Financial Accounting

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John Stittle & Robert Wearing

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  • Glossary

    AccountabilityThe responsibility or obligation to provide information and explanations relating to the control and use of business resources.
    Accounting equationA formula whereby a company's total assets must equal its total liabilities plus owners’ equity.
    Accounting Standards Board (ASB)The ASB is the standard setting body in the UK that is recognised by section 256 of the Companies Act 1985. The ASB issues Financial Reporting Standards and has nine members appointed by the Financial Reporting Council.
    Accruals conceptTransactions are accounted for when revenues and expenses are earned or incurred and not necessarily when they are received or paid. Sometimes referred to as ‘matching concept’.
    Accrued expenseAn expense that has been incurred within a financial period but has not yet been paid.
    Accrued incomeIncome that has been earned but not yet received.
    Acid test ratioAn accounting ratio that is used in assessing the liquidity of a business. It is defined as (current assets stock): current liabilities. Sometimes termed quick ratio.
    Appropriation accountThe part of the profit and loss account which explains how the profit or loss has been allocated to dividends and reserves.
    AssetAny tangible or intangible item to which a value can be assigned. The Accounting Standards Board's Statement of Principles defines assets as ‘rights or other access to future economic benefits controlled by an entity as a result of past transactions or events’.
    AuditA systematic evaluation of the transactions and financial records of an organisation.
    Authorised share capitalThe maximum amount of shares that a company can issue to shareholders; this amount is normally stated in the notes to the accounts.
    Bad debtA debt which is uncollectable e.g. because of the financial collapse of the customer (debtor).
    Balance sheetA financial statement identifying the assets, liabilities, and equity of a business at a given point in time.
    BookkeepingThe process of recording the everyday transactions of the activities of a business.
    CapitalThe funds that are invested in a business.
    CapitalisationTo include an item in the balance sheet.
    Cash accountingIn cash accounting, only amounts actually received and paid are taken into account.
    Cash flowThe amount of cash received by and paid out of a business.
    Cash flow statementA formal accounting statement that identifies movements in cash receipts and payments.
    Closing stockThe stock remaining at the close of an accounting period. Closing stock is shown in both the trading account and the balance sheet.
    Companies ActsLegislation in the UK that regulates the activities of companies.
    CompanyAn entity that has a legal identity separate from that of its shareholding owners.
    Cost of salesThe cost of goods that have been sold during the financial year.
    CreditThe right hand side of an account.
    CreditorsAmounts owing to a business (e.g. for the provision of unpaid goods and services).
    Current assetsItems that are not intended for continuing use in a business e.g. stock, debtors and cash. Such assets are normally readily convertible into cash.
    Current liabilitiesItems that fall due for payment within one year of the balance sheet date e.g. creditors.
    Current ratioThe relationship between current assets and current liabilities, i.e. CA: CL, and is used to assess a company's liquidity.
    DebitThe left hand side of an account.
    Debt (long term)An amount or other liability owed by a business to an external party financing the business. Long term debt is frequently used to refer to the long term borrowings (e.g. a long term loan) of a business.
    DebtorsCustomers who have not yet paid cash.
    DepreciationThe extent to which an asset has been used up in generating benefits.
    DividendsThe return of a proportion of profits to shareholders as a reward for investing in a company.
    Doubtful debtsAmounts owing to a business that may not necessarily be collected (e.g. because of the liquidation of a debtor).
    EarningsThe net profits of a company after deducting interest and tax but before deducting ordinary dividends.
    Efficient markets hypothesisShare prices instantly adjust to accurately reflect all publicly available information.
    EquityThe issued ordinary share capital that, when included with reserves, is classified as shareholders’ funds.
    ExpenseA cost incurred in buying goods or services which is set against a company's revenue to determine profit.
    FIFOFirst In First Out is a method which assumes that the first stock received is the first stock to be sold to a customer or issued to production.
    Final accountsThe financial statements of a business that are prepared at the end of an accounting period. These statements normally include the profit and loss account, the balance sheet and often, a cash flow statement.
