Glossary of Accounting Terms
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
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 (eg. 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.
Accounting equation: The formula used to
prepare a balance sheet: assets = liability + equity .
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 (ie. 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 (ie.
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 (eg. 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. Eg. 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 (eg.
checking a journal's entries against the original purchase and sales
invoices).
Audit Trail: A list of transactions in the
order they occurred.
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B
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 (eg. 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.
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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 (eg. 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 (eg. 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. Eg. 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. Eg: 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 oposite balance to that expected for an account
in that section (in the above example, the Sales Discounts balance would
be shown in brackets - eg. it has a debit balance where Sales has a credit
balance).
Control Account: An account
held in a ledger which summarises 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
instalments. Small and medium-sized companies are exempted from the
instalment 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. Eg. rather than having one account to handle all power costs
for a company, a power account would be opened for each depatrment. You
can then analyse 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 (ie. 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 (eg. 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 (eg. '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 (eg. VAT in the UK).
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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 (eg. 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').
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E
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 (eg. a mortgage is an
encumbrance on a property). Also, any money set aside (ie. 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 Ommission: A double-entry term which
means that a transaction has been ommitted 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 ).
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F
FIFO: First In First Out. A
method of valuing stock.
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 (eg. 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. Eg. 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.
Gross profit: The balance of
the trading account assuming it has a credit balance.
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.
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H
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 (ie. 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).
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J
Journal(s): A
book or set of books where your transactions are first entered.
Journal entries: A term
used to describe the transactions recorded in a journal.
Journal Proper: A term used to describe the
main or general journal where other journals specific to subsidiary
ledgers are also used.
L
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-organised 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 (ie. a loan which lasts for
more than one year such as a mortgage).
Loss: See Net loss .
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M
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 analysing the
sales and expenses which make up those sales to a particular period (eg.
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 deen
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. Eg. 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 .
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N
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 (ie. if the
profit and loss account shows a debit balance).
Net of Tax: The price less any tax. Eg. 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 (ie. 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 .
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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 (eg. rent,
insurance, petrol, staff wages etc.).
P
Paid-up Share
capital: The value of issued shares which have been paid for. See Called-up Share
capital .
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.
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,
ie. 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, eg. 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 (eg. 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 (ie. whether a business has earned more than
it has spent in the current year).
Profit margin: The percentage difference
between the costs of a product and the price you sell it for. Eg. 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 despatched.
Provisions: One or more accounts set up to
account for expected future payments (eg. 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.
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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 (eg. 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.
Realisation principle: The principle whereby
the value of an asset can only be determined when it is sold or otherwise
disposed of, ie. its 'real' (or realised) 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. (eg. 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 (eg. 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 (eg. 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.
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S
Sales: Income received from
selling goods or a service. See Revenue .
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 (ie. 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
(eg. an architect or a window cleaner).
Shareholders: The owners of
a limited company or corporation.
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 ). Eg. 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 (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.
Sole trader: See Sole-proprietor .
Sole-proprietor: The
self-employed owner of a business (see Self-employed ).
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 (ie. 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 (eg. 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.
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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 (ie. 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
Undeposited Funds
Account: An account used to show the current total of money
received (ie. 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.
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W
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 ).
Work in Progress: The value of
partly finished (ie. partly manufactured) goods.
Write-off: Depreciating an
asset to zero in one go.
Z
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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