Accounting Glossary

Please use the glossary index links below to fast-track you to your chosen area of interest.

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

Abnormal Losses:

Losses arising in the production process that should have been avoided.

Absorption Costing:

The method of allocating all indirect manufacturing costs to products. (All fixed costs are allocated to cost units.)

Account:

Part of double entry records, containing details of transactions for a specific item.

Accounting:

The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.

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:

This formula is at the heart of double-entry bookkeeping. Simply stated:

Assets = Source of Funds - Liabilities

Therefore an increase in assets must be accompanied by an equal increase in the liabilities and/or capital. This is the reason a Balance Sheet balances.

Accounting Information System:

The total suite of components that, together, comprises of all the inputs, storage, transaction processing, collating, and reporting of financial transaction data.  It is in effect, the infrastructure that supports the production, and delivery of accounting information.

Accounting Periods:

The period of time used by the business to process it's accounts to produce reports such as the Profit and Loss report and the balance sheet. For example, a company may run it's accounts on a monthly basis, and produce 12 sets of reports in one year.

Accounting Policies:

Those principles, bases, conventions, rules and practices applied by an entity that specify how the effects of transactions and other events are to be reflected in its financial statements.

Accounts:

Accounts (or Final Accounts ) - This is a term previously used to refer to statements produced at the end of accounting periods, such as the trading and profit and loss account and the balance sheet.  Nowadays, the term 'financial statements' is more commonly used.

Accrual Accounting:

An 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.

With the accrual method, income and expenses are recorded as they occur, regardless of whether or not cash has actually changed hands.  An excellent example is a sale on credit.  The sale is entered into the books when the invoice is generated rather than when the cash is collected.  Likewise, an expense occurs when materials are ordered or when a workday has been logged in by an employee, not when the cheque is actually written.  The downside of this method is that you pay income taxes on revenue before you've actually received it.

cf. Cash Accounting.

Accruals:

The accruals process allows a business to adjust the monthly accounts for payments made in arrears.  This process is the reverse of prepayments.

There are certain expenses that are paid for some time after they have been used, electricity is a good example, but there are other similar expenses.  Whilst you are using electricity the cost is accruing.  If the business does not account for these costs in the correct accounting periods that the expense is incurred, then the account would be inaccurate.

In most cases the electricity bill is sent every three months.  If your business receives an electricity bill in April for electricity it has used in January to March and it has not been accounted for in the accounts, the accounts for January to March will be inaccurate.  The profit in all of these months would have been overstated.  To account for this correctly, the business would set up an Accruals account, which is a liability account - this is money that the business owes but has not yet paid.

Most businesses know from experience how much the quarterly electricity bill is likely to be.  In view of this, a 1/3 of that quarterly electricity bill is allocated to the electricity expenses account for three months.  The transactions would be a debit to the electricity account and a credit to the accruals account each month.

The result would be that each month the profit and loss report would show an expense for electricity costs and the balance sheet would show an accruals balance as a liability.  This would increase each month until the electricity bill is received.

Once the bill has been received there is no longer a liability, therefore the accrual can be reversed.  To do this you would then debit the accruals account and credit the electricity account equal to the amount of the accrual, in order to clear down (reset to zero) the balance.  Then finally, the actual amount for the electricity bill would be paid by a debit to the electricity account and a credit to the bank account.

For example, simply click this link to download Excel spreadsheet.

cf. Prepayments.

Accruals Concept:

The accruals concept is that profit is the difference between revenue and the expenses incurred in generating that revenue.

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.  It is included in the balance sheet under current liabilities as 'accruals'.

Accrued Income:

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 in the company headquarters, 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:

This account is used to accumulate depreciation for balance sheet purposes.  It is used in order to leave the cost (or valuation) figure as the balance in the fixed asset account.  It is sometimes confusingly referred to as the 'provision for depreciation account'.

Accumulated Fund:

A form of capital account for a non-profit-oriented organisation.

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.

Acid Test Ratio = (Current Assets - Stock) ÷ Current Liabilities

Thus, this ratio is probably the most important one of all.  It is an attempt to indicate how easily a company could pay its debts without selling its stock.  Stock is not always easy to sell.

See Current Radio for a comparision with the inclusion of stock.

Activity-Based Costing:

The process of using cost drivers as the basis for overhead absorption.

Administration Order (County Court):

County court process permitting an individual to pay off a judgment debt which is less than £5,000 in affordable instalments.  No insolvency practitioner is involved.

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 the variance is identified.  It may, for example, have arisen as a result of an unexpected rise in demand for the product being produced.

AER:

Stands for Annual Equivalent Rate.  Please see What is AER, APR, EAR Interest for detailed information.

cf. APR and EAR.

Aged Debtors:

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.

Aged Debtors Control:

A list of customer balances of money owed to the business.

Allocation:

The process by which payments are matched against purchase invoices, and receipts against sales invoices raised.

Amortisation:

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 deals with tangible or fixed assets such as motor vehicles or plant and equipment.

Analysed Sales Day Book:

A sales day book where the net figures are analysed into the different type of sales.

For example, simply click this link to download Excel spreadsheet.

Annuity:

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.

Annulment:

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 share holders and reserve funds in a company.

APR:

Stands for Annual Percentage Rate.  Please see What is AER, APR, EAR Interest for detailed information.

cf. AER and EAR.

Arbitration:

In arbitration an independent third party considers both sides in a dispute, and makes a decision to resolve it.  The arbitrator is impartial; this 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 you are unhappy with the decision.

Most types of arbitration have the following in common:

• Both parties must agree to use the process
• It is private
• The decision is made by a third party, not the people involved
• The arbitrator often decides on the basis of written information
• If there is a hearing, it is likely to be less formal than court
• The process is final and legally binding
• There are limited grounds for challenging the decision

Articles of Association:

For UK companies, 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.

Assets:

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.

Examples of tangible assets include property, vehicles, stock, cash, money held in the bank and Debtors as they owe money from sales made by the company.  However, these can be broken down still further into Fixed Assets and Current Assets

Examples of intangible assets include patents, copyrights, trademarks and goodwill. While these may not have value to the man on the street, these generate income for the company.

Associates:

Associates of individuals include family members, relatives, partners and their relatives, employees, employers, trustees in certain trust relationships, and companies which the individual controls.  Associates of companies include other companies under common control.

Associate Undertaking:

A company which is not a subsidiary of the investing group or company but in which the investing group or company has a long-term interest and over which it exercises significant influence.

Attainable Standard:

A standard that can be achieved in normal conditions.  It takes into account normal losses, and normal levels of downtime and waste.

Auditor:

A person qualified to inspect, correct and verify business accounts.

Audit Trail:

A register of the details of all accounting transactions. This register shows how a transaction was dealt with from start to finish.

Authorised (Or Licensed) Insolvency Practitioner:

The person (usually an accountant or solicitor) authorised by the Department of Trade and Industry (DTI) or a recognised professional body to act as trustee, nominee, supervisor, liquidator, administrative receiver or administrator.  Only such a person can hold any of these offices.

Authorised Share Capital:

The total value of shares that the company could issue, as distinct from the up and paid up share capital.

AVCO:

A method by which the goods used are priced out at average cost.

