Main Glossary of Accounting Terms

8/8/2019 Main Glossary of Accounting Terms

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Glossary of Accounting Terms

1. Account: A section in a ledger devoted to a single aspect of a business (eg. a Bank account,

Wages account, Office expenses account).

2. Accounting cycle: This covers everything from opening the books at the start of the year

to closing them at the end. In other words, everything you need to do in one accounting year

accounting wise.3. Accounting equation: The formula used to prepare a balance sheet: assets = liability +

equity .

4. Accounts Payable: An account in the nominal ledger which contains the overall balance of

the Purchase Ledger.

5. Accounts Payable Ledger: A subsidiary ledger which holds the accounts of a business's

suppliers. A single control account is held in the nominal ledger which shows the total balance

of all the accounts in the purchase ledger.

6. Accounts Receivable: An account in the nominal ledger which contains the overall balance

of the Sales Ledger.

7. Accounts Receivable Ledger: A subsidiary ledger which holds the accounts of a

business's customers. A single control account is held in the nominal ledger which shows the

total balance of all the accounts in the sales ledger.

8. Accretive: If a company acquires another and says the deal is 'accretive to earnings', it

means that the resulting PE ratio (price/earnings) of the acquired company is less than the

acquiring company. Example: Company 'A' has earnings per share (EPS) of $1. The current

share price is $10. This gives a P/E ratio of 10 (current share price is 10 times the EPS).

Company 'B' has made a net profit for the year of $20,000. If company 'A' values 'B' at, say,$180,000 (P/E ratio=9 [180,000 valuation/20,000 profit]) then the deal is accretive because

company 'A' is effectively increasing its EPS (because it now has more shares and it paid less for

them compared with its own share price). (see dilutive )

9. Accruals: If during the course of a business certain charges are incurred but no invoice is

received then these charges are referred to as accruals (they 'accrue' or increase in value). A

typical example is interest payable on a loan where you have not yet received a bank

statement. These items (or an estimate of their value) should still be included in the profit &

loss account. When the real invoice is received, an adjustment can be made to correct the

estimate. Accruals can also apply to the income side.

10. Accrual method of accounting: Most businesses use the accrual method of accounting

(because it is usually required by law). When you issue an invoice on credit (ie. regardless of

whether it is paid or not), it is treated as a taxable supply on the date it was issued for income

tax purposes (or corporation tax for limited companies). The same applies to bills received from

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suppliers. (This does not mean you pay income tax immediately, just that it must be included in

that year's profit and loss account).

11. Accumulated Depreciation Account: This is an account held in the nominal ledger which

holds the depreciation of a fixed asset until the end of the asset's useful life (either because it

has been scrapped or sold). It is credited each year with that year's depreciation, hence the

balance increases (ie. accumulates) over a period of time. Each fixed asset will have its own

accumulated depreciation account.12. Annualize: To convert anything into a yearly figure. Eg. if profits are reported as running at

10k a quarter, then they would be 40k if annualized. If a credit card interest rate was quoted

as 1% a month, it would be annualized as 12%.

13. Appropriation Account: An account in the nominal ledger which shows how the net profits

of a business (usually a partnership, limited company or corporation) have been used.

14. Arrears: Bills which should have been paid. For example, if you have forgotten to pay your

last 3 months rent, then you are said to be 3 months in arrears on your rent.

15. At cost: The 'at cost' price usually refers to the price originally paid for something, as

opposed to, say, the retail price.

16. Audit: The process of checking every entry in a set of books to make sure they agree with

the original paperwork (eg. checking a journal's entries against the original purchase and sales

invoices).

17. Audit Trail: A list of transactions in the order they occurred.

18. Accounting policies: The detailed methods of recognition and measurement which a

particular company has chosen from those generally accepted by law.

19. Accounting principles: A broad term without a precise definition, but generally taken to

refer to both the underlying concepts found in the conceptual framework and the basic

accounting rules found in individual standards. The use of principles implies a significant role for

the professional judgment of accountants. The term accounting principles is used in contrast

to detailed rules that are also found in some accounting standards and related guidance. Hence

there is debate between those who believe that accounting standards and related guidance

should be based on principles and those who advocate detailed rules.

20. Accounting standards: Technical accounting rules of recognition, measurement and

disclosure.

21.Accounts payable: IFRS expression for creditors, particularly unpaid suppliers.

22. Accounts receivable: IFRS expression for debtors particularly amounts due from

customers.

23. Accrual basis of accounting: One of the underlying assumptions of financial reporting,

whereby transactions and other events are reported in the periods to which they relate, rather

than when cash is received or paid. The accrual basis is not used in cash flow statements.

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24. Acquisition: A business combination in which one of the enterprises obtains control over

another enterprise in exchange for the transfer of assets, incurrence of a liability or issue of

equity. This is also called a purchase. An acquisition (purchase) is accounted for by stating all

the identifiable net assets of the acquiree at fair values. Any excess of acquisition cost over the

fair value of the net assets is goodwill. The alternative method of accounting for certain

business combinations is called merger accounting (UK), pooling of interests (USA). That

alternative is no longer allowed in the USA or under IFRS, so all business combinations areacquisitions.

25. Actuarial gains and losses: Gains and losses which result from :(a) experience

adjustments (the effects of differences between the previous actuarial assumptions and what

has actually occurred); and (b) the effects of changes in actuarial assumptions. The context is

accounting for pensions and other forms of post-employment benefits. Under IAS 19, the

actuarial gains and losses are taken immediately to the statement of recognized income and

expense or gradually to the income statement.

26. Amortization: Certain types of depreciation, particularly that relating to intangible assets.

The term can also refer to any gradual expiration over time.

27. Asset: A resource that, as a result of a past event, is controlled and expected to give future

benefits. It is not necessary to own an asset in order to control it. Therefore, a leased item can

be the asset of the lessee.

28. Associated company: An entity over which significant influence is exercised. Significant

influence over an entity is assumed to exist when a company has a stake of 20 per cent in it. In

consolidated statements, an associate is accounted for using the equity method.

29. Balance sheet: A snap-shot of the accounting records of assets, liabilities and equity of a

business at a particular moment, most obviously the accounting year end. In IAS 1, no balancesheet format is specified, although there is a list of items to be included.

30. Basic earnings per share: The amount of net profit for a period that is attributable to the

holders of ordinary shares divided by the weighted average number of the ordinary shares

outstanding during the period.

31. Basis adjustment: Recognition of hedging gains or losses as part of the initial carrying

amount of non-financial assets or liabilities.

32. Business combinations: The joining together of two or more entities. For accounting

purposes, a combination is treated as an acquisition.

33. Business segment: A distinguishable component of a business that provides a product or

service that is subject to risks and returns those are different from those of other business

segments.

34. Capitalization of borrowing costs: The inclusion in the cost of an asset being constructed

by an enterprise of the interest expense on the money borrowed by the enterprise. This is

allowed by IAS 23.

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35. Cash equivalents: Short-term investments that are readily convertible to known amounts

of cash and which are subject to an insignificant risk of changes in value. Some limit on the

length of the investment is presumed, such as three months.

36. Cash flow statement: One of the main annual financial statements. This statement uses a

cash basis of accounting rather than an accrual basis. The IAS 7 and US version of the

statement presents separately the cash flows relating to operations, financing, investment; and

it reconciles to a wide total including cash and cash equivalents.37. Cash generating unit: The smallest set of assets for which it is possible to measure cash

inflows and outflows separately. In a manufacturing industry, this might be a whole factory

rather than an individual machine. Impairment is measured on the basis of cash generating

units.

38. Compound instrument: A financial instrument that, from the issuers perspective,

contains both a liability and an equity element. Under IAS 32, such an instrument must be

shown in a balance sheet as partly a liability and partly equity.

