Accounting Terms GLOSSARY
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Finance for Non Finance
Accounting / Finance Terms
Accounting, financial analysis and financial modeling are integrated disciplines which a good financial analyst should be familiar with. In
particular, it is important that a sound knowledge of fundamental accounting principles and accounting terms is had to ensure a
common basis and language for understanding, interpreting and analyzing financial statements and financial model results.
List of the most common accounting terms that a financial analyst may come across:
Absorption: the sharing out of the costs of a cost center amongst the
products which use the cost center.
Account: a record in a double entry system that is kept for each (or each
class) of asset, liability, revenue and epense.
Accounting equation: an epression of the e!uivalence, in total, of assets " liabilities
# e!uity.
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Accounting period: that time period, typically one year, to which financial
statements are related.
Accounting policies: the specific accounting bases selected and followed by a business enterprise (e.g. straight line or reducing balance
depreciation).
Accounting rate of return: a ratio sometimes used in investment appraisal but based on
profits not cash flows.
Accounting standards: %rescribed methods of accounting by the accounting standardsor financial reporting standards regulation body in your
&urisdiction.
Accruals: (that which has accrued, accumulated, grown) epenses which
have been consumed or en&oyed but which have not been paid
for at the accounting date.
Accruals convention: the convention that revenues and costs are matched with one
the other and dealt with in the %rofit and Loss (%'L) ccountof the period to which they relate irrespective of the period of
receipt or payment.
Accumulated depreciation: that part of the original cost of a fied asset which has been
regarded as a depreciation epense in successive %rofit andLoss (%'L) ccounts: cost less accumulated depreciation " net
book value.
Acid test: he ratio of current assets (ecluding stock) to current
liabilities.
Acquisitions: operations of a reporting entity that are ac!uired in a period.*eparate disclosure of turnover, profits, etc must be made.
Activity based costing: cost attribution to cost units on the basis of benefit received
Irons indirect activities. he idea is that overhead costs are
driven by activities (e.g. setting up a machine) not products.
Allocation: the charging of discrete, identifiable costs to cost centers or cost units. cost is allocated when it is uni!ue to a particular
cost center.
Amortization: another word for depreciation: commonly used for depreciationof the capital cost of ac!uiring leasehold property.
Apportionment: the division of costs among two or more cost centers in
proportion to estimated benefit on some sensible basis.
pportionment is for shared costs.
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Assets: resources of value owned by a business entity.
Assets utilization ratio: a ratio which purports to measure the intensity of use of
business assets. alculated as sales over net operating assets.an be epressed as sales as a percentage of net operating
assets.
Asset value: a term which epresses the money amount of assets less
liabilities of a company attributable to one ordinary share.
Avoidable costs: the specific costs of an activity or sector of a business whichwould be avoided if that activity or sector did not eist.
Auditing: the independent eamination of, and epression of an opinion
on, the financial statements of an enterprise by an appointed
auditor in pursuance of that appointment and in compliance
with any relevant statutory obligation.
A!" #average cost$: a method of valuing fungible assets (notably stock) at average
(simple or weighted) input prices.
%ad debts: debts known to be irrecoverable and therefore treated as losses by inclusion in the %rofit and Loss (%'L) ccount as an
epense.
%alance S&eet: a financial statement showing the financial position of a
business entity in terms of assets, liabilities and capital at a
specified date.
%ankruptcy: a legal status imposed by a court. -sually a trustee is appointed
to receive and realize the assets of the bankrupt and to
distribute the proceeds to his creditors according to the law.
%enefits in kind: things or services supplied by a company to its directors and
others in addition to cash remuneration. good eample is the
provision of and free use of a motor car. he value of benefits
in kind are taable.
%ond: a formal written document that provides evidence of a loan.ond has mainly merican usage. Its -/ e!uivalent is
debenture.
%onus issue: a free issue of new shares to eisting shareholders. 0o paymentis made for the shares. Its main effect is to divide the substance
of the company (assets less liabilities) into a larger number of
shares.
