Business - accounting
Above the line : This term can be applied to many aspects of accounting. It means transactions, assets etc.,
that are associated with the everyday running of a business. See below the line .
Account: A section in a ledger devoted to a single aspect of a business (eg. a Bank account, Wages account,
Office expenses account).
Accounting cycle: This covers everything from opening the books at the start of the year to closing them at the
end. In other words, everything you need to do in one accounting year accounting wise.
Accounting equation: The formula used to prepare a balance sheet: assets = liability + equity .
Accounts Payable: An account in the nominal ledger which contains the overall balance of the Purchase
Accounts Payable Ledger: A subsidiary ledger which holds the accounts of a business's suppliers. A single
control account is held in the nominal ledger which shows the total balance of all the accounts in the purchase
Accounts Receivable: An account in the nominal ledger which contains the overall balance of the Sales
Accounts Receivable Ledger: A subsidiary ledger which holds the accounts of a business's customers. A single
control account is held in the nominal ledger which shows the total balance of all the accounts in the sales
Accretive: If a company acquires another and says the deal is 'accretive to earnings', it means that the
resulting PE ratio (price/earnings) of the acquired company is less than the acquiring company. Example: Company
'A' has an earnings per share (EPS) of $1. The current share price is $10. This gives a P/E ratio of 10 (current
share price is 10 times the EPS). Company 'B' has made a net profit for the year of $20,000. If company 'A' values
'B' at, say, $180,000 (P/E ratio=9 [180,000 valuation/20,000 profit]) then the deal is accretive because company
'A' is effectively increasing its EPS (because it now has more shares and it paid less for them compared with its
own share price). (see dilutive )
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.
Accrual method of accounting: Most businesses use the accrual method of accounting (because it is usually
required by law). When you issue an invoice on credit (ie. regardless of whether it is paid or not), it is treated
as a taxable supply on the date it was issued for income tax purposes (or corporation tax for limited companies).
The same applies to bills received from suppliers. (This does not mean you pay income tax immediately, just that it
must be included in that year's profit and loss account).
Accumulated Depreciation Account: This is an account held in the nominal ledger which holds the depreciation of
a fixed asset until the end of the asset's useful life (either because it has been scrapped or sold). It is
credited each year with that year's depreciation, hence the balance increases (ie. accumulates) over a period of
time. Each fixed asset will have its own accumulated depreciation account.
Advanced Corporation Tax (ACT - UK only - no longer in use): This is corporation tax paid in advance when a
limited company issues a dividend. ACT is then deducted from the total corporation tax due when it has been
calculated at year end. ACT was abolished in April 1999. See Corporation Tax .
Amortization: The depreciation (or repayment) of an (usually) intangible asset (eg. loan, mortgage) over a fixed
period of time. Example: if a loan of 12,000 is amortized over 1 year with no interest, the monthly payments would
be 1000 a month.
Annualize: To convert anything into a yearly figure. Eg. if profits are reported as running at £10k a quarter,
then they would be £40k if annualized. If a credit card interest rate was quoted as 1% a month, it would be
annualized as 12%.
Appropriation Account: An account in the nominal ledger which shows how the net profits of a business (usually a
partnership, limited company or corporation) have been used.
Arrears: Bills which should have been paid. For example, if you have forgotten to pay your last 3 months rent,
then you are said to be 3 months in arrears on your rent.
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. Typical breakdown includes 'Fixed assets', 'Current
assets' and 'non-current assets'. Fixed refers to equipment, buildings, plant, vehicles etc. Current refers to
cash, money in the bank, debtors etc. Non-current refers to any assets which do not easily fit into the previous
categories (such as Deferred expenditure ).
At cost: The 'at cost' price usually refers to the price originally paid for something, as opposed to, say, the
Audit: The process of checking every entry in a set of books to make sure they agree with the original paperwork
(eg. checking a journal's entries against the original purchase and sales invoices).
Audit Trail: A list of transactions in the order they occurred.
Bad Debts Account: An account in the nominal ledger to record the value of un-recoverable debts from customers.
Real bad debts or those that are likely to happen can be deducted as expenses against tax liability (provided they
refer specifically to a customer).
Bad Debts Reserve Account: An account used to record an estimate of bad debts for the year (usually as a
percentage of sales). This cannot be deducted as an expense against tax liability.
Balance Sheet: A summary of all the accounts of a business. Usually prepared at the end of each financial year.
The term 'balance sheet' implies that the combined balances of assets exactly equals the liabilities and equity
(aka net worth).