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B

Bad Debt:

A person or company who is not expected to pay his debt; for example, because the company has gone into liquidation. Bad debts must be written-off and therefore they will reduce profit.

A bad debt becomes a bad debt when a business decides it is one, this decision is often based on past experience.  Decisions are made by keeping a list of all debtors (aged debtors), and reviewing this list periodically.

If a business is having difficulties collecting money owed from one of its customers it may decide to cancel the debt.  This is called a write-off and the accounts would need to be adjusted for this write-off.

A Bad Debt account would need to be set up and this would be an expense account.

To account for a bad debt there are in fact three transactions involved:

• You would debit the Bad Debt account with the Net amount
• Debit the VAT account with the VAT amount
• Credit the Debtors Control account with the Gross amount

This type of transaction would affect both the profit and loss, and the balance sheet.  The profit and loss would show the bad debt as an expense as this is money owed by a customer that cannot be collected.

The transaction has previously processed as a debit to the Debtors Control account.  As it is money that can no longer be collected, you would reverse this by making a credit to the Debtors Control account.

A list of customers accounts are usually kept called Aged Debtors Control.  A decision to write-off a bad debt would be made by reviewing the Aged Debtors/Debtors Control.

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'.)

For example see Excel spreadsheet (Stage 2)

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'.)

For example see Excel spreadsheet (Stage 2)

Balanced Scorecard:

A technique that assesses performance across a balanced set of four perspectives – customers, internal processes, organisational learning and growth, and financial.

Balance Off The Account:

Insert the difference (called a 'balance') between the two sides of an account, then total and rule-off the account.  This is normally done at the end of a period (usually a month, a quarter, or a year).

For example see Excel spreadsheet (Stage 2)

Accounting students and those using manual accounting systems should see our comprehensive guide on preparing a trial balance using the manual system and some potential errors.

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(1):

A type of pay-in slip usually used when the payment is into an account held at a different bank.  Two types of form are virtually identical - a bank giro credit can be used instead of a pay-in slip, but not the other way round, as the details of the other bank need to be entered on the bank giro credit.

Bank Giro Credit(2):

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 Payment:

A transaction posted that reflects the payment for goods or a service where there has either been no invoice (e.g. buying petrol for a car, 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 to post an invoice onto the purchase ledger. A Bank Payment is represented in Sage by the transaction type "BP".

Bank Receipt:

A transaction posted that reflects the receipt of money for goods or a service where there has either been no invoice (e.g. selling goods over the counter, 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 to post an invoice onto the Sales Ledger. A Bank Receipt is represented in Sage by the transaction type "BR".

Bank Reconciliation:

The process of matching and comparing figures from accounting records against those presented on a bank statement.  Less any items which have no relation to the bank statement, the balance of the accounting ledger should reconcile (match) to the balance of the bank statement.

Bank reconciliation allows companies or individuals to compare their account records to the bank's records of their account balance in order to uncover any possible discrepancies.

Since there are timing differences between when data is entered in the banks systems and when data is entered in the individual's system, there is sometimes a normal discrepancy between account balances.  The goal of reconciliation is to determine if the discrepancy is due to error rather than timing.

For example, simply click this link to download Excel spreadsheet.

Bank Reconciliation Statement:

A calculation comparing the Cash Book balance with the bank statement balance.

Bank Statement:

A copy issued by a bank to a customer showing the customer's current account maintained at the bank.

Bankrupt:

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.

Bankruptcy Restrictions Order Or Undertaking:

A procedure introduced on 1 April 2004 whereby a bankrupt who has been dishonest or in some other way to blame for their bankruptcy may have a court order made against them or give an undertaking to the Secretary of State resulting in certain bankruptcy restrictions continue to apply after discharge for a period of between two to fifteen years.

Bank Statement:

A copy issued by a bank to a customer showing the customer's account maintained at the bank.

Bill of Materials:

(or BOM) A list of the other products (or components) that are needed to make up a product. For example, a toolkit may have a bill of materials listing the following components - a tool box, a spanner set and a screwdriver.

Bonus Shares:

Shares issued to existing shareholders free of charge.  (Also known as scrip issues.)

Book Keeping:

The process of recording data relating to accounting transactions in the accounting books, or software.

Books of Prime Entry:

The books in which the details of the organisation's transactions are initially recorded prior to entry into the main ledger.

Books of Original Entry:

Books where the first entry recording a transaction is made.  (These are sometimes referred to as Books of Prime Entry.)

Break-Even Point:

The level of activity at which total revenues equal total costs.

Bought Ledger:

A variant of a Purchase Ledger where the individuals accounts of the creditors, whether they be for goods or expenses such as stationary or motor expenses, can be kept together in a single ledger.

Budget:

A forecast of expected income or expenditure over a specified period of time.

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.

By-Product:

Products of minor sales value that result from the production of a main product.

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C

Call:

When shares 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:

In general, capital is the money invested in the business. Shareholder’s capital employed refers to share capital and reserves only, total capital employed includes long term loans.

Capital Employed:

The amount owed by a business to its owners, being the amounts injected in cash by the owners, together with any movement in the value of the business not made up by further cash injections or withdrawals.

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:

Profit made on selling an asset for more than its original purchase price.

Capital Gains Tax:

Tax paid on the profit made on selling an asset for more than its original purchase price, i.e. the capital gain.

Capitalisation:

The way that a companys' capital is divided into share and loan capital. In this way they can then be released to the Profit and Loss report in instalments over the accounting periods to which they relate.

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:

An account 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 instead, if they wish, record the shortfall as negative goodwill.

Capitulation:

Spotting when markets have reached the bottom is a tricky and risky process.

Many traders believe in the idea of capitulation; broadly means market surrender.

This is when investors are prepared to get out of the market at any price because they have given up all hope of making money from their shares.

It is often marked by panic-selling and very high volumes of transactions.

The idea is, after capitulation, you reach a point at which, the last investor who is desperate to get out of shares and move into supposedly less risky assets, has sold out.

Once there is a widespread belief that the bottom has been reached, bargain-hunters pile in and the market recovers.

Carriage Inwards:

Cost of transport of goods into a business.

Carriage Outwards:

Cost of transport of goods out to the customers of a business.

Cash:

Cash balances and bank balances, plus funds invested in 'cash equivalents'.

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 business.  Income is recorded when it's received, and expenses are reported when they're actually paid.  The cash method is used by many sole proprietors and businesses with no inventory.  From a tax standpoint, it is sometimes advantageous for a new business to use the cash method of accounting.  That way, recording income can be put off until the next tax year, while expenses are counted right away.

cf. Accrual Accounting.

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.

For simple example and template, simply click this link to download Excel spreadsheet.

For advanced example and template, click this link instead to download Excel spreadsheet.

Cash Flow Statement:

All UK companies, except the very smallest, have to publish a cash flow statement for each accounting period.  This is a statement showing how cash has been generated and disposed of by an organisation.  The layout is regulated by FRS 1.  This is a legal requirement, and should not be confused with a cash flow forecast.

Cash Payment:

A transaction posted that reflects the payment for goods or a service where there has either been no invoice (e.g. buying petrol for a car, 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 to post an invoice onto the purchase ledger. Instead of the money being paid directly out of the bank the money is paid out of either the Petty Cash account or out of the Till account. Cash Payments are reflected in Sage by the transaction type "CP".

