Accounting Terms GLOSSARY

8/18/2019 Accounting Terms GLOSSARY

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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 epense.

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

# e!uity.

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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

depreciation).

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 standardsor financial reporting standards regulation body in your

&urisdiction.

Accruals: (that which has accrued, accumulated, grown) epenses 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) ccountof the period to which they relate irrespective of the period of

receipt or payment.

Accumulated depreciation: that part of the original cost of a fied asset which has been

regarded as a depreciation epense in successive %rofit andLoss (%'L) ccounts: cost less accumulated depreciation " net

book value.

Acid test: he ratio of current assets (ecluding stock) to current

liabilities.

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 depreciationof 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.

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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 epressed as sales as a percentage of net operating

assets.

Asset value: a term which epresses 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 whichwould be avoided if that activity or sector did not eist.

Auditing: the independent eamination of, and epression 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

epense.

%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 eample is the

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

in kind are taable.

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

debenture.

%onus issue: a free issue of new shares to eisting shareholders. 0o paymentis made for the shares. Its main effect is to divide the substance

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

shares.

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

records and alance *heet. he usual book value for fied

assets is cost less accumulated depreciation. lternative wordsinclude 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

eactly e!ual total costs.

%udget: a formal !uantitative epression of management2s plans or epectations. 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 lessliabilities owned by a person or a business.

!apital allo'ances: deductions from profit for fied 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 fied asset

ac!uisitions.

!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: ependiture on fied 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 epected or planned cash receipts andoutgoings 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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!ommitted costs: those fied costs which cannot be eliminated or even cut back

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

rent).

!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 (epenses 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 production

overheads.

!onvertible loan stock : loans where, at the option of the lender, the loan can beconverted into ordinary shares at specified times and specified

rates of conversion.

!ost be&avior: the change in a cost when the level of output changes.

!ost center: a location, function, or item of e!uipment in respect of whichcosts may be ascertained and related to cost units.

!ost convention: the accounting convention whereby alance *heet assets are

mostly valued at input cost or by reference to input cost.

!ost)volume)profit #!P$ analysis: the study of the relationships between variable

costs, total fied costs, levels of output and price and mi of units sold and profit, often analyzed in a 8inancial 3odeling

eercise.



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!redit: commonly used to refer to a benefit or gain also the practice of

selling goods and epecting payment at a later date.

!redit control: those measures and procedures adopted by a firm to ensure thatits credit customers pay their accounts.

!reditors: those persons, firms or organizations to whom the enterprise

owes money.

!reditors payment or settlement period: a ratio (usually creditors inputs on credit in a

year 1;9) which measures how long it takes the firm to payits creditors.

!umulative preference s&ares: preference shares where the rights to dividends omitted

in a given year accumulate. hese dividends must be paid

before a dividend can be paid on the ordinary shares.

!urrent assets: cash # those assets (stock, debtors, prepayments, bank

accounts) which the management intend to convert into cash or

consume in the normal course of business within one year or within the operating cycle.

!urrent cost accounting #!!A$: a system of accounting which recognizes the fluctuating

value of money by measuring current value by applying

specific indices and other devices to historical costs. validmethod which is comple and difficult to understand

intuitively.

!urrent liabilities: debts or obligations that will be paid within one year of the

accounting date. nother term used to describe the same isreditors: amount falling due within one year.

!urrent ratio: the ratio of current assets to current liabilities.

!ut)off : the difficulties encountered by accountants in ensuring all

items of income and epense are correctly ascribed to the right

annual profit statement.

*ebenture: a document which creates or acknowledges a debt. ommonlyused for the debt itself.

*ebt: a sum due by a debtor to his creditor. ommonly used also as a

generic term for borrowings.

*ebtors: those who owe money.

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*ebtors payment #settlement$ period: a calculation of the average time taken by credit

customers to pay for their goods. alculated by


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+conomic "rder ,uantity: that purchasing order size which takes into account the

#+",$ optimum combination of stockholding costs and ordering costs.

+quity convention: the convention that a business can be viewed as a unit that is aseparate entity and apart from its owners and from other firms.

+quity: the ordinary shares or risk capital of an enterprise.

+(ceptional items: material items which derive from events or transactions that

fall within the ordinary activities of the reporting entity and

which need to be disclosed by virtue of their size or incidenceif the financial statements are to give a true and fair view.

6amples are profits or losses on termination of an operation,

costs of a fundamental reorganization and profits and losses ondisposal of fied assets.

+(pense: a cost which will be in the %rofit and Loss (%'L) ccount of ayear.

+(posure draft: a document issue on a specific accounting topic for discussion.

