Accounting Glossary

1. Absorption costing
Absorption costing is a method of identifying and ascertaining the cost of products or services. This is done
by including both fixed and variable costs. The absorption method of costing can be contrasted with variable
or marginal costing methods where costs of products or services are calculated using variable costs only. The
absorption costing method requires the choice of an absorption basis by which fixed costs can be allocated
appropriately. For example, the fixed costs of factory equipment repairs and maintenance may be allocated to
the cost of producing specific products on the basis of their use of machine time. n another example, the cost
of factory rent and rates may be allocated to products based on the amount of factory space that their
production ta!es up.
2. Accounting
Accounting is a difficult term to define. "owever, it is formally defined by the American Accounting
Association as The classification and recording of monetary transactions, the presentation and interpretation
of the results of those transactions in order to assess performance over a period and the financial position at a
given date, and the monetary pro#ection of future activities arising from alternative planned courses of action .
$sing this definition, accounting can be seen to be about the identification and recording of business
transactions as a way of assisting the management and planning of a business.
3. Accounting concepts
Accounting concepts are the principles that guide the preparation of accounting information. These
fundamental accounting concepts are best considered as the building bloc!s on which historical accounting
information. The fundamental accounting concepts are generally ta!ing to include prudence, consistency,
accruals and going concern.
4. Accounting policies
Accounting policies are the specific accounting bases selected and consistently followed by a business.
Accounting policies need to be appropriate to the circumstances of a business so that, when applied to
accounting transactions, the resulting accounting information presents fairly its results and financial position.
Accounting policies are largely governed by the application of accounting standards. "owever, there remains
a large amount of sub#ectivity that needs to be applied when determining how to apply accounting policies.
5. Accounting standards
Accounting standards are authoritative statements of how particular types of transaction and other events
should be reflected in financial statements. Accordingly, compliance with accounting standards will normally
be necessary for financial statements to give a true and fair view. %hen preparing accounts in the $&,
businesses must ta!e account of statements issued by the Accounting 'tandards (oard. These require the
adoption of certain accounting principles and methods. There are currently two forms of Accounting 'tandards
in the $& ) Financial *eporting 'tandards +F*'s, and 'tatements of 'tandard Accounting -ractice +''A-s,.
The only difference between these is that ''A-s were issued prior to .//0. 'ince that date, the name has
been changed to F*'. Accounting standards apply to all companies, and other !inds of entities that prepare
accounts that are intended to provide a true and fair view.
6. Accounting Standards Board (ASB
The A'( is a $& standard)setting body set up in .//0 manage the use of accounting standards. ts declared
aims are to 1establish and improve standards of financial accounting and reporting, for the benefit of users,
preparers and auditors of financial information2. . Accounting standards developed by the A'( are contained
in 3Financial *eporting 'tandards3 +F*'2s,. The A'( collaborates with accounting standard)setters from other
countries and the nternational Accounting 'tandards (oard +A'(, in order to ensure that its standards are
developed as far as possible to be consistent from country to country.
!. Accruals
Accruals are amounts that are owed to third parties for which a business has not yet been invoiced. The total
of accruals is shown in the balance sheet as part of creditors due less than one year. For example, where a
business has not been invoiced by an advertising agency for its costs for the last three months of the year, it
will show in its accounts an accrual for the estimated amount of the invoice.
". Accruals concept
4ne of the fundamental accounting concepts, the accruals concept is also !nown as the matching concept.
$nder the accruals concept, revenue and costs are credited or charged to the profit and loss account for the
year in which they are earned or incurred, not when any cash is received or paid. For example, if a sale is
made on credit this year, but the cash is only received next year, the sale is treated as income in this year.
'imilarly, if a business incurs a cost during the year +e.g. electricity, but is not invoiced until early in the next
year, the accounts will show an estimated liability for the expected amount of the invoice.
#. Acid test ratio
The acid test ratio +also !now as the quic! ratio, is an accounting ratio that is concerned with business
liquidity. t is defined as current assets +excluding stoc!s, divided by creditors falling due within one year. The
acid test ratio is designed to test the short term solvency of a business, in a way similar to the current ratio.
'toc!s are excluded from current assets on the basis that it can often ta!e several months to convert stoc!s
into cash.
1$. Ac%uisition
The term acquisition commonly refers to the ta!e)over of one business by another. 'ometimes the acquisition
will involve the purchase of the entire share capital of a company. n other situations the acquisition is off
certain trading assets rather than an actual company. Acquisitions can be financed by paying cash. 4ften
they also involve the issue of shares by the acquiring business ) given to the shareholders of the business
being sold. Acquisitions are sub#ect to regulatory control via the competition authorities. For larger, cross)
border acquisitions, regulation by authorities such as the 5uropean 6ompetition 6ommission must also be
ta!en into account.
11. Acti&ity'based costing
Activity)based costing +commonly shortened to A(6, is a system of costing which recognises that costs are
incurred by each activity that ta!es place within a business and that products +or customers, should bear
costs according to the activities they use. The use of A(6 requires the identification of cost drivers 7 those
activities that ta!e place in a business that cause costs to be incurred. The costs associated with these cost
drivers also need to be identified so that they can be appropriately allocated to each activity being costed.
12. Aged creditors report
8ost businesses ma!e use of an aged)creditors report to manage the timing of payment to trade creditors.