Cash Receipt:

A transaction posted that reflects the receipt of money for goods or a service where there has either been no invoice (e.g. selling goods over the counter, 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 to post an invoice onto the Sales Ledger. Instead of the money being paid directly into the bank the money is paid into either the Petty Cash account or into the Till account. Cash Receipts are reflected in Sage by the transaction type "CR".

Casting:

An accounting term for adding up a column of figures.  See also Cross Cast.

For example, simply click this link to download Excel spreadsheet.

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 have to pay an annual fee for the card.

cf. Credit 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 or Profit and Loss report.

Cheque Book:

Book containing forms (cheques) used to pay money out of a current account.

Clearing:

The process by which amounts paid by cheque from an account in one bank are transferred to the bank account of the payee.

Close Off Account:

Totalling and ruling off an account on which there is no outstanding balance.

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 period.

Columnar Purchase Day Book:

A Purchase Day Book used to record all items obtained on credit.  It has analysis columns so that various types of expenditure can be grouped together in a column.  Also called a Purchases Analysis Book.

Columnar Sales Day Book:

A Sales Day Book used to show the sales for a period, organised in analysis columns according to how the information recorded is to be analysed.  Also called a Sales Analysis Book.

For example, simply click this link to download Excel spreadsheet.

Compensating Error:

Where two errors of equal amounts, but on opposite sides of the accounts, cancel each other out.

For further information on this type of error accounting students and those using manual accounting systems should see our comprehensive guide on Preparing A Trial Balance (Compensating Errors) using the manual system and some potential errors.

Compound Interest:

Compound Interest is interest earned during a period calculated on the basis of the original sum together with interest earned from previous periods.  If the compound interest is c%, and the original investment is £Q, then the value of the investment after n years is:

£Q  x  ( ( 100 + c ) / 100 )ⁿ

For example, see Calculating Loan Interest

cf. Simple Interest.

Conciliation:

Conciliation is much the same as mediation.  In conciliation, as in mediation, an independent person (the conciliator) tries to help the people in dispute to resolve their problem.  The conciliator should be impartial and should not take one party's side.  The parties in dispute are responsible for deciding how to resolve the dispute, not the conciliator.

cf. Mediation.

Consistency:

Keeping to the same method or recording and processing transactions.

Consolidation Accounting:

This term means bringing together into a single balance sheet and profit and loss account the separate financial statements of a group of companies.  Hence they are known as group financial statements.

Contra Entry:

The 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.

For example: you have sold goods to XYZ to the value of £200. You have also bought goods from XYZ to the value of £100. Overall they owe you £100 (i.e. what they owe you less what you owe them). A contra entry matches up the £100 you owe them against £100 they owe you.

Contribution:

The difference between sales income and marginal cost.  (It can also be defined as sales income minus variable cost, which would virtually always produce the same answer.)

Control Accounts:

Accounts 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 through the bank ledger.

Corporate Governance:

The exercise of power over and responsibility for corporate entities.

Corporation Tax:

A form of direct taxation levied on the profits of (uk) companies.  The rate is determined each year in the Finance Act.

Cost Centre:

A production or service location, function, activity, or item of equipment whose costs may be attributed to cost units.

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.

Cost Unit:

A unit of product or service in relation to which costs are ascertained.

Credit:

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 and Loss report.

Applies an decrease to the PEA accounts and a increase to the RLS accounts.   See the PEARLS rule for further information.

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.

cf. Charge Card.

Credit Note:

Sent from the seller to the customer when goods are returned, in order to cancel or reverse all or part of an invoice.

Creditors:

Third parties to whom money is owed by the business.

Creditor / Purchases Ratio:

A ratio assessing how long a business takes to pay creditors.

Cross Cast:

An accounting term for adding up the totals of a number of columns, to check they add back to the total.  See also Casting.

For example, simply click this link to download Excel spreadsheet.

Current Account:

A bank account used for regular payments in and out of the bank.

Current Asset:

A current asset is an asset that’s worth can be easily realised. It can also be termed a liquid asset, for example, money in the bank or in petty cash, debtors, prepayments, or stock.

cf. Fixed Asset

Current Liability:

A current liability is a debt owed by the company, for example, creditors, accruals or an overdraft that will be cleared in the short term.

cf. Long-Term Liabilities

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 short term liabilities.

Current Ratio = Current Assets ÷ Current Liabilities

Thus, this ratio is an indication of the ability of a business to pay its debts when they fall due.  Sometimes a ratio of 2:1 is quoted as being average.  What this means, is that for every £1 of current debt, there is £2 in current assets to meet that debt.

See Acid Test Radio for a comparision without the inclusion of stock.

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D

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.

Debenture:

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 known as loan stock or as loan capital.

Debenture interest has to be paid whether profits are made or not.  They are therefore different from shares, where dividends depend on profits being made.  A debenture may be either:

• Redeemable, i.e repayable at or by a particular date, or
• Irredeemable, normally repayable only when the company is officially terminated by its going into liquidation.  (Also sometimes referred to as 'perpetual' debentures)

Debit:

One side of the double entry process, representing positive figures on the Balance Sheet (increases in assets; reductions in liabilities and capital), and expenditures on the Profit and Loss report.

Applies an increase to the PEA accounts and a decrease to the RLS accounts.   See the PEARLS rule for further information.

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.

Debtors:

Third parties who owe your business payments for services rendered or goods received.

Debtor/Sales Ratio:

A ratio assessing how long it takes debtors to pay their debts.

Deferred Taxation:

Timing differences arise between the accounting treatment of events and their taxation results.  Deferred taxation accounting adjusts the differences so that the accounts are not misleading.

Depletion:

The wasting away of an asset as it is used up.

Deposit Account:

A bank account for money to be kept in for a long time.  Will normally pay a higher rate of interest when compared to a current account

Depreciation:

A figure representing the reduction in value of a fixed asset, due to use, obsolescence etc., in the calculation of Net profit.

This involves splitting the monetary value of the asset into instalments to each accounting period of its useful life.

Depreciation involves estimates of life and residual values.  It is common that an asset will be worth less at the end of its life expectancy than when the business first started using it, so in affect, it has cost the business money.  If it has cost the business money, then it must be an expense and will therefore affect the profit and loss.  The asset is also expected to be worth less, and thus also affect the balance sheet.

There are various methods of depreciation, Straight Line and Reducing Balance:

Straight Line Depreciation Method

To use the Straight Line method, you need to know:

• The initial cost of an asset.
• The useful life of the asset and the residual value of the asset, (what it will be worth at the end of its useful life) or scrap value.

As an example, the business has a truck worth £10,000 that is expected to last 5 years and is estimated to be valued at £4,000 after that time.  This means it will be worth £6,000 less in 5 years time and the £6,000 will be a cost to the business and therefore needs to be apportioned to the depreciation expense account.  £6,000 divided by 60 months = £100 depreciation cost per month.  To account for this the business would set up a depreciation account as an expense account.  A debit of £100 would be made to this account monthly and a credit would go to the vehicle account reducing the value of the asset each month.  Using this method the value left in the vehicle account by the end of 5 years would be £4000.

