Accounting glossary

Accounting equation  

Given that accounting is all about making sure that an organisation’s finances are healthy, it helps to have a simple equation to discern that. Enter the accounting equation. To establish the net worth of a business, accounts should therefore source figures to input into the following equation: Assets = Liabilities + Equity.  

Accounting period  

To enable comparative analysis and ensure consistency for reporting and workflows, accounting periods are enforced to determine which transactions – based on their date – are included in financial reports. Different accounting periods are used for different business tasks; however, more often than not they will cover either an entire year, a quarter, or a month.  

Accounting software  

Accounting software tackles the complexities of modern accounting and reduces time spent on repetitive tasks. This is achieved through improved functionality and agility of digital applications, the power of automation, and the inability of programmed tools to make errors.  

Some software – like Aurum – focus on performing specific accounting tasks expertly such as reconciliation, whilst others will try to be all-in-one platforms.  

Accounts payable  

When a company has outstanding costs on their books such as bills that they are yet to pay, these are known as accounts payable, payables, AP, or trade creditors. The term ‘accounts payable’ is also often used to refer to the individual or team within a business who are responsible for processing invoices and paying bills.  

Accounts receivable  

Following a sale of a product or a service, firms don’t always immediately receive payment. Sometimes, an invoice is issued which allows a time period for payment to be received. This means money is owed by customers and in turn creates account receivable, receivables, trade debtors, or AR.  

Just like how ‘accounts payable’ is used to describe finance professionals, so too is ‘accounts receivable’. It can therefore also be applied to the staff who are responsible with receiving and chasing up on outstanding payments.  

Accrual accounting  

When money is owed, it is nearly always binding. That is why most accountants engage in accrual accounting – a form of accounting that acknowledges not only cash that is currently possessed by a business but also that which it is owed, and that which it owes others.  

Despite being trickier, accrual accounting provides a more accurate long-term view of a firm’s finances, making it popular with investors.  

Advisory  

Accountancy provides the foundation for financial decisions; however, sometimes accountants are employed to not only inform but also advise on how to improve their numbers, operate in a more tax-efficient way, decrease their interest payments, manage their cash flow better, and more. Those who do, provide advisory services.  

Amortisation  

Nearly everything in real life depreciates over time and the same goes for intangible assets. However, when referring to their depreciation in value, the term, amortisation, is used instead.  

This is key in accounting because it affects how profits and losses are viewed over a period of time.  

Annual report  

To produce an annual report, a company’s operations and their financial performance for the period of 12 months must be accounted for. Publicly traded companies must do so for regulators and shareholders but those that aren’t are still expected to for tax purposes.

Within an annual report you will likely find performance highlights, future goals, letters of intent to shareholders, granular financial statements, and an auditor’s report. As a result, financial accuracies are non-negotiable when it comes to producing annual reports, meaning that automated reconciliation software often plays an integral role in their production.

ARPU  

Average Revenue Per User (ARPU) is an important metric for businesses to be aware of. Depending on its value, it will show whether a few number of sales are required or if a large customer base is required.

Assets  

As one side of the accounting equation that is in opposition to ‘liabilities’, ‘assets’ are what companies own. In other words, they add to their equity rather than reduce it.  

Examples of assets include raw materials, accounts receivable, property, equipment, cash, etc.  

Audit  

An audit is an in-depth assessment to check for compliance and accuracy. It therefore can relate to many areas of a business, meaning that there are tax audits, financial audits, and more.  

Whilst regulated audits are always completed by an independent external source, sometimes firms also order internal audits to review their procedures. However, regardless of whoever conducts an audit, well-organised and accurate records are a necessity, resulting in many firms viewing automated reconciliation software – especially those which create complete audit trails – as a requirement for successful audits.

To discover how beneficial this is, take a read of Slater & Gordon’s case study about their use of Aurum.

Balance sheet  

To illustrate the financial state of a company at any point in time, people turn to a balance sheet. By taking into account the value of a business’ assets, liabilities, and owner’s equity, the financial position of a firm is ascertained. As a result, a balance sheet reveals whether a business is solvent and if it is gaining or losing value in comparison to when a balance sheet was previously produced.

Bank reconciliation  

The action of cross-referencing internal records against those held by your bank is known as bank reconciliation. You can read more about it here.  