The report lists the amounts payable to trade creditors based on the payment terms agreed with them. t also
lists creditors who have been owed money for the longest period.
13. Aged debtors report
An aged debtors report lists amounts owed to a business by trade debtors and analyses how long the
amounts have been due. The report is a crucial piece of information for managing the amount of credit given
to customers and for chasing outstanding amounts.
14. Agency relations(ip
The term agency relationship describes the relationship between management and shareholders. t explains
how management act as agents for shareholders, using their delegated powers to run the business in the best
interests of the shareholders
15. Ad)inistration
Administration is a term used to describe a situation relating to the possible insolvency of a business. $nder
an Administration 4rder, a court supervises the affairs of a company in financial difficulties with to the aim of
securing its survival as a going concern or, failing that, to achieving a more favourable realisation of its assets
than would be possible on liquidation. %hile the administration order is in force, the affairs of the company are
managed by an administrator.
16. Allot)ent o* s(ares
%hen new shares are issued in a company it may be that there is excess demand for the shares. n such a
case, shares are allotted to new subscribers on a fair basis 7 although almost always in lower numbers than
were requested. The process of share allotment is a common feature of new share issues on the 9ondon
'toc! 5xchange.
1!. Alternati&e +n&est)ent ,ar-et
The Alternative nvestment 8ar!et +usually shortened to A8, is a #unior mar!et of the main 9ondon 'toc!
5xchange. A8 replaced the $nlisted 'ecurities 8ar!et in .//:. t provides an opportunity for smaller
companies with growth prospects to raise capital and have their shares traded in a mar!et without the
expense of a full mar!et listing.
1". A)ortisation
Amortisation is a term used to describe the reduction in value of an asset through wear or obsolescence. n
relation to tangible fixed assets, amortisation is mode commonly !nown as depreciation. n the $&,
amortisation usually refers to the reduction in value of intangible assets such as acquired goodwill.
1#. Annual general )eeting
The annual general meeting +A;8, is an annual meeting of the shareholders of a company, which must be
held every year. The usual business transacted at an A;8 is the presentation of the audited accounts, the
appointment of directors and auditors, the fixing of their remuneration, and recommendations for the payment
of dividends. 4ther business may be transacted if notice of it has been given to the shareholders.
2$. Annual report . accounts
All limited companies are required by $& company law +the 6ompanies Act, to prepare an annual report each
year, containing their financial statements, directors2 report and, for larger companies, the auditor2s report. The
annual report of a listed business +i.e. a business quoted on a public stoc! exchange, must also contain a five
year summary of results together with a wide range of other financial and operating disclosures,. The annual
report and accounts must be sent to shareholders and to the *egistrar of 6ompanies 7 the government
department that maintains the public records of companies. 4nce sent to the *egistrar, the annual report
becomes a public document, available for anyone to view.
21. Annuity
An annuity is a constant annual payment. The guarantee of the maintenance of such annual payments is also
!nown as an annuity, and can usually be purchased from insurance companies. A certain2 annuity is paid over
a specified number of years, whereas a life2 annuity is paid until the death of the named recipient. An annuity
may be bought with a lump sum or through a series of contributions.
'ignificant ris!s, since the buying and selling operations are carried out more or less simultaneously and the
profit made does not depend upon ta!ing a view on future price changes. (y eliminating price differentials,
arbitrage contributes to the achievement of mar!et equilibrium.
22. Arbitrage
Arbitrage refers to the exploitation of differences between the prices of financial assets or currency or a
commodity within or between mar!ets by buying where prices are low and selling where they are higher. For
example, if coffee is cheaper in <ew =or! than in 9ondon after allowing for transport and dealing costs, it will
pay to buy in <ew =or! and sell in 9ondon. f interest rates are higher on a 5uro deposit in 9ondon than in
Fran!furt, a higher return will be obtained by switching funds from one centre to the other. $nli!e speculation,
arbitrage does not normally involve
23. Articles o* Association
The Articles of Association +the Articles, is the official company document that acts as a contract between a
business and its shareholders. The Articles describe the rights and duties of the shareholders with the
business and between themselves +see also 8emorandum of Association,
24. Asset
An asset is defined by Financial *eporting 'tandard <umber : as a right or other access to future economic
benefits controlled by an entity as a result of past transactions or events. Future economic benefits might
simply mean the conversion of the asset into cash +e.g. payment of cash received from a trade debtor,. (y
contrast, a fixed asset describes ownership of an asset that can be used in the long)term to create value for
a business +see also current assets, fixed assets, intangible assets,.
25. Asset turno&er
Asset turnover is an accounting ratio. t measures the productivity of the assets of a business achieved by
comparing asset values with sales revenue. For example, fixed asset turnover could be calculated by
dividing the net boo! value of fixed assets by sales.
26. Audit
An audit can be defined as a systematic examination of the activities and status of an entity, based primarily
on investigation and analysis of its systems, controls and records. The Accounting 'tandards (oard defines
the annual audit that is required by most $& limited companies as an independent examination of, and
expression of an opinion on, the financial statements of the enterprise. <ot all companies require an audit 7
there are exemptions available for small companies provided that they meet certain criteria.