+(traordinary items: material items possessing a high degree of abnormality whicharise from events or transactions that fall outside the ordinary

activities of the reporting entity and which are not epected to

recur. hey should be disclosed but are very rare indeed.

Factoring: the sale of debtors to a factoring company to improve cash

flow. 8actoring is a method of obtaining finance tailored to theamount of business done but factoring companies also offer

services such as credit worthiness checks, sales and debtor recording, and debt collection.

F-F": first in first out 7 a method of recording and valuation of fungible assets,

especially stocks, which values items on the assumption that

the oldest stock is used first. 8I8> stocks are valued at mostrecent input prices.

Finance lease: a leasing contract which transfers substantially all the risks and

rewards of ownership of an asset to the lessee. In effect thelessee is really buying the assets with the aid of a loan and the

lease installments are really payments of interest and

repayments of capital. hey are accounted for as such inaccordance with the accounting convention of substance over

form.

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Financial statements: alance *heets, %rofit and Loss ccount, Income and

6penditure ccounts, ash 8low *tatements and other

documents which formally convey information of a financialnature to interested parties concerning an enterprise. In

companies, the financial statements are sub&ect to audit

opinion.

Fi(ed assets: business assets which have a useful life etending over morethan one year. 6amples are land and buildings, plant and

machinery, vehicles.

Fi(ed cost: a cost which in the short term, remains the same at differentlevels of activity. n eample is rent.

Fle(ible budget: a budget which is fleed to recognize the difference in behavior

of fied and variable costs in relation to levels of output. otal

budgeted costs changed to accord with changed levels of activity.

Floating c&arge: an arrangement whereby a lender to a company has a floating

charge over the assets generally of the company gives the

lender priority of repayment from the proceeds of sale of theassets in the event of insolvency. anks fre!uently take a

floating charge when lending.

Format: a specific layout for a financial statement. *everal alternatives

are often prescribed by the prevailing governing authority or

law of the country in which the enterprise operates or reportsits financial performance.

Funds flo' statement: a financial statement which links alance *heets at the

beginning and end of a period with the %rofit and Loss (%'L)ccount for that period. 0ow replaced by the cash flow

statement.

Fungible assets: assets which are substantially indistinguishable from each

other. -sed for stocks which can then be valued on 8I8> or 4> principles. LI8> is also possible but often not usually

for ta reasons.

.earing: also known as leverage, the relationship between debt and

e!uity in the financing structure of a company.

.ilt)edged securities: securities and investments which offer a negligible risk of

default. %rincipally government securities.

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.oal congruence: the situation in which each individual, in satisfying his or her

own interests, is also making the best possible contribution to

the ob&ectives of the enterprise.

.oing concern: the accounting convention which assumes that the enterprise

will continue in operational eistence for the foreseeablefuture. his means in particular that the %rofit and Loss (%'L)

ccount and alance *heet (*) assume no intention or necessity to li!uidate or curtail significantly the scale of

operation.

.ood'ill: an intangible asset which appears on the alance *heet of some businesses. It is valued at (or below) the difference between the

price paid for a whole business and the fair value of the net

assets ac!uired.

.ross: usually means before or without deductions. 8or eampleAross *alary or Aross %rofit.

.ross profit: sales revenue less cost of sales but before deduction of

overhead epenses. In a manufacturing company it is sales

revenue less cost of sales but before deduction of nonBmanufacturing overheads.

.ross margin: (or gross profit ratio), gross profit epressed as a percentage of

sales.

.roup: a set of interrelated companies usually consisting of a holdingcompany and its subsidiary and subBsubsidiary companies.

.roup accounts: the financial statements of a group wherein the separate

financial statements of the member companies of a group are

combined into consolidated financial statements.

-F": &ig&est in &ig&est out, a pricing policy where costs are collected for a &ob onthe basis that the cost of materials and components is the

highest recent input price.

istorical cost: the accounting convention whereby goods, resources andservices are recorded at cost. ost is defined as the echange or

transaction price. -nder this onvention, realizable values are

generally ignored. Inflation is also ignored. he almostuniversal adoption of this convention makes accounting harder

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to understand and lessens the credibility of financial

statements.

urdle: a criteria that a proposed capital investment must pass before itis accepted. It may be a certain interest rate, a positive 0%4 or

a maimum payback period.

-ncome and e(penditure account: the e!uivalent to %rofit and Loss (%'L) ccounts in

nonprofit organizations such as clubs, societies and charities.

-ndirect costs: costs which cannot be traced to particular products. neample is rent or management salaries. hey are usually

shared by more than one product and are called overheads.

-nsolvency: the state of being unable to pay debts as they fall due. lso

used to describe the activities of practitioners in the fields of

bankruptcy, receivership and li!uidations.

-ntangible assets: assets which have long term value but no physical identity.

