Account

A section in a ledger devoted to a single aspect of a business (eg. a Bank account, Wages account, Office expenses account).

Accounting equation

The formula used to prepare a balance sheet
assets = liability + equity .

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.

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.

Accruals

If during the course of a business certain charges are incurred but no invoice is received then these charges are referred to as accruals (they 'accrue' or increase in value). A typical example is interest payable on a loan where you have not yet received a bank statement. These items (or an estimate of their value) should still be included in the profit & loss account. When the real invoice is received, an adjustment can be made to correct the estimate. Accruals can also apply to the income side.

Accrual method of accounting

Most businesses use the accrual method of accounting (because it is usually required by law). When you issue an invoice on credit (ie. regardless of whether it is paid or not), it is treated as a taxable supply on the date it was issued for income tax purposes (or corporation tax for limited companies). The same applies to bills received from suppliers. (This does not mean you pay income tax immediately, just that it must be included in that year's profit and loss account).

Accumulated Depreciation Account

This is an account held in the nominal ledger which holds the depreciation of a fixed asset until the end of the asset's useful life (either because it has been scrapped or sold). It is credited each year with that year's depreciation, hence the balance increases (ie. accumulates) over a period of time. Each fixed asset will have its own accumulated depreciation account.

Amortization

The depreciation (or repayment) of an (usually) intangible asset (eg. loan, mortgage) over a fixed period of time. Example: if a loan of 12,000 is amortized over 1 year with no interest, the monthly payments would be 1000 a month.

Annualize

To convert anything into a yearly figure. Eg. if profits are reported as running at £10k a quarter, then they would be £40k if annualized.  If a credit card interest rate was quoted as 1% a month, it would be annualized as 12%.

Appropriation Account

An account in the nominal ledger which shows how the net profits of a business (usually a partnership, limited company or corporation) have been used.

Arrears

Bills which should have been paid. For example, if you have forgotten to pay your last 3 months rent, then you are said to be 3 months in arrears on your rent.

Assets 

Assets represent what a business owns or is due. Equipment, vehicles, buildings, creditors, money in the bank, cash are all examples of the assets of a business. Typical breakdown includes 'Fixed assets', 'Current assets' and 'non-current assets'. Fixed refers to equipment, buildings, plant, vehicles etc. Current refers to cash, money in the bank, debtors etc. Non-current refers to any assets which do not easily fit into the previous categories.

Audit

The process of checking every entry in a set of books to make sure they agree with the original paperwork (eg. checking a journal's entries against the original purchase and sales invoices).

Audit Trail

A list of transactions in the order they occurred.

Bad Debts Account

An account in the nominal ledger to record the value of un-recoverable debts from customers. Real bad debts or those that are likely to happen can be deducted as expenses against tax liability (provided they refer specifically to a customer).

Bad Debts Reserve Account

An account used to record an estimate of bad debts for the year (usually as a percentage of sales). This cannot be deducted as an expense against tax liability.

Balance Sheet

A summary of all the accounts of a business. Usually prepared at the end of each financial year. The term 'balance sheet' implies that the combined balances of assets exactly equals the liabilities and equity.

Balancing Charge

When a fixed asset is sold or disposed of, any loss or gain on the asset can be reclaimed against (or added to) any profits for income tax purposes. This is called a balancing charge.

Bankrupt

If an individual or unincorporated company has greater liabilities than it has assets, the person or business can petition for, or be declared by its creditors, bankrupt. In the case of a limited company or corporation in the same position, the term used is insolvent .

Below the line

This term is applied to items within a business which would not normally be associated with the everyday running of a business.

Bill

A term typically used to describe a purchase invoice (eg. an invoice from a supplier).

Called-up Share capital

The value of unpaid (but issued shares) which a company has requested payment for.

Capital

An amount of money put into the business (often by way of a loan) as opposed to money earned by the business.

Capital account

A term usually applied to the owner’s equity in the business.

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.

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).