2!. Audit report
All companies above a certain si>e are required to have their financial statements audited by a registered
auditor. The auditor prepares an audit report +which is presented at the front of the financial statements,
stating whether or not the financial statements give a true and fair view of the business2s results and financial
position. n most cases the audit report given is clean 7 in other words there are no problems reported to
shareholders. "owever, audit reports can also be qualified. n qualifying an audit report, the auditor draws
the attention of the user of the financial statements to matters which are material and which should be
considered when reading the accounts. For example, the auditor may be concerned about the ability of the
company to continue on a going concern 7 in which case the audit report would be qualified on a going
concern basis.
2". Audit trail
The audit trail is the range of documents and other evidence which records all the activities and transactions
of a business. 'uch a historic record allows the firm to piece together the chronology of a transaction. t is also
required for compliance purposes. The audit trail is of particular importance to the auditor who is required to
obtain evidence that transactions are correctly recorded and reported by a business.
2#. Auditing /ractices Board (A/B
The Auditing -ractices (oard +A-(, +formed in .//., is responsible for developing and issuing professional
standards for auditors in the $nited &ingdom and the *epublic of reland.
3$. Auditor
An auditor is a professionally qualified accountant who is appointed by, and reports independently to, the
shareholders. The auditor provides an independent opinion to shareholders and other users that the financial
statements have been prepared properly and in accordance with legislative and regulatory requirements? that
they present the information truthfully and fairly, and that they conform to the best accounting practice in their
treatment of the various measurements and valuations +see audit and audit report,
31. Aut(orised s(are capital
The authorised share capital of a company is the maximum amount of share capital that may be issued by a
company. This amount can be found by loo!ing in the company3s memorandum of association. The
authorised share capital must be disclosed on the face of the balance sheet or alternatively in the notes to the
accounts. This is also referred to as nominal share capital.
32. A&erage cost
Average cost represents the average cost per unit of output. t is calculated by dividing total costs, both fixed
costs and variable costs, by the total units of output. For example, if total costs are @A:0,000 +comprising
fixed costs of @.:0,000 and variable costs of @.00,000, and total output units are .0,000? then the average
cost is @A:
33. Bad debt
A bad debt is a debt owed to a business that is not expected to be received. This may arise, for example, as a result
of the insolvency of a customer who had been buying products on a credit basis. (ad debts are written off either as a
charge to the profit and loss account or against an existing doubtful debt provision.
34. Balance s(eet
The balance sheet provides a statement of a business2s financial position at a given point in time. t details the assets
of the business and how these assets are being financed. Financing is bro!en down into two ma#or categories )
shareholders3 funds and liabilities. Bue to the way in which the balance sheet is prepared, total assets will always
equal total finance, i.e. the balance sheet will balance.
35. Balanced scorecard
The balanced scorecard is a popular approach to the analysis and reporting of management information. t
emphasises the need to provide the user with a set of information which addresses all relevant areas of performance
in a way that is ob#ective and unbiased. The information contained in the balanced scorecard usually includes both
financial and non)financial elements, and covers areas such as profitability, customer satisfaction, internal efficiency,
innovation and quality.
36. Ban-ing co&enants
(an!ing covenants are a crucial part of any ban! loan agreement. A loan agreement in the form of a covenant will
include a series of underta!ings, the breaching of which will ma!e the loan repayable immediately. The breaching of
an underta!ing will also be an event of default. n this situation, the ban! assumes much greater financial control over
the business +for example, it can prevent the payment of any dividends,.
3!. Batc( costing
A form of costing in which the unit costs are expressed on the basis of a batch produced
3". Boo--eeping
(oo!!eeping is the process of recording monetary transactions in the financial records of a business. 4riginally,
boo!!eeping was a time)consuming manual process. "owever, it is now largely mechanised through the wide)range
of boo!!eeping software programmes. +'ee double)entry boo!!eeping,
3#. Brea-e&en
(rea!even refers to the quantity of output or value of sales necessary to cover fixed costs.
4$. Brea-e&en c(art
A brea!even chart is a graph on which a business3 total costs, analysed into fixed costs and variable costs, are drawn
over a given range of activity, together with the sales revenue for the same range of activity. The point at which the
sales)revenue curve crosses the total)cost curve is !nown as the brea!even point +expressed either as sales revenue
or productionCsales volume,. The brea!even chart, li!e brea!even analysis, may also be used to determine the profit
or loss li!ely to arise from any given level of production or sales, the impact on profitability of changes in the fixed or
variable costs, and the levels of activity required to generate a required profit.
41. Budget
A budget is a quantified financial statement that covers a defined period of time. A budget will normally include
planned sales costs assets, liabilities and associated cash flows.
42. Budgetary control
(udgetary control is the way in which financial control is maintained within a business ) by using budgets for income
and expenditure for each main function of the business. Buring the course of a financial period, these budgets are
compared with actual performance to establish any variances. ndividual managers who are responsible for the
controllable activities within their budgets are expected to ta!e corrective action on adverse variances +e.g. where
costs are greater than budget or where sales or income are less than budget,
43. Business angel
(usiness angels are wealthy entrepreneurs who provide capital in return for being part of a growing successful
business. For businesses requiring funds of up to @:00,000, business angels are important sources of finance. A
business angel will usually expect hands)on involvement with the businesses into which he or she invests.
