shares
- General Ledger
A ledger for all accounts
other than those for customers and suppliers. Also known as Nominal Ledger.
- Going Concern Concept
The assumption that a business is to continue trading for the foreseeable future.
An intangible asset of a business reflecting its commercial reputation, customer connections, etc.
General Rules of Engagement
The total amount before any deductions.
- Gross Loss
Where the cost of goods sold exceeds the sales revenue
- Gross Margin
A measure of the profitability of a business. It is calculated by dividing gross profit
by sales and is usually expressed as a percentage.
- Gross Profit
- Hire Purchase
Agreements Agreements by which an organisation can obtain the use of an asset and make payment by instalments.
- Holding Company
The outdated term for what is now known as 'parent undertaking'.
- Impersonal Accounts
- Imprest System
- Income & Expenditure Account
for a non-profit
-oriented organisation to find the surplus or loss
made during a period.
- Income OR Earning
In business and accounting
, income (also known as profit
or earnings) is the amount of money that a company earns after paying for all its costs.
- Income per share OR Earnings per share
Income per share is the bottom line net income divided by the number of shares
outstanding. It is more often referred to and reported as earnings per share.
- Income statement
- Incomplete Records
The term used for any system of bookkeeping which does not use full double entry
- Independent Examination
External examination of the accounts
of a charity by someone independent of the organisation. This is available instead of a full audit for charities with income below £250,000, although it is not required if income is below £10,000. An independent examiner must be an individual and must be(...)
- Indirect manufacturing costs
Costs relating to manufacture that cannot be economically traced to the item being manufactured (also known as 'indirect costs' and sometimes, as 'factory overhead expenses
'). Input Tax VAT added to the net price of inputs (i.e. purchases
- Individual Voluntary Arrangement (IVA)
- Initial Public Offering (IPO)
An Initial Public Offering (IPO being the Stock Exchange and corporate acronym) is the first sale of privately owned equity
(stock or shares
) in a company via the issue of shares
to the public and other investing institutions.
of goods and services. Insolvent When liabilities are greater than assets
- Intangible Assets
include copyrights, patents, goodwill, etc., they are saleable but do not contain any intrinsic productive value.
A charge made on a loan
or money received on a capital
- Interest On Capital
An amount at an agreed rate of interest
which is credited to a partner based on the amount of capital
contributed by him/her.
- Interest On Drawings
An amount at an agreed rate of interest
, based on the drawings taken out, which is debited to the partners.
Usually refers to stock held
Investment is a term with several closely related meanings in finance and economics. It refers to the accumulation of some kind of asset in hope of getting a future return from it. Invoice Sent out by the seller or service provider to request payment for goods or services.
- IVA - Individual Voluntary Arrangement
The IVA was established by the Insolvency Act 1986. It constitutes a formal repayment proposal presented to a debtor's creditors via an Insolvency Practitioner. Usually (but not necessarily) the IVA compromises only the claims of unsecured creditors, leaving the rights of secured creditors(...)
- Job Costing
A costing system that is applied when goods or services are produced in discrete jobs, either one item at a time, or in batches.
- Joint Ventures
Business agreements under which two businesses join together for a set
of activities and agree to share the profits.
A book in which an account
of transactions is kept previous to a transfer to the ledger.
- Journal Entries
Double-entry transactions not raised through the cash book
or individual ledgers. Sometimes referred to as a 'Journal'.
book in which the transactions of a business are recorded. The details of customers and their transactions are recorded in the sales ledger. Suppliers and their transactions are recorded in the purchase ledger
Money you owe to others. This can be current (payable within one year) or long-term. Long term liabilities, along with Share Capital
make up one side of the balance sheet
equation showing where the money came from. The other side of the balance sheet
will show Current Liabilities(...)
The London Interbank Bid Rate (LIBID) is a bid rate; the rate bid by banks on Eurocurrency deposits (i.e. the rate at which a bank is willing to borrow from other banks). It is "the opposite" of the LIBOR
(an offered, hence "ask" rate). Whilst the British Bankers' Association BBA LIBOR
London Interbank Offered Rate (or LIBOR
, pronounced LIE-bore) is a daily reference rate based on the interest
rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market). LIBOR
will be slightly higher than the London Interbank(...)