39. Comprehensive income: The income of an entity for a period including all recognized

gains and losses, not just those included in a conventional income statement. In the UK, it can

be seen in the statement of total recognized gains and losses; under IAS 1 in the statement of

changes in equity or the statement of recognized income and expense.

40. Conceptual framework: A theoretical structure to underlie the making and use of

technical rules in accounting. The IASBs framework was published in 1989. It draws on the US

framework prepared by the FASB in the 1970s.

41. Conservatism: See prudence.

42. Consistency: The concept that an enterprise should use the same rules of recognition,

measurement and presentation from year to year in its financial statements.

43. Consistency is required by IAS 1 and IAS 8 unless a change would give more relevant

information or is required by another standard.

44. Consolidated financial statements: A means of presenting the financial position, results

and cash flows of a parent and its subsidiary entities as if they were a single entity.

45. Constructive obligation: An obligation that arises because an enterprise has created a

valid expectation on the part of other parties that it will discharge certain responsibilities by an

established pattern of past practice or published policies.

46. Contingent asset; a possible asset that arises from past events and whose existence willbe confirmed only by the occurrence or non-occurrence of one or more uncertain future events.

Such items are not recognized as assets unless virtually certain, but are disclosed in notes to

the accounts if they are material and probable.

47. Contingent liability: An obligation that is not recognized or a possible obligation whose

existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain

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future events. The reasons that an obligation would not be recognized are: (a) that it is not

probable that an outflow of resources will be required to settle the obligation, or (b) that the

amount of the obligation cannot be measured reliably. Contingent liabilities should be disclosed

in the notes to the accounts. These are the rules of IAS 37.

48. Control: The power to obtain the future economic benefits that flow from an asset or an

enterprise. In the case of the latter, this means the power to govern the financial and operating

policies of the enterprise so as to obtain the benefits from its activities. The definition of anasset includes reference to control, and so does the definition of a subsidiary.

49. Corresponding figures: Amounts reported in financial statements but relating to previous

periods. IAS 1 requires figures for the previous year to be shown in financial statements.

50. Corridor; A range around an enterprises best estimate of post-employment benefit

obligations. In international accounting standard and US accounting rules, the corridor is

equivalent to 10 per cent of the greater of the present value of the obligation and the fair value

of the fund. If actuarial gains and losses go outside this corridor, they must start to be

recognized as income or expense. IAS 19 allows other treatments.

51. Cost: The amount of cash or cash equivalents paid or the fair value of the other

consideration given to acquire an asset. Also included would be subsequent costs to bring the

asset into its present condition and location.

52. Currency forward: A contract to buy or sell an amount of currency at an agreed exchange

rate and at a specified date.

53. Current asset: Under IAS 1, an asset that is expected to be used up or sold within an

entitys operating cycle or within one year.

54. Current liabilities: Those amounts on a balance sheet that are expected to be paid by the

business within one year or within an operating cycle.55. Current tax: The amount of income tax in respect of the taxable profit (or loss) for a period.

The amount of current tax that is unpaid relating to the current and prior periods is recognized

as a liability. The tax expense recorded for a period includes both the current tax and the

deferred tax.

56. Date of transition: In the context of first-time adoption of international financial reporting

standards, the beginning of the first period for which full comparative information is presented.

For example, if first adoption is for the year ended 31 December 2007 and the company

normally presents one prior year of full comparative information, the date of transition is 1

January 2006.

57. Deferred income: An amount recognized in the financial statements but not yet treated as

a realized gain in the profit and loss account. The deferred credit or income is stored as a credit

balance on the balance sheet while waiting to be treated as income. Government grants related

to the purchase of assets can be treated in this way.

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58. Deferred tax: Tax implied by an entitys accounting practices but not yet recognized by the

tax authorities. Under IAS 12, there is a requirement to account for deferred tax arising as a

result of temporary differences, i.e. those between the tax value and the financial reporting

value of balance sheet items.

59. Deferred tax liabilities: Under international accounting standards board rules, the income

taxes payable in future periods in respect of taxable temporary differences.

60. Defined benefit employee obligation: The discounted present value of expected futurepayments required to settle an employee benefit obligation resulting from employee service in

the current and prior periods. This obligation would be reduced by a pension fund so that the

net amount would be shown on the balance sheet as a liability.

61. Defined benefit liability: Approximately, under international accounting standards board

rules, the net total of the present value of the defined benefit obligation minus the fair value of

any plan assets out of which the obligations are to be settled. However, the amount would be

increased by actuarial gains that had not yet been taken to income, and similarly decreased by

any unrecognized actuarial losses and past service cost. This arises in accounting for defined

benefit plans for post-retirement obligations.

62. Depreciable amount: The amount to be charged as depreciation over an assets useful

life. This is the cost of an asset, or another amount substituted for cost in the financial

statements, less its residual value.

63. Depreciated cost: The original cost of an asset less the depreciation charged so far against

that.

64. Depreciation : The systematic allocation of the cost (or up-dated cost) of an asset over its

useful economic life.

65. Derecognize: To remove an asset or liability, or a portion of an asset or liability, from anenterprises balance sheet.

66. Derivative financial instrument: A contract that has the effect of transferring between

the parties to the instrument one or more of the financial risks inherent in an underlying item.

Examples are financial options, futures and forwards, interest rate swaps and currency swaps.

67. Development costs: Costs that are directly attributable to development activities or that

can be allocated to them on a reasonable basis.

68. Discontinued operation: A separate major line of business that has been sold or is

intended for sale within the year. The net assets and net incomes of such operations should bedisclosed separately.

69. Discounted cash flow: Future cash flows, adjusted downwards to take account of their

expected timing.

70. Distributable reserves: In general, the profits of this year, plus previous years

undistributed profits, which are legally available for payment as dividends. In the UK, there is an

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apparently simple definition for all companies: accumulated realized profits less accumulated

realized losses, but the word realized needs to be interpreted carefully.

71. Earnings: A technical accounting term, meaning the amount of profit (normally for a year)

available to the ordinary shareholders. That is, it is the profit after all operating expenses,

interest charges, taxes and dividends on preference shares.

72. Earnings per share: Exactly what its name suggests: the most recent years total earnings

divided by the number of ordinary shares. It is a requirement for listed companies. There mustalso be disclosure of diluted earnings per share.

73. Effective interest rate: The rate that exactly discounts the estimated cash receipts (or

payments) of a financial asset (or liability) to its present carrying amount.

74. Embedded derivative: A derivative financial instrument that is a component of a hybrid

financial instrument. The hybrid also includes a non-derivative host contract.

75. Equity: As an element of a balance sheet, the interest of the owners of an enterprise, which

is equal to the total of the assets less the total of the liabilities.

76. Equity accounting: A method for including an investment in another enterprise in the

financial statements of its investor, whereby the investment is included in the investors balance

sheet as a single line valued at the size of the investees net assets. In the investors income

statement, the share of the investees net income is included. This method is particularly used

for the inclusion of an associate in the consolidated financial statements of an investing group.

77. Equity instrument: A contract that gives a right to a residual interest in the assets of an

enterprise after deducting all of its liabilities. An example is an ordinary share.

78. EU-endorsed IFRS : Those standards and interpretations of the IASB that have been

approved by the EU and therefore are required for the preparation of the consolidated

statements of EU listed companies.79. Executor contract: A legally binding agreement that is unperformed (or equi-proportionally

unperformed) by both parties to the agreement.

80. Fair presentation: The IAS 1 requirement that financial statements should not be

misleading. To a large extent this means obeying the standards, but the concept of fairness

may transcend that, to include an assessment of the overall picture given by the financial

statements.