44. Business angel net0or-
A (usiness Angel <etwor! +(A<, is a group of business angels, who are wealthy individuals loo!ing for investment
opportunities in businesses, and businesses see!ing finance.
45. Business entity concept
The concept that financial accounting and reporting relates to the activities of a specific business entity and not to the
activities of the owners of that entity.
46. Business plan
A detailed plan setting out the ob#ectives of a business over a stated period usually .): years. A business plan is
drawn up by many businesses. For new businesses it is an essential document for raising capital or loans. The plan
should quantify as many of the ob#ectives as possible, providing monthly cash flows and production figures for at least
the first two years. t must also outline its strategy and the tactics it intends to use in achieving its ob#ectives. For a
group of companies the business plan is often called a corporate plan.
4!. 1all option
A call option gives the holder of the option the right to buy a share +or other asset, at the exercise price at some future
time. +'ee also put option,
4". 1apital allo0ances
A tax allowance for businesses on capital expenditure on particular items. These include machinery and plant,
industrial buildings, agricultural buildings, mines and oil wells, and scientific equipment.
4#. 1apital e)ployed
6apital employed is essentially the underlying asset base a business needs to generate its profits and turnover. t is
usually defined as fixed assets plus wor!ing capital, although alternative definitions are possible. t can also be
calculated by adding together shareholders3 funds and long)term liabilities. "aving calculated capital employed, it is
possible to assess the level of return that this investment is producing by using an accounting ratio such as return on
capital employed.
5$. 1apital e2penditure
6apital expenditure is that expenditure by a business that results in the acquisition of fixed assets or an improvement
in their earning capacity. 6apital expenditure is not charged as an expense in the profit and loss account? the
expenditure appears as a fixed asset in the balance sheet. The consumption or use of the fixed asset over time is
reflected in the profit and loss account by calculating the amount of depreciation that has occurred. +'ee depreciation,
51. 1apital Gains 3a2 (1G3
6;T is a tax on capital gains. 8ost countries have a form of income tax under which they tax the profits from trading
and a different tax to tax substantial disposals of assets either by traders for whom the assets are not trading stoc!
+e.g. a trader3s factory, or by individuals who do not trade +e.g. sales of shares by an investor,. The latter type of tax is
a capital gains tax.
52. 1apital )ar-ets
A mar!et in which long)term capital is raised by industry and commerce, the government, and local authorities. The
money comes from private investors, insurance companies, pension funds, and ban!s and is usually arranged by
issuing houses and merchant ban!s. 'toc! exchanges are also part of the capital mar!et in that they provide a mar!et
for the shares and loan stoc!s that represent the capital once it has been raised
53. 1apital rationing
6apital rationing describes a situation in which a business has only a limited amount of capital to invest in potential
pro#ects. As a result, the different possible investments need to be compared with one another in order to allocate the
capital most effectively. This is done by evaluating the potential returns that each investment might achieve, and
allocating capital to the pro#ects with the best pro#ected returns. +'ee also paybac!, net present value, investment
appraisal,
54. 1apital structure
The capital structure of a business refers to the way in which it is financed. n most cases the capital structure will
comprise a combination of long)term capital +e.g. ordinary shares, reserves, preference shares, debentures, long)term
ban! loans etc, and short)term liabilities +such as a ban! overdraft and trade creditors,. t is important that a business
is financed by an appropriate capital structure that reflects the nature of the business and its ability to generate profits
and cash flow. For example, a business at the start)up or growth stage may not be profitable and may also have
significant investment requirements. n this example, the appropriate capital structure would mainly comprise equity
finance such as ordinary shares rather than ban! debt +where the business would need to finance interest charges,.
55. 1as(
6ash is an asset of a business and represents cash in hand, and deposits repayable on demand with any ban! or
other financial institution.
56. 1as( *lo0 budget
The cash flow budget summarises the expected cash inflows and the expected cash outflows of a business over a
budget period. t is usually prepared on a monthly basis, but can be for shorter or longer periods depending on the
needs of management. The main purpose of a cash flow budget is to determine when cash surpluses are li!ely to be
available for investment or when cash deficits are li!ely to arise requiring additional finance. The cash flow budget is
also referred to as the cash flow forecast.
5!. 1as( *lo0 state)ent
The cash flow statement is an historical record of the cash flows of a business, distinguishing between different
categories of cash receipts and payments. Financial *eporting 'tandard F*' . +6ash flow statements, requires most
companies to publish a cash flow statement as part of their annual accounts. The purpose of this statement is to
reveal to users how cash was generated and then applied by the company during the period under review.
5". 1(arge
A term used in relation to the insolvency of a business. 6harge refers to security which is ta!en by a creditor over
property or classes of property owned by a creditor to protect against non)payment of a debt +frequently by a
mortgage or other fixed charge,. The advantage of a charge is that it places the charge)holder ahead of other
creditors in the event of the debtor3s insolvency.
5#. 1o)panies Acts
The $& acts of parliament concerned with companies. 8uch of $& company law is now influenced by 5uropean
legislation.
6$. 1onsistency concept
The consistency concept is one of the fundamental accounting concepts that underpin the preparation of accounts.
%ith the consistency concept, the principle applied is that there is uniformity of accounting treatment of li!e items
within each accounting period and from one period to the next.
61. 1onsolidated accounts
6onsolidated accounts are the financial statements of a group of companies 7 aggregated to show the overall
financial results and position of the group.
