Glossary of Accounting Terms (Aligned with IAS/IFRS)

Accelerated depreciation
Depreciation that is either at a faster rate than would be suggested by an asset's expected
life or using methods that charge proportionately more depreciation (IAS 16) in earlier
years.

Account
A record of all the booking entries relating to a particular item. For example, the wages
account would record all the payments of wages. An account in the double-entry system has
a debit side (left) and a credit side (right). 'Accounts' may also mean financial statements,
such as statement of financial position (IAS 1)s and profit and loss accounts.

Accounting period
The period for which accounts are prepared, usually one year.

Accounting policies
Accounting policies are the principles, bases, conventions, rules and practices chosen by
businesses to account for their activities i.e. that specify how the effects of transactions and
other events are to be reflected in its financial statements.
Frequently there is more than one acceptable method of accounting for a particular
accounting transaction. Only those accounting policies that are "material" are disclosed.

Accounting principles
In the United States, conventions of practice, but in the IAS/IFRS context something more
fundamental and theoretical. Thus, the American Generally Accepted Accounting Principles
(IFRS (where applicable)) encompasses a wide range of broad and detailed accounting rules
of practice. In the IAS/IFRS context, the detailed rules are often called practices, policies or
bases; and broader matters such as accruals or conservatism were traditionally referred to
as concepts or conventions. So, in the IAS/IFRS context, IFRS (where applicable) may mean
'generally accepted accounting practices'.

Accounting standards
Technical accounting rules of recognition, measurement and disclosure set by committees
of accountants. The exact title of accounting standards varies from country to country. The
practical use of the words seems to originate officially with the Accounting Standards
Steering Committee (later the Accounting Standards Committee) in the IAS/IFRS context in
1970.

Accounts payable
Alternative expression for creditors i.e., amounts owing by a business to suppliers of goods
and services.

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Accounts receivable
Alternative expression for debtors i.e., amounts owing to a business by customers who have
not yet paid for goods or services received.

Accruals
The accounting concept which requires that revenues and expenses are recognised in the
accounting period in which they are earned or incurred rather than in the period in which
they are received or paid.

Accumulated depreciation
The total amount by which the accounting value of a fixed asset has so far been reduced to
take account of the fact that it is wearing out or becoming obsolete (see depreciation (IAS
16)).

Acid test
Name sometimes given to a ratio of some of a business's liquid assets to some of its short-
term debts. It is thus one test of the likelihood of liquidity problems. It is also called the
quick ratio.

Amortization
A word used, particularly in North America, to refer to depreciation (IAS 16) of intangible
assets.

Annual report
A report sent annually to the shareholders of a company. It contains the financial
statements and explanatory notes, the report of the auditors, the chairman's statement and
the directors' report.

Asset
Any property or rights owned or controlled by a company that have expected future
economic benefits.

Associated company
A company over which another company or group of companies has a significant influence.
An associated company is essentially the same as a related company. A company will
normally be assumed to be an associated/related company if between 20% and 50% of its
ordinary share capital is owned by another company or group of companies.

Authorized share capital

The maximum amount of a particular type of share in a particular company that may be
issued. It may be interesting information to shareholders as it puts a limit on the number of
co-owners.

Bad debt
An amount owing from debtors which is not expected to be received.

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Balance Sheet
A snapshot of the accounting records of assets, liabilities and equity of a business at a
particular moment, most obviously the accounting year end.

Bills of exchange (payable/receivable)

A written order directing that a specified sum of money be paid to a specified person on a
specified date.

Brought down (b/d), brought forward (b/f)

To denote the opening balance

Business combinations
Acquisitions or mergers involving two or more companies.

Capital employed
Usually refers to the total of the funds invested by shareholders plus the long-term debt.

Capital lease
US term for finance lease.

Capital expenditure
Expenditure on fixed assets.

Capitalization
The inclusion of an item in a statement of financial position (IAS 1).

Carried forward (c/f), carried down (c/d)

To denote the closing balance

Cash flow
The receipts of cash by and payment of cash from a business.

Cash flow statement

A financial statement that reports the cash receipts and cash payments of an accounting
period. Financial Reporting Standard No.l requires all companies to publish a cash flow
statement.