Basis of accounting  

How a firm conducts their accounting is known as the basis which it is founded upon. The two basis of accounting are accrual accounting and cash accounting.  

Accrual accounting acknowledges income and expenses as soon a purchase is made and therefore helps give a better overall picture of a firm’s finances at any point in time. In contrast, cash accounting only updates financial figures once cash has actually changed hands, resulting in a short-term view of liquidity being supplied.

Break-even point  

When a business can cover its costs, it reaches its break-even point and becomes profitable. Businesses can determine when they will reach their break-even point in terms of revenue or volume. The latter is harder to calculate than the former because instead of giving a monetary figure, it shows how much work is needed to break-even. When firms offer goods and services at different prices, this complicates the value break-even formula.  

Book value  

To get an accurate and realistic value of both a business’ equity and the assets they earn, book value is required. This is particularly useful when a business is sold or when shareholders are interested in investing because it can’t be inflated like market value can.

Bootstrapping  

Without any formal business loans or investors, financing of a firm is done independently by a business owner. This is known as bootstrapping.

Funds to bootstrap a business can come from personal savings, unsecured personal loans, credit cards, grants, peer to peer lending, friends-and-family loans or investments, presales, and/or crowdfunding.

Capital  

Most commonly capital refers to the money that a business leverages to build, run, or grow its operations. Sometimes the term is also used to signify the net worth/ book value of a business.

Ultimately, capital is extremely important for all businesses regardless of whether it is ‘working capital’ - that used to meet expenses - or ‘extra capital - additional funds available to improve and grow the business.

Capital expenditure (Capex)  

The total money expended to acquire or upgrade an asset is known as capital expenditure (capex). Given that expenditure is a necessary part of business but also a requirement to develop, there are two appropriately named types of capex - maintenance capex and growth capex.

Cash accounting  

The practice of only counting transactions once money has changed hands is known as cash accounting. In contrast to accrual accounting, this method is less popular as despite being easier to do, it only presents a short-term insight into the financial position of a business.  

Cash flow  

As the total of cash and cash equivalents being transferred in and out of a company over a period of time, cash flow is vital to calculate so that companies can continue to make payments.  

Cash flow management  

In order to pay debts, regardless of whether they arise from loans, salaries for employees, or anything else, businesses require cash. As a result, they engage in cash flow management to help them ascertain whether or not they will have the required funds when needed. Tools used for cash flow management are cash flow forecasts and cash flow statements.

Cash flow statement  

Cash flow statements display where income is coming from, and where expenses are going for a business over a period of time. It therefore reveals if cash is coming in quicker than it is being spent, or the other way around); which areas of the company are bringing in money and which are spending it; and whether or not a business will be able to pay its expenses.

Chargeback  

If a cardholder suspects that they have been charged incorrectly or that they have been the victim of fraud, they can reverse payments by making a chargeback.  

Chart of accounts  

List of every single account that makes up your financial statements and what type of account it is (Fixed Asset, Liability, Revenue etc).

COGS  

Cost of Goods Sold (COGS) is a vital figure for financial professionals to be aware of because it allows them to gain a true calculation of profit. This is because it totals all the money spent by a business to create, handle, and deliver products to customers.  

Commercial invoice  

When goods are sold via international shipping, a commercial invoice is required. This allows custom officials to know the value of goods and in turn work out tariffs on that which is being imported.  

Current assets  

Resources owned by a business that are expected to be used or sold within a year are classified as current assets. It also includes cash.

Current liabilities  

Debts that a business must pay within 12 months are defined as current liabilities or short-term liabilities. Examples include expenses such as rent, purchases made on credit and short-term loans.

Current ratio  

As a type of liquidity, the current ratio of a business reveals its capacity to pay its debts and expenses over the coming months. To determine the current ratio, current assets are divided by current liabilities.

Direct cost  

Selling goods and services also incurs costs. Those directly linked to the goods and services are known as direct costs. Examples include raw materials of what is sold, employment costs of those who deliver a business’ services, energy required to power a factory etc.

Dividend  

Depending on a company’s performance, some might decide to issue dividends to their shareholders. These equate to a portion of a company’s earnings. Most commonly they are issued as cash but sometimes they take the form of property or additional shares.  