62. 1ontingent liability
A contingent liability is a possible liability of a business that arises from past events. The reason why the liability is
contingent is that its existence +and final amount, can only be by the occurrence of one or more uncertain future
events not wholly within the control of the business. For example, a business may be sub#ect to a legal claim of some
!ind which may result in the business having to pay costs or damages. The outcome of the legal claim may be
uncertain 7 as might the possible costs arising. n this case, the business has to ta!e a prudent view as to the li!ely
outcome. %here the amount and outcome of a contingent liability can be predicted with reasonable li!elihood, the
prudence concept suggests that the business should ma!e provision for the liability in its accounts as soon as
possible. +'ee also provisions, prudence concept,
63. 1ontract costing
A costing technique applied to long)term contracts in which the costs are collected by contract.
64. 1ontribution
6ontribution is the amount ) under marginal costing principles 7 of profit that has been earned before ta!ing account
of fixed costs or expenses of a business.
65. 1on&ertible securities
A convertible security is a security that, at the option of the holder, may be exchanged for another asset, generally a
fixed number of shares of common stoc!. 6onvertible issues frequently are fixed)income securities such as
debentures and preferred stoc!.
66. 1orporate go&ernance
6orporate governance describes the way companies are directed and controlled. (oards of directors are responsible
for the governance of their companies. The shareholders2 role in governance is to appoint the directors and the
auditors and to satisfy themselves that an appropriate governance structure is in place.
6!. 1orporation ta2
6orporation tax is the taxation payable by companies on their profits. As with other direct taxes +such as income tax,
there are different rates of corporation tax payable +depending on the level of profits achieved,. 6ompanies also
receive tax allowances which they can use to reduce the amount of corporation tax payable. The main !ind of
allowance 7 capital allowances 7 provides a tax incentive to invest in fixed assets. 'maller companies also benefit
from lower corporation tax rates.
6". 1orporation ta2 rates
The corporation tax rate is the rate at which companies pay corporation tax. The rate varies depending on the si>e of
the business. A small business for tax purposes pays corporation tax, currently A0D. A small business for tax
purposes is defined as a business with taxable profits of @E00,000 or less. The normal rate of corporation tax is
currently E0D and is paid by companies with taxable profits of @..: million or more. 6ompanies with profits between
these two limits pay corporation tax at a tapering rate between A0D and E0D Fchec! these numbersG
6#. 1ost centre
A cost centre is a production or service location, function, activity or item of equipment for which costs are
accumulated and to which they are charged.
!$. 1reati&e accounting
6reative accounting is the term used to describe the deliberate manipulation of reported accounting information with
the intention to mislead users of the accounts. 6reative accounting tries to ta!e advantage of the use of sub#ective
#udgement used in preparing accounts. The ability to use creative accounting has been significantly reduced in recent
years following the issue of a range of more prescriptive and detailed accounting standards. +'ee accounting
standards, window)dressing,.
!1. 1reditors
6reditors form part of a business2s liabilities and represent amounts due to third parties. 6reditors are analysed in the
balance sheet into those due within one year and those due after more than one year. For most businesses, the main
creditor is trade creditors 7 amounts owed to providers of goods and services on credit terms to the business. +'ee
current liabilities,
!2. 1reditor days ratio
The creditor days2 ratio provides an indicator of the average number of days3 credit ta!en by a business before its
trade creditors are paid. t is calculated by the following formulaH +Trade creditors I EJ:,Cannual purchases on credit.
!3. 1urrent liabilities
6urrent liabilities are those short)term liabilities which are intended to be constantly replaced in the normal course of
trading activity. 6urrent liabilities typically compriseH trade creditors, accruals and ban! overdrafts.
!4. 1urrent ratio
The current ratio is an accounting ratio. t is usually defined as current assets divided by creditors falling due within
one year. The ratio is designed to assess the solvency of a business in the short term. f the current ratio exceeds
one, then the value of current assets is greater than the value of the short term creditors, indicating that the business
is able to pay its short term debts as they fall due. <ote that this interpretation is fairly simplistic and the resulting ratio
depends on the nature of the mar!et in which the business operates. For example, supermar!ets usually have a
current ratio of less than one since they do not sell goods on credit +i.e. minimal trade debtors, yet have large ongoing
balances owed to trade creditors. The most important #udgement applied to this ratio +and other similar liquidity ratios,
is in understanding the reasons for any significant deterioration in the ratio.
!5. 4ebenture
A debenture is a form of loan. t is a written ac!nowledgement of a debt by a business that normally containing
provisions as to payment of interest and the terms of repayment of principal. A debenture may be secured on some or
all of the assets of the business or its subsidiaries.
!6. 4ebtor days
The debtor days ratio is an accounting ratio that provides insight into the effectiveness of wor!ing capital
management. The calculation of debtor days +average trade debtors divided by average daily sales on credit terms,
indicates the average time ta!en, in calendar days, to receive payment from credit customers. An increase in debtor
days would suggest that credit customers are being allowed to ta!e longer to pay amounts due 7 which has adverse
effects on business cash flow. +'ee also creditor days,
!!. 4ebtors
Bebtors represent amounts owed to a business by its customers and other third parties. Bebtors are shown as part of
current assets in the balance sheet.