81. Fair value: The amount for which an asset could be exchanged or a liability settled,

between knowledgeable and willing parties at arms length.82. Fair value hedge: A hedge of the exposure to variability in the fair value of an asset or

liability or firm commitment, if the variability could affect profit.

83. FIFO (first in, first out): A common assumption for accounting purposes about the flow of

items of raw materials or other inventories, whereby the oldest inventories still in stock are

those deemed to be the first used for production or sale.

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84. financial asset: According to IAS 39, any asset that is either: (a) cash; (b) a contractual

right to receive cash or another financial asset from another enterprise; (c) a contractual right

to exchange financial instruments with another enterprise under conditions that are potentially

favorable; or (d) an equity instrument of another enterprise. Under IASB rules, there are four

categories: held to maturity financial assets, available-for-sale financial assets, trading financial

assets and loans and receivables.

85. Financial instrument: A contract that creates a financial asset of one enterprise and afinancial liability or equity instrument of another.

86. Financial Reporting Review Panel (FRRP): A UK body established in 1991 whose task is

to investigate complaints against large companies that their financial statements are defective,

such as that they do not give a true and fair view. The FRRP can take companies to court on this

issue. The court has various powers, such as to require a companys directors to withdraw and

amend the financial statements. Since the IASB has no enforcement powers, the FFRP is the

relevant body for monitoring and enforcement of the use of IFRS by UK companies.

87. First-time adoption; the first explicit and complete use by an entity of International

Financial Reporting Standards for the presentation of its annual financial statements.

88. Fixed asset: Mainly a UK rather than an IFRS expression, meaning the assets that are to

continue to be used in the business, such as land, buildings and machines. The opposite are

current assets, such as cash or inventories. An equivalent expression is non-current asset.

89. Foreign currency: A currency other than an enterprises own functional currency.

90. Formats: The allowed layouts of financial statements such as the balance sheet and the

profit and loss account. In the UK, the Companies Act 1985 prescribes formats for those two

statements. These apply to companies not using International Financial Reporting Standards.

IAS 1 contains no formats.91. Functional currency: From the point of view of a parent company preparing consolidated

financial statements, the currency in which a particular foreign subsidiary is deemed to operate.

For an independently operating foreign subsidiary, the functional currency is usually that of the

subsidiarys country, but for a highly integrated subsidiary it may be the parents currency.

92. Going concern concept: An important underlying concept in accounting practice. The

assumption for most businesses is that they will continue for the foreseeable future. This means

that, for most purposes, the break-up or forced-sale value of the assets is not relevant.

93. Goodwill: The amount paid for a business in excess of the fair value of its identifiable net

assets at the date of acquisition. It exists because a going concern business is usually worth

more than the sum of the values of its separable net assets. Under IFRS 3, goodwill should not

be amortized but annually tested for impairment.

94. Hedge accounting: The offset of changes in value or cash flows of a hedged item by those

of a hedging instrument. Such accounting is only allowed under certain conditions, including

prior designation of the item and instrument.

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95. Hedged item : An item (e.g. an asset, liability, or forecasted future transaction) that is

exposed to the risk of changes in fair value or in future cash flows and that is seen as being

offset by a hedging instrument. For financial reporting purposes, this offset is only allowed

under the conditions for hedge accounting.

96. Hedge effectiveness: The degree to which a hedging instrument achieves offsetting

changes in the cash flows or fair value attributable to a hedged item.

97. Hedging instrument: A financial instrument whose fair value or cash flows are expected tooffset changes in the fair value or cash flows of a hedged item.

98. Held-for-sale: A non-current asset or group of assets that is expected to be sold within one

year. Such assets are presented separately on a balance sheet and are measured at the lower

of carrying value and fair value less costs to sell.

99. Held-to-maturity financial assets: Financial assets with fixed or determinable payments

and maturity that an enterprise intends to hold to maturity.

100. Identifiable assets and liabilities: The assets and liabilities of an enterprise that can

be separately identified from each other and from the enterprise as a whole.

101. Impairment: A loss in value of a fixed asset below depreciated cost. The impairment

might be caused by physical damage or by a fall in market value of the assets output. An

impairment loss is charged against income.

102. Income: Increases in economic benefits during a period. According to the IASBs

framework, income comprises revenue and other gains.

103. Initial measurement: The valuation given to an asset or liability when it is first

recorded in an entitys accounting records. Often this measurement is at cost, even if

subsequent measurement is not.

104. Intangible asset: A non-monetary asset that is not physical or tangible.

105. Interim report: A half-yearly or quarterly report by a company listed on an Exchange.

IAS 34 explains how interim reports should be prepared if IFRS are used.

106. Internally generated intangible assets: Those intangible assets of an enterprise that

have not been purchased by it but created. Generally, such assets are not recognized in balance

sheets, although under certain circumstances development expenditure and some other costs

can be capitalized.

107. International Accounting Standards (IAS): The standards originally written by the

international accounting standards committee. In some cases these standards have beenupdated by the International Accounting Standards Board as part of the continuing development

of IFRS.

108. International Accounting Standards Board (IASB): The standard setting board of

the international accounting standards committee foundation. The Board has twelve full-time

and two part-time members. It began work in 2001.

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120. Lower of cost and market: A well-established rule for the valuation of current assets,

particularly inventories, whereby the assets are measured at whichever of cost and a market

value is the lower. In conventional accounting, cost means the historical purchase price of the

stock, plus the costs of work done on it. In the UK and under IAS 2, market value means net

realizable value (NRV), which is what the stock could be sold for in the normal course of

business when ready for sale (less any expected costs involved in finishing and selling it).

121. Marketable securities : Investments for which there is an active market from which amarket value can be observed or for which there is some indicator that enables a market value

to be calculated. Increasingly, such assets are valued at fair value.

122. Matching concept : The convention that the expenses that should be recognized in the

profit and loss account for a period are those costs that can be associated with items of revenue

that have been recognized in that period. For example, the costs of sales are recognized at the

same time as the related sales revenue.

123. Materiality: A concept which means that disclosures are not necessary for, and rules

need not be strictly applied to, unimportant amounts. For example, some companies may have

very small amounts of a particular revenue, expense, asset or liability; if such an amount would

normally be separately disclosed in the financial statements, this need not be done if it is

immaterial in size. This will help to make the statements clearer, by omission of trivial amounts.

Materiality is also to be seen at work in the extensive rounding of numbers in financial

statements. Similarly, approximate measurement or valuation methods may be used if the end

result is close to that which would be arrived at by stricter practices.

124. Measurement: The process of determining the monetary amounts at which assets,

liabilities, revenues and expenses, are to be recognized in the balance sheet and income

statement.125. Minority interest: The amount, that arises in consolidated financial statements when a

subsidiary is not wholly owned, which represents the capital provided by, and earned for, group

shareholders who are not parent company shareholders. In such statements, the proportion of

these attributable to the minority shareholders is separately recognized as minority interests

within equity.

126. Negative goodwill: An excess of the fair value of the identifiable net assets of an

acquired enterprise over the cost of buying it. Under IFRS 3, negative goodwill should be treated

as immediate income.

127. Net realizable value (NRV): The amount that could be raised by selling an asset, less

the costs of the sale. NRV implies a sale in the normal course of trade; thus, there would also be

a deduction for any costs to bring the asset into a saleable state.

128. Net selling price: The amount obtainable from the sale of an asset between

knowledgeable and willing parties at arms length, less the costs of disposal. This can differ from

net realizable value because the latter is also net of costs of completion.

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129. Obligating event: In the context of establishing whether an enterprise has a liability,

an event that creates a legal or constructive obligation that the enterprise has no realistic

alternative but to settle.

