Accounting Glossary[1]

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Accounting Glossary

1. Absorption costing

Absorption costing is a method of identifying and ascertaining the cost of products or services . This is doneby including both fixed and variable costs. The absorption method of costing can be contrasted with variableor marginal costing methods where costs of products or services are calculated using variable costs only. Theabsorption costing method requires the choice of an absorption basis by which fixed costs can be allocatedappropriately. For example, the fixed costs of factory equipment repairs and maintenance may be allocated tothe cost of producing specific products on the basis of their use of machine time. In another example, the cost

of factory rent and rates may be allocated to products based on the amount of factory space that theirproduction takes up.

2. Accounting

Accounting is a difficult term to define. However, it is formally defined by the American AccountingAssociation as The classification and recording of monetary transactions, the presentation and interpretationof the results of those transactions in order to assess performance over a period and the financial position at agiven date, and the monetary projection of future activities arising from alternative planned courses of action.Using this definition, accounting can be seen to be about the identification and recording of businesstransactions as a way of assisting the management and planning of a business.

3. Accounting concepts

Accounting concepts are the principles that guide the preparation of accounting information. These

fundamental accounting concepts are best considered as the building blocks on which historical accountinginformation. The fundamental accounting concepts are generally taking to include prudence, consistency,accruals and going concern.

4. Accounting policies

Accounting policies are the specific accounting bases selected and consistently followed by a business.Accounting policies need to be appropriate to the circumstances of a business so that, when applied toaccounting transactions, the resulting accounting information presents fairly its results and financial position.

Accounting policies are largely governed by the application of accounting standards. However, there remainsa large amount of subjectivity that needs to be applied when determining how to apply accounting policies.

5. Accounting standards

Accounting standards are authoritative statements of how particular types of transaction and other eventsshould be reflected in financial statements. Accordingly, compliance with accounting standards will normallybe necessary for financial statements to give a true and fair view. When preparing accounts in the UK,businesses must take account of statements issued by the Accounting Standards Board. These require theadoption of certain accounting principles and methods. There are currently two forms of Accounting Standardsin the UK - Financial Reporting Standards (FRSs) and Statements of Standard Accounting Practice (SSAPs).The only difference between these is that SSAPs were issued prior to 1990. Since that date, the name hasbeen changed to FRS. Accounting standards apply to all companies, and other kinds of entities that prepareaccounts that are intended to provide a true and fair view.

6. Accounting Standards Board (ASB)

The ASB is a UK standard-setting body set up in 1990 manage the use of accounting standards. Its declaredaims are to establish and improve standards of financial accounting and reporting, for the benefit of users,preparers and auditors of financial information. . Accounting standards developed by the ASB are containedin 'Financial Reporting Standards' (FRSs). The ASB collaborates with accounting standard-setters from othercountries and the International Accounting Standards Board (IASB) in order to ensure that its standards aredeveloped as far as possible to be consistent from country to country.

7. Accruals

Accruals are amounts that are owed to third parties for which a business has not yet been invoiced. The total


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of accruals is shown in the balance sheet as part of creditors due less than one year. For example, where abusiness has not been invoiced by an advertising agency for its costs for the last three months of the year, itwill show in its accounts an accrual for the estimated amount of the invoice.

8. Accruals concept

One of the fundamental accounting concepts, the accruals concept is also known as the matching concept.Under the accruals concept, revenue and costs are credited or charged to the profit and loss account for theyear in which they are earned or incurred, not when any cash is received or paid. For example, if a sale ismade on credit this year, but the cash is only received next year, the sale is treated as income in this year.

Similarly, if a business incurs a cost during the year (e.g. electricity) but is not invoiced until early in the nextyear, the accounts will show an estimated liability for the expected amount of the invoice.

9. Acid test ratio

The acid test ratio (also know as the quick ratio) is an accounting ratio that is concerned with businessliquidity. It is defined as current assets (excluding stocks) divided by creditors falling due within one year. Theacid test ratio is designed to test the short term solvency of a business, in a way similar to the current ratio.Stocks are excluded from current assets on the basis that it can often take several months to convert stocksinto cash.

10. Acquisition

The term acquisition commonly refers to the take-over of one business by another. Sometimes the acquisitionwill involve the purchase of the entire share capital of a company. In other situations the acquisition is offcertain trading assets rather than an actual company. Acquisitions can be financed by paying cash. Oftenthey also involve the issue of shares by the acquiring business - given to the shareholders of the businessbeing sold. Acquisitions are subject to regulatory control via the competition authorities. For larger, cross-border acquisitions, regulation by authorities such as the European Competition Commission must also betaken into account.

11. Activity-based costing

Activity-based costing (commonly shortened to ABC) is a system of costing which recognises that costs areincurred by each activity that takes place within a business and that products (or customers) should bearcosts according to the activities they use. The use of ABC requires the identification of cost drivers thoseactivities that take place in a business that cause costs to be incurred. The costs associated with these costdrivers also need to be identified so that they can be appropriately allocated to each activity being costed.

12. Aged creditors report

Most businesses make use of an aged-creditors report to manage the timing of payment to trade creditors.The report lists the amounts payable to trade creditors based on the payment terms agreed with them. It alsolists creditors who have been owed money for the longest period.

13. Aged debtors report

An aged debtors report lists amounts owed to a business by trade debtors and analyses how long theamounts have been due. The report is a crucial piece of information for managing the amount of credit givento customers and for chasing outstanding amounts.

14. Agency relationship

The term agency relationship describes the relationship between management and shareholders. It explains

how management act as agents for shareholders, using their delegated powers to run the business in the bestinterests of the shareholders

15. Administration

Administration is a term used to describe a situation relating to the possible insolvency of a business. Underan Administration Order, a court supervises the affairs of a company in financial difficulties with to the aim ofsecuring its survival as a going concern or, failing that, to achieving a more favourable realisation of its assetsthan would be possible on liquidation. While the administration order is in force, the affairs of the company aremanaged by an administrator.

16. Allotment of shares


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When new shares are issued in a company it may be that there is excess demand for the shares. In such acase, shares are allotted to new subscribers on a fair basis although almost always in lower numbers thanwere requested. The process of share allotment is a common feature of new share issues on the LondonStock Exchange.

17. Alternative Investment Market

The Alternative Investment Market (usually shortened to AIM) is a junior market of the main London StockExchange. AIM replaced the Unlisted Securities Market in 1995. It provides an opportunity for smallercompanies with growth prospects to raise capital and have their shares traded in a market without the

expense of a full market listing.

18. Amortisation

Amortisation is a term used to describe the reduction in value of an asset through wear or obsolescence. Inrelation to tangible fixed assets, amortisation is mode commonly known as depreciation. In the UK,amortisation usually refers to the reduction in value of intangible assets such as acquired goodwill.

19. Annual general meeting

The annual general meeting (AGM) is an annual meeting of the shareholders of a company, which must beheld every year. The usual business transacted at an AGM is the presentation of the audited accounts, theappointment of directors and auditors, the fixing of their remuneration, and recommendations for the paymentof dividends. Other business may be transacted if notice of it has been given to the shareholders.