Balancing Charge: When a fixed asset is sold or disposed of, any loss or gain on the asset can be reclaimed
against (or added to) any profits for income tax purposes. This is called a balancing charge.
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. In the case of a limited company or
corporation in the same position, the term used is insolvent .
Below the line: This term is applied to items within a business which would not normally be associated with the
everyday running of a business. See above the line .
Bill: A term typically used to describe a purchase invoice (eg. an invoice from a supplier).
Bought Ledger: See Purchase Ledger .
Burn Rate: The rate at which a company spends its money. Example: if a company had cash reserves of $120m and it
was currently spending $10m a month, then you could say that at the current 'burn rate' the company will run out of
cash in 1 year.
CAGR: (Compound Annual Growth Rate) The year on year growth rate required to show the change in value (of an
investment) from its initial value to its final value. If a $1 investment was worth $1.52 over three years, the
CAGR would be 15% [(1 x 1.15) x 1.15 x 1.15]
Called-up Share capital: The value of unpaid (but issued shares) which a company has requested payment for. See
Paid-up Share capital .
Capital: An amount of money put into the business (often by way of a loan) as opposed to money earned by the
Capital account: A term usually applied to the owners equity in the business.
Capital Allowances (UK specific): The depreciation on a fixed asset is shown in the Profit and Loss account, but
is added back again for income tax purposes. In order to be able to claim the depreciation against any profits the
Inland Revenue allow a proportion of the value of fixed assets to be claimed before working out the tax bill. These
proportions (usually calculated as a percentage of the value of the fixed assets) are called Capital
Capital Assets: See Fixed Assets .
Capital Employed (CE): Gross CE=Total assets, Net CE=Fixed assets plus (current assets less current
Capital Gains Tax: When a fixed asset is sold at a profit, the profit may be liable to a tax called Capital
Gains Tax. Calculating the tax can be a complicated affair (capital gains allowances, adjustments for inflation and
different computations depending on the age of the asset are all considerations you will need to take on
Cash Accounting: This term describes an accounting method whereby only invoices and bills which have been paid
are accounted for. However, for most types of business in the UK, as far as the Inland Revenue are concerned as
soon as you issue an invoice (paid or not), it is treated as revenue and must be accounted for. An exception is VAT
: Customs & Excise normally require you to account for VAT on an accrual basis, however there is an option
called 'Cash Accounting' whereby only paid items are included as far as VAT is concerned (eg. if most of your sales
are on credit, you may benefit from this scheme - contact your local Customs & Excise office for the current
rules and turnover limits).
Cash Book: A journal where a business's cash sales and purchases are entered. A cash book can also be used to
record the transactions of a bank account. The side of the cash book which refers to the cash or bank account can
be used as a part of the nominal ledger (rather than posting the entries to cash or bank accounts held directly in
the nominal ledger - see 'Three column cash book').
Cash Flow: A report which shows the flow of money in and out of the business over a period of time.
Cash Flow Forecast: A report which estimates the cash flow in the future (usually required by a bank before it
will lend you money, or take on your account).
Cash in Hand: See Undeposited funds account .
Charge Back: Refers to a credit card order which has been processed and is subsequently cancelled by the
cardholder contacting the credit card company directly (rather than through the seller). This results in the amount
being 'charged back' to the seller (often incurs a small penalty or administration fee to the seller).
Chart of Accounts: A list of all the accounts held in the nominal ledger.
CIF (Cost, Insurance, Freight [c.i.f.]): A contract (international) for the sale of goods where the seller
agrees to supply the goods, pay the insurance, and pay the freight charges until the goods reach the destination
(usually a port - rather than the actual buyers address). After that point, the responsibility for the goods passes
to the buyer.
Circulating assets: The opposite to Fixed assets . Circulating assets describe those assets that turn from cash
to goods and back again (hence the term circulating). Typically, you buy some raw materials, start to manufacture a
product (the asset is called work in progress at this point), produce a product (it is now stock ), sell it (it is
now back to cash again).
Closing the books: A term used to describe the journal entries necessary to close the sales and expense accounts
of a business at year end by posting their balances to the profit and loss account, and ultimately to close the
profit & loss account too by posting its balance to a capital or other account.
Companies House (UK only): The title given to the government department which collects and stores information
supplied by limited companies. A limited company must supply Companies House with a statement of its final accounts
every year (eg. trading and profit and loss accounts, and balance sheet).
Compensating error: A double-entry term applied to a mistake which has cancelled out another mistake.
Compound interest: Apply interest on the capital plus all interest accrued to date. Eg. A loan with an annually
applied rate of 10% for 1000 over two years would yield a gross total of 1210 at the end of the period (year 1
interest=100, year two interest=110). The same loan with simple interest applied would yield 1200 (interest on both
years is 100 per year).