Common stock
US term for the ordinary shares in a corporation. Normally a majority of the ownership
capital will comprise issues of common stock, though preference/preferred shares are also
issued.

Consistency
The accounting concept that a company should use the same accounting policies over time.

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Consolidated accounts
A set of financial statements which combine the accounts of a parent company and its
subsidiaries as if they were a single entity.

Contingencies
Conditions (usually liabilities) that are known at the date of statement of financial position
(IAS 1), but of which the future outcome (i.e. the amount of the liability) is not known for
certain.

Contingent liabilities
Possible future obligations or present obligations that are remote or unquantifiable. They
are not accounted for, in the sense of adjusting the financial statements, but are explained in
the notes to the statement of financial position (IAS 1).

Corporation tax
The tax that is payable by companies.

Cost of sales/cost of goods sold

The costs of making the products that have been sold in a period (usually consists of raw
material, labour and production overhead).

Creditors
Amounts owing by a business to suppliers of goods and services. The US expression is trade
payables (IAS 1).

Current assets
Assets which are already in the form of cash or are expected to be converted into cash
within one year from the date of the statement of financial position (IAS 1).

Current cost accounting

A system of accounting which adjusts for changing prices.

Current liabilities
Amounts which a company owes which are expected to be paid within one year from the
date of the statement of financial position (IAS 1). (Also referred to as 'Creditors: amounts
falling due within one year'.)

Current rate method

The US term for a method of foreign currency translation. The IAS/IFRS term is closing rate
method, although this implies some greater flexibility in the choice of rates.

Current ratio
The current assets divided by the current liabilities of an enterprise at a particular date.

Debentures
Long-term loans which are usually secured on the assets of a company.

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Debtors
Amounts owed to a business from customers. The US terminology is trade receivables (IAS
1).

Deferred asset
An amount owed to a company that is not expected to be received within one year from the
date of the statement of financial position (IAS 1).

Deferred taxation
An estimate of the tax liability payable at some future date that is due to timing differences
in the accounting treatment and the taxation treatment of some types of income and
expenditure. For example, the depreciation allowed for tax purposes (depreciation
allowances (IAS 16, IAS 36)) may be greater than the depreciation (IAS 16) used for
accounting purposes in the early years of an asset's life, but the situation will be reversed in
later years.

Depreciation
A charge against the profit of an accounting period to represent the estimated proportion of
the cost of a fixed asset which has been consumed (whether through use, obsolescence or
the passage of time) during that period.

Dividend
The amount distributed to shareholders out of the profits of a company. Large companies
will normally pay an interim dividend part way through the financial year, with a final
dividend paid after the end of the financial year when it has been approved by the
shareholders.

Earnings
A technical accounting term, meaning the amount of profit (normally for a year) available to
the ordinary shareholders (IAS/IFRS)/common stockholders (US). That is, it is the profit
after all operating expenses, interest charges, taxes and dividends on preferred/preference
stock.

Earnings per share (EPS)

The most recent year's total earnings divided by the average number of ordinary/common
shares outstanding in the year.

Equity
An element of the statement of financial position (IAS 1) showing the owners' interests. It is
equal to the total assets minus the total liabilities.

Equity method
A method of accounting for investments in associated companies.

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Equity share capital
An alternative expression for the normal type of ownership finance, i.e. Ordinary shares. It
is defined as any issued share capital which has unlimited rights to participate in either the
distribution of dividends or capital.

Exceptional items
Items appearing in the profit and loss account that arise within the ordinary course of
business, but are of unusual size.

Extraordinary items
Items of income and expenditure which are significant in amount and which are outside the
normal activities of a business.

Exposure drafts
Documents that precede the issue of accounting standards. They are intended to attract
response from companies, auditors, academics, investment analysts, financial institutions,
etc.

Fair value
The amount that willing buyers and sellers would exchange something for in a market at
arm's length. For example, assets and liabilities of new subsidiaries are brought into
consolidated financial statements (IFRS 10) at fair values rather than book values. This is
designed to be an estimate of their cost to the group at the date of acquisition of a
subsidiary.

FIFO (first-in, first out)

A common assumption for accounting purposes about the flow of items of raw materials or
other inventories. It need not be expected to correspond with physical reality but may be
used for accounting purposes. The assumption is that the first units to be received as part of
inventories are the first ones to be used up or sold. This means that the most recent units
are deemed to be those left at the period end.