    Financial accountingAccounts that are primarily concerned with reporting to external user groups (especially to shareholders).
    Financial Reporting Council (FRC)The UK body established in 1990 that supervises the activities of the Accounting Standards Board.
    Financial reporting standards (FRS)An accounting standard issued by the Accounting Standards Board, first issued in 1991.
    Financial statementsStatements which are prepared periodically to provide financial information about the activities of a business; they consist primarily of statements such as the profit and loss account, balance sheet and cash flow statement.
    GearingReferred to as ‘leverage’ in the US. The relationship between the funds of a business provided by shareholders and by its other longterm source of funds, often carrying a fixed interest charge (i.e. it is the relationship between debt and equity).
    Going concernThe assumption that a business will continue to trade for the foreseeable future.
    GoodwillAn intangible asset of a business that includes items such as reputation or expertise for which a purchaser will be expected to pay a premium to acquire. (Another way to express this term is that goodwill is the difference between the price paid for a business and the value of the net tangible assets acquired in return.)
    Gross profitThe amount by which sales (revenue) exceeds the cost of sales (cost of goods sold).
    Income statementAlso referred to as ‘profit and loss account’. A financial statement of a business that identifies revenues, expenses and profits.
    Incomplete recordsAccounting records that are unfinished or missing and not kept in double entry format.
    Intangible assetA non-monetary asset that is not of a physical or tangible composition, e.g. licences, trade marks and goodwill.
    International Accounting Standards (IAS)Technically, the accounting standards issued by the former IASC. However, the term ‘international accounting standards’ is often used to refer to both IAS and IFRS.
    International Accounting Standards Board (IASB)The standard setting board of the International Accounting Standards Committee Foundation. The IASB has issued International Financial Reporting Standard (IFRS) since 2001.
    International Accounting Standards Committee (IASC)The predecessor to the IASB. The IASC issued International Accounting Standards (IAS).
    International Accounting Standards Committee FoundationFormed in 2001, it is the parent entity of the IASB.
    International financial reporting standards (IFRS)Accounting standards issued by the International Accounting Standards Board.
    InventoryUS equivalent to ‘stock’ in UK.
    Issued share capitalShares in a company that have actually been taken up by shareholders.
    LIFOLast in first out is a method of stock valuation that assumes the most recently acquired items are the first items to be issued or sold.
    Limited liabilityThe liability of a member (shareholder) of a company that is normally restricted to the amount invested in the company.
    Limited liability companyA company that has a separate legal identity from that of its shareholding owners. Normally, the shareholders’ liability for the company's debts and obligations are limited to the extent of their investment in the company.
    LtdAbbreviation which refers to a company with limited liability whose shares are not quoted on a stock exchange.
    LiquidityA condition that refers to the cash resources (or cash equivalents) of a business.
    Management accountingThe provision of accounting services to meet specifically the needs of the managers of a business e.g. budgeting and costing.
    Margin (gross)The difference between sales and cost of sales (= gross profit). Margin can also mean gross profit divided by sales.
    Mark upThe amount by which sales exceed cost of sales (= gross profit). Mark up can also mean gross profit divided by cost of sales.
    Net assetsThe total assets (fixed assets plus current assets) of a business minus its total liabilities (long term liabilities plus current liabilities).
    Net book valueThe value of a fixed asset after deducting accumulated depreciation.
    Net capital employedNet capital employed is defined as total assets (i.e. fixed assets plus current assets) minus current liabilities.
    Net profitExcess of revenue over all expenses. (May be calculated before or after tax.)
    Opening stockThe stock of a business at the beginning of an accounting period. Opening stock is shown in the trading account.
    Operating profitProfit after depreciation but before deduction of interest.
    OverdraftThe amount (in absolute terms) of a bank current account which has a negative balance.
    Paid up sharesThe total of the nominal value of the share capital that has been paid by the shareholders.
    PartnershipWhere two or more individuals agree to trade by sharing risks and profits.
    Petty cashA small amount of cash which is used for minor business expenses.
    PlcAbbreviation which refers to a company with limited liability whose shares can be quoted on a stock exchange.
    PrepaymentsExpenses which have been paid for in advance of receiving benefits at the balance sheet date.