20. Annual report & accounts

All limited companies are required by UK company law (the Companies Act) to prepare an annual report eachyear, containing their financial statements, directors report and, for larger companies, the auditors report. Theannual report of a listed business (i.e. a business quoted on a public stock exchange) must also contain a fiveyear summary of results together with a wide range of other financial and operating disclosures). The annualreport and accounts must be sent to shareholders and to the Registrar of Companies the governmentdepartment that maintains the public records of companies. Once sent to the Registrar, the annual reportbecomes a public document, available for anyone to view.

21. Annuity

An annuity is a constant annual payment. The guarantee of the maintenance of such annual payments is alsoknown as an annuity, and can usually be purchased from insurance companies. A certain annuity is paid over

a specified number of years, whereas a life annuity is paid until the death of the named recipient. An annuitymay be bought with a lump sum or through a series of contributions.

significant risks, since the buying and selling operations are carried out more or less simultaneously and theprofit made does not depend upon taking a view on future price changes. By eliminating price differentials,arbitrage contributes to the achievement of market equilibrium.

22. Arbitrage

Arbitrage refers to the exploitation of differences between the prices of financial assets or currency or acommodity within or between markets by buying where prices are low and selling where they are higher. Forexample, if coffee is cheaper in New York than in London after allowing for transport and dealing costs, it willpay to buy in New York and sell in London. If interest rates are higher on a Euro deposit in London than inFrankfurt, a higher return will be obtained by switching funds from one centre to the other. Unlike speculation,arbitrage does not normally involve

23. Articles of Association

The Articles of Association (the Articles) is the official company document that acts as a contract between abusiness and its shareholders. The Articles describe the rights and duties of the shareholders with thebusiness and between themselves (see also Memorandum of Association)

24. Asset

An asset is defined by Financial Reporting Standard Number 5 as a right or other access to future economicbenefits controlled by an entity as a result of past transactions or events. Future economic benefits might


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A bad debt is a debt owed to a business that is not expected to be received. This may arise, for example, as a resulof the insolvency of a customer who had been buying products on a credit basis. Bad debts are written off either as acharge to the profit and loss account or against an existing doubtful debt provision.

34. Balance sheet

The balance sheet provides a statement of a businesss financial position at a given point in time. It details the assetsof the business and how these assets are being financed. Financing is broken down into two major categories -shareholders' funds and liabilities. Due to the way in which the balance sheet is prepared, total assets will alwaysequal total finance, i.e. the balance sheet will balance.

35. Balanced scorecard

The balanced scorecard is a popular approach to the analysis and reporting of management information. Iemphasises the need to provide the user with a set of information which addresses all relevant areas of performancein a way that is objective and unbiased. The information contained in the balanced scorecard usually includes bothfinancial and non-financial elements, and covers areas such as profitability, customer satisfaction, internal efficiency,innovation and quality.

36. Banking covenants

Banking covenants are a crucial part of any bank loan agreement. A loan agreement in the form of a covenant wilinclude a series of undertakings, the breaching of which will make the loan repayable immediately. The breaching oan undertaking will also be an event of default. In this situation, the bank assumes much greater financial control ovethe business (for example, it can prevent the payment of any dividends).

37. Batch costing

A form of costing in which the unit costs are expressed on the basis of a batch produced

38. Bookkeeping

Bookkeeping is the process of recording monetary transactions in the financial records of a business. Originallybookkeeping was a time-consuming manual process. However, it is now largely mechanised through the wide-rangeof bookkeeping software programmes. (See double-entry bookkeeping)

39. Breakeven

Breakeven refers to the quantity of output or value of sales necessary to cover fixed costs.

40. Breakeven chart

A breakeven chart is a graph on which a business' total costs, analysed into fixed costs and variable costs, are drawnover a given range of activity, together with the sales revenue for the same range of activity. The point at which thesales-revenue curve crosses the total-cost curve is known as the breakeven point (expressed either as sales revenueor production/sales volume). The breakeven chart, like breakeven analysis, may also be used to determine the profior loss likely to arise from any given level of production or sales, the impact on profitability of changes in the fixed ovariable costs, and the levels of activity required to generate a required profit.

41. Budget

A budget is a quantified financial statement that covers a defined period of time. A budget will normally includeplanned sales costs assets, liabilities and associated cash flows.

42. Budgetary control

Budgetary control is the way in which financial control is maintained within a business - by using budgets for incomeand expenditure for each main function of the business. During the course of a financial period, these budgets arecompared with actual performance to establish any variances. Individual managers who are responsible for thecontrollable activities within their budgets are expected to take corrective action on adverse variances (e.g. wherecosts are greater than budget or where sales or income are less than budget)

43. Business angel

Business angels are wealthy entrepreneurs who provide capital in return for being part of a growing successfulbusiness. For businesses requiring funds of up to 500,000, business angels are important sources of finance. Abusiness angel will usually expect hands-on involvement with the businesses into which he or she invests.

44. Business angel network


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A Business Angel Network (BAN) is a group of business angels, who are wealthy individuals looking for investmenopportunities in businesses, and businesses seeking finance.

45. Business entity concept

The concept that financial accounting and reporting relates to the activities of a specific business entity and not to theactivities of the owners of that entity.

46. Business plan

A detailed plan setting out the objectives of a business over a stated period usually 1-5 years. A business plan is

drawn up by many businesses. For new businesses it is an essential document for raising capital or loans. The planshould quantify as many of the objectives as possible, providing monthly cash flows and production figures for at leastthe first two years. It must also outline its strategy and the tactics it intends to use in achieving its objectives. For agroup of companies the business plan is often called a corporate plan.

47. Call option

A call option gives the holder of the option the right to buy a share (or other asset) at the exercise price at some futuretime. (See also put option)

48. Capital allowances

A tax allowance for businesses on capital expenditure on particular items. These include machinery and plantindustrial buildings, agricultural buildings, mines and oil wells, and scientific equipment.

49. Capital employedCapital employed is essentially the underlying asset base a business needs to generate its profits and turnover. It isusually defined as fixed assets plus working capital, although alternative definitions are possible. It can also becalculated by adding together shareholders' funds and long-term liabilities. Having calculated capital employed, it ispossible to assess the level of return that this investment is producing by using an accounting ratio such as return oncapital employed.

50. Capital expenditure

Capital expenditure is that expenditure by a business that results in the acquisition of fixed assets or an improvementin their earning capacity. Capital expenditure is not charged as an expense in the profit and loss account; theexpenditure appears as a fixed asset in the balance sheet. The consumption or use of the fixed asset over time isreflected in the profit and loss account by calculating the amount of depreciation that has occurred. (See depreciation)

51. Capital Gains Tax (CGT)

CGT is a tax on capital gains. Most countries have a form of income tax under which they tax the profits from tradingand a different tax to tax substantial disposals of assets either by traders for whom the assets are not trading stock(e.g. a trader's factory) or by individuals who do not trade (e.g. sales of shares by an investor). The latter type of tax isa capital gains tax.