Finance lease
A contract that transfers the majority of risks and rewards of an asset to the lessee.

Fiscal year
The period for which companies prepare their annual financial statements. The majority of
US companies use 31 December as the fiscal year end, which corresponds with the year end
for tax purposes. In the IAS/IFRS context, the expression 'fiscal year' means tax year.

Fixed assets
Assets such as land, buildings and machines which are intended for use on a continuing
basis by the business rather than for sale.

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Free cash flow (1)
Cash flow after interest, tax, dividends, and capital expenditure, but before acquisitions and
share buy-backs.

Free cash flow (2)

Cash flow available to providers of capital after re- investment in the existing business (i.e.,
Operating cash flow less taxation, less capital expenditure and acquisitions and disposals).

Generally accepted accounting principles (GAAP)

A widely accepted set of rules, conventions, standards, and procedures for reporting
financial information, as established by the Financial Accounting Standards Board.
A technical term in accounting that encompasses the conventions, rules and procedures
necessary to define accepted accounting practice at a particular time.

Gearing
The proportion of the capital employed of a company that is financed by lenders rather than
shareholders.

Going concern
An accounting concept which assumes that a business will continue in operation for the
foreseeable future.

Goodwill
The amount paid for a business which exceeds the fair value of the assets acquired.

Gross profit
The difference between the value of sales and the cost of sales.

Group accounts
The financial statements of a group of companies. These are usually presented in the form
of consolidated financial statements (IFRS 10). IAS/IFRS expression for consolidated
financial statements.

Historical cost accounting

The conventional system of accounting under which assets are recorded at the original cost
of acquiring or producing them.

Holding company
A company which owns or controls other companies. (Control can occur through the
ownership of 50 per cent of the voting rights or through the exercise of a dominant
influence.)

Income statement
The statement of revenues and expenses of a particular period, leading to the circulation of
net income or net profit.
The format of the statement of profit or loss (IAS 1) is either 'vertical'/' statement' form or

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'horizontal' /'two-sided' /'account' form. The equivalent IAS/IFRS statement is the profit
and loss account.

Inflation accounting
A system of accounting which, unlike historical cost accounting, takes account of changing
prices.

Insolvency
This occurs when a business is unable to pay debts as they fall due.

Intangible assets
Assets such as goodwill, patents, trademarks, etc. which have no physical or tangible form.

Interim dividend
Dividend payment bases on all the profits of less than a full accounting period.

Interim report
A half-yearly or quarterly report issued by a company to its shareholders. Listed companies
are required to publish an interim report.

International Accounting Standards Board (IASB)

The standard setting body set up in 2001 by the International Accounting Standards
Committee Foundation, a private sector trust.

Issued share capital

The amount of the share capital of a company that has been issued to shareholders.

Inventories
Raw materials, work-in-progress and goods ready for sale. In the IAS/IFRS context, the
word 'stocks' is generally used instead.

Investment properties
Properties held by a business for investment or rental income, rather than for owner-
occupation.

Joint venture
An entity in which the reporting company holds an interest on a long-term basis and which
is jointly controlled by the reporting company and one or more other ventures under a
contractual arrangement.

Liabilities
The amounts owed by a company. Present obligations of an enterprise, arising from past
events, the settlement of which is expected to result in an outflow of resources (usually
cash). Most liabilities are of known amount and date. They include long-term loans, bank
overdrafts and amounts owed to suppliers.

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There are current and non-current liabilities.
The former are expected to be paid within a year from the date of the statement of financial
position (IAS 1) on which they appear. Most measures of liquidity include the total of
current liabilities. Net current assets is the difference between the current assets and the
current liabilities. Liabilities are valued at the amounts expected to be paid at the expected
maturity date. In some cases, amounts that are not quite certain will be included as
liabilities (provisions, IAS 37); they will be valued at the best estimate available.

LIFO (last-in, first-out)

One of the methods available under US rules for the calculation of the cost of inventories, in
those frequent cases where it is difficult or impossible to determine exactly which items
remain or have been used.

Liquidity
The ability of a company to meet its immediate liabilities.

Listed company
A public company listed or quoted on a stock exchange.

Listed investments
Investments which are listed or quoted on a stock exchange.