Contra account: An account created to offset another account. Eg: a Sales contra account would be Sales
Discounts. They are accounts included in the same section of a set of books, which when compared together, give the
net balance. Example: Sales=10,000 Sales Discounts=1,000 therefore Net Sales=9,000. This example, affecting the
revenue side of a business, is also referred to as Contra revenue . The tell-tale sign of a contra account is that
it has the oposite balance to that expected for an account in that section (in the above example, the Sales
Discounts balance would be shown in brackets - eg. it has a debit balance where Sales has a credit balance).
Control Account: An account held in a ledger which summarises the balance of all the accounts in the same or
another ledger. Typically each subsidiary ledger will have a control account which will be mirrored by another
control account in the nominal ledger (see 'Self-balancing ledgers').
Cook the books: Falsify a set of accounts. See also creative accounting .
Corporation Tax (CT - UK only): The tax paid by a limited company on its profits. At present this is calculated
at year end and due within 9 months of that date. From April 1999 Advanced Corporation Tax was abolished and large
(UK) companies now pay CT in instalments. Small and medium-sized companies are exempted from the instalment
Cost accounting: An area of management accounting which deals with the costs of a business in terms of enabling
the management to manage the business more effectively.
Cost-based pricing: Where a company bases its pricing policy solely on the costs of manufacturing rather than
current market conditions.
Cost-benefit: Calculating not only the financial costs of a project, but also the cost of the effects it will
have from a social point of view. This is not easy to do since it requires valuations of intangible items like the
cost of job losses or the effects on the environment. Genetically modified crops are a good example of where
cost-benefits would be calculated - and also impossible to answer with any degree of certainty!
Cost centre: Splitting up your expenses by department. Eg. rather than having one account to handle all power
costs for a company, a power account would be opened for each depatrment. You can then analyse which department is
using the most power, and hopefully find of way of reducing those costs.
Cost of finished goods: The value (at cost) of newly manufactured goods shown in a business's manufacturing
account. The valuation is based on the opening raw materials balance, less direct costs involved in manufacturing,
less the closing raw materials balance, and less any other overheads. This balance is subsequently transferred to
the trading account.
Cost of Goods Sold (COGS): A formula for working out the direct costs of your stock sold over a particular
period. The result represents the gross profit. The formula is: Opening stock + purchases - closing stock.
Cost of Sales: A formula for working out the direct costs of your sales (including stock) over a particular
period. The result represents the gross profit. The formula is: Opening stock + purchases + direct expenses -
closing stock. Also, see Cost of Goods Sold .
Creative accounting: A questionable! means of making a companies figures appear more (or less) appealing to
shareholders etc. An example is 'branding' where the 'value' of a brand name is added to intangible assets which
increases shareholders funds (and therefore decreases the gearing ). Capitalizing expenses is another method (ie.
moving them to the assets section rather than declaring them in the Profit & Loss account).
Credit: A column in a journal or ledger to record the 'From' side of a transaction (eg. if you buy some petrol
using a cheque then the money is paid from the bank to the petrol account, you would therefore credit the bank when
making the journal entry).
Credit Note: A sales invoice in reverse. A typical example is where you issue an invoice for £100, the customer
then returns £25 worth of the goods, so you issue the customer with a credit note to say that you owe the customer
Creditors: A list of suppliers to whom the business owes money.
Creditors (control account): An account in the nominal ledger which contains the overall balance of the Purchase
Current Assets: These include money in the bank, petty cash, money received but not yet banked (see 'cash in
hand'), money owed to the business by its customers, raw materials for manufacturing, and stock bought for re-sale.
They are termed 'current' because they are active accounts. Money flows in and out of them each financial year and
we will need frequent reports of their balances if the business is to survive (eg. 'do we need more stock and have
we got enough money in the bank to buy it?').
Current cost accounting: The valuing of assets, stock, raw materials etc. at current market value as opposed to
its historical cost .
Current Liabilities: These include bank overdrafts, short term loans (less than a year), and what the business
owes its suppliers. They are termed 'current' for the same reasons outlined under 'current assets' in the previous
Customs and Excise: The government department usually responsible for collecting sales tax (eg. VAT in the
Days Sales Outstanding (DSO): How long on average it takes a company to collect the money owed to it.
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.
Debit: A column in a journal or ledger to record the 'To' side of a transaction (eg. if you are paying money
into your bank account you would debit the bank when making the journal entry).
Debtors: A list of customers who owe money to the business.