    Price earnings ratioA company's market share price divided by its earnings per share.
    ProfitThe excess of revenue over expenses.
    Profit and loss accountAlso referred to as ‘income statement’. A financial statement of a business that identifies revenues, expenses and profits.
    ProprietorshipThe interest of the owner in a business.
    Provision for doubtful debtsAn accounting estimate of the proportion of debts that may eventually need to be written off.
    Quick ratioSee ‘acid test ratio’.
    Realised profitsProfits that have been objectively verified by the evidence of a sale.
    ReliabilityWhere accounting information is free from material error or bias.
    RelevanceTo be relevant, information must normally be capable of influencing an economic decision of a user.
    ReservesProfits and capital gains made by a company in previous accounting periods that have not been distributed to shareholders.
    Retained profitsProfits that have not been distributed to shareholders as dividends but instead have been reinvested in the company.
    Return on capital employed (ROCE)Profit expressed as a percentage of the resources which a business has at its disposal. Normally the profit before interest and tax is compared to net assets, or profit before interest and tax is compared to net capital employed.
    Return on equityProfit (normally profit after tax) expressed as a percentage of shareholders’ funds.
    Revaluation (of assets)Increase or decrease in a company's assets to take account of inflation or changes in the value of assets since they were acquired.
    Rights issueMethod of raising capital that gives existing shareholders the right to subscribe to additional shares.
    Share capitalPart of the owners’ equity and equal to the number of a company's issued shares at their nominal value.
    Share premiumAmount payable for a share above its nominal price.
    ShareholderA member of a company limited by shares.
    Shareholders’ fundsShare capital plus reserves.
    Statements of Standard
    Accounting Practice (SSAP)These were accounting standards issued by the former Accounting Standards Committee (ASC). The first SSAP was issued in 1971 and the ASC was superseded by the Accounting Standards Board (ASB) in 1990. SSAPs are no longer issued but many have been adopted or sometimes re-issued as Financial Reporting Standards (FRS) by the ASB.
    Sole traderAn individual who operates an unincorporated business without partners.
    StewardshipWhere the assets of a business are entrusted to another party. For example, shareholders own a company's assets but the company's directors have day-to-day control of these assets. The assets are deemed to be held in stewardship on behalf of the shareholders.
    StockReferred to as inventories in the US. General term for goods or other assets purchased for resale or purchased for incorporation into the manufacturing of products for later sale.
    Stock turnoverA measure of the frequency with which a business, on average, replaces its stock. It is usually defined as the cost of sales divided by average or closing stock.
    ‘T accountAn account that shows debit entries on the left hand side and credit entries on the right hand side.
    Tangible assetsAssets that are physical in nature, e.g. land and buildings, plant and machinery.
    TaxA charge levied by government. For example, corporation tax is a specific tax on a company's profit.
    Trial balanceA statement listing and totalling both the debit and credit balances from each ledger account.
    True and fair viewThis term is an overriding legal requirement for the presentation of financial statements of UK companies (and also required by the European Union's Fourth Directive).
    Unappropriated profitsProfits that have not been withdrawn from a business or used for any other purpose.
    Undistributed reservesProfits and capital gains from current and previous financial years that have not been paid out to shareholders as dividends.
    Unrealised profitA profit or loss that has not been converted into cash or other readily realisable assets (often termed a ‘paper’ profit or loss).
    User groupsInterested parties who may wish to extract information from the financial statements of a company e.g. shareholders, financial institutions, government, etc.
    Weighted average cost method (for stocks)A method of determining the cost of sales and closing stock valuation. This method values stock on the basis of average stock purchases weighted by volume.
    Working capitalThe difference between the current assets and current liabilities of a business.

    References

    Atrill, P. and McLaney, E. (2006) Accounting and Finance for Non-Specialists,
    5th edition
    , Harlow: Pearson.
    Britton, A. and Waterston, C. (2006) Financial Accounting,
    4th edition
    , Harlow: Pearson.
    Hand, L., Isaaks, C. and Sanderson, P. (2005) Introduction to Accounting for Non-Specialists,London: Thomson.
    Jones, M. (2006) Financial Accounting,Chichester: Wiley.

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