Loan capital
Alternative name for debt capital, i.e. the amounts borrowed by a company as a long-term
source of finance.

Matching
A convention that the expenses and revenues measured in order to calculate the profit for a
period should be those that can be related together for that period.

Materiality
An accounting concept which states that the normal rules of accounting concerning
valuation or disclosure need only be applied to amounts that are significant or important.

Minority interests
The share capital of a subsidiary company that is not held by the parent company. When
consolidated financial statements (IFRS 10) are prepared, 100 per cent of the assets,
liabilities, revenues and expenses of all subsidiaries are normally included.
However, not all subsidiaries are 100 per cent owned and in such cases a minority of the
shares will be left in the ownership of what are known as minority shareholders. The
interests of these minority shareholders in the capital of the group (i.e. the minority
interests) are shown separately in the consolidated statement of financial position (IAS 1).

Net assets
The total of all the assets less liabilities to outsiders. This is equal to the shareholders' funds.

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Net current assets
An alternative name for working capital, i.e. the current assets less current liabilities of a
company.

Net income
Normal US expression for net profit in IAS/IFRS terminology.

Net profit
Normal IAS/IFRS expression for the excess of all the revenues over all the business for a
period. The profit and loss account of a business will show the net profit before tax and the
net profit after tax. The profit is then available for distribution as dividends (assuming there
is sufficient cash) or for transfer to various reserves. After any dividends on preference
shares have been deducted, the figure may be called earnings.

Net realisable value

The amount at which an asset could be sold less the costs incurred in its sale.

Nominal value
Most shares have a nominal or par value. This is little more than a label to distinguish a
share from any of a different value issued by the same company. Normally, the shares will
be currently exchanged at above the nominal value, and the company will consequently
issue any new shares at approximately the market rate. Dividends may be expressed as a
percentage of nominal value; and share capital is recorded at nominal value, any excess
being recorded as share premium.

Off balance sheet financing

Financing operations in such a way that some or all of the finance does not appear as a
statement of financial position (IAS 1) item.

Operating profit
Profit before the deduction of interest and tax.

Ordinary shares
Shares which entitle the owners to share in the profits remaining after deducting loan
interest, taxation and preference share dividends.

Own shares
Shares in a company bought back by the company from its shareholders. In the United
States, own shares are called treasury stock.

Parent company
Similar to a holding company, i.e. a company which owns, or has effective control over the
activities of, another company (its subsidiary).

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Post balance sheet events
Events occurring after the date of the statement of financial position (IAS 1) but before the
accounts are issued. These can be events that require adjustment of the financial statement
('adjusting events') and events that require disclosure but do not require adjustment to the
financial statements ('non- adjusting events').

Preference shares
Shares which normally have preference over ordinary shares for payment of dividends, and
for repayment of capital if a company is wound up. Preference shares are usually entitled to
a fixed rate of dividend.

Private company
A company that is not allowed to issue shares or loan stock to the public.

Profit
The excess of the revenues earned in a period over the costs incurred in earning them.

Profit and Loss Account

The IAS/IFRS expression for the financial statement that summarizes the difference
between the revenues and expenses of a period. Such statements may be drawn up
frequently for the managers of a business, but a full audited statement is normally only
published for each accounting year. The equivalent US expression is statement of profit or
loss (IAS 1); and generally, the IASB also uses this term.

Provision
An amount charged against profit to provide for an expected liability or loss even though
the amount or date of the liability or loss is uncertain.

Prudence
An accounting concept which requires that provision (IAS 37)s be made for all known
liabilities or losses when calculating profit but that any gains or revenues should only be
included when realized in cash or near cash (e.g. debtors).

Public company
A company whose shares and loan stock may be publicly traded. A public company must
have 'public limited company' (or plc) as part of its name.

Realization convention
A well-established principle of conventional accounting, that gains or profits should only be
recognized when they have been objectively realized by some transaction or event. For
example, a gain on revaluation is only realized when the asset is sold for cash.

Receivables
Amounts due to a business from customers or other parties, typically arising from sales on
credit. These are often referred to as trade receivables under IAS 1.

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Recognition
The process of incorporating an item in a financial statement.