52. Capital markets

A market in which long-term capital is raised by industry and commerce, the government, and local authorities. Themoney comes from private investors, insurance companies, pension funds, and banks and is usually arranged byissuing houses and merchant banks. Stock exchanges are also part of the capital market in that they provide a marketfor the shares and loan stocks that represent the capital once it has been raised

53. Capital rationing

Capital rationing describes a situation in which a business has only a limited amount of capital to invest in potentiaprojects. As a result, the different possible investments need to be compared with one another in order to allocate thecapital most effectively. This is done by evaluating the potential returns that each investment might achieve, andallocating capital to the projects with the best projected returns. (See also payback, net present value, investmenappraisal)

54. Capital structure


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The capital structure of a business refers to the way in which it is financed. In most cases the capital structure wilcomprise a combination of long-term capital (e.g. ordinary shares, reserves, preference shares, debentures, long-termbank loans etc) and short-term liabilities (such as a bank overdraft and trade creditors). It is important that a businessis financed by an appropriate capital structure that reflects the nature of the business and its ability to generate profitsand cash flow. For example, a business at the start-up or growth stage may not be profitable and may also havesignificant investment requirements. In this example, the appropriate capital structure would mainly comprise equityfinance such as ordinary shares rather than bank debt (where the business would need to finance interest charges).

55. Cash

Cash is an asset of a business and represents cash in hand, and deposits repayable on demand with any bank orother financial institution.

56. Cash flow budget

The cash flow budget summarises the expected cash inflows and the expected cash outflows of a business over abudget period. It is usually prepared on a monthly basis, but can be for shorter or longer periods depending on theneeds of management. The main purpose of a cash flow budget is to determine when cash surpluses are likely to beavailable for investment or when cash deficits are likely to arise requiring additional finance. The cash flow budget isalso referred to as the cash flow forecast.

57. Cash flow statement

The cash flow statement is an historical record of the cash flows of a business, distinguishing between differencategories of cash receipts and payments. Financial Reporting Standard FRS 1 (Cash flow statements) requires mos

companies to publish a cash flow statement as part of their annual accounts. The purpose of this statement is toreveal to users how cash was generated and then applied by the company during the period under review.

58. Charge

A term used in relation to the insolvency of a business. Charge refers to security which is taken by a creditor oveproperty or classes of property owned by a creditor to protect against non-payment of a debt (frequently by amortgage or other fixed charge). The advantage of a charge is that it places the charge-holder ahead of othercreditors in the event of the debtor's insolvency.

59. Companies Acts

The UK acts of parliament concerned with companies. Much of UK company law is now influenced by Europeanlegislation.

60. Consistency conceptThe consistency concept is one of the fundamental accounting concepts that underpin the preparation of accounts.With the consistency concept, the principle applied is that there is uniformity of accounting treatment of like itemswithin each accounting period and from one period to the next.

61. Consolidated accounts

Consolidated accounts are the financial statements of a group of companies aggregated to show the overalfinancial results and position of the group.

62. Contingent liability

A contingent liability is a possible liability of a business that arises from past events. The reason why the liability iscontingent is that its existence (and final amount) can only be by the occurrence of one or more uncertain futureevents not wholly within the control of the business. For example, a business may be subject to a legal claim of somekind which may result in the business having to pay costs or damages. The outcome of the legal claim may beuncertain as might the possible costs arising. In this case, the business has to take a prudent view as to the likelyoutcome. Where the amount and outcome of a contingent liability can be predicted with reasonable likelihood, theprudence concept suggests that the business should make provision for the liability in its accounts as soon aspossible. (See also provisions, prudence concept)

63. Contract costing

A costing technique applied to long-term contracts in which the costs are collected by contract.

64. Contribution


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Contribution is the amount - under marginal costing principles of profit that has been earned before taking accountof fixed costs or expenses of a business.

65. Convertible securities

A convertible security is a security that, at the option of the holder, may be exchanged for another asset, generally afixed number of shares of common stock. Convertible issues frequently are fixed-income securities such asdebentures and preferred stock.

66. Corporate governance

Corporate governance describes the way companies are directed and controlled. Boards of directors are responsiblefor the governance of their companies. The shareholders role in governance is to appoint the directors and theauditors and to satisfy themselves that an appropriate governance structure is in place.

67. Corporation tax

Corporation tax is the taxation payable by companies on their profits. As with other direct taxes (such as income taxthere are different rates of corporation tax payable (depending on the level of profits achieved). Companies alsoreceive tax allowances which they can use to reduce the amount of corporation tax payable. The main kind ofallowance capital allowances provides a tax incentive to invest in fixed assets. Smaller companies also benefifrom lower corporation tax rates.

68. Corporation tax rates

The corporation tax rate is the rate at which companies pay corporation tax. The rate varies depending on the size of

the business. A small business for tax purposes pays corporation tax, currently 20%. A small business for taxpurposes is defined as a business with taxable profits of 300,000 or less. The normal rate of corporation tax iscurrently 30% and is paid by companies with taxable profits of 1.5 million or more. Companies with profits betweenthese two limits pay corporation tax at a tapering rate between 20% and 30% [check these numbers]

69. Cost centre

A cost centre is a production or service location, function, activity or item of equipment for which costs areaccumulated and to which they are charged.

70. Creative accounting

Creative accounting is the term used to describe the deliberate manipulation of reported accounting information withthe intention to mislead users of the accounts. Creative accounting tries to take advantage of the use of subjective

judgement used in preparing accounts. The ability to use creative accounting has been significantly reduced in recen

years following the issue of a range of more prescriptive and detailed accounting standards. (See accountingstandards, window-dressing).

71. Creditors

Creditors form part of a businesss liabilities and represent amounts due to third parties. Creditors are analysed in thebalance sheet into those due within one year and those due after more than one year. For most businesses, the maincreditor is trade creditors amounts owed to providers of goods and services on credit terms to the business. (Seecurrent liabilities)

72. Creditor days ratio

The creditor days ratio provides an indicator of the average number of days' credit taken by a business before itstrade creditors are paid. It is calculated by the following formula: (Trade creditors 365)/annual purchases on credit.

73. Current liabilities

Current liabilities are those short-term liabilities which are intended to be constantly replaced in the normal course oftrading activity. Current liabilities typically comprise: trade creditors, accruals and bank overdrafts.

74. Current ratio


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The current ratio is an accounting ratio. It is usually defined as current assets divided by creditors falling due withinone year. The ratio is designed to assess the solvency of a business in the short term. If the current ratio exceedsone, then the value of current assets is greater than the value of the short term creditors, indicating that the businessis able to pay its short term debts as they fall due. Note that this interpretation is fairly simplistic and the resulting ratiodepends on the nature of the market in which the business operates. For example, supermarkets usually have acurrent ratio of less than one since they do not sell goods on credit (i.e. minimal trade debtors) yet have large ongoingbalances owed to trade creditors. The most important judgement applied to this ratio (and other similar liquidity ratiosis in understanding the reasons for any significant deterioration in the ratio.

75. Debenture

A debenture is a form of loan. It is a written acknowledgement of a debt by a business that normally containingprovisions as to payment of interest and the terms of repayment of principal. A debenture may be secured on some orall of the assets of the business or its subsidiaries.