130. Off-balance sheet finance: Obligations of an enterprise that are not recognized as

liabilities on its balance sheet.

131. Offsetting: The netting of an asset and liability or of an income and expense. Generally,

offsetting is not allowed for financial reporting, although offsetting of assets and liabilities isallowed under conditions such as that a legal right of set-off exists.

132. Operating lease: A lease which is treated by accountants as a rental rather than as a

finance lease.

133. Option: A right to purchase something at a particular price, in a particular period, and

under particular conditions.

134. Other comprehensive income: US expression for the elements of comprehensive

income other than those recorded in the income statement. Such elements include gains on

revalued and unsold marketable securities.

135. Pension costs: The expenses charged in a profit and loss account relating to pensions.

These will include such items as elements of actuarial gains and losses.

136. Pension fund: assets set aside for the eventual payment of pension obligations. The

term is generally used when the assets have been irrevocably set aside by an employer, and

handed over to trustees or to a financial institution.

137. Pension liabilities/provision: The amount shown in a balance sheet representing

future payments to pensioners. The amount will be calculated after netting the pension fund

against the pension obligation.

138. Percentage-of-completion method : In the context of accounting for contracts, a

method whereby revenues are recognized continuously by stage of completion of a contract

rather than waiting till its end. For contracts whose outcome can be reliably estimated, the

method is required under IAS 11.

139. Plan assets: assets held by legally separate entities (a fund) that are to be used only to

settle employee benefit obligations of an enterprise.

140. Portfolio hedging : hedging when there is no specific individual hedged item but, for

example, a collection of foreign currency assets.

141. Post balance sheet events: Events that occur between the balance sheet date andthe date when the financial statements are authorized for issue. Two types of events are

generally identified by IAS 10: (a) those that provide evidence of conditions that existed at the

balance sheet date (adjusting events); and (b) those that are indicative of conditions that arose

after the balance sheet date (non-adjusting events).

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142. Pre-acquisition profits: Profits of a subsidiary that had been earned before it was

purchased by its present parent company.

143. Presentation: Those aspects of financial reporting related to the arrangement of the

figures on the face of financial statements.

144. Presentation currency: The currency in which an entity presents its financial

statements. This might be different from its functional currency. For example, a Russian

company might present its financial statements in US dollars in order to assist foreign investors.145. Probable: In the context of financial reporting, a term that may mean more likely than

not or may imply some greater degree of likelihood.

146. Projected unit credit method: An actuarial valuation method used to calculate an

enterprises defined benefit employee obligations. This method sees each period as giving rise

to an additional unit of benefit entitlement and measures each unit separately to build up the

final obligation. This is the method required by IAS 19.

147. Property, plant and equipment: The IFRS term for tangible fixed assets.

148.Proportional consolidation: A technique used in some countries as part of the preparation

of consolidated financial statements for a group of companies. It brings into the consolidated

financial statements the groups share of all the assets, liabilities, revenues and expenses of the

partly owned company. It is an optional basis under IAS 31.

149. Provision: Unfortunately, this important term has two distinct meanings: (a) an

allowance (or value adjustment) against the value of an asset, and (b) a liability of uncertain

timing or amount. A company may thus have provisions for (a) depreciation or bad debts, or (b)

taxation or pensions or law suits that are expected to go against the company. IAS 37 relates

only to the second meaning.

150. Prudence: A concept, that implies being cautious in the valuation of assets or the

measurement of profit. It means taking the lowest reasonable estimate of the value of assets;

anticipating losses but never anticipating profits. Prudence is also called conservatism.

151. Purchase accounting: IFRS term for acquisition accounting, the most common method

of accounting for business combinations.

152. Recognition: The process of including an item in a balance sheet or profit and loss

account.

153. Recognition criteria: The conditions that must be satisfied before something is

recorded in the financial statements. For example, the recognition criteria for an asset are thatits expected inflow of benefits should be probable and reliably measurable.

154. Recoverable amount: The higher of the fair value (or, under international accounting

standards committee rules, the net selling price) of an asset and the discounted expected future

net cash receipts from it. The recoverable amount is used in some measures of impairment.

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155. Regulation: In the context of harmonization in the EU, a document drafted by the

Commission and adopted by the Council of Ministers that has direct effect without needing to be

turned into national laws. Regulation 1606 of 2002 requires EU-endorsed IFRS to be used for the

consolidated statements of listed companies.

156. Related parties: Enterprises or persons who have a relationship with the reporting

entity. The definition includes subsidiaries and associates and relatives of the directors.

Generally, parties are considered to be related if one party can control the other party orexercise significant influence over its financial and operating decisions.

157. Reportable segment: A segment of an enterprise for which information is required to

be disclosed. Segmentation can either be by line of business or by geographical market.

Generally, a segment is reportable if its sales, profit or assets are at least 10 per cent of the

total figures for the reporting entity.

158. Reporting entity/enterprise: The enterprise or group of enterprises for which a set of

financial statements are designed to show the financial position and results.

159. Research: In the context of accounting, such scientific or technical investigations up to

the stage of their application to the production of new materials or products.

160. Retrospective application: Use of a new accounting policy for all past, present and

future events and transactions as if the new accounting policy had always been in use. Such

application is generally required for changes in accounting policy.

161. Revenue: International Financial Reporting Standards define revenue as the gross inflow

of economic benefits during a period that results in increases in equity, other than increases

relating to contributions from equity participants. Revenue comes generally from selling things

to customers. Other gains come from selling fixed assets.

162. Revenue recognition: The process of treating items as revenues to be recorded in thecurrent periods income statement. According to IAS 18, revenue should be recognized when

control of assets has passed to another party and when the amount of revenue (and any costs

to be incurred) can be measured reliably and will probably be received.

163. Reverse acquisition: An acquisition whereby Enterprise A obtains ownership of the

shares of Enterprise B but as part of the exchange transaction issues enough voting shares, as

consideration, that control of the combined enterprise passes to the owners of Enterprise

164. Sale and leaseback: A method of raising funds by a company without immediately

depleting resources or incurring liabilities. If a company owns and uses fixed assets, it may find

it advantageous, for tax or other reasons, to sell them to a financial institution (the lessor) which

then leases them back to the company.

165. Securitization: The transformation of financial assets into securities.

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166. Segment reporting: An analysis of sales, profit or assets by line of business or by

geographical area. This analysis is required to be disclosed for reportable segments by certain

enterprises.

167. Share-based payment: A payment whose size is determined by reference to an

entitys share price. Such payments can be made in shares or in cash. A typical example is

payments made for the services of company directors, when those payments are in the form of

share options.168. significant influence; The ability to participate in the financial and operating policy

decisions of an enterprise which stops short of control or joint control over those policies. See

associated company.

169. Standing Interpretations Committee: A sub-committee, set up in 1997, by the

international accounting standards committee. Its task is to publish interpretations of existing

international accounting standards in cases where certain of their requirements have been

misinterpreted or interpreted variously.

170. Start-up costs: Costs of an enterprise caused when setting up a machine or process.

Such costs are generally added to the other costs of the asset. However, the term can also be

used to mean the legal and other costs of setting up a company. These costs must be treated as

expenses under IAS 38.

171. statement of changes in equity: The international accounting standards boards

term for a compulsory major statement which explains all gains and losses and other items that

have caused an enterprises equity to change in the year, but optionally excluding transactions

(such as dividend payments) with an enterprises owners. In the latters case, the term

statement of recognized income and expense is used.

172. Statement of recognized income and expense: A version of the statement of changes in equity as required by international financial reporting standards. This version does

not include transactions with owners, such as dividend payments.

