Start In Business
Bookmark and Share
 home
  Services Explained : Accountancy - United Kingdom

Financial Terms & Accounting Glossary

By Colin Davison, Cranleys Chartered Accountants
Copyright 2001-2002

ACID-TEST RATIO
This measures whether a business can meet its short term commitments. It is calculated by dividing current assets, excluding stock, by current liabilities.
ACCOUNTING EQUATION
Total assets = total liabilities
ACCOUNTING TERMINOLOGY
This is not an exact code, some terms have different explanations, this glossary attempts to describe most terms that are in common usage.
ACCRUALS
Expenses for the current accounting period that have not yet been paid
ACCRUED INCOME
Cash received in advance for a product or service not yet provided.
ASSETS
The resources of an organisation.
ASSET TURNOVER
This measures the effectiveness with which a business uses its assets in relation to the level of income or sales, which they generate. Divide income by capital employed.
ASSOCIATED COMPANY
If a company has between 20% to 50% interest in another company, it is an associated company. If it has over 50% it is a subsidiary company.
BALANCE SHEET
A snap shot of the financial position of a business at a specific date. It lists the assets and how they have been financed.
BOOK VALUE
The cost of a fixed asset less depreciation which has been accumulated at that particular time.
CAPITAL
The permanent capital contributed by the owners of a business, the shareholders. This is the capital injected at the beginning of trading and later when additional funds are required.
CAPITAL EMPLOYED
Fixed assets plus current assets less current liabilities.
CAPITAL EXPENDITURE
Expenditure on fixed assets, the cost of which is spread over several accounting periods by depreciation. Cost of fixed assets, less the accumulated depreciation is capitalised in the balance sheet. The depreciation is shown as a charge in the profit and loss statement.
CAPITAL GEARING
Total bank borrowings in relation to capital employed.
CAPITAL AND RESERVES
Total of the share capital, the share premium, the retained profit and other reserves at the date of the compilation of the balance sheet. When assets increase in value and are revaluated, these reserves are also included.
CASH FLOW
The ability of a business to generate liquid resources/cash to meet its short-term and long-term commitments.
COLLECTION PERIOD
The average length of time it takes for a customer to pay. Divide trade debtors by turnover times 365 days to give the length of time the invoice has been outstanding.
COST
Charge against profits made for the use of resources during a specific accounting period.
COST OF SALES
Cost to the business of the products and services sold to the customers.
CREDITORS
Any person or organisation, to whom a business has a commitment, except the shareholders. Short-term creditors are due to be paid within 12 months of the balance sheet date, these are current liabilities. Long-term creditors, amounts due to be paid after one year. Short and long-term bank borrowings are shown separately.
CURRENT ASSETS
Assets that can be converted into cash within 12 months of the balance sheet date.
CURRENT LIABILITIES
Short term liabilities that have to be discharged within 12 months of the balance sheet date.
CURRENT RATIO
Current assets divided by current liabilities. Current assets less current liabilities are equal to net current assets or working capital.
DAY SALES OUTSTANDING
Measurement of the collection period, the length of time that customers are taking to pay for the products or services provided by a company.
DEBT OF FINANCE DEBT
Interest bearing liabilities such as short and long-term bank loans.
DEBT-EQUITY RATIO
The proportion of short and long-term bank borrowings less cash balances to the shareholders' equity or funds.
DEBTORS
Persons or organisations owing money to the company.
DEFERRED INCOME
Cash received in advance of providing goods and services.
DEFERRED TAXATION
Due to differences of timing when a transaction is recognised differently for accounting purposes and tax purposes.
DEPRECIATION
System of allocating the cost of a fixed asset over its expected working life.
DIRECT COSTS
Costs that can be identified with a specific activity or product.
DIRECTORS' LOANS
Represents cash "lent" to the company by its directors, may consist of current or loan account, but if it is a current liability could be withdrawn or paid like any other creditor.
DIVIDENDS PAYABLE
Payments due to shareholders as declared but not yet paid. If overdue for more than a year can be transferred out of current liabilities to a special reserve.
EARNINGS
Profit after taxation and all other charges less preference dividends and the minority interest, but before extraordinary items. Earnings are attributable to the ordinary shareholders that own the business.
EARNINGS PER SHARE
Profit after taxation and all other charges less preference dividends and the minority interest, but before extraordinary items, divided by the number of shares issued.
EXCEPTIONAL COSTS
These are abnormal in size but not in nature.
EXPENDITURE
Can be - capital expenditure or - revenue expenditure that is charged to the profit and loss account as soon as it is incurred.
EXTRAORDINARY ITEMS
Those items that are abnormal in size and nature, they do not happen often. Non-trading or one-off cash debits or credits are shown separately.
FIFO
Stock valuation method, First in, first out. This is an historical cost convention.
FIXED ASSETS
Permanent assets used in the business.
FUNDS FLOW