Debtors (control account): An account in the nominal ledger which contains the overall balance of the Sales
Deferred expenditure: Expenses incurred which do not apply to the current accounting period. Instead, they are
debited to a 'Deferred expenditure' account in the non-current assets area of your chart of accounts . When they
become current, they can then be transferred to the profit and loss account as normal.
Depreciation: The value of assets usually decreases as time goes by. The amount or percentage it decreases by is
called depreciation. This is normally calculated at the end of every accounting period (usually a year) at a
typical rate of 25% of its last value. It is shown in both the profit & loss account and balance sheet of a
business. See straight-line depreciation .
Dilutive: If a company acquires another and says the deal is 'dilutive to earnings', it means that the resulting
P/E (price/earnings) ratio of the acquired company is greater than the acquiring company. Example: Company 'A' has
an earnings per share (EPS) of $1. The current share price is $10. This gives a P/E ratio of 10 (current share
price is 10 times the EPS). Company 'B' has made a net profit for the year of $20,000. If company 'A' values 'B'
at, say, $220,000 (P/E ratio=11 [220,000 valuation/20,000 profit]) then the deal is dilutive because company 'A' is
effectively decreasing its EPS (because it now has more shares and it paid more for them in comparison with its own
share price). (see Accretive )
Dividends: These are payments to the shareholders of a limited company.
Double-entry book-keeping: A system which accounts for every aspect of a transaction - where it came from and
where it went to. This from and to aspect of a transaction (called crediting and debiting) is what the term
double-entry means. Modern double-entry was first mentioned by G Cotrugli, then expanded upon by L Paccioli in the
Drawings: The money taken out of a business by its owner(s) for personal use. This is entirely different to
wages paid to a business's employees or the wages or remuneration of a limited company's directors (see
EBIT: Earnings before interest and tax (profit before any interest or taxes have been deducted).
EBITA: Earnings before interest, tax and amortization (profit before any interest, taxes or amortization have
EBITDA: Earnings before interest, tax, depreciation and amortization (profit before any interest, taxes,
depreciation or amortization have been deducted).
Encumbrance: A liability (eg. a mortgage is an encumbrance on a property). Also, any money set aside (ie.
reserved) for any purpose.
Entry: Part of a transaction recorded in a journal or posted to a ledger.
Equity: The value of the business to the owner of the business (which is the difference between the business's
assets and liabilities).
Error of Commission: A double-entry term which means that one or both sides of a double-entry has been posted to
the wrong account (but is within the same class of account). Example: Petrol expense posted to Vehicle maintenance
Error of Ommission: A double-entry term which means that a transaction has been ommitted from the books
Error of Original Entry: A double-entry term which means that a transaction has been entered with the wrong
Error of Principle: A double-entry term which means that one or both sides of a double-entry has been posted to
the wrong account (which is also a different class of account). Example: Petrol expense posted to Fixtures and
Expenses: Goods or services purchased directly for the running of the business. This does not include goods
bought for re-sale or any items of a capital nature (see Stock and Fixed Assets ).
FIFO: First In First Out. A method of valuing stock.
Fiscal year: The term used for a business's accounting year. The period is usually twelve months which can begin
during any month of the calendar year (eg. 1st April 2001 to 31st March 2002).
Fixed Assets: These consist of anything which a business owns or buys for use within the business and which
still retains a value at year end. They usually consist of major items like land, buildings, equipment and vehicles
but can include smaller items like tools. (see Depreciation )
Fixtures & Fittings: This is a class of fixed asset which includes office furniture, filing cabinets,
display cases, warehouse shelving and the like.
Flash earnings: A news release issued by a company that shows its latest quarterly results.
Flow of Funds: This is a report which shows how a balance sheet has changed from one period to the next.
FOB: An abbreviation of Free On Board. It generally forms part of an export contract where the seller pays all
the costs and insurance of sending the goods to the port of shipment. After that, the buyer then takes full
responsibility. If the goods are to travel by train, it's called FOR (Free On Rail).
Freight collect: The buyer pays the shipping costs.
Gearing (AKA: leverage): The comparison of a company's long term fixed interest loans compared to its assets. In
general two different methods are used: 1. Balance sheet gearing is calculated by dividing long term loans with the
equity (or proprietor's net worth). 2. Profit and Loss gearing: Fixed interest payments for the period divided by
the profit for the period.
General Ledger: See Nominal Ledger .
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. It is usually included where the business is to be sold as a going concern.
Gross loss: The balance of the trading account assuming it has a debit balance.