76. Debtor days

The debtor days ratio is an accounting ratio that provides insight into the effectiveness of working capitamanagement. The calculation of debtor days (average trade debtors divided by average daily sales on credit termsindicates the average time taken, in calendar days, to receive payment from credit customers. An increase in debtodays would suggest that credit customers are being allowed to take longer to pay amounts due which has adverseeffects on business cash flow. (See also creditor days)

77. Debtors

Debtors represent amounts owed to a business by its customers and other third parties. Debtors are shown as part ofcurrent assets in the balance sheet.

78. Deep discount bonds

A deep-discount bond is a long-term debt security that, because of a low coupon rate of interest compared withcurrent rates of interest, sells at a substantial discount from face value. Bonds of this type, if not original-issuediscounts, are preferred by some investors because they are unlikely to be called before maturity.

79. Depreciation

Depreciation is the name given to the amount charged to the profit and loss account to reflect the wearing out of afixed asset over its useful life. The purpose of depreciation is to comply with the accruals concept. Since the benefit oa fixed asset is received over several periods, the cost of acquiring the asset is charged against profits over thoseperiods. There are several methods available to calculate depreciation. The two most popular approaches are the

straight-line and reducing balance methods. It should be noted that the depreciation charge in the profit and lossaccount has no effect on the cash flows of a business. It is simply a subjective estimate of the amount by which thevalue of a fixed asset has fallen below its original purchase cost. Note: not all fixed assets are depreciated. Foexample, the value of land is rarely depreciated because its value uslaly grows, not falls over time.

80. Depreciation provision

The depreciation provision is the amount of depreciation that has cumulatively been charged to the profit and lossaccount, relating to a fixed asset, from the date of its acquisition. Fixed assets are stated in the balance sheet at theirnet book value (or written down value) which is usually their historical cost less the cumulative amount of depreciationat the balance sheet date. (See also net book value)

81. Direct cost

A direct cost is a cost that can be directly related to producing specific goods or performing a specific service. Fo

example, the wages of an employee engaged in producing a product can be attributed directly to the cost omanufacturing that product.

82. Director

A director is a person elected under a companys Articles of Association to be responsible for the overall direction ofthe companys affairs. Directors usually act collectively as a board and carry out such functions as are specified in thearticles of association or the Companies Acts, but they may also act individually in an executive capacity.

83. Directors report


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The Directors Report forms part of a companys annual report and accounts. It is a legal requirement that thedirectors write a report summarising the companys performance over the financial period covered by the accounts,comment on the companys future prospects, and provide other required disclosures.

84. Discounted cash flow

Discounted cash flow is a method of investment appraisal. It involves the discounting of the projected net cash flowsof a project to ascertain its present value.

85. Discount rate

A term used in investment appraisal to refer to the hurdle rate of interest or cost of capital rate applied to thediscount factors used in a discounted cash flow appraisal calculation. The discount rate may be based on the cost-of-capital rate adjusted by a risk factor based on the risk characteristics of the proposed investment in order to create ahurdle rate that the project must earn before being worthy of consideration. Alternatively, the discount rate may be theinterest rate that the funds used for the project could earn elsewhere.

86. Dividend cover

The dividend cover ratio is an accounting ratio that is concerned with the level of returns that are given toshareholders compared with the ability of the company to deliver profits. The dividend cover ratio is defined as neearnings per share divided by net dividend per share. The purpose of the ratio is to identify how much of a businesssprofits are being distributed to shareholders and how much is being retained to finance future expansion of thebusiness. Generally a business with a low dividend cover is paying out most of its earnings as dividends and isunlikely to achieve high growth in the future, compared to a business with high dividend cover. Dividend cover is

usually only relevant to companies that are quoted on a recognised stock exchange. It is rare that the ratio would becalculated for a private company.

87. Dividend policy

Dividend policy refers to the decisions made by a company as to how much profit should be distributed by way ofdividends to shareholders as opposed to being reinvested in the business

88. Dividends

Dividends represent amounts paid to shareholders out of the profits of a business. Dividends are usually paidannually or semi-annually, and represent part of return on a shareholders investment in a business. Preferenceshares receive a fixed dividend while for equity shares the level of dividend depends on the profitability of thebusiness. Dividends are effectively declared and paid net of income tax. (see also dividend cover)

89. Double entry bookkeepingA method of recording and processing accounting transactions based upon the concept that each transaction has adual aspect; a debit entry and a credit entry

90. Doubtful debt

A doubtful debt is a debtor balance where there is some uncertainty as to whether or not it will be settled, and fowhich there is a possibility that it may eventually prove to be bad. A doubtful debt provision may be created for such adebt by charging it as an expense to the profit and loss account. (See also bad debts)

91. Due diligence

Due diligence is an investigation - normally conducted by an independent accountant or consultant - of the currentfinancial and/or market position and future prospects of a business prior to a stock exchange flotation or a majorinvestment of capital. For example, venture capitalist undertake extensive due diligence on potential investmentsbefore completing the deal.

92. Earnings per share

Earnings per share (usually shortened to eps) is a measure of shareholder return. It measures a businesssprofitability from the point of view of equity shareholders. It is defined as earnings attributable to equity shareholdersdivided by the number of equity shares in issue over the year.

93. EBITDA

EBITDA is an acronym for a calculation of a business profit that excludes financing costs, taxation and depreciation.It is calculated as operating profit before interest, tax, depreciation, and amortisation.

94. Economic order quantity (EOQ)


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The economic order quantity (EOQ) represents the optimal ordering quantity for an item of stock which will minimisestock-holding costs.

95. Useful economic life

The period for which the present owner of an asset will derive economic benefits from its use.

96. Employee share ownership plan (ESOP)

A method of providing the employees of a company with shares in the company. The ESOP buys shares in itssponsoring company, usually with assistance from the company concerned. The shares are ultimately made available

to the employees, usually directors, who satisfy certain performance targets.

97. Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) was introduced on 1 January 1994 with the aim of encouraging new equityinvestment in trading companies by providing generous tax incentives to investors other than those already connectedwith the company. An investor may qualify for both income tax relief and capital gains tax relief in respect of an EISinvestment. The capital gains tax relief in particular can be extremely valuable, as it can mean that the large gain thatmay potentially be made by investors in high tech companies when they realise their investment, may be exempt fromtaxation.

98. Environmental reporting

Publicly-quoted businesses in the UK are required to provide a statement included within their annual report andaccounts that sets out the environmental policies of the business and an explanation of its environmenta

management systems and responsibilities. The environmental report may include reporting on the performance of thebusiness on environmental matters in qualitative terms regarding the extent to which it meets national andinternational standards. It may also include a quantitative report on the performance of the business on environmentamatters against targets, together with an assessment of the financial impact.

99. Equity shares

Also referred to as ordinary shares or (in the USA) common stock. Equity shares represent the right to participate inthe residual assets of a business and typically have voting rights. Equity shareholders will usually receive a dividend,the level of which depends on the level of achieved profits and the extent to which the directors wish to reinvest profitsback into the business. If the business is wound up, equity shareholders will be entitled to any assets left over after alother investors have been paid off. Equity shareholders have limited liability, which means that their liability tocontribute money to the business is limited to the amount they have already invested.