Reducing Balance Depreciation Method

The other method of accounting for depreciation is called Reducing Balance.  The asset is not reduced by the same fixed amount each year but instead by a fixed percentage, which is calculated on the asset balance at the end of each year once depreciation has been applied.

For example, lets assume that a truck will depreciate by 20% every year over the life of 5 years:

Year 1  Original Cost Depreciation = £10,000 - £2,000
Year 2  Balance Depreciation = £8,000 - £1,600
Year 3  Balance Depreciation = £6,400 - £1,280
Year 4  Balance Depreciation = £5,120 - £1,024
Year 5  Balance Depreciation = £4,096 - £819
Balance = £3,277

As you can see the depreciation for year 1 has been calculated as 20% of £10,000, but in year 2 the depreciation has been calculated as 20% of the reduced balance which is £8,000 - £1,600 depreciation in year 2 which differs from the depreciation amount in year 1.

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 Debit Guarantee.  All banks and building societies that take part in the Direct Debit Scheme operate this Guarantee.  The efficiency and security of the Scheme is monitored and protected by your own bank or building society.

Direct Expenses:

Those 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 sales staff, the cost of advertising and any sales promotions.

Directors:

Officials appointed by shareholders to manage the company for them.

Discount:

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, being a preferred customer (trade discounts) or settlement discount.

Discount Allowed:

A deduction from the amount due, given to the customers, who pay their accounts within the time allowed.  It appears as an expense in the profit and loss account.

Discount Received:

A deduction from the amount due, given to a business, by a supplier, when their account is paid before the time allowed has elapsed.  It appears as income in the profit and loss part of the trading and the profit and loss account.

Dishonoured Cheque:

A cheque which the drawer's bank has refused to make payment upon.

Dissolution:

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 reduced by the need to retain some for the reserves.

Dividend:

The amount given to shareholders as their share of the profits of the company.

The amount paid out per share. Usually described as a percentage of the face value (the original price) of one share. So a 10% dividend on a £2.00 share would be 20p.

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.

As every transaction must have an equal or zero effect on both sides of the accounting equation, every positive amount entered (debit) must be mirrored by a negative amount or amounts (credit).

Drawee:

The bank that has issued the cheque and who will have to pay the funds to the payee.

Drawer:

The person who is writing and signing a cheque.

Drawings:

Cash 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.

Dual Aspect Concept:

The concept of dealing with both aspects of a transaction.

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E

EAR:

Stands for Effective Annual Rate.  Please see What is AER, APR, EAR Interest for detailed information.

cf. AER and APR.

Economic Order Quantity (EOQ) :

A mathematical method of calculating 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.

Endorsement:

A means by which someone may pass the right to collect money on a cheque.

Enterprise Resource Planning (ERP) System:

A suite of software modules, each of which relates to a function of the organisation, such as order processing, production, creditor control, debtor control, payroll, marketing, and human resources.

Equity:

The net assets of a company after all creditors have been paid off.

Equity Accounting:

A method of accounting for associated undertakings that brings into the consolidated profit and loss account the investor's share of the associated undertaking's results and that records the investment in the consolidated balance sheet as the investor's share of the associated undertaking's net assets including any goodwill arising to the extent that it has not previously been written off.

Error Of Commission:

Where a correct amount is entered, but in the wrong persons account.

For further information on this type of error accounting students and those using manual accounting systems should see our comprehensive guide on Preparing A Trial Balance (Error of Commission) using the manual system and some potential errors.

Error Of Omission:

Where a transaction is completely omitted from the books.

For further information on this type of error accounting students and those using manual accounting systems should see our comprehensive guide on Preparing A Trial Balance (Error of Omission) using the manual system and some potential errors.

Error Of Original Entry:

Where an item is entered, but both the debit and credit entries are of the same incorrect amount.

For further information on this type of error accounting students and those using manual accounting systems should see our comprehensive guide on Preparing A Trial Balance (Error of Original Entry) using the manual system and some potential errors.

Error Of Principle:

Where an item is entered in the wrong type of account, e.g. a fixed asset in an expense account.

For further information on this type of error accounting students and those using manual accounting systems should see our comprehensive guide on Preparing A Trial Balance (Error of Principle) using the manual system and some potential errors.

Estimation techniques:

The methods adopted in order to arrive at estimated monetary amounts for items that appear in the financial statements.

Exception Reporting:

A process of issuing a warning message to decision-makers when something unexpected is happening: for example when expenditure against a budget is higher than it should be.

Expenses:

Expenses are those items that the company buys which do not go to actually create that company’s product or service. E.g. stationery, petrol, promotional goods.

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F

Factoring:

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).

Please see Factoring.

Fallacy of Omission:

Leaving out information that is relevant but that could weaken your position.

Favourable Variance:

A difference arising that is apparently 'good' from the perspective of the organisation.  For example, when the total actual labour cost is less than the total standard cost because fewer hours were worked than expected.  Whether it is indeed 'good' will be revealed only when the cause of the variance is identified – it may be that fewer hours were worked because demand for the product fell unexpectedly.

FIFO:

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:

This is a term previously used to refer to statements produced at the end of accounting periods, such as the trading and profit and loss account and the balance sheet.  Nowadays, the term 'financial statements' is more commonly used.

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 Accounting:

Financial accounting is concerned with recording financial transactions that have happened already, and with providing information from the accounting records, for example in order to prepare VAT returns, and Trial Balance (the starting point for the preparation of the Profit and Loss Statement and Balance Sheet).

The main features of financial accounting are that it:

• Records transactions that have happened already
• Looks backwards to show what has happened in the past
• Is accurate to the nearest penny, with no estimated amounts
• Is often a legal requirement to keep accounts (in order to prepare VAT returns, and tax returns for the Inland Revenue showing income and expenditure)
• Maintains confidentiality of information (e.g. payroll details, VAT returns)

cf. Management Accounting.

Financial modelling:

Manipulating accounting data to generate forecasts and perform sensitivity analysis.

Financial Statements:

The more common term used to refer to statements produced at the end of accounting periods, such as the trading and profit and loss account and the balance sheet (sometimes referred to as 'Final Accounts' or simply 'The Accounts').

Fixed Assets:

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 resell them.

cf. Current Asset

Fixed Capital Accounts:

Capital accounts which consist only of the amounts of capital actually paid into the firm.

Fixed Costs:

Expenses which remain constant whether activity rises or falls, within a given range of activity.

Flexible Budget:

A budget which, by recognising the difference in behaviour between fixed and variable costs in relation to fluctuations in output, turnover or other factors, is designed to change appropriately with such fluctuations.

Float:

The amount at which the petty cash starts each period.

Fluctuating Capital Accounts:

Capital accounts whose balances change from one period to the next.

Folio Columns:

Columns used for entering reference numbers.

Forecasting:

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.

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G

Garner v Murrary Rule:

If one partner is unable to make good a deficit on his capital account, the remaining partners will share the loss in proportion to their last agreed capitals, not in the profit/loss sharing ratio.

Gearing:

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 for the foreseeable future.

Goodwill:

An intangible asset of a business reflecting its commercial reputation, customer connections, etc. It usually isn't calculated until a business is sold.