Gross margin: The difference between the selling price of a product or service and the cost of that product or
service often shown as a percentage. Eg. if a product sold for 100 and cost 60 to buy or manufacture, the gross
margin would be 40%. Gross margin can also be expressed on a the total revenue and costs of producing that revenue
as well as on an item by item basis.
Gross profit: The balance of the trading account assuming it has a credit balance.
Growth and Acquisition (G & A): Describes a way a company can grow. Growth means expanding through its
normal operations, Acquisition means growth through buying up other companies.
Historical Cost: Assets, stock, raw materials etc. can be valued at what they originally cost (which is what the
term 'historical cost' means), or what they would cost to replace at today's prices (see Price change accounting
Impersonal Accounts: These are accounts not held in the name of persons (ie. they do not relate directly to a
business's customers and suppliers). There are two types, see Real and Nominal .
Imprest System: A method of topping up petty cash. A fixed sum of petty cash is placed in the petty cash box.
When the petty cash balance is nearing zero, it is topped up back to its original level again (known as 'restoring
Income: Money received by a business from its commercial activities. See 'Revenue'.
Inland Revenue: The government department usually responsible for collecting your tax.
Insolvent: A company is insolvent if it has insufficient funds (all of its assets) to pay its debts (all of its
liabilities). If a company's liabilities are greater than its assets and it continues to trade, it is not only
insolvent, but in the UK, is operating illegally (Insolvency act 1986).
Intangible assets: Assets of a non-physical or financial nature. An asset such as a loan or an endowment policy
are good examples. See tangible assets .
Integration Account: See Control Account .
Inventory: A subsidiary ledger which is usually used to record the details of individual items of stock.
Inventories can also be used to hold the details of other assets of a business. See Perpetual , Periodic .
Invoice: A term describing an original document either issued by a business for the sale of goods on credit (a
sales invoice) or received by the business for goods bought (a purchase invoice).
Journal(s): A book or set of books where your transactions are first entered. Full details
Journal entries: A term used to describe the transactions recorded in a journal.
Journal Proper: A term used to describe the main or general journal where other journals specific to subsidiary
ledgers are also used.
K - no entries
Landed Costs: The total costs involved when importing goods. They include buying, shipping, insuring and
Ledger: A book in which entries posted from the journals are re-organised into accounts. Full details
Leverage: See Gearing .
Liabilities: This includes bank overdrafts, loans taken out for the business and money owed by the business to
its suppliers. Liabilities are included on the right hand side of the balance sheet and normally consist of
accounts which have a credit balance.
LIFO: Last In First Out. A method of valuing stock .
LILO: Last In Last Out. A method of valuing stock .
Long term liabilities: These usually refer to long term loans (ie. a loan which lasts for more than one year
such as a mortgage).
Loss: See Net loss .
Management accounting: Accounts and reports are tailor made for the use of the managers and directors of a
business (in any form they see fit - there are no rules) as opposed to financial accounts which are prepared for
the Inland Revenue and any other parties not directly connected with the business. See Cost accounting .
Manufacturing account: An account used to show what it cost to produce the finished goods made by a
Matching principle: A method of analysing the sales and expenses which make up those sales to a particular
period (eg. if a builder sells a house then the builder will tie in all the raw materials and expenses incurred in
building and selling the house to one period - usually in order to see how much profit was made).
Maturity value: The (usually projected) value of an intangible asset on the date it becomes due.
MD & A: Management Discussion and Analysis. Usually seen in a financial report. The information disclosed
has deen derived from analysis and discussions held by the management (and is presented usually for the benefit of
Memo billing (aka memo invoicing): Goods ordered and invoiced on approval. There is no obligation to buy.
Memorandum accounts: A name for the accounts held in a subsidiary ledger. Eg. the accounts in a sales ledger
Minority interest: A minority interest represents a minority of shares not held by the holding company of a
subsidiary. It means that the subsidiary is not wholly owned by the holding company. The minority shareholdings are
shown in the holding company accounts as long term liabilities .
Moving average: A way of smoothing out (i.e. removing the highs and lows) of a series of figures (usually shown
as a graph). If you have, say, 12 months of sales figures and you decide on a moving average period of 3 months,
you would add three months together, divide that by three and end up with an average for each month of the three
month period. You would then plot that single figure in place of the original monthly points on your graph. A
moving average is useful for displaying trends. See Normalize .