173. Stocks: As used in the UK, this word means the raw materials, work in progress and

finished goods of a business. For IFRS the word inventories is used instead.

174. Subsequent measurement: The valuation given to an asset or liability in a balance

sheet at any stage after an entity first recognizes the item. The main measurement possibilities

are the cost basis or fair value.

175. Subsidiary: Generally, an enterprise, controlled by another (the parent company). See

consolidated financial statements.

176. Substance over form: The presentation in financial statements of the economic or

commercial substance of a particular transaction, rather than the superficial legal or technical

form of it. This is one of the necessary qualitative characteristics of accounting information,

according to a conceptual framework.

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177. Tax base of an asset or liability: The amount attributed to that asset or liability in the

records of the taxation authorities. Given the many differences that there might be between tax

valuation rules and financial reporting rules, the tax base of an asset or liability could differ

substantially from its carrying value for financial reporting. This would give rise to a temporary

difference which might lead to accounting for deferred tax.

178. Tax expense: The total included in the determination of net profit or loss for the period

for current tax and deferred tax. The tax expense is the figure seen in an enterprises profit andloss account, but it is most unlikely to be the tax paid in the year. Even the current tax (the tax

relating to the year) may be paid after the year end; and the deferred tax rests on accounting

calculations which look forward for several years.

179. Temporary difference: A difference between the tax basis of an asset or liability and

its accounting carrying value. IAS 12 rules now require deferred tax to be accounted for on

these temporary differences. The UK rules still base deferred taxation on timing differences.

180. Trading asset or liability: When referring to securities, those intended by an

enterprise to be bought and sold.

181. Trading financial assets: Financial assets acquired or held in order to give profit from

short-term changes in price.

182. Treasury shares: Equity instruments bought back and held by the issuing enterprise

(or its subsidiaries). Such shares are called own shares in the UK, and might be called treasury

stock in the USA. The shares are held in the corporate treasury. The term treasury stock is

confusing to a UK reader because it might appear to refer to government bonds. Under

international accounting standards these are shown as deductions from equity.

183. True and fair view: The overriding legal requirement for the presentation of financial

statements of companies in the UK, the rest of the EU and most of the Commonwealth. It isdifficult to tie down an exact meaning to the expression, and it would ultimately have to be

interpreted in a court of law. However, most laws demand a true and fair view, rather than the

true and fair view, and it is clear that the instruction has to be interpreted in the context of

normal accounting practice at the time of the financial statements. One interpretation of the

phrase could be that it means in accordance with the facts, and not misleading. The

requirement under International Financial Reporting Standards to show a fair presentation can

be seen to be equivalent. UK auditors must give an opinion on true and fair even on IFRS

statements.

184. Uniform accounting policies : In the preparation of consolidated financial statements,

the use of the same accounting policies for all the enterprises in the group. This may entail the

adjustment of the policies of some of the subsidiaries (or even of the parent) from those used in

their own individual financial statements.

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185. Useful economic life: The period over which a depreciable asset is expected to be

used by an enterprise. Sometimes, the life is measured in terms of the number of production or

similar units expected from the asset.

186. Value in use: The present value of the estimated future net cash flows expected from

an asset, including that from its disposal at the end of its useful life. The value in use is the

normal value (under IAS 36) to be substituted for the previous carrying value when an asset

suffers impairment. The rules require reduction to recoverable amount, which is the higher of value in use and selling price, but the former is generally higher because otherwise the asset

would have been sold.

187. Accounting policies: The detailed methods of recognition and measurement which a

particular company has chosen from those generally accepted by law.

188. Accounting standards: Technical accounting rules of recognition, measurement and

disclosure.189. Accounts payable: IFRS expression for creditors, particularly unpaid suppliers.

190. Accounts receivable: IFRS expression for debtors particularly amounts due from

customers.

191. Accrual basis of accounting: One of the underlying assumptions of financial reporting,

whereby transactions and other events are reported in the periods to which they relate, rather

than when cash is received or paid. The accrual basis is not used in cash flow statements.

192. Acquisition : A business combination in which one of the enterprises obtains control

over another enterprise in exchange for the transfer of assets, incurrence of a liability or issueof equity. This is also called a purchase. An acquisition (purchase) is accounted for by stating

all the identifiable net assets of the acquiree at fair values. Any excess of acquisition cost over

the fair value of the net assets is goodwill. The alternative method of accounting for certain

business combinations is called merger accounting (UK), pooling of interests (USA). That

alternative is no longer allowed in the USA or under IFRS, so all business combinations are

acquisitions.

193. Actuarial gains and losses: Gains and losses which result from :(a) experience

adjustments (the effects of differences between the previous actuarial assumptions and what

has actually occurred); and (b) the effects of changes in actuarial assumptions. The context is

accounting for pensions and other forms of post-employment benefits. Under IAS 19, the

actuarial gains and losses are taken immediately to the statement of recognized income and

expense or gradually to the income statement.

194. Amortization: Certain types of depreciation, particularly that relating to intangible

assets. The term can also refer to any gradual expiration over time.

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195. Asset: A resource that, as a result of a past event, is controlled and expected to give

future benefits. It is not necessary to own an asset in order to control it. Therefore, a leased

item can be the asset of the lessee.

196. Associated company: An entity over which significant influence is exercised.

Significant influence over an entity is assumed to exist when a company has a stake of 20 per

cent in it. In consolidated statements, an associate is accounted for using the equity method.

197. Bad Debts Account: An account in the nominal ledger to record the value of un-recoverable debts from customers. Real bad debts or those that are likely to happen can be

deducted as expenses against tax liability (provided they refer specifically to a customer).

198. Bad Debts Reserve Account: An account used to record an estimate of bad debts for

the year (usually as a percentage of sales). This cannot be deducted as an expense against tax

liability.

199. Balancing Charge: When a fixed asset is sold or disposed of, any loss or gain on the

asset can be reclaimed against (or added to) any profits for income tax purposes. This is called

a balancing charge.

200. Bankrupt: If an individual or unincorporated company has greater liabilities than it has

assets, the person or business can petition for, or be declared by its creditors, bankrupt. In the

case of a limited company or corporation in the same position, the term used is insolvent .

201. Below the line: This term is applied to items within a business which would not

normally be associated with the everyday running of a business.

202. Bill: A term typically used to describe a purchase invoice (eg. an invoice from a

supplier).

203. Bought Ledger: See Purchase Ledger .

204. Burn Rate: The rate at which a company spends its money. Example: if a company had

cash reserves of $120m and it was currently spending $10m a month, then you could say that

at the current 'burn rate' the company will run out of cash in 1 year.

205. Balance sheet: A snap-shot of the accounting records of assets, liabilities and equity of

a business at a particular moment, most obviously the accounting year end. In IAS 1, no

balance sheet format is specified, although there is a list of items to be included.

206. Basic earnings per share: The amount of net profit for a period that is attributable to

the holders of ordinary shares divided by the weighted average number of the ordinary shares

outstanding during the period.207. Basis adjustment: Recognition of hedging gains or losses as part of the initial carrying

amount of non-financial assets or liabilities.

208. Business combinations: The joining together of two or more entities. For accounting

purposes, a combination is treated as an acquisition.

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209. Business segment: A distinguishable component of a business that provides a product

or service that is subject to risks and returns those are different from those of other business

segments.

210. Capitalization of borrowing costs: The inclusion in the cost of an asset being

constructed by an enterprise of the interest expense on the money borrowed by the enterprise.

This is allowed by IAS 23.

211. CAGR: (Compound Annual Growth Rate) The year on year growth rate required to showthe change in value (of an investment) from its initial value to its final value. If a $1 investment

was worth $1.52 over three years, the CAGR would be 15% [(1 x 1.15) x 1.15 x 1.15]

212. Called-up Share capital: The value of unpaid (but issued shares) which a company has

requested payment for. See Paid-up Share capital .