A method by which the goods sold are said to have come from the last lot of goods received.
- Limited Company
A limited company
is where the owners of the business are the shareholders but the business may be managed by a completely different set
of people, the directors.
- Limited Liability
- Limited Liability Partnerships (LLP)
With this form of partnership, there is limited personal liability for individual partners (similar in manner to a limited company
). For tax purposes, an LLP does not differ greatly from an ordinary partnership.
- Limited Partner
A partner whose liability is limited to the capital
he or she has put into the firm.
- Limiting Factor
Anything that limits activity. Typically, this would be the shortage of supply of something required in production, for example, machine hours, labour hours, raw materials, etc. However, it could also be something that prevents production occurring, for example a lack of storage for finished(...)
When a business or firm is terminated or bankrupt, its assets
are sold and the proceeds pay creditors. Any leftovers are distributed to shareholders. This process is liquidation
This is the measure of how much cash
you have and is it enough for your needs. It can include things that can be turned into cash
quite quickly like debtors
and other current assets
. A ‘liquidity
problem’ is where you don’t have enough cash
to pay your immediate bills.
An arrangement in which a lender loans money or property (known as the principal
or principle amount) to a borrower and the borrower agrees to return the principal
amount or repay the money, usually along with interest
, at some future point(s) in time. Usually, there is a predetermined time(...)
- Long-term asset
are those assets
usually in service over one year such as buildings, equipment, etc. These often receive favourable tax treatment over short-term assets
- Long-Term Liabilities
Liabilities that do not have to be paid within twelve months of the Balance Sheet
The result of selling goods for less than they cost to purchase.
- Main Ledger
This is where the double-entry takes places of all transactions of the business.
- Management Accounting
is concerned with the provision and use of accounting
information to enable managers of a business in their decision making and management control functions.
The purchase and sale of a good may be shown as Cost Price + Profit
= Selling Price. The profit
when expressed as a fraction, or percentage, of the selling price is known as the margin
Of Safety The gap between the level of activity at the break-even point and the actual level of activity.
- Marginal Cost
Marginal cost is the cost of doing one more thing, e.g. making the 101st widget, when all the set
up costs have already been included in the costs of producing the 1st 100 widgets. Producing 100 widgets costs £200, including all the set
up costs of £150 (i.e. £2 per widget) and producing the(...)
- Marginal Costing
An approach to costing that takes account
of the variable cost of products rather than the full production cost
. It is particularly useful when considering utilisation of spare capacity.
The purchase and sale of a good may be shown as Cost Price + Profit
= Selling Price. The percentage added to the cost price to provide a profit
is known as the mark-up.
The concept that something should only be included in the financial statements
if it would be of interest
to the stakeholders, i.e. to those people who make use of financial accounting
statements. It need not be material to every stakeholder, but it must be material to a stakeholder before it(...)
- Measurement Basis
The monetary aspects of the items in the financial statements
, such as the basis of the stock valuation, say FIFO or LIFO
Mediation is a well-established process for resolving disagreements in which an impartial third party (the mediator) helps people in dispute to find a mutually acceptable resolution.
A repayable loan
secured on property. The borrower (called the mortgagor) offers up property to the lender (called the mortgagee) as security for a debt
A description and explanation of transactions recorded in the journal.
- Negative Contribution
The excess of direct costs
allocated to a section of a business over the revenue
from that section.
- Negative Goodwill
The name given to the amount by which the total purchase price for a business a limited company
has taken over is less than the valuation of the assets
at that time. The amount is entered at the top of the fixed assets
in the balance sheet
as a negative amount. Sole traders and partnerships(...)
The amount that remains after all deductions have been made.
- Net Book Value (NBV)
- Net Current Assets
minus current liabilities. The figure represents the amount of resources the business has in a form that is readily convertible into cash
. Same as working capital
- Net income
Refers to the profits of a company after expenses
and is calculated as gross profit
less operating expenditure.