!". 4eep discount bonds
A deep)discount bond is a long)term debt security that, because of a low coupon rate of interest compared with
current rates of interest, sells at a substantial discount from face value. (onds of this type, if not original)issue
discounts, are preferred by some investors because they are unli!ely to be called before maturity.
!#. 4epreciation
Bepreciation is the name given to the amount charged to the profit and loss account to reflect the wearing out of a
fixed asset over its useful life. The purpose of depreciation is to comply with the accruals concept. 'ince the benefit of
a fixed asset is received over several periods, the cost of acquiring the asset is charged against profits over those
periods. There are several methods available to calculate depreciation. The two most popular approaches are the
straight)line and reducing balance methods. t should be noted that the depreciation charge in the profit and loss
account has no effect on the cash flows of a business. t is simply a sub#ective estimate of the amount by which the
value of a fixed asset has fallen below its original purchase cost. <oteH not all fixed assets are depreciated. For
example, the value of land is rarely depreciated because its value uslaly grows, not falls over time.
"$. 4epreciation pro&ision
The depreciation provision is the amount of depreciation that has cumulatively been charged to the profit and loss
account, relating to a fixed asset, from the date of its acquisition. Fixed assets are stated in the balance sheet at their
net boo! value +or written down value, which is usually their historical cost less the cumulative amount of depreciation
at the balance sheet date. +'ee also net boo! value,
"1. 4irect cost
A direct cost is a cost that can be directly related to producing specific goods or performing a specific service. For
example, the wages of an employee engaged in producing a product can be attributed directly to the cost of
manufacturing that product.
"2. 4irector
A director is a person elected under a company2s Articles of Association to be responsible for the overall direction of
the company2s affairs. Birectors usually act collectively as a board and carry out such functions as are specified in the
articles of association or the 6ompanies Acts, but they may also act individually in an executive capacity.
"3. 4irectors5 report
The Birectors2 *eport forms part of a company2s annual report and accounts. t is a legal requirement that the
directors write a report summarising the company2s performance over the financial period covered by the accounts,
comment on the company2s future prospects, and provide other required disclosures.
"4. 4iscounted cas( *lo0
Biscounted cash flow is a method of investment appraisal. t involves the discounting of the pro#ected net cash flows
of a pro#ect to ascertain its present value.
"5. 4iscount rate
A term used in investment appraisal to refer to the hurdle rate of interest or cost of capital rate applied to the
discount factors used in a discounted cash flow appraisal calculation. The discount rate may be based on the cost)of)
capital rate ad#usted by a ris! factor based on the ris! characteristics of the proposed investment in order to create a
hurdle rate that the pro#ect must earn before being worthy of consideration. Alternatively, the discount rate may be the
interest rate that the funds used for the pro#ect could earn elsewhere.
"6. 4i&idend co&er
The dividend cover ratio is an accounting ratio that is concerned with the level of returns that are given to
shareholders compared with the ability of the company to deliver profits. The dividend cover ratio is defined as net
earnings per share divided by net dividend per share. The purpose of the ratio is to identify how much of a business2s
profits are being distributed to shareholders and how much is being retained to finance future expansion of the
business. ;enerally a business with a low dividend cover is paying out most of its earnings as dividends and is
unli!ely to achieve high growth in the future, compared to a business with high dividend cover. Bividend cover is
usually only relevant to companies that are quoted on a recognised stoc! exchange. t is rare that the ratio would be
calculated for a private company.
"!. 4i&idend policy
Bividend policy refers to the decisions made by a company as to how much profit should be distributed by way of
dividends to shareholders as opposed to being reinvested in the business
"". 4i&idends
Bividends represent amounts paid to shareholders out of the profits of a business. Bividends are usually paid
annually or semi)annually, and represent part of return on a shareholders2 investment in a business. -reference
shares receive a fixed dividend while for equity shares the level of dividend depends on the profitability of the
business. Bividends are effectively declared and paid net of income tax. +see also dividend cover,
"#. 4ouble entry boo--eeping
A method of recording and processing accounting transactions based upon the concept that each transaction has a
dual aspect? a debit entry and a credit entry
#$. 4oubt*ul debt
A doubtful debt is a debtor balance where there is some uncertainty as to whether or not it will be settled, and for
which there is a possibility that it may eventually prove to be bad. A doubtful debt provision may be created for such a
debt by charging it as an expense to the profit and loss account. +'ee also bad debts,
#1. 4ue diligence
Bue diligence is an investigation ) normally conducted by an independent accountant or consultant ) of the current
financial andCor mar!et position and future prospects of a business prior to a stoc! exchange flotation or a ma#or
investment of capital. For example, venture capitalist underta!e extensive due diligence on potential investments
before completing the deal.
#2. 6arnings per s(are
5arnings per share +usually shortened to eps, is a measure of shareholder return. t measures a business2s
profitability from the point of view of equity shareholders. t is defined as earnings attributable to equity shareholders
divided by the number of equity shares in issue over the year.
#3. 6B+34A
5(TBA is an acronym for a calculation of a business2 profit that excludes financing costs, taxation and depreciation.
t is calculated as operating profit before interest, tax, depreciation, and amortisation.
#4. 6cono)ic order %uantity (678
The economic order quantity +54K, represents the optimal ordering quantity for an item of stoc! which will minimise
stoc!)holding costs.