Dividend yield  

To help shareholders determine whether their investment is serving them well or not, looking at dividends paid as percentage of their share price (dividend yield) is a useful tool.  

The equation for dividend yield is: (Annual dividend per shared / Current price per share) x 100 = Dividend yield %

EBITDA  

To understand the performance of a company from purely a business-perspective, EBITDA is often turned to due to it literally standing for, Earning Before Interest, Taxation, Depreciation and Amortisation.

Earnings per share (EPS)  

A business’ profitability per share is calculated through EPS. To do so, dividends on preferred shares are deducted from net profit to produce a total that is then divided by the average number of ordinary shares over the reporting period.

Enterprise resource planning (ERP)  

Acting as a central space to hold business information by connecting to other applications, Enterprise Resource Planning (ERP) software helps automate and improve the efficiency of businesses of all sizes.  

Given the large amount of functions that are now run through software, ERP systems are expected to consolidate accounts payable and receivable along with other finance functions, payroll and other HR activities, inventory management and other supply chain data, plus much more.

Equity  

The valuation of a business minus any debts that it owes reveals a firm’s equity. It should be noted that having negative equity is not only a bad statistic, it also makes a firm insolvent, rendering it illegal to operate in some countries.

Expense  

Business expenses aren’t solely monetary claims made by employees; they cover all resources flowing out of a business. An expense can therefore be any cost for a business such as payments made in the form of time, cash, or any other resource.  

Financial management  

Based entirely around money, financial management consists of planning how a business should earn money and spend it. Along with practical attainment and application of money, it also includes the setting of financial goals and analysing financial data.

In order for financial management to be successful, movement of money must be tracked and verified before reporting can take place. This means that best practices when it comes to reconciliation is imperative.  

Financial reporting  

Tracking, analysing and reporting upon business income is the primary purpose of financial reporting. Products of it are better business decisions and increased transparency to attract investors.

Given these aims, financial reporting should cover:

• How effectively capital is being used

• Cash flow

• Assets, liabilities and owner’s equity

• And more

Financial statement  

Commonly covering the period of a year, financial statements report upon the financial activities and performance of a business over this time. It is a legal requirement for limited companies to file their financial statements with Companies House once a year.  

Fiscal year  

Otherwise known as a financial year, a fiscal year is an accounting period of 12 months and is used by businesses for financial and tax reporting purposes. Due to businesses all having different types of activities which see them have varying periods of busyness, a fiscal year is not always between January 1^st and December 31^st, instead organisations can choose their reporting period.  

Fixed assets  

Typically tangible, physical objects that are not to be sold to customers and are unlikely to be sold for cash within 12 months are known as fixed assets. Examples include land, buildings, machinery etc.  

Fixed cost  

Regardless of the activity of a business, the expense of fixed costs remain the same. Examples include council tax, insurance, permanent labour wages etc.  

Gross profit  

Once cost of sales are deducted from revenue, gross profit is revealed. This is the amount of money a business makes on sales.  

However, they do not keep this money for long. Instead, it is used to cover operating expenses such as rent, loan repayments, plus taxes. Only once these totals are also deducted can net profit be calculated.

Gross profit margin  

Represented as a percentage, gross profit margin details the percentage of sales income remaining after taking into account the cost of sales.  

The equation for gross profit margin is:  

(Gross profit / revenue) x 100 = Gross profit margin  

IFRS  

Detailing how information in financial statements should be collected and presented, the International Financial Reporting Standards (IFRS) are a set of rules that the International Accounting Standards Board (IASB) maintain.

By ensuring that records are consistent across the world, financial reporting becomes credible and comparable thanks to the IFRS.  

Income tax  

Individuals are subject to a government levy known as income tax. In order for it to work, individuals must declare their taxable income, allowing the government to take a percentage for public services.

Indirect costs  

Whilst revenue is all about the money obtained off the back of selling goods or services, not all costs are linked directly to them. These are indirect costs. Common examples include wages, insurance, utilities, marketing activities, and more.

Inflation  

The rate of price increases over a period of time determines inflation. To calculate it, the price change of selected goods and services is monitored for an average to be found.  

Intangible assets  

Despite having no physical presence, intangible assets still hold theoretical value for businesses. They can be classed as identifiable intangible assets such as copyrights, patents and intellectual property, or unidentifiable intangible assets like goodwill.