Gross:

The total amount before any deductions.

Gross Equity Accounting:

A form of equity accounting applicable to joint ventures under which the investor's share of the aggregate gross assets and liabilities of the joint venture is shown on the face of the balance sheet and the investor's share of the joint venture's turnover is noted in the profit and loss account.

Gross Loss:

Where the cost of goods sold exceeds the sales revenue.

Gross Margin:

A measure of the profitability of a business by which the gross profit is divided by the sales. It is usually expressed as a percentage.

Gross Profit:

The difference between total revenue from sales and the total cost of purchases or materials, with an adjustment for stock.

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H

Hire Purchase Agreements:

These are legal agreements by which an organisation can obtain the use of an asset in exchange for payment by instalment.

Historical Cost Concept:

Assets are normally shown at cost price.

Holding Company:

The outdated term for what is now known as 'parent undertaking'.

Honorarium:

A voluntary fee paid for a service which is usually free.

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I

Ideal Standard:

A standard that is based upon the premise that everything operates at the maximum level of efficiency.  It takes no account of normal losses, or of normal levels of downtime and waste.

Impersonal Accounts:

All accounts other than debtors and creditors accounts.

Imprest System:

A system where a refund is made of the total paid out in a period in order to restore the float to its agreed level.

Income & Expenditure Account:

An account for a non-profit-oriented organisation to find the surplus or loss made during a period.

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).

Inputs:

Purchases of goods and services.

Insolvent:

When liabilities are greater than assets.

Intangible Assets:

Intangible assets include copyrights, patents, goodwill, etc., they are saleable but do not contain any intrinsic productive value.

cf. Tangible Asset.

Interest:

A charge made on a loan or money received on a capital investment.

See Compound Interest and Simple Interest

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.

Invoice:

Sent out by the seller or service provider to request payment for goods or services.  A contra-entry for this type of transaction would normally be a credit note.

Irrelevant Costs:

A managerial accounting term that represents a cost, either positive or negative, that does not relate to a situation requiring management's decision.

As with relevant costs, irrelevant costs may be irrelevant for some situations but relevant for others.  Examples of irrelevant costs are fixed overheads, notional (implied) costs, sunk costs and book values.

Future costs that will not be affected by a decision.

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J

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.

Job Product:

Two or more products, each of which has significant sales value, created in the same production process.

Joint Ventures:

Business agreements under which two businesses join together for a set of activities and agree to share the profits.

Journal Entries:

Double-entry transactions, not raised through the cash book or individual ledgers.  Sometimes referred to as a 'Journal'.

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K

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L

Ledgers:

The principal 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. All ledgers are amalgamated in the nominal ledger by the posting of balances from the individual ledgers. The nominal ledger also receives postings from the cash book and directly from journal entries for all other accounting transactions.

Liabilities:

Amounts owed by a business to third parties including suppliers, banks, tax authorities and employees.

LIBID:

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 rates, there is no correspondent official LIBID fixing.

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 Bid Rate (LIBID), the rate at which banks are prepared to accept deposits.

LIFO:

A method by which the goods sold are said to have come from the last lot of goods received.

Limited Company:

Most large businesses will be formed as limited companies.  A limited company is where the owners of the business are the shareholders but the business is often managed by a completely different set of people, the directors.  In legal terms, a limited company is a completely separate entity from the owners, the shareholders.  Many companies are run as private limited companies (Ltd), and often, the shareholders and the directors, are the same people.  The largest companies however, are public limited companies (PLC), and in these companies, the shareholders and the directors are completely different.  The directors run the company on behalf of the shareholders, the owners, and are accountable to the shareholders for their management of the business and stewardship of the assets.

The shareholders provide the capital for the business by buying shares in the company and they share in the profits of the company by being paid dividends.  The accounting records that are required for a limited company are regulated by law and most companies will tend to have a large and comprehensive accounting function.

See Sole Trader and Partnership for a comparision of different business types.

Limited Liability:

The main difference between the trading of a sole trader and a partnership on the one hand, and a company on the other is the concept of limited liability.   If the business of a sole trader or a partnership is declared bankrupt then the owner or owners are personally liable for any outstanding debts of the business.  However, the shareholders of a company have limited liability.  This means that once they have fully paid for their shares, then they cannot be called upon for any more money, if the company is declared bankrupt.  All they will lose is the amount they paid for their shares.

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 goods, or a lack of a market for the products.

Liquidation:

When a business or firm is terminated or bankrupt, its assets are sold and the proceeds pay creditors.  Any leftovers are distributed to shareholders.

Liquidty:

A measure of the ability of a debtor to pay their debts as and when they fall due.  It is usually expressed as a ratio or a percentage of current liabilities.

Liquidty Ratios:

Those ratios that relate to the cash position in an organisation and hence its ability to pay liabilities when due.

Loan:

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 property or repay the money, usually along with interest, at some future point(s) in time.  Usually, there is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan.

Lodgement:

An accumulation or a deposit.

Long-Term Liabilities:

Liabilities that do not have to be paid within twelve months of the Balance Sheet date.

cf. Current Liabilities

Loss:

The result of selling goods for less than they cost to purchase.

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M

Main Ledger:

This is where the double-entry takes places of all transactions of the business.

See also subsidiary or memorandum ledger.

Management Accounting:

Management accounting is concerned with looking at actual transactions in different ways from financial accounting.  In particular, the cost of each product or service, are considered both in the past, and the likely costs in the future.  In this way, management accounting is able to provide information to help the business or organisation plan for the future.

The main features of management accounting are that it:

• Uses accounting information to summarise transactions that have happened already and to make estimates for the future
• Looks in detail at the costs - materials, labour and expenses, and the sales income of products and services
• Looks forward to predict what is likely to happen in the future
• May use estimates where these are the most useful or suitable form of information
• Provides management with reports that are of use in running the business or organisation
• Provides management information as frequently as circumstances demand - speed is often vital as information may go out-of-date very quickly
• Is not sent to people outside the organisation - it is for internal use
• Maintains confidentiality of information (e.g. payroll details)

cf. Financial Accounting.

Manufacturing Account:

An account in which production cost is calculated.

Margin:

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.

Margin Of Safety:

The gap between the level of activity at the break-even point and the actual level of activity.

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.

Mark-up:

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.

Master Budget:

The overall summary budget encompassing all the individual budgets.

Materiality:

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 merits inclusion.

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:

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.

cf. Conciliation.

Memorandum Joint Venture Account:

A memorandum account outside the double entry system where the information contained in all the joint venture accounts held by the parties to the joint ventures are collated, the joint venture profit is calculated and the share of profit of each party is recorded in order to close off the account.

Minority Interests:

Shareholders in subsidiary undertakings other than the parent undertaking who are not therefore part of the group.

Money Measurement Concept:

The concept that accounting is concerned only with facts measurable in monetary terms, and for which purpose measurements can be used that obtain general agreement as to their suitability.

Multiple-Step Income Statement:

An income statement (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).

cf. Single-Step Income Statement

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N

Narrative:

A description and explanation of the transaction 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 can use this approach instead of a capital reserve.)

