Glossary

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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 areallocated to cost units.)

Account:

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

Accounting:

The process of identifying, measuring and communicating economic information to permitinformed 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 financialstatements 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 aBalance Sheetbalances.

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 infrastructurethat 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 theProfit and Loss reportand 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 howthe 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 atthe 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 expensesincurred in generating those revenues. It ignores the timing of the cash flows associated withrevenues 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 isentered into the books when the invoice is generated rather than when the cash iscollected. Likewise, an expense occurs when materials are ordered or when a workday has beenlogged in by an employee, not when the cheque is actually written. The downside of this methodis 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 inarrears. This process is the reverse of prepayments.There are certain expenses that are paid for some time after they have been used, electricity is agood example, but there are other similar expenses. Whilst you are using electricity the cost isaccruing. If the business does not account for these costs in the correct accounting periods thatthe expense is incurred, then the account would be inaccurate.In most cases the electricity bill is sent every three months. If your business receives anelectricity bill in April for electricity it has used in January to March and it has not beenaccounted for in the accounts, the accounts for January to March will be inaccurate. The profitin all of these months would have been overstated. To account for this correctly, the businesswould set up an Accruals account, which is aliabilityaccount - this is money that the businessowes but has not yet paid.

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Most businesses know from experience how much the quarterly electricity bill is likely to be. Inview of this, a 1/3 of that quarterly electricity bill is allocated to the electricity expenses accountfor three months. The transactions would be a debit to the electricity account and a credit to theaccruals account each month.The result would be that each month the profit and loss reportwould show an expense for electricity costs and the balance sheetwould show an accruals balance as a liability. This wouldincrease each month until the electricity bill is received.Once the bill has been received there is no longer a liability, therefore the accrual can bereversed. To do this you would then debit the accruals account and credit the electricity accountequal to the amount of the accrual, in order to clear down (reset to zero) the balance. Thenfinally, the actual amount for the electricity bill would be paid by a debit to the electricityaccount and a credit to the bank account.For example, simply click this link todownload Excel spreadsheet.cf.Prepayments.

Accruals Concept:

The accruals concept is that profitis the difference betweenrevenueand theexpensesincurred 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 endof the period. It is included in the balance sheetunder current liabilitiesas 'accruals'.

Accrued Income:

Accrued income is normally from a source of income, outside of the main source of businessincome, 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 todebtorsin the balance sheet.

Accumulated Depreciation Account:

This account is used to accumulatedepreciationfor balance sheetpurposes. It is used in order to leave the cost (or valuation) figure as the balance in thefixed assetaccount. It is sometimesconfusingly referred to as the 'provision for depreciation account'.

Accumulated Fund:

A form of capitalaccount for a non-profit-oriented organisation.

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Acid Test Ratio:

This shows that, provided creditors and debtors are paid at approximately the same time, a viewmight be made as to whether the business has sufficient liquid resources to meet its currentliabilities.

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 acompany could pay its debts without selling its stock. Stock is not always easy to sell.SeeCurrent Radiofor 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 morematerials having been used than anticipated. Whether it is indeed 'bad' will be revealed onlywhen the cause of the variance is identified. It may, for example, have arisen as a result of anunexpected rise in demand for the product being produced.

AER:

Stands for Annual Equivalent Rate. Please seeWhat is AER, APR, EAR Interestfor detailedinformation.cf.APR andEAR .

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 thoseamounts have remained unpaid. For example, all customers who have outstanding invoices thatare over a month old.

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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 salesinvoices raised.

Amortisation:

Spreading the cost of anintangible 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 thenuse that figure as the annual charge. This is similar to depreciation except that depreciation dealswithtangibleor fixed assets such as motor vehicles or plant and equipment.

Analysed Sales Day Book:

Asales day book where the net figures are analysed into the different type of sales.For example, simply click this link todownload Excel spreadsheet.

Annuity:

An income-generating investment whereby, in return for the payment of a single lump sum, theannuitant 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 seeWhat is AER, APR, EAR Interestfor detailedinformation.cf.AER andEAR .

Arbitration:

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In arbitration an independent third party considers both sides in a dispute, and makes a decisionto resolve it. The arbitrator is impartial; this means he or she does not take sides. In most casesthe arbitrator's decision is legally binding on both sides, so it is not possible to go to court if youare unhappy with the decision.Most types of arbitration have the following in common:

y

Both parties must agree to use the process

y

It is private

y

The decision is made by a third party, not the people involved

y

The arbitrator often decides on the basis of written information

y

If there is a hearing, it is likely to be less formal than court

y

The process is final and legally binding

y

There are limited grounds for challenging the decision

Articles of Association:

For UK companies, the document that arranges the internal relationships, for example, betweenmembers of the company, and the duties of directors. The Companies Act 1985 gives a modelknown as Table A.

Assets:

Generally, an asset is something that is of value to a company. An asset can then be broken downfurther into

tangible

and

intangible

assets.Examples of tangible assets include property, vehicles, stock, cash, money held in the bank andDebtorsas they owe money from sales made by the company. However, these can be brokendown still further intoFixed AssetsandCurrent Assets Examples of intangible assets include patents, copyrights, trademarks and goodwill. While thesemay 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 individualcontrols. 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 theinvesting group or company has a long-term interest and over which it exercises significantinfluence.

Attainable Standard:

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A standard that can be achieved in normal conditions. It takes into account normal losses, andnormal 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 wasdealt with from start to finish.