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%ook value: the amount at which an asset is carried on the accounting
records and alance *heet. he usual book value for fied
assets is cost less accumulated depreciation. lternative wordsinclude written down value, net book value and carrying value.
ook value rarely if ever corresponds to saleable value.
%reakeven c&art: a chart which illustrates costs, revenues, profit and loss at
various levels of activity within a relevant range.
%reakeven point: the level of activity (e.g. level of sales) at which the business
makes neither a profit nor a loss i.e. where total revenues
eactly e!ual total costs.
%udget: a formal !uantitative epression of management2s plans or epectations. 3aster budgets are the forecast or planned %rofit
and Loss ccount and alance *heet. *ubsidiary budgets
include those for sales, output, purchases, labor, cash etc.
!apital: an imprecise term meaning the whole !uantity of assets lessliabilities owned by a person or a business.
!apital allo'ances: deductions from profit for fied asset purchases. In effect
capital allowances is a standard system of depreciation used
instead of depreciation for ta purposes only.
!apital budgeting: the process of planning or appraising possible fied asset
ac!uisitions.
!apital employed: a term describing the total net assets employed in a business.
4arious definitions are used, so beware when talking at cross purposes.
!apital e(penditure: ependiture on fied assets.
!as&: strictly coins and notes but used also to mean all forms of ready
money including bank balances.
!as& discount: a reduction in the amount payable by a debtor to induce prompt
payment (e!uivalent to settlement discount).
!as& flo': a vague term (compare cash flow difficulties) used for the
difference between total cash in and total cash out in a period.
!as& flo' forecast: a document detailing epected or planned cash receipts andoutgoings for a future period.
!as& flo' statement: a formal financial statement showing a summary of cash
inflows and outflows under certain re!uired headings.
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!ommitted costs: those fied costs which cannot be eliminated or even cut back
without having a ma&or effect on the enterprise2s activities (e.g.
rent).
!ommon stock : the -.* e!uivalent of ordinary shares.
!onservatism: (also known as prudence) the convention whereby revenue
and profits are not anticipated, but provision is made for all
known liabilities (epenses and losses) whether the amount of these is known with certainty or is a best estimate. 6ssentially 7
future profit, wait until it happens 7 future loss, count it
!onsideration: the amount to be paid for anything sold including businesses.
3ay be cash, shares or other securities.
!onsistency: convention that there is consistency of accounting treatment of
like items within each year and from year to year.
!onsolidation: the aggregation of the financial statements of the separate
companies of a group as if they were a single entity.
!ontribution: a term used in marginal costing 7 the difference between sale price and associated variable costs.
!ontrollable costs (also known as managed costs): costs, chargeable to a budget
or cost centre, which can be influenced by the actions of the
persons in whom control is vested.
!onversion cost: the cost of bringing a product or service into its present
location or condition. 3ay include a share of production
overheads.
!onvertible loan stock : loans where, at the option of the lender, the loan can beconverted into ordinary shares at specified times and specified
rates of conversion.
!ost be&avior: the change in a cost when the level of output changes.
!ost center: a location, function, or item of e!uipment in respect of whichcosts may be ascertained and related to cost units.
!ost convention: the accounting convention whereby alance *heet assets are
mostly valued at input cost or by reference to input cost.
!ost)volume)profit #!P$ analysis: the study of the relationships between variable
costs, total fied costs, levels of output and price and mi of units sold and profit, often analyzed in a 8inancial 3odeling
eercise.
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!redit: commonly used to refer to a benefit or gain also the practice of
selling goods and epecting payment at a later date.
!redit control: those measures and procedures adopted by a firm to ensure thatits credit customers pay their accounts.
!reditors: those persons, firms or organizations to whom the enterprise
owes money.
!reditors payment or settlement period: a ratio (usually creditors inputs on credit in a
year 1;9) which measures how long it takes the firm to payits creditors.
!umulative preference s&ares: preference shares where the rights to dividends omitted
in a given year accumulate. hese dividends must be paid
before a dividend can be paid on the ordinary shares.