6amples are goodwill, patents, trade marks and brands.

-nterim dividend: a dividend paid during a financial year, generally after the issueof unBaudited profit figures half way through the year.

-nternal rate of return: the rate of discount which will &ust discount the future cash

flows of a proposed capital investment back to the initial

outlay.

-nventory: a detailed list of things. -sed by accountants as another word

for stock.

-nvestment appraisal: the use of accounting and mathematical methods to determine

the likely returns for a proposed investment or capital pro&ect.

0ey factor: a factor of production which is in limited supply and thereforeconstrains production.

1abor &our rate: a method of absorption where the costs of a cost centre are

shared out amongst products on the basis of the number of hours of direct labor used on each product.

1everage: another word for gearing.

1-F": 1ast in first out 7 a valuation method for fungible items where the newest items

are assumed to be used first. 3eans stocks will be valued at old

prices. 0ot used in certain &urisdictions such as the -./ for tareasons.

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1imiting or key factor: a factor of production which is in limited supply and therefore

constrains output.

1iquidation: the procedure whereby a company is wound up, its assetsrealized and the proceeds divided up amongst the creditors and

shareholders.

1iquidity: the ease with which funds can be raised by the sale of assets.

1iquidity ratios: ratios which purport to indicate the li!uidity of a business.

hey include the current ratio and the acid test ratio.

1isted companies: companies whose shares are traded on the stock echange.

2ac&ine &our rate: a method of absorption of the costs of a cost center where the

costs are shared out among the products which use the centre in

proportion to the use of machine hours by the relevant products.

2anagement accounting: the provision and interpretation of information which assists

management in planning, controlling, decision making, and

appraising performance.

2anagement by e(ception: control and management of costs and revenues byconcentrating on those instances where significant variances by

actual from budgets have occurred.

2anufacturing accounts: 8inancial statements which measure and demonstrate the totalcosts of manufacturing in a period. hey are followed by

rading and %rofit and Loss (%'L) ccounts.

2arginal costing: a system of cost analysis which distinguishes fied costs from

variable costs.

2arginal cost: the additional cost incurred by the production of one etra unit.

2argin of safety: the ecess of budgeted activity over breakeven activity.

-sually epressed as a percentage of budgeted activity.

2ark)up: gross profit epressed as a percentage of cost of goods sold.

2atc&ing convention: the idea that revenues and costs are accrued, matched with oneanother as far as possible so far as their relationship can be

established or &ustifiably assumed, and dealt with in the %rofit

and Loss (%'L) ccount of the period in which they relate. n

eample is the matching of sales of a product with the

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development costs of that product. he appropriate periods

would be when the sales occur.

2aster budgets: the overall budgets of an enterprise comprising cash budget,forecast %rofit and Loss (%'L) ccount and forecast alance

*heet (*). hey are made up from subsidiary budgets.

2ateriality: the accounting convention that recognizes that accounting is a

summarizing process. *ome items and transactions are large(i.e. material) enough to merit separate disclosure rather than

inclusion with others in a lump sum. 6amples are an

eceptionally large bad debt or an eceptionally large loss onsale of a fied asset.

2inority interest: the interests in the assets of a Aroup relating to shares in group

companies not held by the holding company or other members

of the group.

2odified accounts: financial statements which are shortened versions of fullaccounts. *mall and medium sized companies can file these

with the Degistrar of ompanies instead of full accounts.

2oney measurement: the convention that re!uires that all assets, liabilities, revenues

and epenses shall be epressed in money terms.

Net: usually means after deductions. 8or eample net current assets

current assets less current liabilities and net cash flow means

cash inflows less cash outflows. ontrast gross.

Net book value: the valuation on the alance *heet of an asset. lso known asthe carrying value or written down value.

Net present value: the value obtained by discounting all cash inflows and outflows

attributable to a proposed capital investment pro&ect by a

selected discount rate.

Net realizable value: the actual or estimated selling price of an asset less all further costs to completion (e.g. ost of a repair if it needs to be

repaired before sale) and all costs to be incurred before and onsale (e.g. commission).

N-F": Ne(t in first out 7 a pricing policy where costs are collected on the basis that the

cost of materials and components is the net input price.

Nominal value: the face value of a share or debenture as stated in the official

documents. Eill not usually be the same as the issue pricewhich may be at a premium and which will almost never

correspond to actual value.

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"b3ectivity: the convention of using reliable and verifiable facts (e.g. the

input cost of an asset) rather than estimates of Fvalue2 even if

the latter is more realistic.

"perating cycle: the period of time it takes a firm to buy inputs, make or market

a product and sell to and collect the cash from a customer.

"pportunity cost: the value of a benefit sacrificed in favor of an alternative

course of action.