213. Capital: An amount of money put into the business (often by way of a loan) as opposed

to money earned by the business.

214. Capital account: A term usually applied to the owners equity in the business.

215.Capital Allowances: The depreciation on a fixed asset is shown in the Profit and Loss

account, but is added back again for income tax purposes. In order to be able to claim the

depreciation against any profits the Inland Revenue allow a proportion of the value of fixed

assets to be claimed before working out the tax bill. These proportions (usually calculated as a

percentage of the value of the fixed assets) are called Capital Allowances.

216. Capital Assets: See Fixed Assets .

217. Capital Employed (CE): Gross CE=Total assets, Net CE=Fixed assets plus (current

assets less current liabilities).

218. Capital Gains Tax: When a fixed asset is sold at a profit, the profit may be liable to a

tax called Capital Gains Tax. Calculating the tax can be a complicated affair (capital gains

allowances, adjustments for inflation and different computations depending on the age of the

asset are all considerations you will need to take on board).

219. Cash Accounting: This term describes an accounting method whereby only invoices

and bills which have been paid are accounted for. However, for most types of business in the

UK, as far as the Inland Revenue are concerned as soon as you issue an invoice (paid or not), it

is treated as revenue and must be accounted for. An exception is VAT : Customs & Excise

normally require you to account for VAT on an accrual basis, however there is an option called

'Cash Accounting' whereby only paid items are included as far as VAT is concerned (eg. if mostof your sales are on credit, you may benefit from this scheme - contact your local Customs &

Excise office for the current rules and turnover limits).

220. Cash Book: A journal where a business's cash sales and purchases are entered. A cash

book can also be used to record the transactions of a bank account. The side of the cash book

which refers to the cash or bank account can be used as a part of the nominal ledger (rather

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than posting the entries to cash or bank accounts held directly in the nominal ledger - see

'Three column cash book').

221. Cash Flow: A report which shows the flow of money in and out of the business over a

period of time.

222. Cash Flow Forecast: A report which estimates the cash flow in the future (usually

required by a bank before it will lend you money, or take on your account).

223. Cash in Hand: See Un-deposited funds account .224. Charge Back: Refers to a credit card order which has been processed and is

subsequently cancelled by the cardholder contacting the credit card company directly (rather

than through the seller). This results in the amount being 'charged back' to the seller (often

incurs a small penalty or administration fee to the seller).

225. Chart of Accounts: A list of all the accounts held in the nominal ledger.

226. CIF (Cost, Insurance, Freight [c.i.f.]): A contract (international) for the sale of goods

where the seller agrees to supply the goods, pay the insurance, and pay the freight charges

until the goods reach the destination (usually a port - rather than the actual buyers address).After that point, the responsibility for the goods passes to the buyer.

227. Circulating assets: The opposite to fixed assets . Circulating assets describe those

assets that turn from cash to goods and back again (hence the term circulating). Typically, you

buy some raw materials, start to manufacture a product (the asset is called work in progress at

this point), produce a product (it is now stock ), sell it (it is now back to cash again).

228. Closing the books: A term used to describe the journal entries necessary to close the

sales and expense accounts of a business at year end by posting their balances to the profit and

loss account, and ultimately to close the profit & loss account too by posting its balance to a

capital or other account.

229. Companies House: The title given to the government department which collects and

stores information supplied by limited companies. A limited company must supply Companies

House with a statement of its final accounts every year (eg. trading and profit and loss

accounts, and balance sheet).

230. Compensating error: A double-entry term applied to a mistake which has cancelled

out another mistake.

231. Compound interest: Apply interest on the capital plus all interest accrued to date. Eg.

A loan with an annually applied rate of 10% for 1000 over two years would yield a gross total of 1210 at the end of the period (year 1 interest=100, year two interest=110). The same loan with

simple interest applied would yield 1200 (interest on both years is 100 per year).

232. Contra account: An account created to offset another account. Eg: a Sales contra

account would be Sales Discounts. They are accounts included in the same section of a set of

books, which when compared together, give the net balance. Example: Sales=10,000 Sales

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Discounts=1,000 therefore Net Sales=9,000. This example, affecting the revenue side of a

business, is also referred to as Contra revenue . The tell-tale sign of a contra account is that it

has the opposite balance to that expected for an account in that section (in the above example,

the Sales Discounts balance would be shown in brackets - eg. it has a debit balance where Sales

has a credit balance).

233. Control Account: An account held in a ledger which summarizes the balance of all the

accounts in the same or another ledger. Typically each subsidiary ledger will have a controlaccount which will be mirrored by another control account in the nominal ledger (see 'Self-

balancing ledgers').

234. Cook the books: Falsify a set of accounts. See also creative accounting .

235. Corporation Tax: The tax paid by a limited company on its profits. At present this is

calculated at year end and due within 9 months of that date.

236. Cost accounting: An area of management accounting which deals with the costs of a

business in terms of enabling the management to manage the business more effectively.

237. Cost-based pricing: Where a company bases its pricing policy solely on the costs of

manufacturing rather than current market conditions.

238. Cost-benefit: Calculating not only the financial costs of a project, but also the cost of

the effects it will have from a social point of view. This is not easy to do since it requires

valuations of intangible items like the cost of job losses or the effects on the environment.

Genetically modified crops are a good example of where cost-benefits would be calculated - and

also impossible to answer with any degree of certainty!

239. Cost centre: Splitting up your expenses by department. Eg. Rather than having one

account to handle all power costs for a company, a power account would be opened for each

department. You can then analyze which department is using the most power, and hopefullyfind of way of reducing those costs.

240. Cost of finished goods: The value (at cost) of newly manufactured goods shown in a

business's manufacturing account. The valuation is based on the opening raw materials

balance, less direct costs involved in manufacturing, less the closing raw materials balance, and

less any other overheads. This balance is subsequently transferred to the trading account.

241. Cost of Goods Sold (COGS): A formula for working out the direct costs of your stock

sold over a particular period. The result represents the gross profit. The formula is: Opening

stock + purchases - closing stock.

242. Cost of Sales: A formula for working out the direct costs of your sales (including stock)

over a particular period. The result represents the gross profit. The formula is: Opening stock +

purchases + direct expenses - closing stock. Also, see Cost of Goods Sold .

243. Creative accounting: A questionable! means of making a companies figures appear

more (or less) appealing to shareholders etc. An example is 'branding' where the 'value' of a

brand name is added to intangible assets which increases shareholders funds (and therefore

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decreases the gearing ). Capitalizing expenses is another method (ie. moving them to the

assets section rather than declaring them in the Profit & Loss account).

244. Credit: A column in a journal or ledger to record the 'From' side of a transaction (eg. if

you buy some petrol using a cheque then the money is paid from the bank to the petrol

account, you would therefore credit the bank when making the journal entry).

245. Credit Note: A sales invoice in reverse. A typical example is where you issue an invoice

for 100, the customer then returns 25 worth of the goods, so you issue the customer with acredit note to say that you owe the customer 25.

246. Creditors: A list of suppliers to whom the business owes money.

247. Creditors (control account): An account in the nominal ledger which contains the

overall balance of the Purchase Ledger.

248. Current Assets: These include money in the bank, petty cash, money received but not

yet banked (see 'cash in hand'), money owed to the business by its customers, raw materials for

manufacturing, and stock bought for re-sale. They are termed 'current' because they are active

accounts. Money flows in and out of them each financial year and we will need frequent reports

of their balances if the business is to survive (eg. 'do we need more stock and have we got

enough money in the bank to buy it?').