Negotiation:

In simplest terms, negotiation is a discussion between two or more disputants who are trying to work out a solution to their problem.  This interpersonal or inter-group process can occur at a personal level, as well as at a corporate level.  Negotiations typically take place because the parties wish to resolve a problem or dispute between them.  The parties acknowledge that there is some conflict of interest between them and think they can use some form of influence to get a better deal, rather than simply taking what the other side will voluntarily give them.  They prefer to search for agreement rather than fight openly, give in, or break off contact.

Net:

The amount that remains after all deductions have been made.

Net Book Value (NBV):

The net value of an asset.  Equal to its original cost (its book value) minus depreciation and amortisation.  Also called net book value and depreciated cost.

Net Current Assets:

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 Loss:

Where the cost of goods sold plus expenses is greater than the revenue.

Net Present Value (NPV):

The sum of the present values of a series of cash flows.

Net Profit:

This is the amount earned by a company after expenses. This is calculated as;

Gross Profit - Expenses = 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:

The value of a business as represented by subtracting its liabilities from its assets;

Assets - Liabilities = Net Worth

Nominal Account:

Accounts in which expences, revenue and capital are recorded.

Nominal Ledger:

This ledger is affected by all transactions posted in all ledgers. It is the core of the accounting process. The balances on all of the nominal accounts form the Trial Balance and therefore the Profit and Loss and the Balance Sheet.  Another name for the General Ledger.

Normal Losses:

Losses arising in the production process that could not be avoided.

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O

Opening Balance:

The balance of an account when it is initially opened, or the balance carried over from the previous accounting period, (i.e. last accounting periods’ closing 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:

This is calculated; Gross Profit - Expenses.

It is the same as net profit unless the business has other income from investments or expenditure on loan interest. These items are not considered in calculating the Operating Profit.

Ordinary Shares:

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.

Overdraft:

A facility granted by a bank that allows a customer holding a current account with the bank to spend more than the funds in the account.  Interest is charged daily on the amount of the overdraft on that date and the overdraft is repayable at any time upon request from the bank.

Overheads:

Business expenses and other indirect costs for a business, such as rent or research. This value is not attributable directly to any department or product and can therefore be assigned only arbitrarily.

Overtrading:

Overtrading, or excessive sales volume transacted on a thin margin of investment, presents a potential problem with creditors.  Overtrading can come from considerable management skill, but outside creditors must furnish more funds to carry on daily operations.

This is usually due to a business growing too rapidly.  This can lead to bankruptcy and liquidation.

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P

Paid-Up Share Capital:

The monetary 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.

The terms 'parent undertaking' and 'subsidiary undertaking' have been in use for only a few years.  Previously, a parent undertaking was called a 'holding company', and a subsidiary undertaking was called a 'subsidiary company'.  One of the reasons these terms have been changed was that consolidated financial statements used to be concerned with only companies.  Now, subsidiary undertakings can include unincorporated businesses as well.

Pareto Principle:

Also known as the 80/20 Rule, the law of the vital few and the principle of factor sparsity, states that, for many events, 80% of the effects come from 20% of the causes.

Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed that 80% of income in Italy went to 20% of the population.

It is a common rule of thumb in business; e.g., "80% of your sales comes from 20% of your clients."

Partnership:

A partnership is a group of individuals who are trading together with the intention of making a profit.  Partnerships are often created as a sole trader's business expands and more capital and more expertise are needed within the business.  Typical partnerships are those of accountants, solicitors and dentists and usually comprise between 2 and 20 partners.  A partnership will tend to be larger than sole traders; there will tend to be more employees and a greater likelihood of a bookkeeper being employed to maintain the accounting records.

Each of the partners will contribute capital to the business and will normally take part in the business activities.  The profits of the business will be shared between the partners; setting up a partnership agreement whereby the financial rights of each partner are set out normally does this.  Just as with sole traders the partners will tend to withdraw the profits due to them from the business in the form of drawings, although in some cases partners may also be paid a salary by the business.

See Sole Trader and Limited Company for a comparision of different business types.

PAYE (Pay As You Earn):

The system whereby income tax is deducted from wages and salaries by employers and sent to the Inland Revenue(UK).

Payee:

The person / company to who a cheque is being paid.  See also Drawer and Drawee.

Paying-In Slip:

A form used for paying money into a bank account with the bank the account is held.

P.E.A.R.L.S:

All Transactions affect two Nominal Accounts.  This is achieved by making a Debit entry to one Nominal account and then making a Credit entry to another Nominal account.

To proceed you need to identify which Nominal account to Debit and which Nominal account to Credit.  An aid in deciding which account to debit and which account to credit is to use the PEARLS rule:

• Purchases
• Expences
• Assets

To increase Purchases, Expences, and Asset accounts you Debit them, and to decrease these accounts you would credit them.

• Revenue (Sales)
• Liabilities
• Source of Funds (Capital)

To increase Revenue, Liabilites, and Source of Funds accounts you credit them, and to decrease these accounts you would debit them.

The transaction would be recorded in the Nominal Ledger which can represented in a T shape.   Debits appear on the left side of the T and Credits appear on the right side of the T, with the name of the Nominal account or the Nominal account code between them.

Period:

See Accounting Periods.

Personal Account:

Bank accounts, which contain personal funds, separate to business accounts.

Personal Allowances:

Amounts each person 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.  They are for things like being married, caring for a dependent relative, etc.

Personal Identification Number (PIN):

A secret number issued by a bank to a customer so that the customer may use a debit or credit card in an ATM.

Petty Cash Book:

A Cash Book for small payments.

Plastic Card:

The generic name for the range of payment-related cards.

Postings:

The processing of an accounting transaction, or the entering of a transaction on your accounts program.

Pre-Incorporation Profit Or Loss:

A profit or loss that arises immediately before a limited company is legally incorporated.  Any such profit will be treated as capital profit not for distribution while, for sake of prudence; any such loss will be set against post-incorporation profits.

Preference Shares:

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.

Prepayments:

A payment for goods or services before they are received.  e.g. Insurance paid 1 year in advance and accounted for over 12 months.

Most businesses would pay for their insurance 1-year in advance.  You would account for this transaction by making a credit entry to the bank account and a debit entry to the Insurance account.  This transaction is quite correct from a bookkeeping point of view.  However, every business is expected to present accurate accounts showing all expenses in the accounting period that the costs/expenses relate to.  If the insurance transaction were left, as it is, the cost for a whole year would be shown in one accounting period - this would give a misinterpretation of the accounts.  To account for this transaction correctly the business would have a Prepayments Account.

A Prepayment Account is an asset account because something has been paid for but not yet used in the business.  To correctly account for the insurance that has been paid in advance you would debit the full amount to the Prepayment Account and credit the full amount to the Insurance Account.

When the accounts are processed at the end of each accounting period you would credit 1/12^th of the of the annual amount from the Prepayment Account and debit 1/12^th of the annual amount to the Insurance Account.  This would enable the business to correctly account for the insurance in each accounting period i.e. 1/12^th of the annual amount would be shown in the Insurance Account each month, making the profit & loss report more accurate.  The outstanding balance of the prepayment for each accounting period would be shown in the balance sheet as a current asset.  This would reduce each month until the year has been fully expensed.

cf. Accruals.