- Net Loss
- Net Present Value (NPV)
The sum of the present values of a series of cash
- Net Profit
- Net Realisable Value
The amount that would be received for the immediate sale of stock, after accounting
for any costs associated directly with the sale.
- Net Worth
- Nominal Ledger
Another name for the General Ledger. This ledger is the core of the accounting
process. It is affected by all transactions posted in all ledgers. The balances on all of the nominal accounts
form the Trial Balance and therefore the Profit
and the Balance Sheet
- Normal Losses
Losses arising in the production process that could not be avoided.
- Opening Balance
- Operating Lease
An agreement whereby the leaser retains the risks and rewards associated with ownership and normally assumes responsibility for repairs, maintenance and insurance.
- Operating Profit
- Opportunity Costs
These are costs associated with losing the opportunity to do something else with your time.
- Ordinary Shares
entitled to dividends after the preference shareholders have been paid their dividends. Output Tax VAT added to the net price of outputs (i.e. sales). Outputs Sales of goods and services.
A facility granted by a bank that allows a customer holding a current account
to spend more than the funds in the account
is charged daily on the amount of the overdraft on that date and the overdraft is repayable at any time upon demand from the bank.
Sometimes called core costs, these are the costs which must be paid for by all the projects and activities of the organisation, e.g. accounting
fees, some salaries, office rent, etc.
- Owners’ equity
, also known as risk or liable capital
, is a financial term for the difference between a company's assets
and liabilities -- that is, the value that accrues to the owners (sole proprieter, partners, or shareholders). In a corporation, it is called shareholders' equity
- P/E ratio (price per earnings)
The P/E ratio is an important indicator showing how the investing market views the health, performance, prospects and investment risk of a public company listed on a stock exchange (a listed company). The P/E ratio is also a highly complex concept - it's a guide to use alongside other(...)
- Paid-Up Share Capital
The amount that shareholders of a company have paid to the company for their fully-paid shares
- Parent Undertaking
An undertaking which controls or has a dominating influence over the affairs of another undertaking.
- Pareto Principle
Also known as the 80/20 Rule, states that, for many events, 80% of the effects come from 20% of the causes.
A partnership is a group of individuals who are trading together with the intention of making a profit
. Partnerships are often created when a sole trader's business expands and more capital
and more expertise is needed.
- Partnership Return (form SA800)
This shows each partner’s share of profits (or losses) and must be filed with HMRC annually.
- PAYE (Pay As You Earn)
The system whereby income tax is deducted from wages and salaries by employers and sent to HM Revenue
The person / company to who a cheque is being paid.
The process of paying employees by calculating the gross remuneration due less statutory deductions for tax and National Insurance (NI) and other deductions.
- Personal Allowances
Amounts that may subtract from income in order to arrive at taxable income. The value of each allowance is set
by the government following the Budget each year.
- Petty cash
Businesses often need small amounts of cash
, known as petty cash
, for expenditures where it is not practical to make the payment by other means.
- Petty Cash Book
The process of entering a transaction on your accounts
- Preference Shares
that are entitled to an agreed rate of dividend before the ordinary shareholders receive anything.
- Preliminary Expenses
All the costs that are incurred when a company is formed.
A payment for goods or services before they are received. e.g. Insurance paid 1 year in advance and accounted for over 12 months.
- Present Value
The amount that a future cash flow
is worth in terms of today's money.
- Prime Cost
- Private Ledger
- Process Costing
A costing system that is applied when goods or services are produced in a continuous flow.
- Production Cost
The excess of revenues over costs in a business.
- Profit and Loss Report
A report that categorises the income and expenditure of a business over an accounting
period. The profit
) of a business is its income less its expenditure; profit
is analysed, along with gross profit
(sales less the cost of those sales) and net profit
(all income less all expenditure,(...)
An amount written off or retained by way of providing for depreciation
, renewals or diminution in value of assets
, or retained by way of providing for any known liability of which the amount cannot be determined with 'substantial accuracy'.