"rdinary s&ares: the e!uity capital of a company.

"utsourcing: the use of services (such as administration or computing) from

separate outside firms instead of using the enterprise2s own

employees.

"ver&eads: Indirect cost.

"vertrading: paradoical situation when a company does so much business that stocks and debtors rise leading to working capital

and li!uidity difficulties.

Par value: the nominal sum imprinted on a share certificate and which

spears on the alance *heet (*) of a company as sharecapital. It has no significance as a value.

Payback : the number of years which will elapse before the total

incoming cash receipts of a proposed pro&ect are forecast toeceed the initial outlays.

Periodicity: the convention that financial statements are produced at regular

intervals usually at least annually.

Preference s&ares: *hares in which holders are entitled to a fied rate of dividend

(if one is declared) in priority to the ordinary shareholders in awinding up situation.

Planning variance: variance arising because the budgeted cost is now seen as out

of date. 6amples are wage or price rises.

Prepayments: 6penditure already made on goods or services but where the benefit will be felt after the alance *heet (*) date. 6amples

are rent or rates or insurances paid in advance.

Price earnings ratio: an investor ratio calculated as 7 share earnings per share.

Prime cost: the direct costs of production.



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Private company: any company that is not a public company.

Profitability inde(: in investment appraisal, the net present value of cash inflows

the initial out lays.

Profit and 1oss #P41$ Account: a financial statement which measures and reports the profit earned over a period of time.

Pro 5ata: in proportion to.

Prospectus: an official document being in advertisement offering shares for

sale to the public.

Provision: a charge in the %rofit and Loss (%'L) ccount of a business for an epense which arose in the past but which will only give

rise to a payment in the future. o be a provision the amount

payable must be uncertain as to amount or as to playability or both. n eample is possible damages awardable by a court in

a future action over a past incident (e.g. a libel).

Prudence (or conservatism):the convention whereby revenue and profits are not anticipated,

but provision is made for all known liabilities (epenses andlosses) whether the amount of these is known with certainty or

is a best estimate. 6ssentially future profit, wait until it happens

7 future loss, count it now.

,uick ratio: also known as acid test ratio, current assets (ecept stock)

current liabilities.

,uoted company: also known as a listed company, a company whose shares are

traded on the stock echange.

5ealizable value: the amount that an asset can be sold for.

5ealization: to sell an asset and hence turn it into cash.

5ealization convention: the concept that a profit is accounted (or when a good is sold

and not when the cash is received.

5eceiver: an insolvency practitioner who is appointed by a debenture

holder with a fied or floating charge when a companydefaults.

5edemption: repayment of shares, debentures or loans.

5edemption yield: the yield given by an investment epressed as a percentage and

taking into account both income and capital gain or loss.



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5educing balance: a method of depreciation whereby the asset is epensed to the

%rofit and Loss (%'L) ccount over its useful life by applying

a fied percentage to the written down value.

5elevant costs: costs that will only be incurred if a proposed course of action is

actually taken. he only ones relevant to an actual decision.

5elevant range: the range of activity which is likely. Eithin it variable costs are

epected to be linearly variable with output and fied costs areepected to be unchanged.

5eporting: the process whereby a company or other institution seeks to

inform shareholders and other interested parties of the results

and position of the entity by means of financial statements.

5eserves: a technical term indicating that a company has total assets

which eceed in amount the sum of liabilities and share capital.his ecess arises from retained profits or from revaluations of

assets.

5esource accounting and budgeting: the use of normal accruals accounting and

alance *heets in federal government departments and

agencies.

5etained profits: also known as retentions, the ecess of profits over dividends.

5eturn on capital: a profitability ratio being income epressed as a

employed percentage of the capital which produced the income.

5eturn on sales: the ratio of profit to sales epressed as a percentage.

5eturns: the income flowing from the ownership of assets. 3ay include

capital gains.

5evenue: amounts charged to customers for goods or services rendered.

5evenue e(penditure: ependiture that benefits only the current period and which will

therefore be charged in the %rofit and Loss (%'L) ccount.

5ig&ts issue: an invitation to eisting shareholders to subscribe cash for new

shares in the company in proportion to their holdings.

Salvage value: also known as residual value, the amount estimated to berecoverable from the sale of a fied asset at the end of its

useful life.

Secured liabilities: liabilities secured by a fied or floating charge or by other

operation of law such as hire purchase commitments.

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Securities: financial assets such as shares, debentures and loan stocks.

Segmental reporting: the practice of breaking down turnover, profits and capital

employed into sections to show the separate contributions of each to the overall picture. *egments can be distinct products,

geographical areas, or classes of customers, etc.

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Accounting Terms GLOSSARY