Multiple-step income statement (aka Multi-step): An income statement (aka Profit and Loss ) which has had its
revenue section split up into sub-sections in order to give a more detailed view of its sales operations. Example:
a company sells services and goods. The statement could show revenue from services and associated costs of those
revenues at the start of the revenue section, then show goods sold and cost of goods sold underneath. The two
sections totals can then be amalgamted at the end to show overall sales (or gross profit). See Single-step income
Narrative: A comment appended to an entry in a journal. It can be used to describe the nature of the
transaction, and often in particular, where the other side of the entry went to (or came from).
Net loss: The value of expenses less sales assuming that the expenses are greater (ie. if the profit and loss
account shows a debit balance).
Net of Tax: The price less any tax. Eg. if you sold some goods for $12 inclusive of $2 sales tax, then the 'net
of tax' price would be $10
Net profit: The value of sales less expenses assuming that the sales are greater (ie. if the profit and loss
account shows a credit balance).
Net worth: See Equity .
Nominal Accounts: A set of accounts held in the nominal ledger. They are termed 'nominal' because they don't
usually relate to an individual person. The accounts which make up a Profit and Loss account are nominal accounts
(as is the Profit and Loss account itself), whereas an account opened for a specific customer is usually held in a
subsidiary ledger (the sales ledger in this case) and these are referred to as personal accounts.
Nominal Ledger: A ledger which holds all the nominal accounts of a business. Where the business uses a
subsidiary ledger like the sales ledger to hold customer details, the nominal ledger will usually include a control
account to show the total balance of the subsidiary ledger (a control account can be termed 'nominal' because it
doesn't relate to a specific person). Full details
Normalize: This term can be applied to many aspects of accounting. It means to average or smooth out a set of
figures so they are more consistent with the general trend of the business. This is usually done using a Moving
Opening the books: Every time a business closes the books for a year, it opens a new set. The new set of books
will be empty, therefore the balances from the last balance sheet must be copied into them (via journal entries) so
that the business is ready to start the new year.
Ordinary Share: This is a type of share issued by a limited company. It carries the highest risk but usually
attracts the highest rewards.
Original book of entry: A book which contains the details of the day to day transactions of a business (see
Overheads: These are the costs involved in running a business. They consist entirely of expense accounts (eg.
rent, insurance, petrol, staff wages etc.).
Paid-up Share capital: The value of issued shares which have been paid for. See Called-up Share capital .
P.A.Y.E (UK only): 'Pay as you earn'. The name given to the income tax system where an employee's tax and
national insurance contributions are deducted before the wages are paid.
Pareto optimum: An economic theory by Vilfredo Pareto. It states that the optimum allocation of a society's
resources will not happen whilst at least one person thinks he is better off and where others perceive themselves
to be no worse.
Pay on delivery: The buyer pays the cost of the goods (to the carrier) on receipt of them.
Periodic inventory: A Periodic Inventory is one whose balance is updated on a periodic basis, ie. every
week/month/year. See Inventory .
PE ratio: An equation which gives you a very rough estimate as to how much confidence there is in a company's
shares (the higher it is the more confidence). The equation is: current share price multiplied by earnings and
divided by the number of shares . 'Earnings' means the last published net profit of the company.
Perpetual inventory: A Perpetual Inventory is one whose balance is updated after each and every transaction. See
Personal Accounts: These are the accounts of a business's customers and suppliers. They are usually held in the
Sales and Purchase Ledgers.
Petty Cash: A small amount of money held in reserve (normally used to purchase items of small value where a
cheque or other form of payment is not suitable).
Petty Cash Slip: A document used to record petty cash payments where an original receipt was not obtained
(sometimes called a petty cash voucher).
Point of Sale (POS): The place where a sale of goods takes place, eg. a shop counter.
Post Closing Trial Balance: This is a trial balance prepared after the balance sheet has been drawn up, and only
includes balance sheet accounts.
Posting: The copying of entries from the journals to the ledgers.
Preference Shares: This is a type of share issued by a limited company. It carries a medium risk but has the
advantage over ordinary shares in that preference shareholders get the first slice of the dividend 'pie' (but
usually at a fixed rate).
Pre-payments: One or more accounts set up to account for money paid in advance (eg. insurance, where part of the
premium applies to the current financial year, and the remainder to the following year).
Price change accounting: Accounting for the value of assets, stock, raw materials etc. by their current market
value instead of the more traditional Historic Cost .
Prime book of entry: See Original book of entry .
Profit: See Gross profit , Net profit , and Profit and Loss Account .
Profit and Loss Account: An account made up of revenue and expense accounts which shows the current profit or
loss of a business (ie. whether a business has earned more than it has spent in the current year). Full details
Profit margin: The percentage difference between the costs of a product and the price you sell it for. Eg. if a
product costs you $10 to buy and you sell it for $20, then you have a 100% profit margin. This is also known as
Pro-forma accounts (pro-forma financial statements): A set of accounts prepared before the accounts have been
officially audited. Often done for internal purposes or to brief shareholders or the press.