#5. 9se*ul econo)ic li*e
The period for which the present owner of an asset will derive economic benefits from its use.
#6. 6)ployee s(are o0ners(ip plan (6S7/
A method of providing the employees of a company with shares in the company. The 5'4- buys shares in its
sponsoring company, usually with assistance from the company concerned. The shares are ultimately made available
to the employees, usually directors, who satisfy certain performance targets.
#!. 6nterprise +n&est)ent Sc(e)e
The 5nterprise nvestment 'cheme +5', was introduced on . Lanuary .//M with the aim of encouraging new equity
investment in trading companies by providing generous tax incentives to investors other than those already connected
with the company. An investor may qualify for both income tax relief and capital gains tax relief in respect of an 5'
investment. The capital gains tax relief in particular can be extremely valuable, as it can mean that the large gain that
may potentially be made by investors in high tech companies when they realise their investment, may be exempt from
taxation.
#". 6n&iron)ental reporting
-ublicly)quoted businesses in the $& are required to provide a statement included within their annual report and
accounts that sets out the environmental policies of the business and an explanation of its environmental
management systems and responsibilities. The environmental report may include reporting on the performance of the
business on environmental matters in qualitative terms regarding the extent to which it meets national and
international standards. t may also include a quantitative report on the performance of the business on environmental
matters against targets, together with an assessment of the financial impact.
##. 6%uity s(ares
Also referred to as ordinary shares or +in the $'A, common stoc!. 5quity shares represent the right to participate in
the residual assets of a business and typically have voting rights. 5quity shareholders will usually receive a dividend,
the level of which depends on the level of achieved profits and the extent to which the directors wish to reinvest profits
bac! into the business. f the business is wound up, equity shareholders will be entitled to any assets left over after all
other investors have been paid off. 5quity shareholders have limited liability, which means that their liability to
contribute money to the business is limited to the amount they have already invested.
1$$. 62ceptional ite)s
5xceptional items are separately reported in a business2s profit and loss account. 5xceptional items are those which
are material, derived from events or transactions within a business2s ordinary activities and which need to be
disclosed separately to ensure that the business2s accounts give a true and fair view. +'ee also extraordinary items,
1$1. 62port credit insurance
5xport credit insurance is insurance ta!en out against the ris! of non)payment by foreign customers for export debts.
1$2. 62traordinary ite)s
5xtraordinary items are separately disclosed in a business2s profit and loss account. tems which are material,
possess a high degree of abnormality, are not expected to recur and are derived from events or transactions outside
of the ordinary activities of a business. <ote that, because the definition of ordinary activities is extremely wide, it is
extremely unli!ely that a business will show an extraordinary item in its accounts in any one year. +see also
exceptional items,.
1$3. :actoring
Factoring describes an arrangement whereby the debts of a business are collected by a factor business, which
advances a proportion of the money it is due to collect. +'ee also invoice discounting,.
1$4. :inance lease
A finance lease is a lease where the lessor transfers substantially all the ris!s and rewards of ownership of the asset
to the lessee. +'ee also operating leases,
1$5. :inancial accounting
Financial accounting is the function responsible for the reporting required by company legislation for shareholders. t
also provides such similar information as required for ;overnment and other interested third parties, such as potential
investors, employees, lenders, suppliers, customers, and financial analysts.
1$6. :inancial inter)ediary
A financial intermediary is a party that brings together providers and users of finance, either as a bro!er or as
principal.
1$!. :inancial )anage)ent
Financial management is the general term that describes the management of all the processes associated with the
raising and use of financial resources in a business.
1$". :inancial ;eporting 1ouncil
The Financial *eporting 6ouncil +F*6, is the body which provides the strategic direction behind the development of
Accounting 'tandards in the $&. t has two main operations ) the Accounting 'tandards (oard and the Financial
*eporting *eview -anel, which issue and enforce Accounting 'tandards in the $&. Nadd lin!sO
1$#. :inancial ;eporting ;e&ie0 /anel
The Financial *eporting *eview -anel is the body responsible for ensuring that companies in the $& follow
Accounting 'tandards. Nadd lin!O +'ee also Accounting 'tandards (oard and Financial *eporting 6ouncil,
11$. :inancial ;eporting Standards
Financial *eporting 'tandards +F*'s, are issued by the Accounting 'tandards (oard. The use of F*'s replaced
the previous form of accounting standards in the $& which were named 'tatements of 'tandard Accounting
-ractice. +see also Accounting 'tandards,.
111. :inis(ed goods
-roducts that have completed the manufacturing process and are available for distribution to customers. 6ompare
finished goods with wor!)in)progress.
112. :irst in *irst out (:+:7
First)in first)out is a method used to calculate the cost if stoc!s or inventories. t assumes that the oldest items or
costs are the first to be used. t is commonly applied to the pricing of issues of materials, based on using first the costs
of the oldest materials in stoc!, irrespective of the sequence in which actual material usage ta!es place. 6losing
stoc!s are therefore valued at relatively current costs.