Invoice  

To charge a customer for goods or services, an invoice is issued by a business them. It will detail all the necessary information relating to a transaction such as the total cost, the quantity of goods or services provided, when and how they customer should pay, a description of the transactions. It must also include a date, a unique reference code, and the VAT number of the invoice issuer if they’re VAT registered.

Journal entry  

A record of a transaction within your business books is referred to as a journal entry. To ensure accurate bookkeeping, every transaction must in fact result in the creation of two journal entries to fulfil the requirement of double-entry bookkeeping showing how transactions debit one book and credit another. To find out more about journal entries, check out our blog on them.

Liabilities  

A business can owe many things - money, goods, or services. Collectively, these are defined as liabilities and are the opposite of assets.

Liquidation  

In order to “free up” cash, assets must be sold. This is known as liquidation.

Liquidity  

Usually illustrated as a ratio, liquidity demonstrates a firm’s ability to pay its bills and loan repayments over a certain period of time.

Margin  

Margin is expressed as a percentage and determined by which type of profit is being used. For instance to calculate gross profit margin, gross profit is divided by revenue before being multiplied by 100. Whereas to calculate net profit margin, the same is done with net profit instead of gross profit.

Marginal cost  

How much more it will cost a business - typically in manufacturing - to produce one more item, is known as the marginal cost.

Markup  

Expressed as a percentage, markup is the additional price added to the cost of producing and selling a product, or delivering a service so that a profit is made.

NDA  

Non-disclosure agreements (NDAs) mean that signatories are legally prevented from sharing confidential information with anyone who is not part of the agreement. NDAs always specify what information it applies to but often it covers financial information, intellectual property, and data.

Net income  

Sharing the same formula as net profit, net income is calculated by minusing expenses and annual taxes from business revenue.  

Net profit  

The bottom line for businesses, net profit is the money that a business gets to keep once all taxes and expenses are paid.  

Net profit margin  

The percentage of total incomes that a business gets to keep after all taxes and expenses are paid is known as the net profit margin.  

Non-current assets  

Assets which cannot easily be converted into cash within a year are known as non-current assets or long-term assets. Typically, they are:

• Long-term investments including bonds and shares

• Fixed assets like property and equipment

• Intangible assets such as copyrights  

Non-current liabilities  

When a business has debt that isn’t due for payment before 12 months, it is known as a non-current liability or a long-term liability.  

Operating profit  

To ascertain profits before taxes are deducted, operating profit is calculated. This is achieved by minusing operating expenses from gross profit.  

Overhead  

By definition, any expense that is not directly involved in delivering products or services to a customers is defined as an overhead. However, each business has their own classification of an overhead meaning that the term is used in many different ways.  

P45  

When an employee leaves a business, they are issued with a P45 form. It details their income for that year and the tax contributions they’ve made to HMRC.

Passive income  

Generating money without any activity is not just a pipe-dream, it is actually a reality and takes form in passive income. What this looks like depends on the form of passive income which is usually split into three different types:

• Business-based passive income could be offering knowledge or resources that are purchased on repeat without any presence. Downloadable pdfs, ebooks, and digital templates are all examples.

• Separate business revenue passive income is when investment takes place in another business and you reap the rewards of their success without any further input.

• Non-business related passive income does what it says on the tin. Examples include investment in rental properties or gaining interest through banked money.

P60  

At the end of the year, employees receive from their employer a P60 form. It details their income for the year and the tax they’ve paid on it. Other details include National Insurance contributions, Maternity Pay, Student Loan repayments and Statutory Sick Pay.

Payroll  

The method of paying employees is known as payroll. The term is also used to refer to the total amount paid to employees and the list of paid employees.  

Payroll records  

Payroll records document information on individual employee’s compensation. Depending on which company a business operates in, different information must be included; however, payroll records should always break down how an employee’s pay was calculated.

Payslip  

Every payday, an employee receives a payslip from their employer. It will show their earnings, less deductions for tax and other items such as Student Loan repayments and pension contributions if applicable.  

Petty cash  

For small purchases that people at a business might need to make quickly in person, firms keep petty cash on premises. What petty cash is used for will depend on a business’ needs; however, items such as office essentials like pens or staples are commonly bought with petty cash.  