Pro-forma invoice: An invoice sent that requires payment before any goods or services have been despatched.
Provisions: One or more accounts set up to account for expected future payments (eg. where a business is
expecting a bill, but hasn't yet received it).
Purchase Invoice: See Invoice .
Purchase Ledger: A subsidiary ledger which holds the accounts of a business's suppliers. A single control
account is held in the nominal ledger which shows the total balance of all the accounts in the purchase ledger.
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Raw Materials: This refers to the materials bought by a manufacturing business in order to manufacture its
Real accounts: These are accounts which deal with money such as bank and cash accounts. They also include those
dealing with property and investments. In the case of bank and cash accounts they can be held in the nominal
ledger, or balanced in a journal (eg. the cash book) where they can then be looked upon as a part of the nominal
ledger when compiling a balance sheet. Property and investments can be held in subsidiary ledgers (with associated
control accounts if necessary) or directly in the nominal ledger itself.
Realisation principle: The principle whereby the value of an asset can only be determined when it is sold or
otherwise disposed of, ie. its 'real' (or realised) value.
Rebate: If you pay for a service, then cancel it, you may receive a 'rebate'. That is, you may be refunded some
of the money you paid for the service. (eg. if you cancel a 1 year insurance policy after 3 months, you may get a
rebate for the remaining 9 months)
Receipt: A term typically used to describe confirmation of a payment - if you buy some petrol you will normally
ask for a receipt to prove that the money was spent legitimately.
Reconciling: The procedure of checking entries made in a business's books with those on a statement sent by a
third person (eg. checking a bank statement against your own records).
Refund: If you return some goods you have just bought (for whatever reason), the company you bought them from
may give you your money back. This is called a 'refund'.
Reserve accounts: Reserve accounts are usually set up to make a balance sheet clearer by reserving or
apportioning some of a business's capital against future purchases or liabilities (such as the replacement of
capital equipment or estimates of bad debts).
A typical example is a company where they are used to hold the residue of any profit after all the dividends
have been paid. This balance is then carried forward to the following year to be considered, together with the
profits for that year, for any further dividends.
Retail: A term usually applied to a shop which re-sells other people's goods. This type of business will require
a trading account as well as a profit and loss account.
Retained earnings: This is the amount of money held in a business after its owner(s) have taken their share of
Retainer: A sum of money paid in order to ensure a person or company is available when required.
Retention ratio: The proportion of the profits retained in a business after all the expenses (usually including
tax and interest) are taken into account. The algorithm is retained profits divided by profits available for
ordinary shareholders (or available for the proprietor/partners in the case of unincorporated companies).
Revenue: The sales and any other taxable income of a business (eg. interest earned from money on deposit).
Run Rate: A forecast for the year based on the current year to date figures. If a company's 1st quarter profits
were, say, $25m, they may announce that the run rate for the year is $100m.
Sales: Income received from selling goods or a service. See Revenue .
Sales Invoice: See Invoice .
Sales Ledger: A subsidiary ledger which holds the accounts of a business's customers. A control account is held
in the nominal ledger (usually called a debtors' control account) which shows the total balance of all the accounts
in the sales ledger.
Self Assessment (UK only): A new style of income tax return introduced for the 1996/1997 tax year. If you are
self-employed, or receive an income which is un-taxed at source, you will need to register with the Inland Revenue
so that the relevant self assessment forms can be sent to you. The idea of self assessment is to allow you to
calculate your own income tax.
Self-balancing ledgers: A system which makes use of control accounts so that each ledger will balance on its
own. A control account in a subsidiary ledger will be mirrored with a control account in the nominal ledger.
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).
Selling, General & Administrative expense (SG & A): The expenses involved in running a business.
Service: A term usually applied to a business which sells a service rather than manufactures or sells goods (eg.
an architect or a window cleaner).
Shareholders: The owners of a limited company or corporation.
Share premium: The extra paid above the face value of a share. Example: if a company issues its shares at $10
each, and later on you buy 1 share on the open market at $12, you will be paying a share premium of $2
Shares: These are documents issued by a company to its owners (the shareholders) which state how many shares in
the company each shareholder has bought and what percentage of the company the shareholder owns. Shares can also be
Shares issued (aka Shares outstanding): The number of shares a company has issued to shareholders.