- Provision for Bad Debt
Ensuring that profit
is not shown as being too high, or that assets
are not shown at too high a value and that the financial statements
are neutral: that is, that neither gains nor losses are understated or overstated.
- Public company
A company that can issue its shares
publicly, and for which there is no maximum number of shareholders.
- Purchase Credit Notes
These are issued by suppliers in order to cancel purchase invoices
either in full or in part. They are normally issued when goods or services are faulty or when the purchase invoice was incorrect.
- Purchase Discounts
- Purchase Invoices
These are issued by suppliers as a request for payment in respect of the supply of goods or services.
- Purchase Ledger
The purchase ledger
keeps track, in account
order, of all invoices, credit notes and discounts received from suppliers and all payments to suppliers. It can be quickly referred to if you want to find the current status of any of the supplier accounts
. The total balance outstanding should equal(...)
- Purchase Payments
Payments made to suppliers in respect of invoices for the goods and/or services supplied.
Goods or services bought for the purpose of making a direct sale. e.g. Material costs such as stationary that is resold, hardware that is resold etc.
- Purchases Day Book
- Quick Ratio
A ratio for calculating the liquidity
of a business. It is calculated as : - (Current Assets
- Stock) ÷ Current Liabilities
A written acknowledgment that a specified article, sum of money, or shipment of merchandise has been received.
An amount awaiting receipt
The process of agreeing accounting
entries from one source, with entries from another source. The most common reconciliation is a bank reconciliation, which matches transactions posted against a bank account
with the statement received from the bank.
- Reduced Rate (of VAT)
A lower VAT rate applicable to certain goods and services.
- Reducing Balance Method
A method of calculating depreciation
based on the principle that you calculate annual depreciation
as a percentage of the net-of-depreciation
-to-date balance brought forward at the start of the period on the fixed asset.
- Registered Business
A business that has registered for VAT. It must account
for VAT and submit a VAT Return at the end of every VAT tax period.
- Remittance Advice
A document accompanying a receipt
, showing which invoices less credit notes are being paid.
- Remittance List
A listing of all the receipts
of the business for a period, usually that day.
- Reserve Accounts
The transfer of apportioned profits to accounts
for use in future years.
The accumulated and retained difference between profits and losses year on year since the company's formation.
- Residual Value
The net amount receivable when a fixed asset is put out of use by the business.
- Retained earning
Retained earnings are profits that were not paid to a company's shareholders. They are reported in the ownership equity
section of the firm's balance sheet
. Dividing profits between dividends and retained earnings depends on at least two things: the firm's judgement of its own investment(...)
An amount of money retained by a customer for a specified period of time after a service has been provided, to ensure that if anything should subsequently go wrong then it will be rectified.
- Return on Capital Employed (R.O.C.E.)
- Return on investment
A fundamental financial and business performance measure. This term can mean different things to different people (often depending on perspective and what is actually being judged) so it's important to clarify understanding if interpretation has serious implications.
- Return On Owners' Equity
as a percentage of ordinary share capital
plus all reserves
, often abbreviated as ROOE. The more common term in use for this is (return on shareholders' funds).
- Return On Shareholders' Funds
as a percentage of ordinary share capital
plus all reserves
, often abbreviated as ROSF and more commonly used than the alternative term, return on owners' equity
Goods returned to the business by a customer, or by the business to a supplier.
- Revaluation Account
used to record gains and losses when assets
Another term for sales or income.
- Revenue Expenditure
needed for the day-to-day running of the business.
- Revenue Reserves
A balance of profits retained available to pay cash
dividends including an amount voluntarily transferred from the profit
by debiting it, reducing the amount of profits left for cash
dividend purposes, and crediting a named reserve account
, such as a general reserve.
- Rights Issue
A rights issue
is a way in which a company can sell new shares
in order to raise capital
are offered to existing shareholders in proportion to their current shareholding, respecting their pre-emption rights. The price at which the shares
are offered is usually at a discount
Partnership Return form This shows each partner’s share of profits (or losses) and must be filed with HMRC annually.
