Accounting Glossary of Terms

Accountants are responsible for the preparation of financial statements such as income statements
and statements of financial position
Accounting concepts are broad principles that guide the preparation of financial statements so that
they are relevant, reliable, comparable and understandable
Accrual is an expense for services that have been used but not yet invoiced to the business at the
end of the accounting period
Accumulated depreciation (also called provision for depreciation') means the accumulated
depreciation on non-Current assets
Asset is anything that is owned by a business, eg. physical objects such as land, buildings, vehicles,
equipment, machinery, furniture and inventory; cash or money in the bank account; and customers
who owe money to the business (trade receivables)
Auditors are appointed by the directors to check the financial statements that have been produced
by the directors or other employees of the company
Authorised share capital is the maximum share capital that a company can issue
BACS is the most common method of credit transfer - Bankers Automated Clearing Services
Bank loan is a fixed amount that must be repaid, plus interest, over a stated amount of time in equal
monthly instalments
Bank overdraft means that the bank account has a negative balance
Bonus issue involves issuing free shares to existing shareholders out of capital or revenue reserves
Bookkeepers are responsible for recording day-to-day transactions in the books of prime entry and
in the ledgers
Budget is a plan of the future income and/or expenditure of a business
Capital expenditure is expenditure on the purchase, alteration or improvement of non-current
assets
Capital gearing = non-current liabilities capital employed X 100
Capital reserves (revaluation reserve and share premium) are created because of non-trading profit
Cash book is the book of prime entry that is used to record bank receipts and bank payments, as
well as cash discount allowed and cash discount received
Cash budget shows the forecast inflows (receipts) and outflows (payments) and calculates the
predicted bank balance at the end of each period
Cash discount is offered to encourage quick payment
Companies Acts are UK laws that state how UK companies should be run and what should be
included in their financial statements
Contribution per unit = Selling price - Variable cost per unit
Contribution sales ratio = Contribution per unit / State Selling price
Cost of sales = Opening inventory + Purchases - Purchase returns + Carriage in - Closing inventory
Credit notes are issued to show that goods have been returned and that they do not need to be paid
for
Credit transfers are receipts or payments made electronically in or out of a bank account
Current assets are resources that are owned by a business that are already cash or are intended to
be cash within the next 12 months
Current liabilities are amounts owed by the business that must be repaid within one year
Current ratio = Current assets + Current liabilities
Debentures are long-term loans to a company from investors that may be secured on the assets of
the company
Debit card transactions are payments made using a debit card. The bank statement will show the
payee and the amount paid
Direct debit is an arrangement where a business authorises its bank to allow another business to
transfer money from its bank account on pre-arranged dates
Directors are employees who are responsible for the day-to-day running of the company
Directors' remuneration means salaries and other payments made to the company directors
Dishonoured cheques (also called returned cheques) are cheques that have been returned by the
bank because there is not enough money in the account to make the payment. These can either be
cheques paid by the business or cheques received by the business
Dividend is a portion of a company's earnings distributed to its shareholders
Equity is the total monetary value of a company represented by issued share capital and reserves
==> Equity = Issued share capital + Capital reserves + Revenue reserves
Expenses in relation to revenue = Expenses+ Revenue * 100
External stakeholders are suppliers, customers, lenders, HMRC and the local community
Finance cost is interest payable on non-current liabilities such as bank loans, mortgages and
Debentures
Financial accounting uses historical information to produce financial statements
Financing activities include cash received from issuing shares (including share premium), cash
received from new loans or debentures, repayment of loans, debentures or shares and dividends
paid
Fixed cost is a cost that does not immediately change due to a change in output or the number of
goods sold
General journal is the book of prime entry that is used to record non-routine transactions
General ledger includes T-accounts for every item that will appear in the financial statements
Goodwill is an intangible asset that is the difference between the value of the business as a whole
and the net value of its assets and liabilities
Gross profit = Revenue - Cost of sales
Gross profit margin = Gross profit + Revenue * 100
Income due is an amount due to a business that has not been received at the end of the financial
year
Income includes sales revenue, capital, rent received, discount received and any other sources of
income
Income received in advance is a payment received in advance of the accounting period to which it
relates
Incremental budgeting means adding a small percentage to the previous year's budget or actual
Performance
Internal stakeholders are the owners of the business and managers and other employees
Inventory turnover ('days') = Average inventory / Cost of sales * 365 days
Inventory turnover ('times) = Cost of sales / Average inventory
Invoice is the document that the seller gives to the buyer when it supplies goods or services on
credit. It includes details of the goods and services supplied and the amount to be paid
Irrecoverable debt is a debt that will not be paid - the business will not receive the amount owed by
a customer who has been sold goods on credit
Irrecoverable debt recovered is when a former trade receivable, whose account had been written
off as an irrecoverable debt, makes a payment
Issued share capital is the amount of share capital that a company has issued, shown at nominal