100. Exceptional itemsExceptional items are separately reported in a businesss profit and loss account. Exceptional items are those whichare material, derived from events or transactions within a businesss ordinary activities and which need to bedisclosed separately to ensure that the businesss accounts give a true and fair view. (See also extraordinary items)

101. Export credit insurance

Export credit insurance is insurance taken out against the risk of non-payment by foreign customers for export debts.

102. Extraordinary items

Extraordinary items are separately disclosed in a businesss profit and loss account. Items which are material,possess a high degree of abnormality, are not expected to recur and are derived from events or transactions outsideof the ordinary activities of a business. Note that, because the definition of ordinary activities is extremely wide, it isextremely unlikely that a business will show an extraordinary item in its accounts in any one year. (see alsoexceptional items).

103. Factoring

Factoring describes an arrangement whereby the debts of a business are collected by a factor business, whichadvances a proportion of the money it is due to collect. (See also invoice discounting).

104. Finance lease

A finance lease is a lease where the lessor transfers substantially all the risks and rewards of ownership of the asseto the lessee. (See also operating leases)

105. Financial accounting


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Financial accounting is the function responsible for the reporting required by company legislation for shareholders. Italso provides such similar information as required for Government and other interested third parties, such as potentiainvestors, employees, lenders, suppliers, customers, and financial analysts.

106. Financial intermediary

A financial intermediary is a party that brings together providers and users of finance, either as a broker or asprincipal.

107. Financial management

Financial management is the general term that describes the management of all the processes associated with theraising and use of financial resources in a business.

108. Financial Reporting Council

The Financial Reporting Council (FRC) is the body which provides the strategic direction behind the development ofAccounting Standards in the UK. It has two main operations - the Accounting Standards Board and the FinanciaReporting Review Panel, which issue and enforce Accounting Standards in the UK.

109. Financial Reporting Review Panel

The Financial Reporting Review Panel is the body responsible for ensuring that companies in the UK followAccounting Standards. (See also Accounting Standards Board and Financial Reporting Council)

110. Financial Reporting Standards

Financial Reporting Standards (FRSs) are issued by the Accounting Standards Board. The use of FRSs replacedthe previous form of accounting standards in the UK which were named Statements of Standard AccountingPractice. (see also Accounting Standards).

111. Finished goods

Products that have completed the manufacturing process and are available for distribution to customers. Comparefinished goods with work-in-progress.

112. First in first out (FIFO)

First-in first-out is a method used to calculate the cost if stocks or inventories. It assumes that the oldest items ocosts are the first to be used. It is commonly applied to the pricing of issues of materials, based on using first the costsof the oldest materials in stock, irrespective of the sequence in which actual material usage takes place. Closing

stocks are therefore valued at relatively current costs.113. Fixed assets

A fixed asset is defined as any asset, tangible or intangible, acquired for retention by an entity for the purpose oproviding a service to the business, and not held for resale in the normal course of trading. This includes, for exampleequipment, machinery, furniture, fittings, computers (see also depreciation)

114. Fixed charge

A fixed charge is held by the charge-holder over specific assets (typically a mortgage in respect of property) whichprevents a debtor from selling or otherwise dealing with the charged property without payment in settlement of thedebt due to the charge-holder

115. Fixed cost

A fixed cost is one which, within certain output or turnover limits, tends to be unaffected by fluctuations in the levels oactivity (output or turnover). A good example would be the rent and rates charge for an office, or the employmencosts of staff who provide services not directly related to production or output (e.g. the accounting department).

116. Forward currency transaction

A forward currency transaction is a transaction where a rate of exchange is agreed today but delivery occurs on anagreed date in the future. The rate of exchange is known as the forward exchange rate. Forward exchange rates aremainly used as a way of creating greater certainty about what the actual cost of a transaction will be in the localcurrency of the business. The use of forward currency transactions is often referred to as currency hedging.

117. Gearing


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Gearing refers to the use of debt as part of the financial structure of a business. The use of debt as a source offinance reduces the amount of equity funding that is required. However, a business partly financed by debt needs tobe satisfied that it will be able to meet the interest payment obligations of the debt providers.

118. Generally accepted accounting principles (GAAP)

In the UK the concept of generally-accepted accounting principles is taken to mean accounting standards and therequirements of company legislation and the stock exchange.

119. Gearing ratio

The gearing ratio is an accounting ratio which measures the level of debt finance a business has raised relative to itslevel of shareholders funds. The gearing ratio is also known as the debt to equity ratio. It is usually defined as totadebt divided by shareholders funds, expressed as a percentage. The precise definition will vary, however, fromsituation to situation. The higher the percentage from the calculation, the more highly geared a business is. It ispossible to calculate the net gearing ratio, where cash balances are deducted from debt in the calculation. (See alsointerest cover and gearing)

120. Going concern

Going concern is one of the fundamental accounting concepts (the others being prudence, accruals and consistency)Under the going concern concept it is assumed that a business will continue in operational existence for theforeseeable future. This assumption has significant implications for the valuation of assets in the balance sheet which can be stated at their net book value. If there was a doubt about the ability of the business to operate as agoing concern, then certain assets would have to be valued at their disposal value (which is likely to be lower than net

book value). (See also accounting concepts)

121. Goodwill

Goodwill, in the accounting sense, refers to the difference between the total value of a business and the value of itsnet assets in its balance sheet. It represents the ability of the business to generate profits and cash in the future. Thevalue of goodwill is often only determined when a business is bought or sold. Acquired goodwill (the differencebetween the purchase price for a business and its net assets, is amortised through the profit and loss account.

122. Gross margin

Gross margin is a profitability ratio calculated as gross profit divided by sales. The ratio focuses on the ability of thebusiness to maintain trading margins. (See also gross profit).

123. Gross profit

Gross profit is the difference between sales and the total cost of sales. (See also gross margin).

124. Indirect cost

Indirect costs are those costs that are untraceable to particular units or cost centres. It is expenditure on labour,materials or services which cannot be economically identified with a specific saleable cost unit. In order to determinethe total cost of production on a fully absorbed basis) such costs have to be allocated, that is assigned to a singlecost unit, cost centre, or cost account or time period.

125. Insolvency

Businesses are placed into insolvency when they are unable to pay creditors debts in full after realisation of all theirassets. The decision to place a business into insolvency is normally taken by the creditors of a business usually abank. There are several different forms of insolvency the main ones being administration, receivership andliquidation.