!urrent assets: cash # those assets (stock, debtors, prepayments, bank
accounts) which the management intend to convert into cash or
consume in the normal course of business within one year or within the operating cycle.
!urrent cost accounting #!!A$: a system of accounting which recognizes the fluctuating
value of money by measuring current value by applying
specific indices and other devices to historical costs. validmethod which is comple and difficult to understand
intuitively.
!urrent liabilities: debts or obligations that will be paid within one year of the
accounting date. nother term used to describe the same isreditors: amount falling due within one year.
!urrent ratio: the ratio of current assets to current liabilities.
!ut)off : the difficulties encountered by accountants in ensuring all
items of income and epense are correctly ascribed to the right
annual profit statement.
*ebenture: a document which creates or acknowledges a debt. ommonlyused for the debt itself.
*ebt: a sum due by a debtor to his creditor. ommonly used also as a
generic term for borrowings.
*ebtors: those who owe money.
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*ebtors payment #settlement$ period: a calculation of the average time taken by credit
customers to pay for their goods. alculated by
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+conomic "rder ,uantity: that purchasing order size which takes into account the
#+",$ optimum combination of stockholding costs and ordering costs.
+quity convention: the convention that a business can be viewed as a unit that is aseparate entity and apart from its owners and from other firms.
+quity: the ordinary shares or risk capital of an enterprise.
+(ceptional items: material items which derive from events or transactions that
fall within the ordinary activities of the reporting entity and
which need to be disclosed by virtue of their size or incidenceif the financial statements are to give a true and fair view.
6amples are profits or losses on termination of an operation,
costs of a fundamental reorganization and profits and losses ondisposal of fied assets.
+(pense: a cost which will be in the %rofit and Loss (%'L) ccount of ayear.
+(posure draft: a document issue on a specific accounting topic for discussion.
+(traordinary items: material items possessing a high degree of abnormality whicharise from events or transactions that fall outside the ordinary
activities of the reporting entity and which are not epected to
recur. hey should be disclosed but are very rare indeed.
Factoring: the sale of debtors to a factoring company to improve cash
flow. 8actoring is a method of obtaining finance tailored to theamount of business done but factoring companies also offer
services such as credit worthiness checks, sales and debtor recording, and debt collection.
F-F": first in first out 7 a method of recording and valuation of fungible assets,
especially stocks, which values items on the assumption that
the oldest stock is used first. 8I8> stocks are valued at mostrecent input prices.
Finance lease: a leasing contract which transfers substantially all the risks and
rewards of ownership of an asset to the lessee. In effect thelessee is really buying the assets with the aid of a loan and the
lease installments are really payments of interest and
repayments of capital. hey are accounted for as such inaccordance with the accounting convention of substance over
form.
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Financial statements: alance *heets, %rofit and Loss ccount, Income and
6penditure ccounts, ash 8low *tatements and other
documents which formally convey information of a financialnature to interested parties concerning an enterprise. In
companies, the financial statements are sub&ect to audit
opinion.
Fi(ed assets: business assets which have a useful life etending over morethan one year. 6amples are land and buildings, plant and
machinery, vehicles.
Fi(ed cost: a cost which in the short term, remains the same at differentlevels of activity. n eample is rent.
Fle(ible budget: a budget which is fleed to recognize the difference in behavior
of fied and variable costs in relation to levels of output. otal
budgeted costs changed to accord with changed levels of activity.
Floating c&arge: an arrangement whereby a lender to a company has a floating
charge over the assets generally of the company gives the
lender priority of repayment from the proceeds of sale of theassets in the event of insolvency. anks fre!uently take a
floating charge when lending.
Format: a specific layout for a financial statement. *everal alternatives
are often prescribed by the prevailing governing authority or
law of the country in which the enterprise operates or reportsits financial performance.
Funds flo' statement: a financial statement which links alance *heets at the
beginning and end of a period with the %rofit and Loss (%'L)ccount for that period. 0ow replaced by the cash flow
statement.
