Glossary of Accounting Terms
Accrual or Income & Expenditure Accounts
This is where accounts are
prepared in a way which shows not only what happened
in a period, but what should have happened in the
period, e.g. If you got a gas bill after year-end,
it would be included in the accounts since the gas
was actually used before the year-end. If you issued
an invoice for work done before year-end and it had
not been paid, you would include it in the accounts
as if it had been paid. This approach enables you to
measure the trading surplus/(deficit), rather than
the flow of cash in/out of the organization over the
accounting period.
Accruals (another meaning)
These are estimates of specific
expenses that have been incurred by the company, but
have not been billed or paid for during the
accounting period.
Assets
These can be:
- Fixed – valuable items that last more than one year,
e.g. vehicles, furniture, equipment, IT,
investments.
- Current – cash or things that can be turned into
cash within a short period, e.g. stock, money in the
bank, petty cash, prepayments and debtors.
Audit
An audit is a check on the
figures in the accounts by an Auditor. A Registered
Auditor must follow a set of guidelines issues by
the Auditing Practices Board. The Auditor does not
say that the accounts are correct, but simply
expresses an opinion on the accounts. Generally,
small and medium sized companies are not required to
have their accounts audited.
Average Costs
Average cost is the cost of doing
each thing, e.g. if it costs £200 to produce 100
widgets, including all the initial set up costs, the
average cost of those 100 widgets is 200/100 = £2
per widget. If you then produce another widget,
making a total of 101 widgets with a total cost of
£200.50 the average cost per widget will be
200.50/101 = £1.985 per widget. On this basis the
cost of the 101st widget is £1.985 – compare this to
the Marginal Cost example later in the Glossary.
Balance Sheet
This is a statement within the
accounts that explains what the business has and
where it came from. The first part adds up the good
things (like money in the bank), and subtracts the
bad things (like bills you haven't paid yet). The
second half usually shows where the money to fund
the business came from, i.e. money paid in by the
shareholders/proprietors which has not yet been
withdrawn for personal spending.
Capital
Capital has many meanings in
accounting, the most common use being expenditure to
purchase or convert buildings, vehicles or
equipment, as opposed to revenue expenditure which
is short term, e.g. purchasing stock or paying
wages.
Cost Driver
This is the factor that drives
the cost of an activity up or down, e.g. the more
people that come to the lunch club, the more the
catering will cost. In this example the cost-driver
is people attending.
Creditors
These are people you owe money to
at any particular time - usually listed at the year
end in the accounts.
Debtors
Debtors represent money owed to
the business. Although debtors are considered an
asset, if you are owed a vast amount, this might
indicate problems collecting monies owed and
possible cash flow difficulties.
Deferred revenue
This is income received in one
period which actually relates to work that will be
carried out in a future period. Sometimes this may
be called Revenue in Advance. An example is a
deposit paid for a holiday that will be taken in the
future.
Depreciation
Depreciation is a way of
spreading the cost of an asset over the expected
useful economic life of that asset. So, if you buy a
computer that you expect to last three years, the
cost will be divided by three and one third will be
charged against your income in each of the next
three years.
Direct costs
Costs that can be attributed
clearly to the activity you are considering, e.g.
the salary of a youth project worker.
Fixed Costs
Costs that remain the same
however much activity you do, e.g. the line rental
charge in a phone bill.
iXBRL - Inline eXtensible
Business Reporting Language
iXBRL involves the application of
computer-readable tags to business data allowing it
to be processed automatically by software whilst
also being readable by humans.
From 1 April 2011 all company Tax
Returns and accounts for periods ending after 31
March 2010 must be submitted to HM Revenue & Customs
in iXBRL format.
A company’s financial statements,
when converted into iXBRL, appear unchanged to a
human reader but contain tags, usually hidden to the
eye, which can be accessed and used by software.
iXBRL provides an identifying tag for each
individual item of business data. For example,
‘operating profit’ has its own unique tag, as does
‘current assets’.
Indirect or Shared costs
These are costs that also relate
to a particular activity, but less clearly. They are
often costs shared by a number of projects or
activities.
Liabilities
Money you owe to others. These
can be current (payable within one year) or
long-term e.g. a bank loan payable over 5 years.
Liquidity
This is the measure of how much
cash you have and whether it is enough for your
needs. It can include things that can be turned into
cash quite quickly like debtors and other current
assets. A ‘liquidity problem’ is where you don’t
have enough cash to pay your immediate bills on
time.
Marginal Costs
Marginal cost is the incremental
cost of doing one more thing, e.g. making the 101st
widget, when all the set up costs have already been
included in the costs of producing the 1st 100
widgets. Producing 100 widgets costs £200, including
all the set up costs of £150 (i.e. £2 per widget)
and producing the 101st widget will cost £200.50 in
total – the same as in the Average Costs example. As
the first 100 widgets are already produced and the
set up costs have already been covered, the marginal
cost of producing the 101st widget will be £200.50 -
£200 = £0.50 – different from the Average Costs
example earlier in the Glossary.
Materiality
This is a concept often used in
accounts. It basically means 'big enough to bother
about'. For example a £100 error in the petty cash
may be very 'material' to a small business but
'immaterial' for a big national group. The basic
test of materiality is - if the reader of the
accounts would form a different opinion if they knew
about it, then it is material.
Net Current Assets
This is a figure that appears in
the Balance Sheet. It comprises the current assets
less the current liabilities. It can be a very
important figure. For example, you may have total
assets of £1,000,001, but if a million of this is an
old building and only £1 is in the bank then it’s
not so good.
Opportunity Costs
These are costs associated with
losing the opportunity to do something else with
your time, e.g. instead of going to a training
course, you could have delivered a course of your
own and earned £500 for your organisation.
Overheads
These are the costs usually
incurred at the office, which must be paid for by
all the projects and activities of the business,
e.g. post & stationery, office wages, office rent,
etc.
Prepayments
These are services that the
company has paid for in advance, but not used during
the accounting period. A common example is an annual
subscription paid before the year end for a service
that will be received in the following year.
Profit / (Loss)
Profit arises where the income of
a business exceeds its expenditure. Profits can be
kept in the business or distributed to its owners.
Loss arises where the expenditure of a business
exceeds its income. When a business makes a loss,
the owners have no profits to withdraw as income.
Receipts & Payments or Cash
Accounts
These are accounts prepared to
show simply what money has been received and paid
out through the bank and petty cash during the
accounting period. This approach does not measure
the profit/(loss) during the period.
Reserves
The accumulated profits and
losses of a business that have built up since it
started to trade that have not been withdrawn by the
owners of the business as income.
Revenue
This has two meanings. The first
is “sales” or “turnover” i.e. the income received by
the business in the period. The second is “short
term” i.e. revenue expenditure means buying things
that will be used within one year.
Surplus / (Deficit)
Surplus is the positive amount
derived from trading or financial activities. It is
reinvested in the organisation and its aims and
objectives. It may also be used to build up reserves
to appropriate levels to ensure sustainability.
Deficit is when trading or financial activities
produce a negative result.
Turnover
Turnover is the volume of sales
over a period of time. It can also be referred to as
income or revenue.
Variable Costs
Costs that vary as you do more
activity, e.g. the call charges detailed in a phone
bill.
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