Cash Accounting

This term describes an accounting method whereby only invoices and bills which have been paid are accounted for. However, for most types of business in the UK, as far as the Inland Revenue are concerned as soon as you issue an invoice (paid or not), it is treated as revenue and must be accounted for. An exception is VAT : Customs & Excise normally require you to account for VAT on an accrual basis, however there is an option called 'Cash Accounting' whereby only paid items are included as far as VAT is concerned (eg. if most of your sales are on credit, you may benefit from this scheme - contact your local Cust& Excise office for the current rules and turnover limits).

Cash Book

A journal where a business's cash sales and purchases are entered. A cash book can also be used to record the transactions of a bank account. The side of the cash book which refers to the cash or bank account can be used as a part of the nominal ledger (rather than posting the entries to cash or bank accounts held directly in the nominal ledger - see 'Three column cash book').

Cash Flow

A report which shows the flow of money in and out of the business over a period of time.

Cash Flow Forecast

A report which estimates the cash flow in the future (usually required by a bank before it will lend you money, or take on your account).

Chart of Accounts

A list of all the accounts held in the nominal ledger.

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).

Compensating error

A double-entry term applied to a mistake which has cancelled out another mistake.

Control Account

An account held in a ledger which summarises the balance of all the accounts in the same or another ledger. Typically each subsidiary ledger will have a control account which will be mirrored by another control account in the nominal ledger (see 'Self-balancing ledgers').

Corporation Tax (CT - UK only)

The tax paid by a limited company on its profits. At present this is calculated at year end and due within 9 months of that date.

Cost accounting

An area of management accounting which deals with the costs of a business in terms of enabling the management to manage the business more effectively.

Cost-based pricing

Where a company bases its pricing policy solely on the costs of manufacturing rather than current market conditions.

Cost-benefit

Calculating not only the financial costs of a project, but also the cost of the effects it will have from a social point of view. This is not easy to do since it requires valuations of intangible items like the cost of job losses or the effects on the environment. Genetically modified crops are a good example of where cost-benefits would be calculated - and also impossible to answer with any degree of certainty!

Cost centre

Splitting up your expenses by department. Eg. rather than having one account to handle all power costs for a company, a power account would be opened for each depatrment. You can then analyse which department is using the most power, and hopefully find of way of reducing those costs.

Cost of finished goods

The value (at cost) of newly manufactured goods shown in a business's manufacturing account. The valuation is based on the opening raw materials balance, less direct costs involved in manufacturing, less the closing raw materials balance, and less any other overheads. This balance is subsequently transferred to the trading account.

Cost of Goods Sold (COGS)

A formula for working out the direct costs of your stock sold over a particular period. The result represents the gross profit. The formula is: Opening stock + purchases - closing stock.

Cost of Sales

A formula for working out the direct costs of your sales (including stock) over a particular period. The result represents the gross profit. The formula is: Opening stock + purchases + direct expenses - closing stock.

Credit

A column in a journal or ledger to record the 'From' side of a transaction (eg. if you buy some petrol using a cheque then the money is paid from the bank to the petrol account, you would therefore credit the bank when making the journal entry).

Credit Note

A sales invoice in reverse. A typical example is where you issue an invoice for £100, the customer then returns £25 worth of the goods, so you issue the customer with a credit note to say that you owe the customer £25.

Creditors

A list of suppliers to whom the business owes money.

Creditors (control account)

An account in the nominal ledger which contains the overall balance of the Purchase Ledger.

Current Assets

These include money in the bank, petty cash, money received but not yet banked (see 'cash in hand'), money owed to the business by its customers, raw materials for manufacturing, and stock bought for re-sale. They are termed 'current' because they are active accounts. Money flows in and out of them each financial year and we will need frequent reports of their balances if the business is to survive (eg. 'do we need more stock and have we got enough money in the bank to buy it?').

Current cost accounting

The valuing of assets, stock, raw materials etc. at current market value as opposed to its historical cost.

Current Liabilities

These include bank overdrafts, short term loans (less than a year), and what the business owes its suppliers. They are termed 'current' for the same reasons outlined under 'current assets' in the previous paragraph.

Debenture

This is a type of share issued by a limited company. It is the safest type of share in that it is really a loan to the company and is usually tied to some of the company's assets so should the company fail, the debenture holder will have first call on any assets left after the company has been wound up.