126. Interest cover

Interest cover is an accounting ratio. It measures the level of a businesss profits relative to its interest charge in theprofit and loss account. It is usually defined as profits before interest and tax divided by interest charges, but theprecise definition will vary depending on the circumstances. The higher the ratio, the less gearing a business hasThe interest cover ratio is particularly important for lenders, in that it helps them determine the vulnerability of interespayments to a drop in profit. (See also gearing and gearing ratio)

127. Internal audit


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Internal audit is the name given to an independent appraisal function established within a business to examine andevaluate its activities as a service to the business. The objective of internal auditing is to assist members of thebusiness in the effective discharge of their responsibilities. To this end, internal auditing furnishes them with analysesappraisals, recommendations, counsel and information concerning the activities reviewed. (See also audit)

128. Internal control

An internal control is a financial or other form of management control that helps provide a business with moreeffective, efficient operation, or to enable the business to comply with laws and regulations. Many internal controlsare concerned with the application of authority and approval levels (for example, who can authorise purchases or

make payments). Others are concerned with the complete and accurate maintenance of business records. Thesystem of internal controls is usually monitored by the internal audit function (if one exists) and is reviewed by theauditors of a business as part of their audit of the financial statements.

129. Internal rate of return (IRR)

The internal rate of return (IRR) is the annual percentage return achieved by a project, at which the sum of thediscounted cash inflows over the life of the project is equal to the sum of the discounted cash outflows. A businessthat uses discounted cash flow techniques as a method of investment appraisal will often use a target IRR as adiscount rate in evaluating potential investments or projects.

130. Investment appraisal

Investment appraisal is a process whereby the likely revenues and costs generated by an investment are evaluatedover the life of the project.. Such appraisal includes the assessment of the risks of, and the sensitivity of the project's

viability to, forecasting errors. The appraisal enables a judgement to be made whether to commit resources to theproject.

131. Invoice discounting

Invoice discounting is used by some businesses as a way of raising working capital. It involves the purchase (by theprovider of the invoice discounting service) of trade debtors at a discount to their book value. Invoice discountingenables the business from which the debts are purchased to raise working capital by swapping trade debtors intocash. (See also invoice factoring).

132. Job costing

Job costing is a method of costing which identifies the individual costs of performing each job.

133. Last in first out (LIFO)

Last-in, first out (LIFO) is a method of valuing stocks (inventory). LIFO assumes that the last item of stock receivedis the first to be used.

134. Leasing

Leasing relates to a contract between a lessor and a lessee for hire of a specific asset selected from a manufactureror vendor of such assets by the lessee. The lessor has ownership of the assets. The lessee has possession of theasset on payment of specified lease rentals over a period. (See also finance lease and operating lease)

135. Liabilities

Liabilities represent amounts owed by a business to the third-party providers of finance other than the equityshareholders. The main examples of liabilities include trade creditors (suppliers who sell goods to the business oncredit) and bank loans and overdrafts. Liabilities that are due to be repaid within one year are shown in the balancesheet under the heading Creditors due within one year. Similarly, liabilities that are not due for more than one yeaare separately disclosed.

136. Limited liability company

A limited liability company is one in which the liability of shareholders for the companys debts is limited to the amounpaid and, if any, unpaid on the shares taken up by them. The important point about a limited liability company is thathe shareholders are protected against claims against the company, which is treated by law as a separate legapersonality.

137. Limiting factor


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In the preparation of budgets, account should be taken of limiting factors. A limiting factor is a constraint which limitsbusiness activities, for example, labour or materials which are in short supply. Budgets should bear limiting factors inmind.

138. Liquidation

Liquidation is the formal procedure for closing down a company or partnership including realisation and distribution ofassets

139. Liquidator

A liquidator is the Official Receiver or an insolvency practitioner who is appointed to attend to the liquidation of acompany or partnership.

140. Liquid resources

Liquid resources are alternative terms for the liquid assets of a business. These are the cash balances and otheassets readily convertible into cash, for example short-term investments.

141. Liquidity ratios

There are various accounting ratios that relate to the financial resources of a business. These are known as liquidityratios. The main two statistics are the current ratio and the acid test ratios which measure the relationship betweencurrent assets and current liabilities.

142. Loan stock

Loan stock is long-term business finance on which interest is paid, usually at a fixed rate. Holders of loan stock aretherefore, long-term creditors of a business.

143. Long-term capital

Capital invested or lent and borrowed for a period of five years or more

144. Management accounting

Management accounting is a broad term to describe the techniques used to collect, process, and present financialand quantitative data within a business to enable effective scorekeeping, cost control, planning, pricing, and decisionmaking to take place.

145. Management buy-out (MBO)

The acquisition of a business by its existing management. MBOs are usually funded by venture capitalists

146. Marginal cost

The variable costs per unit of production. The variable costs are usually regarded as the direct costs plus the variableoverheads. Marginal cost represents the additional cost incurred as a result of the production of one additional unit ofproduction

147. Marginal costing

Marginal costing is a costing method whereby each unit of output is charged with only the directly-attributable variableproduction costs. Using this method, fixed production costs (such as the factory rent and rates) are not considered tobe real costs of production, but costs which provide the facilities for an accounting period that enable production totake place.

148. Matching conceptThe matching concept is an alternative term for the accruals concept - one of the fundamental accounting concepts(See also accruals concept)

149. Materiality

Materiality is the concept that is used to evaluate whether accounting information is sufficiently significant to users ofaccounts such that it should not be omitted or misstated in the accounts. Materiality depends on the size of the itemor error judged in the particular circumstances of its omission or misstatement. The concept of materiality isparticularly important for auditors who must assess whether errors they find in accounts need to be adjusted beforethe accounts are finalised. (See also audit)

150. Memorandum of association


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The Memorandum of Association is a constitutional document of a company that deals with matters such as thecompany name, registered office, that it has limited liability, its trading objects and other relevant facts. The other mainconstitutional document of a business is the Articles of Association.

151. Merchant banks

Merchant banks are financing institutions that carry out a variety of financial services, including the acceptance of billsof exchange, the issue and placing of loans and securities, portfolio and unit trust management and some bankingservices.

152. Mezzanine debt

Mezzanine debt is a kind of loan finance where there is little or no security left after the main bank loan debt has beensecured. To reflect the higher risk of mezzanine funds, the lender will charge a rate of interest of perhaps four to eightper cent over bank base rate, may take an option to acquire some equity and may require repayment over a shorterterm.

153. Minority interests

Minority interests arise when a company has a subsidiary company in which it does not own all of the shares. Theshareholders apart from the holding company are referred to as the minority interests. For example, where a holdingcompany owns 80% of the shares in a subsidiary company, the remaining 20% of shareholders are the minorityinterests.

154. Net assets

Net assets are disclosed as part of the balance sheet. Net assets equals total assets on the balance sheet less totaliabilities.

155. Net assets per share

Net assets per share is an accounting ratio. It is defined as net assets divided by the number of shares in issue. It isalso known as net worth per share. The purpose of the ratio is to compare the net assets per share with the shareprice. The share price will either be at a premium to net asset value or a discount.

156. Net current assets

Net current assets are disclosed as part of the balance sheet. Net current assets equal total current assets less totalcreditors falling due within one year. It is also more commonly known as working capital. When short term creditorsexceed current assets, it is referred to as net current liabilities.

157. Net book value

Net book value is the difference between the original purchase cost of a fixed asset less the cumulative amount ofdepreciation that has been charged to the profit and loss account in relation to that asset. For example, if a piece ofmachinery had a purchase cost of 75,000 and depreciation of 50,000 had been charged on that asset, the net bookvalue of the machinery in the balance sheet would be 25,000.

