Glossary

Glossary of Accounting Terms

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

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.

Accruals: If during the course of a business certain charges are incurred but no invoice is received then these charges are referred to as accruals (they ‘accrue’ or increase in value). A typical example is interest payable on a loan where you have not yet received a bank statement. These items (or an estimate of their value) should still be included in the profit & loss account. When the real invoice is received, an adjustment can be made to correct the estimate. Accruals can also apply to the income side.

Assets: Assets represent what a business owns or is due. Equipment, vehicles, buildings, creditors, money in the bank, cash are all examples of the assets of a business.

Audit: The process of checking every entry in a set of books to make sure they agree with the original paperwork.

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

Audit Trail: A list of transactions in the order they occurred.

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.

Bankrupt: If an individual or unincorporated company has greater liabilities than it has assets, the person or business can petition for, or be declared by its creditors, bankrupt.

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

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

Cash Book: A journal where a business’s cash sales and purchases are entered.

Cash Flow: A report which shows the flow of money in and out of the business over a period of time.

Creditors: A list of suppliers to whom the business owes money.

Debenture: This is a type of share issued by a limited company. It is the safest type of share in that it is really a loan to the company and is usually tied to some of the company’s assets so should the company fail, the debenture holder will have first call on any assets left after the company has been wound up.

Debtors: A list of customers who owe money to the business.

Depreciation: The value of assets usually decreases as time goes by. The amount or percentage it decreases by is called depreciation.

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

Drawings: The money taken out of a business by its owner(s) for personal use.

Expenses: Goods or services purchased directly for the running of the business.

FIFO: First In First Out. A method of valuing stock.

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.

Goodwill: This is an extra value placed on a business if the owner of a business decides it is worth more than the value of its assets.

Liabilities: This includes bank overdrafts, loans taken out for the business and money owed by the business to its suppliers.

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.

Net Profit: This is the amount earned by a company after expenses.

Operating Lease: An agreement whereby the leaser retains the risks and rewards associated with ownership and normally assumes responsibility for repairs, maintenance and insurance.

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.

Profit and Loss Account: An account made up of revenue and expense accounts which shows the current profit or loss of a business.

Provisions: One or more accounts set up to account for expected future payments.

Reconciling: The procedure of checking entries made in a business’s books with those on a statement sent by a third person.

Retained earnings: This is the amount of money held in a business after its owner(s) have taken their share of the profits.

Sales: Income received from selling goods or a service.

Self-employed: The owner (or partner) of a business who is legally liable for all the debts of the business (ie. the owner(s) of a non-limited company).

Shareholders: The owners of a limited company or corporation.

Source document: An original invoice, bill or receipt to which journal entries refer.

Turnover: The income of a business over a period of time.

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