Debit

A column in a journal or ledger to record the 'To' side of a transaction (eg. if you are paying money into your bank account you would debit the bank when making the journal entry).

Debtors

A list of customers who owe money to the business.

Debtors (control account)

An account in the nominal ledger which contains the overall balance of the Sales Ledger.

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.

Dividends

These are payments to the shareholders of a limited company.

Double-entry book-keeping

A system which accounts for every aspect of a transaction - where it came from and where it went to. This from and to aspect of a transaction (called crediting and debiting) is what the term double-entry means.

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').

EBIT

Earnings before interest and tax (profit before any interest or taxes have been deducted).

EBITA

Earnings before interest, tax and amortization (profit before any interest, taxes or amortization have been deducted).

EBITDA

Earnings before interest, tax, depreciation and amortization (profit before any interest, taxes, depreciation or amortization have been deducted).

Entry

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

Equity

The value of the business to the owner of the business (which is the difference between the business's assets and liabilities).

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

FIFO

First In First Out a method of valuing stock.

Fiscal year

The term used for a business's accounting year. The period is usually twelve months which can begin during any month of the calendar year (eg. 1st April 2001 to 31st March 2002).

Fixed Assets

These consist of anything which a business owns or buys for use within the business and which still retains a value at year end. They usually consist of major items like land, buildings, equipment and vehicles but can include smaller items like tools.

Fixtures &Fittings

This is a class of fixed asset which includes office furniture, filing cabinets, display cases, warehouse shelving and the like.

Gearing

The comparison of a company's long term fixed interest loans compared to its assets. In general two different methods are used:
1. Balance sheet gearing is calculated by dividing long term loans with the equity (or proprietor's net worth).
2. Profit and Loss gearing: Fixed interest payments for the period divided by the profit for the period.

Goodwill

This is an extra value placed on a business if the owner of a business decides it is worth more than the value of its assets. It is usually included where the business is to be sold as a going concern.

Gross loss

The balance of the trading account assuming it has a debit balance.

Gross margin

The difference between the selling price of a product or service and the cost of that product or service often shown as a percentage. Eg. if a product sold for 100 and cost 60 to buy or manufacture, the gross margin would be 40%. Gross margin can also be expressed on the total revenue and costs of producing that revenue as well as on an item by item basis.

Gross profit

The balance of the trading account assuming it has a credit balance.

HM Revenue and Customs

The government department usually responsible for collecting your tax.

Historical Cost

Assets, stock, raw materials etc. can be valued at what they originally cost (which is what the term 'historical cost' means), or what they would cost to replace at today's prices.

Income

Money received by a business from its commercial activities. See 'Revenue'.

Insolvent

A company is insolvent if it has insufficient funds (all of its assets) to pay its debts (all of its liabilities). If a company's liabilities are greater than its assets and it continues to trade, it is not only insolvent, but in the UK, is operating illegally (Insolvency act 1986).

Intangible assets

Assets of a non-physical or financial nature. An asset such as a loan or an endowment policy are good examples.

Inventory

A subsidiary ledger which is usually used to record the details of individual items of stock. Inventories can also be used to hold the details of other assets of a business.

Invoice

A term describing an original document either issued by a business for the sale of goods on credit (a sales invoice) or received by the business for goods bought (a purchase invoice).

Journal(s)

A book or set of books where your transactions are first entered.

Journal entries

A term used to describe the transactions recorded in a journal.

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Landed Costs

The total costs involved when importing goods. They include buying, shipping, insuring and associated taxes.

Ledger

A book in which entries posted from the journals are re-organised into accounts.

Liabilities

This includes bank overdrafts, loans taken out for the business and money owed by the business to its suppliers. Liabilities are included on the right hand side of the balance sheet and normally consist of accounts which have a credit balance.

LIFO

Last In First Out a method of valuing stock .

LILO

Last In Last Out a method of valuing stock .

Long term liabilities

These usually refer to long term loans (ie. a loan which lasts for more than one year such as a mortgage).

