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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the money to fund the business came from, i.e. money paid in by the shareholders/proprietors which has not yet been withdrawn for personal spending.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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Chartered Certified Accountants and Business Advisers

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Registered Office: 2 Sark Gardens, Ferring, WORTHING, West Sussex, BN12 5QB | Director: Heather Still FCCA