Authorised (Or Licensed) Insolvency Practitioner:

The person (usually an accountant or solicitor) authorised by the Department of Trade andIndustry (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 theseoffices.

Authorised Share Capital:

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

AVCO:

A method by which the goods used are priced out at average cost.SKIP TO TOP B

Bad Debt:

A person or company who is not expected to pay his debt; for example, because the company hasgone into liquidation. Bad debts must bewritten-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), andreviewing this list periodically.

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If a business is having difficulties collecting money owed from one of its customers it maydecide to cancel the debt. This is called a write-off and the accounts would need to be adjustedfor this write-off.A Bad Debt account would need to be set up and this would be anexpenseaccount.To account for a bad debt there are in fact three transactions involved:

y

Y

ou would debit the Bad Debt account with the Net amount

y

Debit the VAT account with the VAT amount

y

Credit the Debtors Control account with the Gross amountThis 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 ismoney that can no longer be collected, you would reverse this by making a credit to the DebtorsControl account.A list of customers accounts are usually kept calledAged 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 oppositeside to the one on which the balance carried down was entered. (This is normally abbreviated to'balance b/d'.)For example seeExcel spreadsheet (Stage 2)

Balance Carried Down:

The difference between both sides of an account that is entered above the totals and makes bothsides equal to each other. (This is normally abbreviated to 'balance c/d'.)For example seeExcel 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:

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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 ayear).For example seeExcel spreadsheet (Stage 2) Accounting students and those using manual accounting systems should see our comprehensiveguide on preparing a trial balanceusing 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 theend of an accounting period. A Balance Sheet must always balance, i.e. debits must always equalthe 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 thefull 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 beenno 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 postan invoice onto the purchase ledger. A Bank Payment is represented in Sage by the transactiontype "BP".

Bank Receipt:

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A transaction posted that reflects the receipt of money for goods or a service where there haseither 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 therebyremoving the need to post an invoice onto the Sales Ledger. A Bank Receipt is represented inSage by the transaction type "BR".

Bank Reconciliation:

The process of matching and comparing figures from accounting records against those presentedon 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 reconciliationallows 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 whendata is entered in the individual's system, there is sometimes a normal discrepancy betweenaccount balances. The goal of reconciliation is to determine if the discrepancy is due to error rather than timing.For example, simply click this link todownload 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 isrelieved from the payment of all debts after the surrender of all assets to a court-appointedtrustee.

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 madefor the debtor to be made bankrupt.

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Bankruptcy Restrictions Order Or Undertaking:

A procedure introduced on 1 April 2004 whereby a bankrupt who has been dishonest or in someother way to blame for their bankruptcy may have a court order made against them or give anundertaking to the Secretary of State resulting in certain bankruptcy restrictions continue toapply 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, aspanner set and a screwdriver.

Bonus Issue:

A bonus share is a free share of stock given to current/existing shareholders in a company, basedupon the number of shares that the shareholder already owns at the time of announcement of the bonus. While the issue of bonus shares increases the total number of shares issued and owned, itdoes not increase the value of the company. Although the total number of issued sharesincreases, the ratio of number of shares held by each shareholder remains constant.Whenever a company announces a bonus issue, it also announces a ³Book Closure Date´ whichis a date on which the company will ideally temporarily close its books for fresh transfers of stock.An issue of bonus shares is referred to as a bonus issue.Depending upon the constitutional documents of the company, only certain classes of shares may be entitled to bonus issues, or may be entitled to bonus issues in preference to other classes.Bonus share is free share in fixed ratio to the shareholders.Sometimes a company will change the number of shares in issue by capitalising its reserve. Inother words,it can convert the right of the shareholders because each individual will hold thesame proportion of the outstanding shares as before. Main reason for issuance is the price of theexisting share has become unwieldy.Also known as a ³scrip issue´ or ³capitalization issue´.

Bonus Shares:

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

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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 toentry into the main ledger.

Books of Original Entry:

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

Break-Even Point:

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

Bought Ledger:

A variant of aPurchase Ledger where the individuals accounts of thecreditors, whether they be for goods or expenses such as stationary or motor expenses, can be kept together in a singleledger.

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 privatetransactions 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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SKIP TO TOP C

Call:

When shares are issued only part of their cost is usually paid at the time of application andallotment. 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 paymentsmay not necessarily be made.

Capital:

In general, capital is the money invested in the business. Shareholder¶s capital employed refers toshare 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 injectionsor withdrawals.

Capital Expenditure:

Money spent on the acquisition of an asset, such as premises, motor vehicles, plant or machinerythat 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. thecapital gain.

Capitalisation:

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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 theyrelate.

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 bysole tradersand partnershipsto place the amount by which the total purchase price paid for a business is less than thevaluationof the netassets acquired.Limited companiescannot 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 givenup 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 toget out of shares and move into supposedly less riskyassets, has sold out.Once there is a widespread belief that the bottom has been reached, bargain-hunters pile in andthe 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:

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A scheme where VAT is paid on payments and receipts rather than the invoices that youraise. 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 inand out of the business. Income is recorded when it's received, and expenses are reported whenthey're actually paid. The cash method is used by many sole proprietors and businesses with noinventory. From a tax standpoint, it is sometimes advantageous for a new business to use thecash 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 onshort-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 willlend 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 todownload Excel spreadsheet.For advanced example and template, click this link instead todownload Excel spreadsheet.

Cash Flow Statement:

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

Cash Payment:

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