Accounting Terminology

ACCOUNTING REPORTS AND TERMINOLOGY

Accounting Terminology

Alan Lewis AAccccoouunnttaannttss

Any period of time utilised to measure accounting performance

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1. Accounting Period

Short term financial obligations


2. Accounts Payable (Sundry Creditors)

Amounts owed to the firm by customers


3. Accounts Receivable (Sundry Debtors)

Acquired by the firm to accomplish its business objectives


4. Assets

The comparison of operating figures from one firm with another


5. Benchmarks

Sales to cover all variable and fixed expenses


6. B.O.S. (Before Owners’ Salary)

Sales to cover all variable and fixed expenses


7. Break – Even Sales

Future maintainable profit expressed at a capitalisation rate

Rate of return required by a prudent investor

Reflects a mark up on prevailing interest rates

Items which affect rate of return:◦ Risk◦ Lack of negotiability◦ Economic conditions


8. Capitalisation Rate

Items which affect rate of return (cont’d):◦ Restrictions on entry◦ Size of the share parcel◦ General business risks


8. Capitalisation Rate cont'd...

Review your performance during each benchmark period


9. Comparative Analysis

Opening StockPlus:PurchasesFreight Inwards

Less:Closing Stock

Equals – Cost Of Goods Sold


10. Cost Of Goods Sold

Average days to pay creditors divided into 365 days


11. Creditors Turnover

Usually turned into cash within twelve months


12. Current Assets

Normally paid within twelve months


13. Current Liabilities

Indication of Liquidity Calculated

Current Assets Current Liabilities

= Current Ratio


14. Current Ratio

Business’ valuation of assets


15. Current Market Value

Shows how a business is paying its creditors

Calculated: Creditors

Average Daily Credit Purchase

= Days Creditors Outstanding


16. Days Creditors Outstanding

Calculated:Debtors

Average Daily Credit Sales

= Days Debtors Outstanding


17. Days Debtors Outstanding

Percentage of debtors outstanding compared to credit sales

Debtors Ratio – calculated:Debtors x 100

Credit Sales 1


18. Debtors’ Ratio

Amounts owed to the firm by customers


19. Debtors

Debtor Ratio to Borrowed Funds

Working Capital Ratio to Borrowed Funds

Debt to Equity Ratio

Other key performance indicators applicable


20. Debt Covenants

Percentage of external debt to equity

Debt to Equity % - calculated:Total Debt x 100 Equity 1


21. Debt To Equity Percentage

Record department’s:◦ Sales◦ Cost of Goods Sold◦ Gross ProfitsTo determine GP% for each department


22. Departmental Gross Profit %

Costs incurred in producing net profit


23. Expenses

Measures financial commitments:◦ Profitability◦ Exposure to Debt◦ Interest Rate◦ Owners’ ReinvestmentIndicators to measure:◦ Debt as % of Sale◦ Debt as % of Equity


24. Financing Indicators

Earning before Interest and Tax


25. EBIT

Earnings Before Interest, Depreciation and Tax


26. EBIDT

Earnings Before Interest, Tax, Depreciation & Amortisation.


27. EBITDA

Calculated earnings before interest and tax plus principal’s wages, superannuation etc


28. Adjusted EBIT

Items owned by the business used to generate business revenue


29. Fixed Assets

Fixed Assets as a % of Total Assets – calculated:

Fixed Assets x 100Total Assets 1


30. Fixed Assets As A Percentage Of Total Assets

Expected profitability after making adjustment for unusual or non recurring itemsIncludes:◦ Reasonable Management Salaries◦ “Notional Rent” on Owned Premises


31. Future Maintainable Profits

Difference between sales and cost of goods sold


32. Gross Profit

Measures gross profit earned on sales


33. Gross Profit % Of Sales

Sales - Cost of Goods Sold = Gross Profit, then


34. Gross Profit Ratio

Gross ProfitX

100= Gross Profit

RatioSales 1

Borrowings expressed as a percentage of assets:Assets worth $100,000Borrowings $ 62,000

Calculated:Assets Worth x 100 Borrowings 1

Gearing is: = 62%


35. Gearing

Measures increase from previous year.Factors effecting growth includes:◦ Competition◦ Business Presentation◦ Catchment Area Growth◦ Customer Buying Habits◦ Advertising


36. Growth - Sales

Original cost of assets


37. Historical Cost

Industry group according to the Australian & New Zealand Standard Industry Classification Coding System of the Australian Bureau of Statistics.