Fungible assets: assets which are substantially indistinguishable from each
other. -sed for stocks which can then be valued on 8I8> or 4> principles. LI8> is also possible but often not usually
for ta reasons.
.earing: also known as leverage, the relationship between debt and
e!uity in the financing structure of a company.
.ilt)edged securities: securities and investments which offer a negligible risk of
default. %rincipally government securities.
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.oal congruence: the situation in which each individual, in satisfying his or her
own interests, is also making the best possible contribution to
the ob&ectives of the enterprise.
.oing concern: the accounting convention which assumes that the enterprise
will continue in operational eistence for the foreseeablefuture. his means in particular that the %rofit and Loss (%'L)
ccount and alance *heet (*) assume no intention or necessity to li!uidate or curtail significantly the scale of
operation.
.ood'ill: an intangible asset which appears on the alance *heet of some businesses. It is valued at (or below) the difference between the
price paid for a whole business and the fair value of the net
assets ac!uired.
.ross: usually means before or without deductions. 8or eampleAross *alary or Aross %rofit.
.ross profit: sales revenue less cost of sales but before deduction of
overhead epenses. In a manufacturing company it is sales
revenue less cost of sales but before deduction of nonBmanufacturing overheads.
.ross margin: (or gross profit ratio), gross profit epressed as a percentage of
sales.
.roup: a set of interrelated companies usually consisting of a holdingcompany and its subsidiary and subBsubsidiary companies.
.roup accounts: the financial statements of a group wherein the separate
financial statements of the member companies of a group are
combined into consolidated financial statements.
-F": &ig&est in &ig&est out, a pricing policy where costs are collected for a &ob onthe basis that the cost of materials and components is the
highest recent input price.
istorical cost: the accounting convention whereby goods, resources andservices are recorded at cost. ost is defined as the echange or
transaction price. -nder this onvention, realizable values are
generally ignored. Inflation is also ignored. he almostuniversal adoption of this convention makes accounting harder
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to understand and lessens the credibility of financial
statements.
urdle: a criteria that a proposed capital investment must pass before itis accepted. It may be a certain interest rate, a positive 0%4 or
a maimum payback period.
-ncome and e(penditure account: the e!uivalent to %rofit and Loss (%'L) ccounts in
nonprofit organizations such as clubs, societies and charities.
-ndirect costs: costs which cannot be traced to particular products. neample is rent or management salaries. hey are usually
shared by more than one product and are called overheads.
-nsolvency: the state of being unable to pay debts as they fall due. lso
used to describe the activities of practitioners in the fields of
bankruptcy, receivership and li!uidations.
-ntangible assets: assets which have long term value but no physical identity.
6amples are goodwill, patents, trade marks and brands.
-nterim dividend: a dividend paid during a financial year, generally after the issueof unBaudited profit figures half way through the year.
-nternal rate of return: the rate of discount which will &ust discount the future cash
flows of a proposed capital investment back to the initial
outlay.
-nventory: a detailed list of things. -sed by accountants as another word
for stock.
-nvestment appraisal: the use of accounting and mathematical methods to determine
the likely returns for a proposed investment or capital pro&ect.
0ey factor: a factor of production which is in limited supply and thereforeconstrains production.
1abor &our rate: a method of absorption where the costs of a cost centre are
shared out amongst products on the basis of the number of hours of direct labor used on each product.
1everage: another word for gearing.
1-F": 1ast in first out 7 a valuation method for fungible items where the newest items
are assumed to be used first. 3eans stocks will be valued at old
prices. 0ot used in certain &urisdictions such as the -./ for tareasons.
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1imiting or key factor: a factor of production which is in limited supply and therefore
constrains output.
1iquidation: the procedure whereby a company is wound up, its assetsrealized and the proceeds divided up amongst the creditors and
shareholders.
1iquidity: the ease with which funds can be raised by the sale of assets.
1iquidity ratios: ratios which purport to indicate the li!uidity of a business.
hey include the current ratio and the acid test ratio.