Present Value:

The amount that a future cash flow is worth in terms of today's money.

Prime Cost:

Direct materials plus direct labour plus direct expenses.

Principal:

The loan amount, or the part of the loan amount that remains unpaid (excluding interest).  Also called principal amount.

Private Ledger:

A ledger for capital and drawings accounts.

Process Costing:

A costing system that is applied when goods or services are produced in a continuous flow.

Production Cost:

Prime cost plus indirect manufacturing costs.

Profit:

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 (or loss) 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, before and after tax has been deducted).

Provision:

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:

An amount put by for those debts which may not be paid. It appears as an expense on the profit and loss account and is deducted from the debtors control account.

Prudence:

Ensuring that profit is not shown as being too high, or that assets are 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.

Public Sector:

All organisations that are not privately owned or operated.

Purchased Goodwill:

The difference between the amount paid to acquire a part or the whole of a business as a going concern and the value of the net assets owned by the business.

Purchases:

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.

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 Credit Notes are represented in Sage by the Transaction Type, "PC".

Purchase Discounts:

Purchase Discounts may be given for a variety of reasons, e.g. buying in bulk, spending large amounts, being a preferred customer or settlement discount. However as far as Sage is concerned it refers to just settlement discount or Prompt Payment Discount. This discount is taken only when an invoice is paid within the agreed number of days. Purchase Discounts are represented in Sage by the transaction type, "PD".

Purchase Invoices:

These are issued by suppliers as a request for payment in respect of the supply of goods or services. Purchase Invoices are represented in Sage by the transaction type, "PI".

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 the balance of the creditors control account in the nominal ledger.

Purchase Payments:

Payments made to suppliers in respect of invoices for the goods and/or services supplied. These are represented in Sage by the transaction type, "PP".

Purchases Day Book:

Book of original entry for credit purchases.  Also called the Purchases Journal.

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Q

Quick Ratio:

A ratio for calculating the liquidity of a business. It is calculated as : -

(Current Assets - Stock) ÷ Current Liabilities

This ratio is used to see the solvency of a company.

This ratio is also referred to as the "liquid ratio" or "acid-test ratio".

Quotation:

A statement of the current market price of a service or security (an asset which the lender can have recourse if the borrower defaults on the loan repayment).

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R

Real Accounts:

Accounts in which property of all kinds is recorded.

Realisation Concept:

Only profits and gains realised at the balance sheet date should be included in the profit and loss account.  For a gain to be realised, it must be possible to be reasonably certain that it exists and that it can be measured with sufficient reliability.

Receipt:

A written acknowledgment that a specified article, sum of money, or shipment of merchandise has been received.

Receipts:

Unless otherwise qualified, in accounting means cash received.

Receipts And Payments Account:

A summary of the Cash Book of a non-profit-oriented organisation.

Receivable:

An amount awaiting receipt of payment.

Reconciliation:

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.

See depreciation for example and additional information.

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.

Relevant Costs:

Those costs of the future that will be affected by a decision.

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.

Residual Value:

The net amount receivable when a fixed asset is put out of use by the business.

Resource Accounting:

An accounting system based on normal commercial practice, including accruals and movements in cash flows.

Retention:

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 Capital Employed = (Net Profit ÷ Capital Employed) x 100

This is one of the most important profitability ratios, as it encompasses all the other ratios, and because an adequate return on capital employed, is why people invest their money in a business in the first place.

This ratio gives an indication as to how much profit in percentage terms is being earned from the money invested in the business.  If the owner could earn more from investing the capital in a building society, it would be pointless running the business.

There are several ways of calculating this ratio in respect to the capital employed figure.   Sometimes it is Opening Capital, sometimes the Closing Capital and sometimes the Average Capital.

Return On Owners' Equity:

Net profit 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:

Net profit 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.

Returns:

Goods returned to the business by a customer, or by the business to a supplier.

Returns Inwards:

Goods returned by customers. (Also known as 'sales returns'.)

Returns Inwards Day Book:

Book of original entry for goods returned by customers.  Also called the Returns Inwards Journal or the Sales Returns Day Book.

Returns Outwards:

Goods returned to suppliers.  (Also known as 'purchases returns'.)

Returns Outwards Day Book:

Book of original entry for goods returned to suppliers.  Also called the Returns Outwards Journal or the Purchases Returns Book.

Revaluation Account:

An account used to record gains and losses when assets are revalued.

Revenue:

Another term for sales or income.

Revenue Expenditure:

Expenses 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 and loss appropriation account 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:

An issue of shares to existing shareholders.

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S

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.

Sales:

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 was incorrect. Sales credit notes are represented in Sage by the transaction type, "SC".

Sales Day Book:

Primary record for recording sales invoices, ie credit sales.  See also Analysed Sales Day Book.

Sales Discounts:

Sales Discounts may be allowed for a variety of reasons, e.g. buying in bulk, spending large amounts, being a preferred customer (trade discount) or settlement discount. However as far as Sage is concerned it refers to just settlement discount or Prompt Payment Discount. This discount is taken only when an invoice is paid within the agreed number of days. Sales discounts are represented in Sage by the transaction type "SD".

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 equal the balance of the debtors control account in the nominal ledger.

Sales Receipts:

These are made when invoices are paid off by the recipient of the goods or services. Sales receipts are represented in Sage by the transaction type "SR".

Sales Returns Day Book:

The primary record for recording credit notes.

Sensitivity 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.  Also called 'what if' analysis.

Separate Determination Concept:

States that each component of any category of assets or liabilities should be valued separately when arriving at a total to be shown in the accounts for that category.  For example, the value of each stock item should be calculated individually (at the lower of cost and net realizable value) and these values should then be totaled to give the stock figure which will appear in the accounts.  Stock should not be valued at the lower of total cost and total net reserve value (NRV).

Separate Valuation Concept:

Recording and measurement rule that relates to the determination of the aggregate amount of any item.  In order to determine the aggregate amount of an asset or a liability, each individual asset or liability that comprises the aggregate must be determined separately.  This is important because material items may reflect different economic circumstances.  There must be a review of each material item to comply with the appropriate accounting standards.

Settlement Discount:

A CASH DISCOUNT or SETTLEMENT DISCOUNT is a percentage discount of the total invoice value that is offered to a customer to encourage that customer to pay up or settle the invoice earlier. 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 for payment within 10 days of the invoice date.

A cash discount differs from a trade discount in that although the seller offers the discount to the customer it is up to the customer to decide whether or not to accept the offer of the discount. Therefore the discount does not appear on the face of the invoice but it will be noted at the bottom of the invoice in the "Terms" section.

There is one complication here with VAT. If a cash discount is offered then the VAT is calculated on the assumption that the cash discount is taken up by the customer and therefore the VAT calculation is made based upon the net invoice total after deducting the cash discount.

For full calculations and working examples, simply click this link to download Excel spreadsheet.

Shares:

The division of the capital of a limited company into parts or shares.

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'.

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.

Shares At No Par Value:

Shares that do not have a fixed par, or nominal value.

Simple Interest:

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.

For example, see Calculating Loan Interest

cf. Compound Interest.

