Accounting Terms Glossary

Accounts Payable (Creditors, Payables)
Accounts payable are those accounts where the business has an obligation to pay for receiving goods or services. They are classified as a current liability.

Accounts Receivable (Debtors, Receivables)
Accounts receivable are those accounts where the business is owed money for providing goods or services. It is an asset.

Accrual Concept
Accrual concept is one of the core accounting concepts. Accrual concept states that an economic event should be recorded in the period in which it is incurred rather than when it is paid for or when cash is received in return. It also includes the Matching concept which says that the revenues and related costs should be matched in the income statement

Accrued Expenses (Accruals)
Accrued expenses are those expenses which have been incurred but not yet invoiced or paid. They are usually treated as a Current Liability

Accrued Income
Accrued income is income that is earned but not yet invoiced or received. It is treated as a Current Asset.

Asset
Asset is something that is owned by a business that has commercial value or exchange value. Assets are subdivided into Fixed Assets ie those that will be there for more than one year and Current Assets ie those that will convert to cash within one year

Balance Sheet
A balance sheet is the list of all the assets and liabilities of the business.

Capital Employed
Capital Employed reflects the Balance Sheet value of the assets used by the business to generate revenue. It is calculated as follows:

Capital Employed = Fixed Assets + Current Assets – Current Liabilities.

It can also be calculated by looking at the financing side of the balance sheet when it will be: . Capital Employed = Shareholders Funds + Term Liabilities

Cash

Cash includes all notes and coins held by the business together with all credit balances in bank accounts and sometimes includes short term investments in other liquid assets eg Government Bonds

Cash Flow Statement
Cash flow statement is a financial statement that provides details of the inflow and outflow of cash for the business. It is divided into three parts:

cash flows from operations
cash flows from financing,
cash flows from investing

Collection Period (Days Sales Outstanding, Debtor Days)
Collection period defines the amount of time it takes to convert average sales into cash. In other words, it reflects the average number of days credit taken by customers. It is calculated as follows

Collection Period = (Debtors X 365) / Sales

Consistency Principle
Consistency principle of accounting says that the same accounting policies and procedures should be followed in every accounting period. If policy is changed the relevant change should be disclosed in the notes to the accounts

Cost of Sales (Cost of Goods Sold)
Cost of Sales is the cost of procuring and processing goods. In a manufacturing business it includes direct material, labour and factory overheads. In a trading business it is usually just the cost of the goods traded. In a service business it is usually just the direct labour used in delivering the service.

Creditors
Creditors reflect the total amount of money owed to suppliers but not yet paid. It is usually divided into Trade Creditors and Other Creditors

Creditor Days (Payments Period)
This reflects the average number of days taken to pay creditors. It is calculated as follows:

. Creditor Days = (Creditors X 365) / Cost of Sales

This is usually calculated on Trade Creditors

Current Assets
Current Assets are those assets that are usually sold or converted into cash within the normal trade cycle of the business which is usually taken to be one year.

Current Liabilities
Current liabilities are the liability obligations of the business which it is expected to pay off within one year.

Current Ratio
Current ratio is the ratio that compares the current assets to the current liabilities in the business. It is calculated by the formula: Current Ratio = Current Assets / Current Liabilities.

Days Inventory
Day’s inventory shows the average amount of time that the items are held in the inventory. It is calculated as follows:

Days Inventory = (Inventory X 365) / Cost of Sales

Days Payable Outstanding
Days payable outstanding shows the amount of time it takes for the business to pay off its creditors (See Creditor Days)

Days Sales Outstanding
Days sales outstanding is the amount of time it takes for converting debtors/receivables to cash. (See Collection period)

Debtor
A person or persons who owe money to the business are collectively known as debtors.

Debtor Days
Debtor days is the average number of days taken to convert receivables to cash. (See Collection Period)

Depreciation
Depreciation is a charge for the use of fixed assets which reflects the book value of the amount of the assets consumed every year in generating revenue or simply due to the reduction in its value caused by wear and tear, obsolescence etc

Dividend
Dividend is a portion of the earnings of the business that is paid to the shareholders

Fixed Asset
Fixed assets are those assets that are required for normal conduct of business and will be on the Balance Sheet for more than one year

GAAP
GAAP is the acronym for Generally Accepted Accounting Principles, which is an accepted set of accounting procedures, policies and rules.

Going Concern Concept
Going Concern Concept of Accounting assumes that the business will remain in existence for the foreseeable future.

Gross Profit
Gross profit is the excess of sales over production costs. It is calculated as follows:

Gross Profit = Sales – Cost of Sales

Intangible Asset
An Intangible asset is an asset that cannot be physically seen or felt, but its presence delivers economic benefits the business, e.g goodwill.

Inventory (Stock)
Inventory is the stock of raw materials, work in progress and finished goods

Liability
Liability is a loan or a debt of the business that has not yet been discharged.

Matching Concept
Matching concept is the concept in accounting that says that revenues should be matched with their related costs in the income statement. ( See Accrual Concept)

Net Profit
Net profit is the excess of income from all sources over all expenses.

Net Sales
Net sales is the amount of sales attained after deducting VAT, sales returns, allowances, discounts etc.

Net Worth
Net Worth of a Business = Total Assets – Total Third Party Liabilities

Operating Profit (Earnings before Interest and Tax , EBIT)
Operating profit is the excess of Gross Profit over other operating expenses ie

Operating Profit = Gross Profit – S G & A expenses

Prepayments

Prepayments reflect amounts paid in advance to service providers for services which have not yet been received eg Rent paid in advance. They usually are treated as Current Assets on the Balance Sheet

Profit after Tax (Net Profit)
Profit after tax is the excess of revenue over all the expenses and after payment of tax.

Profit Before Taxes
Profit before tax is the profit earned by the business before making the deduction for tax.

It is calculated as follows:

Profit before Tax = Operating Profit – Interest Charges

Quick Assets
Quick assets is the sum of the current assets minus inventory.

Receivable
Receivable is the money which is due to the business and has not yet been received.

Retained Earnings
Retained earnings are that part of the profit which has not been given to the owners, but retained in the business for future use.

Return on Capital Employed
Return on Capital employed is a measure of how effectively a business is using its capital. Return on Capital Employed = Operating Profit / (Total Assets – Current Liabilities)

or
Return on Capital Employed = Operating Profit / (Shareholders Funds + Term Liabilities)

Return on Equity
Return on Equity = Net Income / Shareholders Funds

Selling, General and Administrative Expense (S,G & A Expenses)
Selling, general and administrative expenses reflect all the non production costs incurred in selling and distributing the goods and the administrative expenses of the business. They do not include interest or tax.

Shareholders Funds (Shareholders Equity)

This reflects the total amount owed by the business to the owners. It includes Share Capital, Share Premium, Retained Earnings and Revaluation Reserves

Tangible Assets

These are all the physical Fixed Assets of the business including Land and Buildings, Plant and Machinery, Office Equipment and Computers, Fixtures and Fittings, Motor Vehicles

Term Liabilities

Term Liabilities are those liabilities which are payable more than one year after the Balance Sheet date eg Bank Term Loans, Pension Liabilities

Total Assets
Total assets is the sum of all the fixed and current assets.

Trade Debtors
Trade debtors are those who owe the business money, on account of goods sold to them on credit.

Turnover
Turnover is another name for net sales.

Useful Life
Useful life is the approximate amount of time for which an asset is assumed to be useful before it is fully depreciated.

Variable Costs
Variable costs are those which vary with an increase or decrease in production.

Working Capital
Working Capital = Current Assets – Current Liabilities