Reducing balance depreciation

A technique of calculating the depreciation (IAS 16) charge, usually for machines, whereby
the annual charge reduces over the years of an asset's life. A fixed percentage depreciation
(IAS 16) is charged each year on the undepreciated cost.

Registrar of companies
A government official who is responsible for collecting and arranging public access to the
annual reports of all companies.

Related companies
Associated companies.

Replacement cost accounting

A system of accounting in which assets (and related expenses such as depreciation (IAS 16))
are valued at what it would cost to replace them.

Reserves
Reserves consist of the accumulated profits that have been retained by a company, plus any
surplus from the revaluation of assets, plus any share premium. Reserves belong to
shareholders and are part of shareholders' funds.

Retained profits
Profits that have not been paid out as dividends to shareholders, but retained for further
investment by the company.

Revaluation
Conventional accounting uses historical COST as the basis for the valuation of ASSETS.
However, under IASB and some other rules, it is acceptable to revalue fixed assets annually.

Revaluation reserve
The gain or loss arising from the revaluation of assets.

Rights issue
The issue of new shares by a company to existing shareholders. The 'rights' to buy the new
shares are usually fixed at a price below the current market price.

Sales
The figure for sales recorded in the financial statements for a period, including all those
sales agreed or delivered in the period, rather than those that are paid for in cash. The sales
figure will be shown net of sales taxes (VAT, etc). In the IAS/IFRS context the word turnover
is used in the financial statements, although 'sales' is generally used in the books of account.

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Segment reporting
The disclosure of sales, profit or assets by line of business or by geographical area.

Share capital
The nominal value of the shares that have been issued by a company.

Share premium
The amount received by a company for its shares that is in excess of their nominal value.

Shareholders' funds
The total of the shareholders' interest in a company. It consists of share capital plus
reserves and is equal to the net assets of the company.

Short-term debt
A type of current liability. A loan that is repayable within one year from the date of the
statement of financial position (IAS 1).

Solvency
The ability to pay debts as they become due.

Statement of comprehensive income

Under IFRS, it is a financial statement that presents an entity's financial performance over a
specific period, showing both:

Profit or loss: the results from ordinary activities, including revenue, expenses,
gains, and losses recognized in the income statement.

Other comprehensive income (OCI): which includes items that are not recognized in
profit or loss, such as revaluation surpluses, foreign currency translation
adjustments, and certain gains or losses on financial instruments.

Stock
US term for securities of various kinds; for example, common stock or preferred stock
(equivalent to ordinary and preference shares in IAS/IFRS terminology).

Stocks and work in progress

This consists of items purchased for resale and includes raw materials required for
production, partially completed products (work in progress) and finished products.

Straight-line depreciation
A system calculating the annual depreciation (IAS 16) expense of a fixed asset. This method
charges equal annual instalments against profit over the useful life of the asset.

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Subsidiary
A company that is controlled by another company (a parent company). Control can occur
because either more than 50 per cent of the voting rights are owned by another company or
because a 'dominant influence' is exercised by another company.

Substance over form

The presentation in financial statements of the underlying economic or commercial
substance of a particular transaction, rather than the superficial, strictly legal or technical
form of it.

Tangible assets
Normally applied to those fixed assets that have a physical existence, such as land and
buildings, plant and machinery.

Total assets
The total of the fixed assets and current assets of a company.

Treasury stock
US expression for a company's shares that have been bought back by the company and not
cancelled. The shares are held 'in the corporate treasury'. They received no dividends and
carry no votes at company meetings. The IAS/IFRS equivalent term is 'own shares'.

True and fair view

The overriding legal requirement for the presentation of financial statements of companies
in the IAS/IFRS context, most of the (British) Commonwealth and the European Union. The
nearest US equivalent is 'fair presentation'.

Turnover
The sales revenue of an accounting period.

Unlisted investments
Investments which are not listed on a stock exchange.

Window dressing
Manipulation of financial statements in order to give a misleading or unrepresentative
impression.

Working capital
An alternative name for net current assets, i.e. the current assets less current liabilities of a
company.

Written down value

The value of assets in the books of a company. This is usually the historical cost less the
cumulative amount of depreciation (IAS 16) written off at the statement of financial
position (IAS 1) date.

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Sources: This glossary is based on glossaries published in Pendlebury and Groves (2001)
and Alexander and Nobes (2004), and IFRS.

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