1isted companies: companies whose shares are traded on the stock echange.
2ac&ine &our rate: a method of absorption of the costs of a cost center where the
costs are shared out among the products which use the centre in
proportion to the use of machine hours by the relevant products.
2anagement accounting: the provision and interpretation of information which assists
management in planning, controlling, decision making, and
appraising performance.
2anagement by e(ception: control and management of costs and revenues byconcentrating on those instances where significant variances by
actual from budgets have occurred.
2anufacturing accounts: 8inancial statements which measure and demonstrate the totalcosts of manufacturing in a period. hey are followed by
rading and %rofit and Loss (%'L) ccounts.
2arginal costing: a system of cost analysis which distinguishes fied costs from
variable costs.
2arginal cost: the additional cost incurred by the production of one etra unit.
2argin of safety: the ecess of budgeted activity over breakeven activity.
-sually epressed as a percentage of budgeted activity.
2ark)up: gross profit epressed as a percentage of cost of goods sold.
2atc&ing convention: the idea that revenues and costs are accrued, matched with oneanother as far as possible so far as their relationship can be
established or &ustifiably assumed, and dealt with in the %rofit
and Loss (%'L) ccount of the period in which they relate. n
eample is the matching of sales of a product with the
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development costs of that product. he appropriate periods
would be when the sales occur.
2aster budgets: the overall budgets of an enterprise comprising cash budget,forecast %rofit and Loss (%'L) ccount and forecast alance
*heet (*). hey are made up from subsidiary budgets.
2ateriality: the accounting convention that recognizes that accounting is a
summarizing process. *ome items and transactions are large(i.e. material) enough to merit separate disclosure rather than
inclusion with others in a lump sum. 6amples are an
eceptionally large bad debt or an eceptionally large loss onsale of a fied asset.
2inority interest: the interests in the assets of a Aroup relating to shares in group
companies not held by the holding company or other members
of the group.
2odified accounts: financial statements which are shortened versions of fullaccounts. *mall and medium sized companies can file these
with the Degistrar of ompanies instead of full accounts.
2oney measurement: the convention that re!uires that all assets, liabilities, revenues
and epenses shall be epressed in money terms.
Net: usually means after deductions. 8or eample net current assets
current assets less current liabilities and net cash flow means
cash inflows less cash outflows. ontrast gross.
Net book value: the valuation on the alance *heet of an asset. lso known asthe carrying value or written down value.
Net present value: the value obtained by discounting all cash inflows and outflows
attributable to a proposed capital investment pro&ect by a
selected discount rate.
Net realizable value: the actual or estimated selling price of an asset less all further costs to completion (e.g. ost of a repair if it needs to be
repaired before sale) and all costs to be incurred before and onsale (e.g. commission).
N-F": Ne(t in first out 7 a pricing policy where costs are collected on the basis that the
cost of materials and components is the net input price.
Nominal value: the face value of a share or debenture as stated in the official
documents. Eill not usually be the same as the issue pricewhich may be at a premium and which will almost never
correspond to actual value.
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"b3ectivity: the convention of using reliable and verifiable facts (e.g. the
input cost of an asset) rather than estimates of Fvalue2 even if
the latter is more realistic.
"perating cycle: the period of time it takes a firm to buy inputs, make or market
a product and sell to and collect the cash from a customer.
"pportunity cost: the value of a benefit sacrificed in favor of an alternative
course of action.
"rdinary s&ares: the e!uity capital of a company.
"utsourcing: the use of services (such as administration or computing) from
separate outside firms instead of using the enterprise2s own
employees.
"ver&eads: Indirect cost.
"vertrading: paradoical situation when a company does so much business that stocks and debtors rise leading to working capital
and li!uidity difficulties.
Par value: the nominal sum imprinted on a share certificate and which
spears on the alance *heet (*) of a company as sharecapital. It has no significance as a value.
Payback : the number of years which will elapse before the total
incoming cash receipts of a proposed pro&ect are forecast toeceed the initial outlays.
Periodicity: the convention that financial statements are produced at regular
intervals usually at least annually.