38. Industry Categories

Number of times interest charges are covered by EBIT


39. Interest Cover

Goods purchased or manufactured for sale to customers


40. Inventory (Stock On Hand)

Detailed review and comparison of a business against a “pool of similar businesses”


41. Inter Firm Comparisons

Amounts owing by the firm


42. Liabilities

Ability to pay financial obligations


43. Liquidity

Current Assets to Current Liabilities


44. Liquid Ratio

Amounts owed not due for repayment within the next twelve months


45. Long Term Liabilities

People who look like current customers.

They are normally the first group of prospects targeted in a marketing campaign.


46. Low-Hanging Fruit

Amount added to invoice cost


47. Mark - Up

Amount remaining after cost of goods sold and operating expenses have been deducted from sales


48. Net Profit

Operating Profit or Loss after income tax.


49. Net Profit After Tax

Measures net profit before tax earned on each dollar of sales


50. Net Profit Percentage Of Sales

Owner’s Funds as a percentage of total assets – calculated:

Owner’s Funds x 100 Total Funds 1


51. Owner’s Funds As A Percentage Of Total Assets

Include all expenditure to be paid from Gross Profit.


52. Overheads

A measure of output generated from resources


53. Productivity

Net profit after tax divided by total revenue and multiplied by 100.


54. Profit Margin

Ratio between current assets minus stock and current liabilities minus bank overdraft


55. Quick Ratio

The goods shall remain the property of the seller until all monies are paid


56. Romalpa Clause

Realistic arms length salaries if external persons were appointed


57. Reasonable Management Salaries

Relationship between net profit and total assets

Return on Assets – calculated:Net Profit x 100 Assets 1


58. Return On Assets

Relationship between net profit and owner’s equity

Return on Equity – calculated:Net Profit x 100 Equity 1


59. Return On Equity (Investment)

Net profit after tax as a percentage of shareholder's funds.


60. Return On Funds

Net profit after tax as a percentage of total revenue.


61. Return On Revenue

Factors affecting staffing costsIncluding:◦ Structures◦ Monitoring◦ Training◦ Experience◦ Turnover◦ productivity


62. Staffing Profile

Goods purchased or manufactured to sell to customers


63. Stock On Hand

Success of stock management including:◦ Displays◦ Mix◦ Ordering Systems◦ Stocktaking◦ Security


64. Stock Indicators

Dissection of sales income into departmental sales and measures income to be contributed from each product group


65. Sales Mix

Describes characteristics of retail store: ◦ Average customers◦ Average items per customer◦ Average sale per customer◦ Trading days◦ Trading hours◦ Floor area◦ Sales per floor area


66. Store Profile

Shrinkage measures a business' ability to control its margins and pricing.

Strong stock management policies will reduce shrinkage.


67. Shrinkage

Number of times the entire stock is sold and replaced


68. Stock Turnover/Stock Turns

Shows ability of a borrower to service the interest cost of a loan out of the business’ profit

Times Interest Covered by Profit – calculated:

Profit Before Tax And Interest Interest


69. Times Interest Covered By Profit

Based on prior year’s performance:◦ Competition◦ Management◦ Business Planning◦ Business Reinvestment◦ Demographic Information


70. Trend Analysis

Excess of current assets over current liabilities

Calculated:Current Assets less Current Liabilities= Working Capital


71. Working Capital

Accounting Terminology

Business

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