Management accounting

Accounts and reports are tailor made for the use of the managers and directors of a business (in any form they see fit - there are no rules) as opposed to financial accounts which are prepared for the Inland Revenue and any other parties not directly connected with the business. See Cost accounting .

Matching principle

A method of analysing the sales and expenses which make up those sales to a particular period (eg. if a builder sells a house then the builder will tie in all the raw materials and expenses incurred in building and selling the house to one period - usually in order to see how much profit was made).

Narrative

A comment appended to an entry in a journal. It can be used to describe the nature of the transaction, and often in particular, where the other side of the entry went to (or came from).

Net loss

The value of expenses less sales assuming that the expenses are greater (ie. if the profit and loss account shows a debit balance).

Net of Tax

The price less any tax. Eg. if you sold some goods for £12 inclusive of £2 sales tax, then the 'net of tax' price would be £10

Net profit

The value of sales less expenses assuming that the sales are greater (ie. if the profit and loss account shows a credit balance).

Nominal Accounts

A set of accounts held in the nominal ledger. They are termed 'nominal' because they don't usually relate to an individual person. The accounts which make up a Profit and Loss account are nominal accounts (as is the Profit and Loss account itself), whereas an account opened for a specific customer is usually held in a subsidiary ledger (the sales ledger in this case) and these are referred to as personal accounts.

Nominal Ledger

A ledger which holds all the nominal accounts of a business. Where the business uses a subsidiary ledger like the sales ledger to hold customer details, the nominal ledger will usually include a control account to show the total balance of the subsidiary ledger (a control account can be termed 'nominal' because it doesn't relate to a specific person).

Ordinary Share

This is a type of share issued by a limited company. It carries the highest risk but usually attracts the highest rewards.

Overheads

These are the costs involved in running a business. They consist entirely of expense accounts (eg. rent, insurance, petrol, staff wages etc.).

P.A.Y.E

'Pay as you earn'. The name given to the income tax system where an employee's tax and national insurance contributions are deducted before the wages are paid.

Paid-up Share capital

The value of issued shares which have been paid for. See Called-up Share capital.

Pay on delivery

The buyer pays the cost of the goods (to the carrier) on receipt of them.

PE ratio

An equation which gives you a very rough estimate as to how much confidence there is in a company's shares (the higher it is the more confidence). The equation is

current share price multiplied by earnings and divided by the number of shares . 'Earnings' means the last published net profit of the company.

Petty Cash

A small amount of money held in reserve (normally used to purchase items of small value where a cheque or other form of payment is not suitable).

Petty Cash Slip

A document used to record petty cash payments where an original receipt was not obtained (sometimes called a petty cash voucher).

Point of Sale (POS)

The place where a sale of goods takes place, eg. a shop counter.

Posting

The copying of entries from the journals to the ledgers.

Preference Shares

This is a type of share issued by a limited company. It carries a medium risk but has the advantage over ordinary shares in that preference shareholders get the first slice of the dividend 'pie' (but usually at a fixed rate).

Pre-payments

One or more accounts set up to account for money paid in advance (eg. insurance, where part of the premium applies to the current financial year, and the remainder to the following year).

Profit and Loss Account

An account made up of revenue and expense accounts which shows the current profit or loss of a business (ie. whether a business has earned more than it has spent in the current year). Often referred to as a P&L.

Profit margin

The percentage difference between the costs of a product and the price you sell it for. Eg. if a product costs you £10 to buy and you sell it for £20, then you have a 100% profit margin. This is also known as your 'mark-up'.

Pro-forma invoice

An invoice sent that requires payment before any goods or services have been despatched.

Provisions

One or more accounts set up to account for expected future payments (eg. where a business is expecting a bill, but hasn't yet received it).

Purchase Ledger

A subsidiary ledger which holds the accounts of a business's suppliers. A single control account is held in the nominal ledger which shows the total balance of all the accounts in the purchase ledger.

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Raw Materials

This refers to the materials bought by a manufacturing business in order to manufacture its products.