249. Current cost accounting: The valuing of assets, stock, raw materials etc. at current

market value as opposed to its historical cost .

250. Current Liabilities: These include bank overdrafts, short term loans (less than a year),

and what the business owes its suppliers. They are termed 'current' for the same reasons

outlined under 'current assets' in the previous paragraph.

251. Customs and Excise: The government department usually responsible for collecting

sales tax.

252. Days Sales Outstanding (DSO): How long on average it takes a company to collect

the money owed to it.

253. Cash equivalents: Short-term investments that are readily convertible to known

amounts of cash and which are subject to an insignificant risk of changes in value. Some limit

on the length of the investment is presumed, such as three months.

254. Cash flow statement: One of the main annual financial statements. This statement

uses a cash basis of accounting rather than an accrual basis. The IAS 7 and US version of the

statement presents separately the cash flows relating to operations, financing, investment; andit reconciles to a wide total including cash and cash equivalents.

255. Cash generating unit: The smallest set of assets for which it is possible to measure

cash inflows and outflows separately. In a manufacturing industry, this might be a whole factory

rather than an individual machine. Impairment is measured on the basis of cash generating

units.

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256. Compound instrument: A financial instrument that, from the issuers perspective,

contains both a liability and an equity element. Under IAS 32, such an instrument must be

shown in a balance sheet as partly a liability and partly equity.

257. Comprehensive income: The income of an entity for a period including all recognized

gains and losses, not just those included in a conventional income statement. In the UK, it can

be seen in the statement of total recognized gains and losses; under IAS 1 in the statement of

changes in equity or the statement of recognized income and expense.258. Conceptual framework: A theoretical structure to underlie the making and use of

technical rules in accounting. The IASBs framework was published in 1989. It draws on the US

framework prepared by the FASB in the 1970s.

259. Conservatism: See prudence.

260. Consistency: The concept that an enterprise should use the same rules of recognition,

measurement and presentation from year to year in its financial statements. Consistency is

required by IAS 1 and IAS 8 unless a change would give more relevant information or is required

by another standard.

261. Consolidated financial statements: A means of presenting the financial position,

results and cash flows of a parent and its subsidiary entities as if they were a single entity.

262. Constructive obligation: An obligation that arises because an enterprise has created a

valid expectation on the part of other parties that it will discharge certain responsibilities by an

established pattern of past practice or published policies.

263. Contingent asset: A possible asset that arises from past events and whose existence

will be confirmed only by the occurrence or non-occurrence of one or more uncertain future

events. Such items are not recognized as assets unless virtually certain, but are disclosed in

notes to the accounts if they are material and probable.

264. Contingent liability: An obligation that is not recognized or a possible obligation whose

existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain

future events. The reasons that an obligation would not be recognized are: (a) that it is not

probable that an outflow of resources will be required to settle the obligation, or (b) that the

amount of the obligation cannot be measured reliably. Contingent liabilities should be disclosed

in the notes to the accounts. These are the rules of IAS 37.

265. Control: The power to obtain the future economic benefits that flow from an asset or an

enterprise. In the case of the latter, this means the power to govern the financial and operating

policies of the enterprise so as to obtain the benefits from its activities. The definition of an

asset includes reference to control, and so does the definition of a subsidiary.

266. Corresponding figures: Amounts reported in financial statements but relating to

previous periods. IAS 1 requires figures for the previous year to be shown in financial

statements.

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267. Corridor: A range around an enterprises best estimate of post-employment benefit

obligations. In international accounting standard and US accounting rules, the corridor is

equivalent to 10 per cent of the greater of the present value of the obligation and the fair value

of the fund. If actuarial gains and losses go outside this corridor, they must start to be

recognized as income or expense. IAS 19 allows other treatments.

268. Cost: The amount of cash or cash equivalents paid or the fair value of the other

consideration given to acquire an asset. Also included would be subsequent costs to bring theasset into its present condition and location.

269. Currency forward: A contract to buy or sell an amount of currency at an agreed

exchange rate and at a specified date.

270. Current asset: Under IAS 1, an asset that is expected to be used up or sold within an

entitys operating cycle or within one year.

271. Current liabilities: Those amounts on a balance sheet that are expected to be paid by

the business within one year or within an operating cycle.

272. Current tax: The amount of income tax in respect of the taxable profit (or loss) for a

period. The amount of current tax that is unpaid relating to the current and prior periods is

recognized as a liability. The tax expense recorded for a period includes both the current tax

and the deferred tax.

273. Debenture: This is a type of share issued by a limited company. It is the safest type of

share in that it is really a loan to the company and is usually tied to some of the company's

assets so should the company fail, the debenture holder will have first call on any assets left

after the company has been wound up.

274. Debit: A column in a journal or ledger to record the 'To' side of a transaction (eg. if you

are paying money into your bank account you would debit the bank when making the journalentry).

275. Debtors: A list of customers who owe money to the business.

276. Debtors (control account): An account in the nominal ledger which contains the

overall balance of the Sales Ledger.

277. Deferred expenditure: Expenses incurred which do not apply to the current

accounting period. Instead, they are debited to a 'Deferred expenditure' account in the non-

current assets area of your chart of accounts . When they become current, they can then be

transferred to the profit and loss account as normal.278. Depreciation: The value of assets usually decreases as time goes by. The amount or

percentage it decreases by is called depreciation. This is normally calculated at the end of every

accounting period (usually a year) at a typical rate of 25% of its last value. It is shown in both

the profit & loss account and balance sheet of a business.

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279. Dilutive: If a company acquires another and says the deal is 'dilutive to earnings', it

means that the resulting P/E (price/earnings) ratio of the acquired company is greater than the

acquiring company. Example: Company 'A' has an earnings per share (EPS) of $1. The current

share price is $10. This gives a P/E ratio of 10 (current share price is 10 times the EPS).

Company 'B' has made a net profit for the year of $20,000. If company 'A' values 'B' at, say,

$220,000 (P/E ratio=11 [220,000 valuation/20,000 profit]) then the deal is dilutive because

company 'A' is effectively decreasing its EPS (because it now has more shares and it paid morefor them in comparison with its own share price). (see Accretive )

280. Dividends: These are payments to the shareholders of a limited company.

281. Double-entry book-keeping: A system which accounts for every aspect of a

transaction - where it came from and where it went to. This from and to aspect of a transaction

(called crediting and debiting) is what the term double-entry means. Modern double-entry was

first mentioned by G Cotrugli, then expanded upon by L Paccioli in the 15th century.

282. Drawings: The money taken out of a business by its owner(s) for personal use. This is

entirely different to wages paid to a business's employees or the wages or remuneration of a

limited company's directors (see 'Wages').

283. Date of transition: In the context of first-time adoption of international financial

reporting standards, the beginning of the first period for which full comparative information is

presented. For example, if first adoption is for the year ended 31 December 2007 and the

company normally presents one prior year of full comparative information, the date of transition

is 1 January 2006.

284. Deferred income: An amount recognized in the financial statements but not yet

treated as a realized gain in the profit and loss account. The deferred credit or income is stored

as a credit balance on the balance sheet while waiting to be treated as income. Governmentgrants related to the purchase of assets can be treated in this way.

285. Deferred tax: Tax implied by an entitys accounting practices but not yet recognized by

the tax authorities. Under IAS 12, there is a requirement to account for deferred tax arising as a

result of temporary differences, i.e. those between the tax value and the financial reporting

value of balance sheet items.

286. Deferred tax liabilities: Under international accounting standards board rules, the

income taxes payable in future periods in respect of taxable temporary differences.