Simple interest: Interest applied to the original sum invested (as opposed to compound interest ). Eg. 1000
invested over two years at 10% per year simple interest will yield a gross total of 1200 at the end of the period
(10% of 1000=100 per year).
Single-step income statement: An income statement where all the revenues are shown as a single total rather than
being split up into different types of revenue (this is the most common format for very small businesses). See
Profit and Loss , Multiple-step income statement .
Sinking fund: An account set up to reduce another account to zero over time (using the principles of
amortization or straight line depreciation). Once the sinking fund reaches the same value as the other account,
both can be removed from the balance sheet.
SME: Small and Medium Enterprises (ie. small and medium size businesses). The distinction between what is
'small' and what is 'medium' varies depending on where you are and who you talk to.
Sole trader: See Sole-proprietor .
Sole-proprietor: The self-employed owner of a business (see Self-employed ).
Source document: An original invoice, bill or receipt to which journal entries refer.
Stock: This can refer to the shares of a limited company (see Shares ) or goods manufactured or bought for
re-sale by a business.
Stock control account: An account held in the nominal ledger which holds the value of all the stock held in the
inventory subsidiary ledger.
Stockholders: See Shareholders .
Stock Taking: Physically checking a business's stock for total quantities and value.
Stock valuation: Valuing a stock of goods bought for manufacturing or re-sale.
Straight-line depreciation: Depreciating something by the same (ie. fixed) amount every year rather than as a
percentage of its previous value. Example: a vehicle initially costs $10,000. If you depreciate it at a rate of
$2000 a year, it will depreciate to zero in exactly 5 years. See Depreciation .
Subordinated debt: If a company is liquidated (i.e. becomes insolvent ), the secured creditors are paid first.
If any money is left, the unsecured creditors are then paid. The amount of money owed to the unsecured creditors is
termed the 'subordinated debt' of the company.
Subsidiary ledgers: Ledgers opened in addition to a business's nominal ledger. They are used to keep sections of
a business separate from each other (eg. a Sales ledger for the customers, and a Purchase ledger for the
suppliers). (See Control Accounts )
Suspense Account: A temporary account used to force a trial balance to balance if there is only a small
discrepancy (or if an account's balance is simply wrong, and you don't know why). A typical example would be a
small error in petty cash. In this case a transfer would be made to a suspense account to balance the cash account.
Once the person knows what happened to the money, a transfer entry will be made in the journal to credit or debit
the suspense account back to zero and debit or credit the correct account.
T Account: A particular method of displaying an account where the debits and associated information are shown on
the left, and credits and associated information on the right.
Tangible assets: Assets of a physical nature. Examples include buildings, motor vehicles, plant and equipment,
fixtures and fittings. See Intangible assets .
Three column cash book: A journal which deals with the day to day cash and bank transactions of a business. The
side of a transaction which relates directly to the cash or bank account is usually balanced within the journal and
used as a part of the nominal ledger when compiling a balance sheet (ie. only the side which details the sale or
purchase needs to be posted to the nominal ledger ).
Total Cost of Ownership (TCO): The real amount an asset will cost. Example: An accounting application retails at
$1000. Support - which is mandatory, costs a further $200 per annum. Assuming the software will be in use for 5
years, TCO will be $2000 (1000+5x200=2000).
Trading account: An account which shows the gross profit or loss of a manufacturing or retail business, i.e.
sales less the cost of sales.
Transaction: Two or more entries made in a journal which when looked at together reflect an original document
such as a sales invoice or purchase receipt.
Trial Balance: A statement showing all the accounts used in a business and their balances. Full details
Turnover: The income of a business over a period of time (usually a year).
Value Added Tax (VAT - applies to many countries): Value Added Tax, or VAT as it is usually called is a sales
tax which increases the price of goods. At the time of writing the UK VAT standard rate is 17.5%, there is also a
rate for fuel which is 5% (this refers to heating fuels like coal, electricity and gas and not 'road fuels' like
petrol which is still rated at 17.5%).
VAT is added to the price of goods so in the UK, an item that sells at £10 will be priced £11.75 when 17.5% VAT
Wages: Payments made to the employees of a business for their work on behalf of the business. These are classed
as expense items and must not be confused with 'drawings' taken by sole-proprietors and partnerships (see Drawings
Work in Progress: The value of partly finished (ie. partly manufactured) goods.
Write-off: Depreciating an asset to zero in one go.
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Zero Based Account (ZBA): Usually applied to a personal account (checking) where the balance is kept as close to
zero as possible by transferring money between that account and, say, a deposit account.
Zero Based Budget (ZBB): Starting a budget at zero and justifying every cost that increases that budget.
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