- Sale or Return
Goods supplied on the understanding that if not sold on (by the customer/retailer) they may be returned without charge. Such transactions are best not recorded in the accounts
, until the actual sales figures are known. Examples include newspapers and magazines.
Goods sold by the business in which it normally deals, which were bought with the prime intention of resale.
- Sales Credit Notes
These are issued to customers in order to cancel sales invoices either in full or in part. They are normally issued when goods or services are faulty or when the sales invoice
- Sales Day Book
Primary record for recording sales invoices, ie credit sales.
- Sales Discounts
- Sales Invoice
A document showing details of goods sold and the prices of those goods.
- Sales Ledger
The sales ledger keeps track, in account
order, of all invoices, credit notes and discounts sent to customers and all receipts
received from customers. It can be quickly referred to if you want to find the current status of any of the customer accounts
. The total balance outstanding should(...)
- Sales Receipts
These are made when invoices are paid off by the recipient of the goods or services.
- Sensitivity Analysis
Also called 'what if' analysis. Altering volumes and amounts so as to see what would be likely to happen if they were changed. For example, a company may wish to know the financial effects of cutting its selling price by £1 a unit.
Standard Engagement Terms
- Settlement Discount
A Settlement or cash Discount
is a percentage discount
of the total invoice value that is offered to a customer to encourage early payement. For example, if it is normal policy to request that payment is made by customers 30 days after the invoice date, a cash discount
of 4% might be offered(...)
- Share capital
The balance sheet
nominal value paid into the company by shareholders at the time(s) shares
- Share Discount
Where a share was issued at a price below its par, or nominal value, the shortfall was known as a discount
. However, it is no longer legal under the Companies Acts to issue shares
at a discount
- Share Premium
Where a share is issued at a price above its par, or nominal value, the excess is known as a premium.
is an individual or company (including a corporation), that legally owns one or more shares
in a company. Companies listed at the stock market strive to enhance shareholder
- Shareholders' equity
- Shareholders' funds
- Shares At No Par Value
that do not have a fixed par, or nominal value.
- Simple Interest
(I) is calculated by multiplying the amount invested (sometimes called the principle, P) by the length of time (T) the money is invested and the rate of interest
(R) converted to a equation; that is: I = ( P x R x T ) / 100.
- Sinking Fund
Small and Medium Enterprises (ie. 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.
Start of Business: 10:00
- Sole Trader
The simplest type of business is that of a sole trader. A sole trader is someone who trades under his or her own name.
- Source of Funds / Capital Employed
Any money invested into the business including Share Capital
, and long-term loans.
Standard System and Procedure
- Standard Cost
What you would expect something to cost.
- Standard Costing
A control technique that compares standard costs and standard revenues with actual costs and actual revenues in order to determine differences (variances) that may then be investigated.
- Standard Rate
The VAT rate usually used.
- Standard Rated Business
- Standing Order
An order made by a customer (business or personal) to their bank to pay a specified amount usually on or around a particular day of the month regularly to another account
A copy of a customer's account
taken from the supplier's books showing unpaid invoices and unallocated credit notes. A statement may include an aged analysis to show amounts outstanding over 30 days, 60 days, 90 days, and more.
- Statement Of Affairs
The total goods or raw materials held by a business for the purpose of resale. Stock is valued in the balance sheet
at the lower of cost and net realisable value
. (Also known as inventory.)
- Stock Explosion
A report to show what components each stock item is made up of. For example, a stereo system could be made up of a set
of speakers, an amplifier, a CD player, a tape-deck and some connecting wires.
- Stock Turnover
The number of times stock is sold in an accounting
period. (Also known as 'stockturn'.)
The process of physically identifying and counting the stock on hand at a given point in time.
- Straight Line Method (Depreciation)
- Subsidiary Company
The outdated term for what is now known as a 'subsidiary undertaking'.
- Subsidiary Ledgers
These are ledgers where supporting or memorandum ledger accounts
are kept, in addition to the main ledger.
- Subsidiary Undertaking
An undertaking which is controlled by another undertaking or where that other undertaking exercises a dominating influence over it.