A transaction that has or will have an effect on cash. Access to funds implies an ability to finance or pay for short and long-term expenditure.
GROSS PROFIT
The difference between turnover and the direct cost of producing the goods or providing the service.
GROUP FINANCIAL STATEMENTS
Set of annual accounts for parent company, holding companies and related companies.
HISTORICAL COST
The traditional method of valuing assets in a balance sheet and costs in the profit and loss account. The criterion for valuation is the acquisition cost.
ILLIQUID
When a business cannot meet its short-term commitments.
INCOME STATEMENT
Profit and loss account
INTANGIBLE ASSETS
Goodwill, research and development, brand names, patents, etc, items that have no value for the analyst, judgement is needed to assess value.
INTEREST COVER
Indicator of solvency. Profit is expressed before interest and taxation as a multiple of the net interest charge.
INDIRECT COSTS
Those costs which may not be identified with a specific activity or product.
LEASING
Lease and rental transactions are an alternative form of debt financing. The lessee retains the majority of the re-sale value and behaves as if they are the owners. Assets financed in this manner should be capitalised in the accounts and outstanding lease rentals shown as liabilities.
LIFO
Stock evaluation method, Last in, First out.
LIABILITY
Amounts owed to the business by others. Total liabilities equal shareholders' funds plus amounts due to creditors.
LIQUIDITY
The ability of the business to meet its short-term commitments.
LIQUID RESOURCES
Cash and bank balances plus short-term investments.
NET ASSETS
Another term for CAPITAL EMPLOYED.
NET CURRENT ASSETS
Current assets less current liabilities
NET PROFIT
Accounts for the deduction of all other business expenses from the gross profit state onwards.
NET WORTH
The real value of the company expressed either as a source of funds or as the use of those funds. The terminology is confusing, net worth; net assets and capital employed are sometimes interchangeable.
MINORITY INTEREST
The capital provided and earned for group shareholders who are not parent company shareholders.
OPERATING COSTS
All costs excluding interest charges and taxation.
OPERATING PROFIT
Turnover less operating costs.
ORDINARY SHARES
Indicates the par value, authorised and issued share capital of a company, by ordinary shares. These are at the back of the queue in the event of a winding up. A dividend can be paid in returnfor the investment made
OVERTRADING
If a company expands quickly, trade debtors and stocks may increase to such an extent that creditors cannot be paid, as cash is not available. PAR VALUE Nominal value of a company's shares.
PREFERENCE SHARES
A class above ordinary shares normally has a fixed return and must be paid before any ordinary shares, even if there is no profit.
PREPAYMENT
Cash payment that includes an amount covering a subsequent accounting period.
PROFIT
The difference between turnover and costs in an accounting period.
PROFIT AND LOSS ACCOUNT
A summary of the income and turnover and costs for an accounting period. This is the trading performance for a given period, usually one year.
PROFIT MARGIN
A measure of profitability. The profit before or after interest and taxation expressed as a percentage of turnover.
PROVISION
Additional allowance for a cost or charge incurred but not paid for at the balance sheet date.
RETAINED PROFIT
Profit for the year after all charges and the distribution of dividends to shareholders. The balance sheet shows accumulated retained profit since the business started to trade.
RETURN ON CAPITAL EMPLOYED (roce)
Defined as the profit before interest and taxation expressed as a percentage of the capital employed. Basic measure of profitability.
RETURN ON SHAREHOLDERS' EQUITY
Profit after all charges and the minority interest but before extraordinary items expressed as a percentage of shareholders' funds
REVENUE
Income or sales.
RIGHTS ISSUE
Sale of additional shares by a company to its existing shareholders, in proportion to their existing holdings, at a discount to the prevailing stock market price.
SALES
Income or revenue.
SHAREHOLDERS' EQUITY/FUNDS
Sum of the share capital plus share premium plus retained profit plus other reserves at the balance sheet date.
SHARE PREMIUM
Difference between the issue price and the nominal or par value of a share. Share issue can be made at above par value; this can only be used for certain specific capital purpose.
SOLVENCY
Ability of a business to meet its long-term commitments.
STOCK TURNOVER RATE
Average number of times each year the stocks are turned over in the course of trading activity. Divide sales or cost of sales by the average of closing stocks.
SUBSIDIARY COMPANY
Company owned or partly owned by another, stake is usually more than 50%.
TRADE CREDITORS
Amounts due to suppliers for goods and services received not yet paid for.
TRADE DEBTORS
Amounts due from customers for goods and services supplied but not yet paid for.
TRADING PROFIT
Profit after all charges except interest and taxation.
TURNOVER
Value of goods and services provided to customers.
WORKING CAPITAL
Current assets less current liabilities
WORK IN PROGRESS
Estimate of the value of goods in the course of production at the date of the balance sheet.



Promote your new business with EMC Ad Gifts
how to sell a business online

Advertise your 'business for sale'
with us.


Thousands of buyers visit us each day looking to buy a business.

You have the opportunity to contact registered buyers for free or advertise to attract prospective buyers for very little cost.

More info on selling busineses...