value
Labour budget calculates the labour hours and labour costs of the employees who are involved in
the production process
Liability is anything that is owed by a business, e.g. amounts owed to suppliers ('trade payables) or
bank overdraft or bank loan
Limited company is a separate legal entity that is owned by shareholders and controlled by directors
Limited liability means that the amount of money that shareholders can lose is limited to what they
paid for their shares; they do not have to provide any more money to pay the company's debts
Liquid capital ratio = Current assets - Inventory - Current liabilities
Lodgements are amounts that have been banked
Management accounting focuses on planning, control and decision making. It provides information
for internal rather than external stakeholders
Margin of safety = Actual level of sales- Break-even point
Marginal cost is the cost of producing one extra unit
Mark-up = Gross profit Cost of sales * 100
Mortgage is a bank loan that is used to buy property and is secured on that property
Net assets = Total assets - Total liabilities
Net book value = Cost - Provision for depreciation
Net current assets = Current assets - current liabilities
Net realisable value means the selling price of inventory minus any expenses incurred in getting
the goods into a saleable condition
Non-current assets are resources owned by the business that it intends to keep for more than one
year
Non-current liabilities are amounts owed by a business that will be fully repaid after more than one
year
Operating activities include profit from operations, depreciation profit or loss on disposal of non-
current assets, changes in inventory, trade receivables and trade payables, interest paid and tax paid
Operating profit = Gross profit + Other income - Expenses
Outstanding cheque means the same as 'unpresented' cheque
Owner's capital is money introduced by the existing owner of the business
Payables ledger includes T-accounts for each credit supplier
Prepayment is an expense that has been paid in advance and relates to the next accounting period
Production budget calculates the number of units that must be produced to meet the budgeted
level of sales
Profit for the year for a sole trader = Gross profit + Other income - Expenses
Profit for the year for a limited company = Operating profit - Finance cost - Tax
Profit in relation to revenue = Profit for the year before tax + Revenue * 100
Provision for depreciation (also called accumulated depreciation) means the accumulated
depreciation on non-current assets
Provision tor doubtful debts is an estimate by a business of the likely amount of its trade receivables
figure that may become irrecoverable
Purchases budget calculates the quantity and value of goods that need to be bought
Purchases journal is the book of prime entry that Lists the invoices for credit purchases
Purchases ledger control account shows the total owed to the credit suppliers of a business
Purchases returns journal is the book of prime entry that lists the credit notes received by the
business
Receivables ledger includes T-accounts for each credit customer
Reducing balance depreciation = Net book value x Percentage given
Return on capital employed = Operating profit / Capital employed * 100
Revaluation means the increase or decrease in the value of non-current assets, inventory or trade
receivables
Revaluation reserve is created when a non-current asset such as land and buildings is revalued at a
higher value than was previously shown
Revenue expenditure is expenditure on running costs
Revenue reserves (retained earnings) are the accumulated profits from trading activities that have
been retained in the company rather than paid out to shareholders
Rights issues involve shares being offered to existing shareholders at a price a little below the
market value but often above their nominal value, which creates share premium
Running costs include purchases, carriage, rent, wages, rent, light and heat, bills for electricity, gas
and telephone, and any other expenses
Sale or return means that the sale of goods from one business to another is not recognised until the
second business has sold those goods to its own customers
Sales budget records predicted levels of sales in units and in revenue
Sales journal is the book of prime entry that lists the invoices for credit sales
Sales ledger control account shows the total owed by the credit customers of a business
Sales returns journal is the book of prime entry that lists the credit notes issued by the business
Share capital is money invested by shareholders, which makes them the owners of a limited
company
Share premium is created when shares are issued at a higher amount than their nominal value
Sole trader is a business that is owned and controlled by one person
Stakeholders are people or organisations that are affected by the performance of a business
Standing order is an instruction from a business to its bank to make fixed payments at regular
intervals, e.g. a loan repayment
Straight line depreciation (method 1) = (Cost - Expected residual value) + Expected years of useful
life
Straight line depreciation (method 2) = Cost * Percentage given
Suspense account is a temporary T-account that is used if the trial balance doesn't balance
Total contribution = Contribution per unit * Number of units sold
Trade discount is given for buying in bulk
Trade payable days = Trade payables Credit purchases * 365
Trade receivable days = Trade receivables Credit sales * 365
Trial balance is a list of all the balances in the general ledger under the headings 'debit' and 'credit,
where the total debit balances should be equal to the total credit balances
Unlimited liability is when sole traders or partners are responsible for paying any debts that the
business is unable to pay, even if that means selling their own personal assets
Unpresented payments and unpresented receipts are items that have been entered in the cash
book but are not yet shown on the bank statement
Variable cost is a cost that immediately changes in proportion to the level of output or number of
goods sold
Variance is the difference between a budgeted figure and the actual figure
Zero-based budgeting is when budgets are set at zero and managers have to justify every item of
expenditure