The world of accounting uses many terms to define different actions, circumstances and classifications for preparing financial statements with the most accurate information possible. Accounting terminology can be quite a mouthful and hard to remember, especially if you don’t have much prior experience with financial or management accounting. However knowing what these terms mean is critical to understanding the performance of your business. Here is Big Red Book’s definition of common accounting terminology.
Account Payable: an amount due for payment to a supplier, also known as a trade creditor.
Account Receivable: an amount due from a customer which can be also described as a trade debtor
Accruals Basis: The effects of transactions are recognised when they occur rather than when they are received and paid. They are recorded in the accounts and reported in the periods which the occur.
Acid Test: The ratio of liquid assets to current liabilities.
Assets: Rights/access to future economic benefits controlled by an entity.
Audit: The independent examination of financial statements of an organisation resulting in a expressed opinion or view of the statements.
Bad Debt: It is known that a debtor is unable to pay the amount due.
Balance Sheet: A statement of the financial position of an entity showing assets, liabilities and ownership interest.
Bond: Another name for loan finance, more commonly used in the U.S.
Capital: An amount of finance provided to enable a business to acquire assets and sustain its operations.
Capital Expenditure: The amount spent on non-current/fixed assets of an organisation.
Cash: Cash on hand and deposits in a bank which can be withdrawn upon command.
Cash Flow Statement: Provides information about changes in financial position.
Charge: In relation to interest or taxes, describes the reduction in ownership interest reported in the income statement due to the cost of interest and tax payable.
Contingent Liabilities: Liabilities that are not entered into the Balance Sheet because they depend upon some other event occurring.
Cost: The cost of making a non-current asset ready for use i.e. the cost of finished goods.
Cost of Goods Sold/Cost of Sales: Costs directly related to the goods or services provided by the organisation.
Credit: The supplier agrees to allow the customer to make payment sometime after delivery.
Creditor: An entity to whom money is owed by the organisation.
Current Asset: An asset which is expected to be converted into cash within a trading cycle.
Debenture: A name used for loan financing taken on by a company.
Debtor: An entity which owe the organisation money.
Depreciation: The systematic allocation of a depreciable amount to an asset over its useful life.
Dividend: An amount paid to shareholders of the organisation as a reward for investment in the company. Dividend paid is related to the number of shares and individual shareholder has.
Drawings: Cash taken from the business for personal use. The opposite of capital.
Earnings Per Share: Metric calculated as earnings for ordinary shareholders divided by the number of shares which the company has issued.
Equity: A description applied to the ordinary share capital of an entity.
Expense: An expense is caused by a transaction or event arising which results in a decrease of ownership interest during the ordinary activities of the business.
Fixed Asset: An asset that is held by the organisation on a continuing basis for use in production or administrative services.
Gearing: The ratio of debt capital to ownership claim.
Goodwill: The difference between the fair value of the amount paid for an investment and the fair value of the net assets acquired. Related to the reputation and the perception of the entity.
Gross: Before making deductions.
Gross Profit/Gross Margin: Sales less cost of sales before deduction of other expenses.
IAS: International Accounting Standard, issued by the IASB’s predecessor body.
Impairment: A reduction in the carrying value of asset, beyond the expected depreciation. Impairments must be reflected within the Balance Sheet.
Intangible: Without shape or form. Cannot be touched. Usually related to assets such as intellectual property rights.
Interest on loans: The percentage return on the loan capital required by the lender.
Inventory: Stock held for use in the production process or for resale.
Investors: Persons or organisations which have provided money/capital to a business in exchange for ownership shares.
Key Performance Indicators (KPI): Quantified measures of factors that help to measure the performance of the business effectively.
Liabilities: Obligations to transfer economic benefits to another entity due to past events or transactions.
Liquidity: The extent to which a business has access to cash or items which can readily be exchanged for cash.
Management Accounting: Reporting financial information from within the business for use by management only.
Market Value (of a share): The price for which a share could be transferred between a buyer and a willing seller.
Minority Interest/Non-controlling Interest: The ownership in a company held by persons other than the parent company.
Net: After making deductions.
Net Assets: Assets minus Liabilities which is equal to ownership interest.
Net Profit: Sales minus cost of sales minus all administrative and selling costs.
Operating Margin: Operating profit as a percentage of sales.
Ordinary Shares: Entitle the holder to a share of the dividend and of net assets on closing down of the business.
Preference Shares: Shares in a company which give the holder a preference to receive dividend before any ordinary share dividend is declared.
Premium: An amount paid in addition, or extra.
Profit: Calculated as revenue minus expenses.
Provision: A liability of uncertain timing or amount.
Prudence: Not overstating gains and assets and not understating losses and liabilities.
Reserves: The claim which owners have on the assets of a company because the company has created new wealth for them over the period since it began.
Return on Capital Employed: Operating profit before deducting interest and taxation, divided by share capital plus reserves plus long term loans.
Sales/Revenue: Created by transactions during the ordinary course of business which increase the ownership interest. Money received by the business in exchange for goods and services.
Share Capital: Name given to the total amount of cash which the shareholders have contributed to the company.
Tangible Fixed Asset: A fixed asset which has a physical existence.
True & Fair View: Requirement for UK companies not using the ISAB system when preparing their financial records.
Working Capital: Finance to support the short term assets of the business to the extent that these are not financed by short term creditors. Current assets less current liabilities.
Work-in-Progress: Cost of partly completed goods or services, intended for completion and recorded as an asset.