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.

cf. Multi-Step Income Statement

Sinking Fund:

An account set up to reduce another account to zero over time (using the principles of amortisation 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:

The simplest type of business is that of a sole trader.  A sole trader is someone who trades under his or her own name.  Many, many businesses are sole traders, from electricians through to accountants.  Being a sole trader does not mean that the owner is the only one working in the business.  Some sole traders are one-man-bands, but many will also employ a number of other staff.  Even so, in most cases the owner will be in charge of most of the business functions such as buying and selling of goods or services and doing the bookkeeping and producing the accounts.  In some instances however, the sole trader will employ an external bookkeeper, which may also be a sole trader, in order to regularly update the accounting records.

The owner of the business is the one who contributes the capital to the business, although it may also have loans, either commercial or from friends.  The owner is also the only party to benefit from the profits of the business, and the owner taking money, or goods out of the business is known as drawings.

See Limited Company and Partnership for a comparision of different business types.

Source of Funds / Capital Employed:

Any money invested into the business including Share Capital, Reserves, and long-term loans.

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:

A business that charges VAT at the standard rate on its sales.

Standing Order:

An order by a customer (business or personal) to their banker to pay a specified amount usually on or around a particular day of the month regularly to another account.  This could be typically to a person's building society for regular payment of mortgage interest or for premiums for life assurance.  If the payee, for example, a building society, requires payments to be increased (or decreased) it must write to the customer requesting a change in the amount of the standing order.  The customer then instructs their bank accordingly.  The current trend for regular payments however seems to be towards direct debit where the customer agrees to the payee debiting (claiming funds from) his/her account.

Statement:

A copy of a customer's personal account taken from the supplier's books.

Statement Of Affairs:

A statement from which the capital of the owner can be found by estimating assets and liabilities.  Then Capital = Assets - Liabilities.  It is the equivalent of the balance sheet.

Stock:

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'.)

Stocktaking:

The process of physically identifying the stock on hand at a given point in time.

Straight Line Method:

See Straight Line Depreciation Method.

Subsidiary Company:

The outdated term for what is now known as a 'subsidiary undertaking'.

Subsidiary Undertaking:

An undertaking which is controlled by another undertaking or where that other undertaking exercises a dominating influence over it.

cf. Parent Undertaking.

Subsidiary Ledgers:

These are ledgers where supporting or memorandum ledger accounts are kept, in addition to the main ledger.

Sunk Costs:

A cost which has already occurred and cannot, therefore, be avoided whatever decision is taken.  It should be ignored when taking a decision.  See Irrelevant Costs.

Super Profits:

Net profit less the opportunity costs of alternative earnings and alternative returns on capital invested that have been foregone.

Supply Chain:

Everything within the two end-points of the continuous sequence running from demand forecasting through to receipt of payment from customers.

Supply Chain Management:

The system of control over the information and/or item flows both within and outside the organisation that comprise the supply chain.

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. It is most commonly used in Sage when the Opening Balances are being put onto the system.

Accounting students and those using manual accounting systems should see our comprehensive guide on Preparing A Trial Balance (Creation Of A Suspense Account) using the manual system and some potential errors.

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T

T-Account:

The layout of accounts in the accounting books.

T-ACCOUNT is the basis for journal entry in accounting.  T-accounts 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 the appropriate side (debit or credit).  See P.E.A.R.L.S

Tangible Asset:

Assets having a physical existence, such as cash, equipment, and real estate; accounts receivable are also usually considered tangible assets for accounting purposes.

cf. Intangible Asset.

Tax Code:

The number found by adding up an individual's personal allowances which is used to calculate that individual's tax liability (U.K).

Time Interval Concept:

Financial statements are prepared at regular intervals.

Total Cost:

Production cost plus administration, selling and distribution expenses and finance expenses.

Trade Discount:

A percentage reduction from the list price of goods that a business may offer to some customers.   The reason for offering this reduced price might be due to the fact that this is a regular and valued customer, or it could be offered as an incentive to a new customer to buy.

The amount of the trade discount will be shown on the face of the invoice as a deduction from the list price. A Settlement Discounts is very different. Don't confuse the two.

For full calculations and working examples, simply click this link to download Excel spreadsheet.

Trading Account:

Compares sales, stock used and direct expenses to find the profit or loss made by buying and selling.

Trading And Profit And Loss Account:

A financial statement in which both gross profit and net profit are calculated.

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. The double entry book-keeping system, if completed correctly, requires that the total of all debits equals the total of all credits. In theory the balances should always be equal when using automated accounts programs like Sage. If an imbalance occurs, it may indicate that you have corrupt data.

Accounting students and those using manual accounting systems should see our comprehensive guide on preparing a trial balance using the manual system and some potential errors.

For full calculations and working examples, simply click this link to download Excel spreadsheet.

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.

Trustee:

An individual or organization which holds or manages and invests assets for the benefit of another.  The trustee is legally obliged to make all trust-related decisions with the trustee's interests in mind, and may be liable for damages in the event of not doing so.  Trustees may be entitled to a payment for their services, if specified in the trust deed.  In the specific case of the bond market, a trustee administers a bond issue for a borrower, and ensures that the issuer meets all the terms and conditions associated with the borrowing.

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U

Undertrading:

Undertrading is usually caused by management's poor use of investment money and their general lack of ingenuity, skill or aggressiveness

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 is maintained

Unquoted Investments:

Investments not dealt in on a recognised stock exchange.

Unregistered Business:

A business that 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.

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V

Valuation:

Formal assessment of the worth of property, goods etc.

Value Added Tax (VAT):

A tax charged on the supply of most goods and services.

• VAT is applied to all VAT registered businesses for a Net Sale or Purchase amount.
• VAT is a tax imposed by the government on certain goods/services supplied.  For the latest upto date figures for VAT rates etc, see HM Revenue & Customs website.
• When a business is registered for VAT it is able to claim back VAT paid on goods/services

Variable Costs:

Expenses which change in response to changes in the level of activity.

Variance:

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 the Customs & Excise department, by which VAT is charged on amounts actually received net of amounts paid, rather than on the invoices for those amounts.

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:

The Customs & Excise department requires all businesses registered for VAT to account to them for all amounts of VAT charged on sales invoices (outputs) net of amounts incurred on purchase invoices (inputs).

VAT Receipt:

A receipt showing the amount of VAT as a separate item, together with the issuer’s VAT registration number.

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 given a registration number. This number must be printed on all invoices.

VAT Tax Point:

The date on which VAT eligible sales are completed.

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W

'What If':

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.  Also called sensitivity analysis.

Work Certified:

The value of work in progress on a contract as certified by, for example, an architect or an engineer.

Work In Progress (W.I.P):

Items not completed at the end of an accounting period.

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:

To cancel a bad debt or obsolete asset from the accounts. Or,

To consider a transaction as a loss or set off (a loss) against revenues. Or,

To depreciate an asset by periodic charges. Or,

To charge a specified amount against gross profits as depreciation of an asset.

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X

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Y

Yield:

The annual income provided by an investment.

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Z

Zero-Rated:

Denoting goods on which the buyer pays no VAT although the seller can claim back any tax he/she has paid.

These include some food items, newspapers, magazines and books, medicine and children’s clothing.

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.

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