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 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 is income that is earned but not yet invoiced or received. It is treated as a Current 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
A balance sheet is the list of all the assets and liabilities of the business.
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 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 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 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 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 are the liability obligations of the business which it is expected to pay off within one year.
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.
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)
A person or persons who owe money to the business are collectively known as debtors.
Debtor days is the average number of days taken to convert receivables to cash. (See Collection Period)
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 is a portion of the earnings of the business that is paid to the shareholders
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 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 is the excess of sales over production costs. It is calculated as follows:
Gross Profit = Sales – Cost of Sales
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 is the stock of raw materials, work in progress and finished goods
Liability is a loan or a debt of the business that has not yet been discharged.
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 is the excess of income from all sources over all expenses.
Net sales is the amount of sales attained after deducting VAT, sales returns, allowances, discounts etc.
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 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 is the sum of the current assets minus inventory.
Receivable is the money which is due to the business and has not yet been received.
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)
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
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 are those liabilities which are payable more than one year after the Balance Sheet date eg Bank Term Loans, Pension Liabilities
Total assets is the sum of all the fixed and current assets.
Trade debtors are those who owe the business money, on account of goods sold to them on credit.
Turnover is another name for net sales.
Useful life is the approximate amount of time for which an asset is assumed to be useful before it is fully depreciated.
Variable costs are those which vary with an increase or decrease in production.
Working Capital = Current Assets – Current Liabilities