- Sunk cost
Sunk costs are costs that have already been incurred and which cannot be recovered to any significant degree. Sunk costs should not influence decisions because they have already been incurred and cannot affect a decision.
- Suspense Account
A temporary account
that is used when you are unsure as to what you should do with a certain value. The Suspense Account
can be used as a holding account
until it is decided what should be done with the value. The balance on the Suspense Account
should ultimately be zero.
The layout of accounts
in the accounting
books. The T-account
is the basis for journal entry in accounting
have three basic elements. A title, a left side (debit side) and a right side (credit side). To make an entry in a T-account
, put the currency (dollar, pound, etc.) amount on(...)
- Tangible Asset
having a physical existence, such as cash
, equipment,, stock and property. Accounts
receivable are also usually considered tangible assets
- Tax Code
The number found by adding up an individual's personal allowances which is used to calculate that individual's tax liability.
- Time Value of Money (TVM)
Time Value of Money is the principle that a certain currency amount of money today has a different buying power (value) than the same currency amount of money in the future. The value of money at a future point of time would take account
earned or inflation accrued over a given(...)
- Total Cost
- Trade Discount
A reduction from the sales list price that a business might offer to some of its customers. The amount of the trade discount
will be shown on the face of the invoice as a deduction from the list price. A Settlement Discount
- Trading Account
- Trading And Profit And Loss Account
- Transposition Error
Where the characters within a number are entered in the wrong sequence.
- Trial Balance
A list of all the nominal accounts
at a given time, together with their net balances, shown as either a debit or a credit balance.
A monetary pool in which tips / gratuities are collected and later shared out between all staff, e.g. in a restaurant.
- True And Fair View
The expression that is used by auditors to indicate whether, in their opinion, the financial statements
fairly represent the state of affairs and financial performance of a company.
- Unpresented Cheques
Cheques paid out which are passing through the bank clearing
system, but have not yet been presented to the bank where the account
- Unregistered Business
A business that is not VAT registered. It ignores VAT and treats it as part of the cost of purchases
. It does not charge VAT on its outputs. It does not need to maintain any record of VAT paid.
Formal assessment of the worth of property, goods etc.
- Value Added Tax (VAT)
A tax charged on the supply of most goods and services.
- Variable Costs
which change in response to changes in the level of activity.
The difference between budget and actual. Can also be used to describe the difference between the opening and closing balance
of an account
- Variance Analysis
A means of assessing the difference between a predetermined cost/income and the actual cost/income.
- VAT Cash Accounting
A special arrangement for accounting
for VAT that must be agreed with HM Revenue
& Customs. VAT is charged on amounts actually received net of amounts paid, rather than on the invoices for those amounts.
Test 2 Test 3 Test 4 Test 5
- VAT Invoice
An invoice issued by a supplier registered for VAT showing the supplier’s VAT registration
number, the date of issue and the tax point.
- VAT Outputs and Inputs
VAT charged on sales is referred to as Outputs and VAT incurred on purchases
is referred to as Inputs.
- VAT Receipt
- VAT Registration
All businesses registered for VAT are given a registration number. This number must be printed on all invoices.
- VAT Return
All businesses registered for VAT are required to submit a statement each quarter to HM Revenue
& Customs to account
for VAT Outputs and Inputs
. The VAT Return is a declaration which determines the liability to pay VAT, or receive a refund.
- VAT Tax Point
The date on which VAT eligible sales are completed.
- 'What If'
Also called sensitivity analysis
. The process of altering volumes and amounts so as to see what would be likely to happen if they were changed. For example, a company may wish to know the financial effects of cutting its selling price by £1 a unit.
- Work In Progress (W.I.P)
Items not completed at the end of an accounting
- Working Capital
The excess of current assets
less current liabilities. The figure represents the amount of resources the business has in a form that is readily convertible into cash
. Same as net current assets
- Write Off
The annual income provided by an investment.
Denoting goods on which the buyer pays no VAT although the seller can claim back any tax he/she has paid.
- Zero-Rated Business
A business that only supplies zero-rated goods and services. It does not charge VAT to its customers but it receives a refund of VAT on goods and services it purchases