158. Net present value (NPV)

Net present value is the value obtained by discounting all cash outflows and inflows of a capital investment by achosen target rate of return or cost of capital

159. New issues

A new issue relates to the listing of a companys shares onto the stock exchange for the first time

160. Non-executive director

A non-executive director is part of a companys board of directors. However, the non-executive director does nohave any executive responsibility in the business. In other words, he or she does not get involved in the day-to-daymanagement of the business. The purpose of non-executives is to act as an independent reviewer of the activities othe executive directors and to safeguard the interests of the shareholders.

161. Operating cycle

The operating cycle, or working capital cycle, is calculated by deducting creditor days from stock days plus debtordays. It represents the period of time which elapses between the point at which cash begins to be expended on theproduction of a product and the collection of cash from the customer.

162. Operating lease


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An operating lease is a lease where the lessor retains most of the risks and rewards of ownership. (See also financelease)

163. Operating margin

Operating margin is an accounting ratio that is concerned with the level of profitability. It is calculated by dividingoperating profit by total sales and expressing the result as a percentage.

164. Operating profit

Operating profit is the net profit that is earned by a business before any exceptional items, finance costs or tax

charges. It can be calculated by taking gross profit (or gross margin) plus/less all operating revenues and costs.

165. Operational gearing

Operational gearing refers to the relationship of fixed costs to total costs. The greater the proportion of fixed costs, thehigher the operating gearing, and the greater the advantage to the business of increasing sales volume. If sales dropa business with high operating gearing may face a problem from its high level of fixed costs.

166. Opportunity cost

Opportunity cost is an important concept particularly in the context of investment or project appraisal. Theopportunity cost is the value of the benefit sacrificed when one course of action is chosen, in preference to analternative. The opportunity cost is represented by the forgone potential benefit from the best rejected course ofaction.

167. OptionsOptions are found in most areas of finance. For example, options are used in convertible shares and warrantsinsurance, currency arrangements and interest rate management. The two main types of option are call options andput options.

168. Ordinary shares

Ordinary shares are part of the equity finance of a business. Ordinary shares entitle the holders to the remainingdivisible profits (and, in a liquidation, the assets) after prior interests, for example creditors and prior charge capitalhave been satisfied

169. Overdraft financing

Overdraft financing is provided when businesses make payments from their business current account exceeding the

available cash balance. An overdraft facility enables businesses to obtain short-term funding although in theory theamount loaned is repayable on demand by the bank.

170. Overhead

An overhead is a cost that is not directly related to the production of a specific good or service but that is indirectlyrelated to a variety of goods or services. For example, the cost of maintaining and insuring a large factory is anindirect production cost that must be spread over a number of products or services.

171. Overhead absorption rate

The overhead absorption rate provides a means of attributing overhead to a product or service, based, for exampleon direct labour hours, direct labour cost or machine hours. Overhead absorption rates are required by the full cosmethod of pricing products and services. (See also marginal costing)

172. Overtrading

Overtrading occurs when a business expands too rapidly, putting a strain on its financial resources. This can lead toliquidity problems.

173. Payback

Payback is a method of investment appraisal. The payback period represents the number of years it takes the cashinflows from a capital investment project to equal the cash outflows. A business may have a target payback period,above which projects are rejected. The main drawback with the payback method is that it does not reflect the timevalue of money. Accordingly, it does not discriminate between receiving cash now as compared with receiving thesame amount of cash in several years time. Another criticism of the payback method is that it ignores cash flows thaarise after the payback has been completed.

174. Post balance sheet events


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Post balance sheet events are those favourable and unfavourable events, which occur between the balance sheedate and the date on which the financial statements are approved by the board of directors. The directors musdecide whether the financial statements should either reflect post-balance sheet events or whether they simply needto be mentioned (without adjusting the accounts). An event which might require the accounts to be adjusted would beone which provides evidence about conditions existing at the balance sheet date. For example, the insolvency of amajor trade debtor would suggest that the debtor balance at the year-end should be provided for as a bad debt.

175. Preference shares

Preference shares are part of the equity finance of a company. Preference shares usually receive a fixed dividend

each year and which, if redeemed, are redeemed at par value. Although the dividend is fixed, it is not guaranteedHowever, if the company fails to pay ('passes') the preference dividend for the year to ordinary shareholders. Wherethe preference shares are cumulative, any arrears of preference dividend will also have to be paid prior to the ordinarydividend being paid in any year. Preference shares may be redeemable, when they will be redeemed at a set date.They may also be convertible. Finally, they may be participating, which means that in addition to the fixed dividend,they will receive a variable dividend dependent on the performance of the company. (See also ordinary shares)

176. Preferential creditor

A preferential creditor is a creditor who is entitled to receive certain payments in priority to other unsecured creditorsSuch creditors include government departments, occupational pension schemes and employees.

177. Prepayments

Prepayments are classified as current assets in the balance sheet. Prepayments include prepaid expenses fo

services not yet used, for example rent in advance or electricity charges in advance, and also accrued income.Accrued income relates to sales of goods or services that have occurred and have been included in the profit and lossaccount for the trading period but have not yet been invoiced to the customer.

178. Present value

Present value is the cash equivalent now of a sum of money receivable or payable at stated future date, discounted ata specified rate of return. (See also net present value)

179. Price-to-earnings ratio (p/e ratio)

The price-earnings (p/e) ratio is an accounting ratio that is concerned with measuring the overall profitability of abusiness based in relation to the equity shareholders who will share in that profit. The p/e ratio is defined as the shareprice divided by the earnings per share. Broadly speaking, the higher a businesss P/E ratio, the more expensive thebusiness and the more highly rated it is. (See also earnings per share)

180. Profit and loss account

The profit and loss account is one of the primary financial statements. It shows a businesss income and expenditureover a period of time, usually one year. The term profit and loss account is also used in the shareholders funds parof the balance sheet. In this context, the term represents accumulated profits which a business has generated sinceits incorporation.

181. Profit before tax (PBT)

Profit before tax is a separate line in the profit and loss account. It is calculated by taking operating profit plus ominus net interest.

182. Profit centre

A profit centre is a part of the business that is accountable for both costs and revenues the manager is responsiblefor revenues and costs.

183. Provisions

Provisions are liabilities where the business is uncertain as to the amount or timing of the expected future costs. Forexample, if a business is subject to a law suit, it may provide now for the expected liability on loss of the law suit. Thisis an example of the prudence concept. (See also liabilities)

184. Prudence


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The prudence concept is one of the fundamental accounting concepts. It is important that financial statements areprepared on a prudent basis. Revenue must not be shown in the accounts until the cash realisation of the revenue isreasonably certain. On the other hand, costs arising as a result of past actions should be provided for immediately,even if the cash will not be paid over until the future.

185. Public limited company (PLC)

A public limited company plc) is a company which, by registering as a plc and adhering to strict legal requirementsas a result, has the ability to issue shares to the public. Contrast this with a Private Limited Company, which is notpermitted to issue shares to the public. A public limited company should not be confused with a Listed Company. A

listed company is a public limited company which has obtained a listing from the UK Listing Authority and not all publiclimited companies do this.