Rebate

If you pay for a service, then cancel it, you may receive a 'rebate'. That is, you may be refunded some of the money you paid for the service. (eg. if you cancel a 1 year insurance policy after 3 months, you may get a rebate for the remaining 9 months)

Receipt

A term typically used to describe confirmation of a payment - if you buy some petrol you will normally ask for a receipt to prove that the money was spent legitimately.

Reconciling

The procedure of checking entries made in a business's books with those on a statement sent by a third person (eg. checking a bank statement against your own records).

Reserve accounts

Reserve accounts are usually set up to make a balance sheet clearer by reserving or apportioning some of a business's capital against future purchases or liabilities (such as the replacement of capital equipment or estimates of bad debts).

A typical example is a company where they are used to hold the residue of any profit after all the dividends have been paid. This balance is then carried forward to the following year to be considered, together with the profits for that year, for any further dividends.

Retail

A term usually applied to a shop which re-sells other people's goods. This type of business will require a trading account as well as a profit and loss account.

Retained earnings

This is the amount of money held in a business after its owner(s) have taken their share of the profits.

Revenue

The sales and any other taxable income of a business (eg. interest earned from money on deposit).

Sales

Income received from selling goods or a service.

Sales Ledger

A subsidiary ledger which holds the accounts of a business's customers. A control account is held in the nominal ledger (usually called a debtors' control account) which shows the total balance of all the accounts in the sales ledger.

Self Assessment

If you are self-employed, or receive an income which is un-taxed at source, you will need to register with the Inland Revenue so that the relevant self assessment forms can be sent to you. The idea of self assessment is to allow you to calculate your own income tax.

Self-employed

The owner (or partner) of a business who is legally liable for all the debts of the business (ie. the owner(s) of a non-limited company).

Selling, General &
Administrative expense
(SG &A)

The expenses involved in running a business.

Service

A term usually applied to a business which sells a service rather than manufactures or sells goods (eg. an architect or a window cleaner).

Shareholders

The owners of a limited company or corporation.

Share premium

The extra paid above the face value of a share. Example: if a company issues its shares at £10 each, and later on you buy 1 share on the open market at £12, you will be paying a share premium of £2

Shares

These are documents issued by a company to its owners (the shareholders) which state how many shares in the company each shareholder has bought and what percentage of the company the shareholder owns. Shares can also be called 'Stock'.

Shares issued

The number of shares a company has issued to shareholders.

SME

Small and Medium Enterprises (ie. small and medium size businesses). The distinction between what is 'small' and what is 'medium' varies depending on where you are and who you talk to.

Sole trader

The self-employed owner of a business.

Source document

An original invoice, bill or receipt to which journal entries refer.

Stock

This can refer to the shares of a limited company or goods manufactured or bought for re-sale by a business.

Stock Taking

Physically checking a business's stock for total quantities and value.

Stock valuation

Valuing a stock of goods bought for manufacturing or re-sale.

Straight-line depreciation

Depreciating something by the same (ie. fixed) amount every year rather than as a percentage of its previous value.

Suspense Account

A temporary account used to force a trial balance to balance if there is only a small discrepancy (or if an account's balance is simply wrong, and you don't know why). A typical example would be a small error in petty cash. In this case a transfer would be made to a suspense account to balance the cash account. Once the person knows what happened to the money, a transfer entry will be made in the journal to credit or debit the suspense account back to zero and debit or credit the correct account.

Tangible assets

Assets of a physical nature. Examples include buildings, motor vehicles, plant and equipment, fixtures and fitting.

Transaction

Two or more entries made in a journal which when looked at together reflect an original document such as a sales invoice or purchase receipt.

Trial Balance

A statement showing all the accounts used in a business and their balances.

Turnover

The income of a business over a period of time (usually a year).

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Value Added Tax
(VAT - applies to many countries)

Value Added Tax, or VAT as it is usually called is a sales tax which increases the price of goods.

Wages

Payments made to the employees of a business for their work on behalf of the business. These are classed as expense items and must not be confused with 'drawings' taken by sole-proprietors and partnerships.

Work in Progress

The value of partly finished (ie. partly manufactured) goods.

Write-off

Depreciating an asset to zero in one go.

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