Profit  

After business expenses are paid, profit is what remains. However, there are three different types of profit depending on what expenses are paid - gross profit, operating profit, and net profit.

Profit and loss statement  

Showing how much a business has spent and earned over a period of time, a profit and loss statement reveals exactly what its name suggests - if a business is making a profit or a loss. It’s other name isn’t so literal, but it is also known as an income statement.  

Profit margin  

The percentage of revenue left after paying business expenses determines profit margin. If the equation is totalled after paying for the cost of goods and services, it calculates gross profit margin. On the other hand, if the equation is totalled after paying all costs and taxes, it calculates net profit margin.  

Pro forma financial statement  

Predictions formed by estimated data on future financial results are found in a pro forma financial statement. To formulate the predictions within the statement, often recurring income and costs are referred to.

Purchase price allocation (PPA)  

When a business is in the process of being purchased, a purchase price allocation should take place by the buyer’s accountant. This activity details how the assets and liabilities of the business looking the b bought will impact their own balance sheets once acquired.  

Quick ratio  

Sometimes referred to as the ‘acid test’ ratio, the quick ratio informs a business whether it can cover debts over the coming quarter. This is determined by assessing a business’ short-term liabilities against its liquid assets.

To ascertain a quick ratio, the calculation is:

Current assets less stock (most of your liquid assets)

The result the companies and investors look for is a quick ratio above 1. This means that a business can pay its debts and in some circumstances, even attain more favourable interest rates from lenders. In contrast, anything below 1 is typically a warning sign that should see companies assess its liquid assets.

Retained earning  

Once dividends for shareholders are taken from net profits and are distributed, the total amount of money remaining is possessed by the business. This is known as retained earnings.  

ROI  

Measured as a percentage, Return on Investment (ROI) highlights the profitability of a monetary investment so that businesses can understand what they have gained from it. Often, ROI is applied to marketing initiatives, research and development schemes, and when reviewing the purchase of certain assets.  

Sole proprietorship  

With only one owner, due to being an extension of the owner rather than a separate legal entity, sole proprietorship is a unique type of business.  

Whilst sole proprietorships are easier to set up than other companies and so too are their taxes, personal assets of the owner are immediately at risk if the company incurs debt or becomes bankrupt.

Stock management  

Businesses that trade goods must acquire, store, organise, and track their goods. This is known as stock management. Collectively, these actions help them ensure that they have the optimum amount of stock available depending on customer demand.  

Trade creditors  

Also known as account payables, trade creditors are bills that a business are yet to pay.  

Trade debtors  

Also known as accounts receivable, trade debtors are invoice owed by customers to businesses.  

Trial balance  

Collecting the closing balances of all accounts in a general ledger at one point in time is extremely useful when it comes to preparing balance sheets, and are especially sought after by auditors. Fortunately, this is what a trial balance does.

TTM  

Trailing Twelve Months (TTM) refers to the financial data of twelve previous months from the current month. Unlike the numbers for the last fiscal year which could have ended 8 months ago for instance if the current month is August, TTM gives a contemporary review of the last yearly period from any point in time.

As a result, analysis that uses TTM resolves the issue of using outdated fiscal numbers plus that of seasonal changes.

Turnover  

Interchangeable with the term ‘revenue’, turnover describes the money a business receives by selling goods or services over a period of time.

Unlike profit, it doesn’t take into account costs for producing, delivering and selling good or services.

Variable cost  

Costs that fluctuate are known as variable costs. Whether they go up or down is determined by a range of factors including supply and demand. As they can change at any point in time, costs that are identified as variable make budgeting harder; however, it is still best to identify them as variable rather than be surprised when they change.

Working capital  

Ascertaining whether a company can cover upcoming costs can be achieved by calculating whether or not it has a surplus or a negative working capital. To do so, current liabilities are subtracted by current assets.

It is important to note that current liabilities are typically defined as money owed over the coming 12 months, and current assets include cash that businesses have available, payments they are owed, and the value of anything they could sell quickly.

Working capital ratio  

Presented as a ratio to reveal whether a business can pay bills and loan repayments over the coming 12 months, the working capital ratio compares current liabilities (the total amount a business owes over the next 12 months) against current assets (payments due in the next 12 months and any assets that could be sold in that period plus cash).