287. Defined benefit employee obligation: The discounted present value of expected

future payments required to settle an employee benefit obligation resulting from employee

service in the current and prior periods. This obligation would be reduced by a pension fund so

that the net amount would be shown on the balance sheet as a liability.

288. Defined benefit liability: Approximately, under international accounting standards

board rules, the net total of the present value of the defined benefit obligation minus the fair

value of any plan assets out of which the obligations are to be settled. However, the amount

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would be increased by actuarial gains that had not yet been taken to income, and similarly

decreased by any unrecognized actuarial losses and past service cost. This arises in accounting

for defined benefit plans for post-retirement obligations.

289. Depreciable amount : The amount to be charged as depreciation over an assets useful

life. This is the cost of an asset, or another amount substituted for cost in the financial

statements, less its residual value.

290. Depreciated cost: The original cost of an asset less the depreciation charged so faragainst that.

291. Depreciation: The systematic allocation of the cost (or up-dated cost) of an asset over its

useful economic life.

292. Derecognize: To remove an asset or liability, or a portion of an asset or liability, from

an enterprises balance sheet.

293. Derivative financial instrument: A contract that has the effect of transferring

between the parties to the instrument one or more of the financial risks inherent in an

underlying item. Examples are financial options, futures and forwards, interest rate swaps and

currency swaps.

294. Development costs: Costs that are directly attributable to development activities or

that can be allocated to them on a reasonable basis.

295. Discontinued operation: A separate major line of business that has been sold or is

intended for sale within the year. The net assets and net incomes of such operations should be

disclosed separately.

296. Discounted cash flow: Future cash flows, adjusted downwards to take account of their

expected timing.

297. Distributable reserves: In general, the profits of this year, plus previous years

undistributed profits, which are legally available for payment as dividends. In the UK, there is an

apparently simple definition for all companies: accumulated realized profits less accumulated

realized losses, but the word realized needs to be interpreted carefully.

298. EBIT: Earnings before interest and tax (profit before any interest or taxes have been

deducted).

299. EBITA: Earnings before interest, tax and amortization (profit before any interest, taxes

or amortization have been deducted).

300. EBITDA: Earnings before interest, tax, depreciation and amortization (profit before anyinterest, taxes, depreciation or amortization have been deducted).

301. Encumbrance: A liability (eg. a mortgage is an encumbrance on a property). Also, any

money set aside (ie. reserved) for any purpose.

302. Entry: Part of a transaction recorded in a journal or posted to a ledger.

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303. Equity: The value of the business to the owner of the business (which is the difference

between the business's assets and liabilities).

304. Error of Commission: A double-entry term which means that one or both sides of a

double-entry has been posted to the wrong account (but is within the same class of account).

Example: Petrol expense posted to Vehicle maintenance expense.

305. Error of Ommission: A double-entry term which means that a transaction has been

ommitted from the books entirely.306. Error of Original Entry: A double-entry term which means that a transaction has been

entered with the wrong amount.

307. Error of Principle: A double-entry term which means that one or both sides of a

double-entry has been posted to the wrong account (which is also a different class of account).

Example: Petrol expense posted to Fixtures and Fittings.

308. Expenses: Goods or services purchased directly for the running of the business. This

does not include goods bought for re-sale or any items of a capital nature (see Stock and Fixed

Assets ).

309. Earnings: A technical accounting term, meaning the amount of profit (normally for a

year) available to the ordinary shareholders. That is, it is the profit after all operating expenses,

interest charges, taxes and dividends on preference shares.

310. Earnings per share: Exactly what its name suggests: the most recent years total

earnings divided by the number of ordinary shares. It is a requirement for listed companies.

There must also be disclosure of diluted earnings per share.

311. Effective interest rate: The rate that exactly discounts the estimated cash receipts (or

payments) of a financial asset (or liability) to its present carrying amount.

312. Embedded derivative: A derivative financial instrument that is a component of a

hybrid financial instrument. The hybrid also includes a non-derivative host contract.

313. Equity: As an element of a balance sheet, the interest of the owners of an enterprise,

which is equal to the total of the assets less the total of the liabilities.

314. Equity accounting : A method for including an investment in another enterprise in the

financial statements of its investor, whereby the investment is included in the investors balance

sheet as a single line valued at the size of the investees net assets. In the investors income

statement, the share of the investees net income is included. This method is particularly used

for the inclusion of an associate in the consolidated financial statements of an investing group.315. Equity instrument: A contract that gives a right to a residual interest in the assets of

an enterprise after deducting all of its liabilities. An example is an ordinary share.

316. EU-endorsed IFRS: Those standards and interpretations of the IASB that have been

approved by the EU and therefore are required for the preparation of the consolidated

statements of EU listed companies.

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317. Executor contract: A legally binding agreement that is unperformed (or equi-

proportionally unperformed) by both parties to the agreement.

318. FIFO: First In First Out. A method of valuing stock.

319. Fiscal year: The term used for a business's accounting year. The period is usually

twelve months which can begin during any month of the calendar year (eg. 1st April 2001 to

31st March 2002).

320. Fixed Assets: These consist of anything which a business owns or buys for use within

the business and which still retains a value at year end. They usually consist of major items like

land, buildings, equipment and vehicles but can include smaller items like tools. (see

Depreciation )

321. Fixtures & Fittings: This is a class of fixed asset which includes office furniture, filing

cabinets, display cases, warehouse shelving and the like.

322. Flash earnings: A news release issued by a company that shows its latest quarterly

results.

323.Flow of Funds: This is a report which shows how a balance sheet has changed from one

period to the next.

324. FOB: An abbreviation of Free On Board. It generally forms part of an export contract

where the seller pays all the costs and insurance of sending the goods to the port of shipment.

After that, the buyer then takes full responsibility. If the goods are to travel by train, it's called

FOR (Free on Rail).

325. Freight collect: The buyer pays the shipping costs.

326. Fair presentation: The IAS 1 requirement that financial statements should not be

misleading. To a large extent this means obeying the standards, but the concept of fairness

may transcend that, to include an assessment of the overall picture given by the financial

statements.

327. Fair value: The amount for which an asset could be exchanged or a liability settled,

between knowledgeable and willing parties at arms length.

328. Fair value hedge: A hedge of the exposure to variability in the fair value of an asset or

liability or firm commitment, if the variability could affect profit.

329. FIFO (first in, first out): A common assumption for accounting purposes about the

flow of items of raw materials or other inventories, whereby the oldest inventories still in stock

are those deemed to be the first used for production or sale.330. Financial asset: According to IAS 39, any asset that is either: (a) cash; (b) a contractual

right to receive cash or another financial asset from another enterprise; (c) a contractual right

to exchange financial instruments with another enterprise under conditions that are potentially

favorable; or (d) an equity instrument of another enterprise. Under IASB rules, there are four

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categories: held to maturity financial assets, available-for-sale financial assets, trading financial

assets and loans and receivables.

331. Financial instrument: A contract that creates a financial asset of one enterprise and a

financial liability or equity instrument of another.

332. Financial Reporting Review Panel (FRRP): A UK body established in 1991 whose

task is to investigate complaints against large companies that their financial statements are

defective, such as that they do not give a true and fair view. The FRRP can take companies tocourt on this issue. The court has various powers, such as to require a companys directors to

withdraw and amend the financial statements. Since the IASB has no enforcement powers, the

FFRP is the relevant body for monitoring and enforcement of the use of IFRS by UK companies.

333. First-time adoption; the first explicit and complete use by an entity of International

Financial Reporting Standards for the presentation of its annual financial statements.

334. Fixed asset: Mainly a UK rather than an IFRS expression, meaning the assets that are to

continue to be used in the business, such as land, buildings and machines. The opposite are

curre

Main Glossary of Accounting Terms

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