Preference s&ares: *hares in which holders are entitled to a fied rate of dividend
(if one is declared) in priority to the ordinary shareholders in awinding up situation.
Planning variance: variance arising because the budgeted cost is now seen as out
of date. 6amples are wage or price rises.
Prepayments: 6penditure already made on goods or services but where the benefit will be felt after the alance *heet (*) date. 6amples
are rent or rates or insurances paid in advance.
Price earnings ratio: an investor ratio calculated as 7 share earnings per share.
Prime cost: the direct costs of production.
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Private company: any company that is not a public company.
Profitability inde(: in investment appraisal, the net present value of cash inflows
the initial out lays.
Profit and 1oss #P41$ Account: a financial statement which measures and reports the profit earned over a period of time.
Pro 5ata: in proportion to.
Prospectus: an official document being in advertisement offering shares for
sale to the public.
Provision: a charge in the %rofit and Loss (%'L) ccount of a business for an epense which arose in the past but which will only give
rise to a payment in the future. o be a provision the amount
payable must be uncertain as to amount or as to playability or both. n eample is possible damages awardable by a court in
a future action over a past incident (e.g. a libel).
Prudence (or conservatism):the convention whereby revenue and profits are not anticipated,
but provision is made for all known liabilities (epenses andlosses) whether the amount of these is known with certainty or
is a best estimate. 6ssentially future profit, wait until it happens
7 future loss, count it now.
,uick ratio: also known as acid test ratio, current assets (ecept stock)
current liabilities.
,uoted company: also known as a listed company, a company whose shares are
traded on the stock echange.
5ealizable value: the amount that an asset can be sold for.
5ealization: to sell an asset and hence turn it into cash.
5ealization convention: the concept that a profit is accounted (or when a good is sold
and not when the cash is received.
5eceiver: an insolvency practitioner who is appointed by a debenture
holder with a fied or floating charge when a companydefaults.
5edemption: repayment of shares, debentures or loans.
5edemption yield: the yield given by an investment epressed as a percentage and
taking into account both income and capital gain or loss.
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5educing balance: a method of depreciation whereby the asset is epensed to the
%rofit and Loss (%'L) ccount over its useful life by applying
a fied percentage to the written down value.
5elevant costs: costs that will only be incurred if a proposed course of action is
actually taken. he only ones relevant to an actual decision.
5elevant range: the range of activity which is likely. Eithin it variable costs are
epected to be linearly variable with output and fied costs areepected to be unchanged.
5eporting: the process whereby a company or other institution seeks to
inform shareholders and other interested parties of the results
and position of the entity by means of financial statements.
5eserves: a technical term indicating that a company has total assets
which eceed in amount the sum of liabilities and share capital.his ecess arises from retained profits or from revaluations of
assets.
5esource accounting and budgeting: the use of normal accruals accounting and
alance *heets in federal government departments and
agencies.
5etained profits: also known as retentions, the ecess of profits over dividends.
5eturn on capital: a profitability ratio being income epressed as a
employed percentage of the capital which produced the income.
5eturn on sales: the ratio of profit to sales epressed as a percentage.
5eturns: the income flowing from the ownership of assets. 3ay include
capital gains.
5evenue: amounts charged to customers for goods or services rendered.
5evenue e(penditure: ependiture that benefits only the current period and which will
therefore be charged in the %rofit and Loss (%'L) ccount.
5ig&ts issue: an invitation to eisting shareholders to subscribe cash for new
shares in the company in proportion to their holdings.
Salvage value: also known as residual value, the amount estimated to berecoverable from the sale of a fied asset at the end of its
useful life.
Secured liabilities: liabilities secured by a fied or floating charge or by other
operation of law such as hire purchase commitments.
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Securities: financial assets such as shares, debentures and loan stocks.
Segmental reporting: the practice of breaking down turnover, profits and capital
employed into sections to show the separate contributions of each to the overall picture. *egments can be distinct products,
geographical areas, or classes of customers, etc.
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