Accounting Terms GLOSSARY

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  • 8/18/2019 Accounting Terms GLOSSARY


    Finance for Non Finance

    Accounting / Finance Terms

    Accounting, financial analysis and financial modeling are integrated disciplines which a good financial analyst should be familiar with. In

     particular, it is important that a sound knowledge of fundamental accounting principles  and accounting terms  is had to ensure a

    common basis and language for understanding, interpreting and analyzing financial statements and financial model results.

    List of the most common accounting terms that a financial analyst may come across:

    Absorption: the sharing out of the costs of a cost center amongst the

     products which use the cost center.

    Account: a record in a double entry system that is kept for each (or each

    class) of asset, liability, revenue and epense.

    Accounting equation: an epression of the e!uivalence, in total, of assets " liabilities

    # e!uity.

    Sunil Parkar Finance for Non Finance : Accounting Terms $

  • 8/18/2019 Accounting Terms GLOSSARY


    Accounting period: that time period, typically one year, to which financial

    statements are related.

    Accounting policies: the specific accounting bases selected and followed by a  business enterprise (e.g. straight line or reducing balance


    Accounting rate of return: a ratio sometimes used in investment appraisal but based on

     profits not cash flows.

    Accounting standards: %rescribed methods of accounting by the accounting standards or financial reporting standards regulation body in your 


    Accruals: (that which has accrued, accumulated, grown) epenses which

    have been consumed or en&oyed but which have not been paid

    for at the accounting date.

    Accruals convention: the convention that revenues and costs are matched with one

    the other and dealt with in the %rofit and Loss (%'L) ccount of the period to which they relate irrespective of the period of 

    receipt or payment.

    Accumulated depreciation: that part of the original cost of a fied asset which has been

    regarded as a depreciation epense in successive %rofit and Loss (%'L) ccounts: cost less accumulated depreciation " net

     book value.

    Acid test: he ratio of current assets (ecluding stock) to current


    Acquisitions: operations of a reporting entity that are ac!uired in a period. *eparate disclosure of turnover, profits, etc must be made.

    Activity based costing: cost attribution to cost units on the basis of benefit received

    Irons indirect activities. he idea is that overhead costs are

    driven by activities (e.g. setting up a machine) not products.

    Allocation: the charging of discrete, identifiable costs to cost centers or cost units.  cost is allocated when it is uni!ue to a particular 

    cost center.

    Amortization: another word for depreciation: commonly used for depreciation of the capital cost of ac!uiring leasehold property.

    Apportionment: the division of costs among two or more cost centers in

     proportion to estimated benefit on some sensible basis.

    pportionment is for shared costs.

    Sunil Parkar Finance for Non Finance : Accounting Terms +

  • 8/18/2019 Accounting Terms GLOSSARY


    Assets: resources of value owned by a business entity.

    Assets utilization ratio: a ratio which purports to measure the intensity of use of 

     business assets. alculated as sales over net operating assets. an be epressed as sales as a percentage of net operating


    Asset value: a term which epresses the money amount of assets less

    liabilities of a company attributable to one ordinary share.

    Avoidable costs: the specific costs of an activity or sector of a business which would be avoided if that activity or sector did not eist.

    Auditing: the independent eamination of, and epression of an opinion

    on, the financial statements of an enterprise by an appointed

    auditor in pursuance of that appointment and in compliance

    with any relevant statutory obligation.

    A!" #average cost$: a method of valuing fungible assets (notably stock) at average

    (simple or weighted) input prices.

    %ad debts: debts known to be irrecoverable and therefore treated as losses  by inclusion in the %rofit and Loss (%'L) ccount as an


    %alance S&eet: a financial statement showing the financial position of a

     business entity in terms of assets, liabilities and capital at a

    specified date.

    %ankruptcy: a legal status imposed by a court. -sually a trustee is appointed

    to receive and realize the assets of the bankrupt and to

    distribute the proceeds to his creditors according to the law.

    %enefits in kind: things or services supplied by a company to its directors and

    others in addition to cash remuneration.  good eample is the

     provision of and free use of a motor car. he value of benefits

    in kind are taable.

    %ond: a formal written document that provides evidence of a loan.ond has mainly merican usage. Its -/ e!uivalent is


    %onus issue: a free issue of new shares to eisting shareholders. 0o payment is made for the shares. Its main effect is to divide the substance

    of the company (assets less liabilities) into a larger number of 


    Sunil Parkar Finance for Non Finance : Accounting Terms 1

  • 8/18/2019 Accounting Terms GLOSSARY


    %ook value: the amount at which an asset is carried on the accounting

    records and alance *heet. he usual book value for fied

    assets is cost less accumulated depreciation. lternative words include written down value, net book value and carrying value.

    ook value rarely if ever corresponds to saleable value.

    %reakeven c&art: a chart which illustrates costs, revenues, profit and loss at

    various levels of activity within a relevant range.

    %reakeven point: the level of activity (e.g. level of sales) at which the business

    makes neither a profit nor a loss i.e. where total revenues

    eactly e!ual total costs.

    %udget: a formal !uantitative epression of management2s plans or  epectations. 3aster budgets are the forecast or planned %rofit

    and Loss ccount and alance *heet. *ubsidiary budgets

    include those for sales, output, purchases, labor, cash etc.

    !apital: an imprecise term meaning the whole !uantity of assets less liabilities owned by a person or a business.

    !apital allo'ances: deductions from profit for fied asset purchases. In effect

    capital allowances is a standard system of depreciation used

    instead of depreciation for ta purposes only.

    !apital budgeting: the process of planning or appraising possible fied asset


    !apital employed: a term describing the total net assets employed in a business.

    4arious definitions are used, so beware when talking at cross  purposes.

    !apital e(penditure: ependiture on fied assets.

    !as&: strictly coins and notes but used also to mean all forms of ready

    money including bank balances.

    !as& discount: a reduction in the amount payable by a debtor to induce prompt

     payment (e!uivalent to settlement discount).

    !as& flo': a vague term (compare cash flow difficulties) used for the

    difference between total cash in and total cash out in a period.

    !as& flo' forecast: a document detailing epected or planned cash receipts and outgoings for a future period.

    !as& flo' statement: a formal financial statement showing a summary of cash

    inflows and outflows under certain re!uired headings.

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  • 8/18/2019 Accounting Terms GLOSSARY


    !ommitted costs: those fied costs which cannot be eliminated or even cut back 

    without having a ma&or effect on the enterprise2s activities (e.g.


    !ommon stock : the -.* e!uivalent of ordinary shares.

    !onservatism: (also known as prudence) the convention whereby revenue

    and profits are not anticipated, but provision is made for all

    known liabilities (epenses and losses) whether the amount of  these is known with certainty or is a best estimate. 6ssentially 7 

    future profit, wait until it happens 7 future loss, count it

    !onsideration: the amount to be paid for anything sold including businesses.

    3ay be cash, shares or other securities.

    !onsistency: convention that there is consistency of accounting treatment of 

    like items within each year and from year to year.

    !onsolidation: the aggregation of the financial statements of the separate

    companies of a group as if they were a single entity.

    !ontribution: a term used in marginal costing 7 the difference between sale  price and associated variable costs.

    !ontrollable costs  (also known as managed costs): costs, chargeable to a budget

    or cost centre, which can be influenced by the actions of the

     persons in whom control is vested.

    !onversion cost: the cost of bringing a product or service into its present

    location or condition. 3ay include a share of product