186. Put option

A put option gives the holder of the option the right to sell a share (or other asset) at the exercise price at some futuretime. (See also call option)

187. Quick ratio

A measure of liquidity, similar to the current ratio except that stocks are excluded from the calculation of net currentassets (since it may be some time before stocks can be converted back into cash).

188. Ratio analysis

Ratio analysis is the study of the relationships between financial variables. Ratios of one business are often compared

with the same ratios of similar businesses or of all operators in a single industry. This comparison indicates if aparticular business financial statistics are suspect. Likewise, a particular ratio for a business may be evaluated over aperiod of time to determine if any special trend exists.

189. Reserves

Reserves are part of shareholders funds on the balance sheet. All parts of shareholders funds apart from sharecapital are reserves, such as the share premium account, the profit and loss account and the revaluation reserve.

190. Residual value

The residual value of an asset is the expected proceeds from the sale of the asset, net of the costs of sale, at the endof its estimated useful life. Residual value is used for computing the straight-line method and diminishing-balancemethod of depreciation, and also for inclusion in the final year's cash inflow in a discounted cash flow appraisal.

191. Retained profits

Retained profits are those profits that have not been paid out as dividends to shareholders, but retained for futureinvestment by the company.

192. Return on capital employed

Return on capital employed (ROCE) is an accounting ratio designed to assess the profit-generating capacity ofcapital employed . It is defined as profits before interest and tax divided by capital employed, expressed as apercentage. Broadly speaking, the higher the return on capital employed, the more successful the business.

193. Return on equity

Return on equity (usually shortened to ROE) is a measure of investment return that compares the profit earned by abusiness with the amount invested in the business by shareholders.

194. Revenue expenditure

Revenue expenditure is charged to the profit and loss account. It is expenditure that is incurred (1) for the purpose othe trade of the business (e.g. selling costs, administration costs) or (2) to maintain the existing earning capacity offixed assets

195. Rights issue

A rights issue is an issue of shares for cash by a company to its existing shareholders on a basis pro rata to theiexisting shareholdings. The rights issue will normally be at a substantial discount to the current share price (oftenbetween 20% and 40% discount).

196. Risk capital


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An alternative term for venture capital

197. Sale and leaseback

The sale of a fixed asset that is then leased by the former owner from the new owner. A sale and leaseback permits afirm to withdraw its equity in an asset without giving up use of the asset. Sale and leasebacks are popular methods ofraising cash by businesses that own property assets.

198. Scrip dividend

A scrip dividend is an issue of shares to an investor in lieu of a cash dividend. The value of the shares will be

designed to equal the value of the cash dividend foregone. This may be useful for investors who wish to increase theirinvestment in a company without incurring the costs of buying shares in the market.

199. Secured creditor

A secured creditor is a creditor who holds security, such as a mortgage, over a debtor's assets

200. Segmental reporting

The inclusion in a businesss report and accounts of analysis of turnover, profits and net assets by class of businessand by geographical segments (Companies Acts 1985/89 and SSAP 25).

201. Sensitivity analysis

A modelling and risk assessment technique in which changes are made to significant variables in order to determinethe effect of these changes on the planned outcome. Particular attention is thereafter paid to variables identified asbeing of special significance.

202. Share capital

Capital is the number of existing shares in the business multiplied by the nominal value of the shares.

203. Shareholder

A shareholder is an owner of shares in a limited company or limited partnership. A shareholder is a member of thecompany.

204. Shareholder value

Shareholder value is an approach to business valuation and management that focuses on maximising the value of ashareholder's equity above other business objectives. Normally, shareholder value can be increased in three ways

dividend payments, appreciation in the value of the shares, and cash repayments.

205. Share premium account

Part of shareholders' funds in a businesss balance sheet. Arises when shares are issued at a premium to theirnominal value. For example, if shares with a nominal value of 100p are issued at a price of 150p, the share capital ofthe business will increase by the nominal value of 100p per share and the share premium account will increase by50p per share. The total of share capital plus share premium account therefore represents the total cash raised fromshareholders by the business in the past.

206. Short-term capital

Capital that is lent or borrowed for a period which might range from as short as overnight up to about one year

207. Stakeholder theory

An approach to business that incorporates all the interests of stakeholders in a business. It widens the view that a firmis responsible only to its owners; instead it includes other interested groups, such as its employees, customers,suppliers, and the wider community, which could be influenced by environmental issues. It thus attempts to adopt aninclusive rather than a narrow approach to business responsibility.

208. Standard cost


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The planned unit cost of the products, components or services produced in a period. The standard cost may bedetermined on a number of bases. The main uses of standard costs are in performance measurement, control, stockvaluation and in the establishment of selling prices.

209. Stocks

Goods purchased by a business to resell on to its customers. Included as part of current assets in the businesssbalance sheet. Also known as inventories in the USA.

210. Stock turnover

An alternative term for inventory turnover, measuring how quickly stocks are converted into finished goods and sales.

211. Stock valuation

Stock valuation refers to the valuation of stocks of raw material, work in progress, and finished goods. According togenerally accepted accounting practice, stocks should be valued at the lower of cost or net realisable value and thecosts incurred up to the stage of production reached.

212. Straight-line depreciation

A method of depreciation that charges equal amounts of depreciation to the Profit & Loss Account during the usefulife of an asset.

213. Subsidiary business

A subsidiary business is a business which is controlled by another business, referred to as its holding businessControl is usually achieved either by owning shares with more than 50% of the voting rights in the subsidiary, or byhaving the right to appoint directors to the Board who have a majority of voting rights on the Board.

214. Sunk cost

Sunk costs are those costs which have already been incurred and which cannot now be recovered.

215. Taxable profits

Taxable profits are the profits on which a business calculates its corporation tax charge for a year. Note that thedefinition of taxable profits is not the same as accounting profits before tax. The reason for this is that the businesshas considerable flexibility in the way it calculates its accounting profit before tax. As a result, the Inland Revenue hasdifferent rules in some areas for the calculation of taxable profits.

216. True and fair view

The requirement for financial statements prepared in compliance with the Companies Act to give a true and fair viewoverrides any other requirements. Although not precisely defined in the Companies Act this is generally accepted tomean that accounts show a true and fair view if they are unlikely to mislead a user of financial information in giving afalse impression of the business.

217. Turnover

An alternative term for sales or revenue.

218. Urgent Issues Task Force

The Urgent Issues Task Force (UITF) is a sub-committee of the Accounting Standards Board which is set up to dea

with urgent accounting issues on an ad hoc basis. It produces Abstracts, which are essentially mini AccountingStandards and must be followed by companies when preparing their accounts. (See also accounting standards).

219. Variable cost

Variable costs are those costs that vary in direct proportion to the volume of activity.

220. Variance

A variance is the difference between a planned, budgeted or standard cost and the actual cost incurred. The samecomparisons may be made for revenues.

221. Variance analysis


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Accounting Glossary[1]

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