113. :i2ed assets
A fixed asset is defined as any asset, tangible or intangible, acquired for retention by an entity for the purpose of
providing a service to the business, and not held for resale in the normal course of trading. This includes, for example,
equipment, machinery, furniture, fittings, computers +see also depreciation,
114. :i2ed c(arge
A fixed charge is held by the charge)holder over specific assets +typically a mortgage in respect of property, which
prevents a debtor from selling or otherwise dealing with the charged property without payment in settlement of the
debt due to the charge)holder
115. :i2ed cost
A fixed cost is one which, within certain output or turnover limits, tends to be unaffected by fluctuations in the levels of
activity +output or turnover,. A good example would be the rent and rates charge for an office, or the employment
costs of staff who provide services not directly related to production or output +e.g. the accounting department,.
116. :or0ard currency transaction
A forward currency transaction is a transaction where a rate of exchange is agreed today but delivery occurs on an
agreed date in the future. The rate of exchange is !nown as the forward exchange rate. Forward exchange rates are
mainly used as a way of creating greater certainty about what the actual cost of a transaction will be in the local
currency of the business. The use of forward currency transactions is often referred to as currency hedging.
11!. Gearing
;earing refers to the use of debt as part of the financial structure of a business. The use of debt as a source of
finance reduces the amount of equity funding that is required. "owever, a business partly financed by debt needs to
be satisfied that it will be able to meet the interest payment obligations of the debt providers.
11". Generally accepted accounting principles (GAA/
n the $& the concept of generally)accepted accounting principles is ta!en to mean accounting standards and the
requirements of company legislation and the stoc! exchange.
11#. Gearing ratio
The gearing ratio is an accounting ratio which measures the level of debt finance a business has raised relative to its
level of shareholders2 funds. The gearing ratio is also !nown as the debt to equity ratio. t is usually defined as total
debt divided by shareholders2 funds, expressed as a percentage. The precise definition will vary, however, from
situation to situation. The higher the percentage from the calculation, the more highly geared a business is. t is
possible to calculate the net gearing ratio, where cash balances are deducted from debt in the calculation. +'ee also
interest cover and gearing,
12$. Going concern
;oing concern is one of the fundamental accounting concepts +the others being prudence, accruals and consistency,.
$nder the going concern concept it is assumed that a business will continue in operational existence for the
foreseeable future. This assumption has significant implications for the valuation of assets in the balance sheet 7
which can be stated at their net boo! value. f there was a doubt about the ability of the business to operate as a
going concern, then certain assets would have to be valued at their disposal value +which is li!ely to be lower than net
boo! value,. +'ee also accounting concepts,
121. Good0ill
;oodwill, in the accounting sense, refers to the difference between the total value of a business and the value of its
net assets in its balance sheet. t represents the ability of the business to generate profits and cash in the future. The
value of goodwill is often only determined when a business is bought or sold. Acquired goodwill +the difference
between the purchase price for a business and its net assets, is amortised through the profit and loss account.
122. Gross )argin
;ross margin is a profitability ratio calculated as gross profit divided by sales. The ratio focuses on the ability of the
business to maintain trading margins. +'ee also gross profit,.
123. Gross pro*it
;ross profit is the difference between sales and the total cost of sales. +'ee also gross margin,.
124. +ndirect cost
ndirect costs are those costs that are untraceable to particular units or cost centres. t is expenditure on labour,
materials or services which cannot be economically identified with a specific saleable cost unit. n order to determine
the total cost of production on a fully absorbed basis, such costs have to be allocated, that is assigned to a single
cost unit, cost centre, or cost account or time period.
125. +nsol&ency
(usinesses are placed into insolvency when they are unable to pay creditors2 debts in full after realisation of all their
assets. The decision to place a business into insolvency is normally ta!en by the creditors of a business 7 usually a
ban!. There are several different forms of insolvency 7 the main ones being administration, receivership and
liquidation.
126. +nterest co&er
nterest cover is an accounting ratio. t measures the level of a business2s profits relative to its interest charge in the
profit and loss account. t is usually defined as profits before interest and tax divided by interest charges, but the
precise definition will vary depending on the circumstances. The higher the ratio, the less 1gearing2 a business has.
The interest cover ratio is particularly important for lenders, in that it helps them determine the vulnerability of interest
payments to a drop in profit. +'ee also gearing and gearing ratio,
12!. +nternal audit
nternal audit is the name given to an independent appraisal function established within a business to examine and
evaluate its activities as a service to the business. The ob#ective of internal auditing is to assist members of the
business in the effective discharge of their responsibilities. To this end, internal auditing furnishes them with analyses,
appraisals, recommendations, counsel and information concerning the activities reviewed. +'ee also audit,
12". +nternal control
An internal control is a financial or other form of management control that helps provide a business with more
effective, efficient operation, or to enable the business to comply with laws and regulations. 8any internal controls
are concerned with the application of authority and approval levels +for example, who can authorise purchases or
ma!e payments,. 4thers are concerned with the complete and accurate maintenance of business records. The
system of internal controls is usually monitored by the internal audit function +if one exists, and is reviewed by the
auditors of a business as part of their audit of the financial statements.
12#. +nternal rate o* return (+;;
The internal rate of return +**, is the annual percentage return achieved by a pro#ect, at which the sum of the
discounted cash inflows over the life of the pro#ect is equal to the sum of the discounted cash outflows. A business
that uses discounted cash flow techniques as a method of investment appraisal will often use a target ** as a
discount rate in evaluating potential investments or pro#ects.
13$. +n&est)ent appraisal
nvestment appraisal is a process whereby the li!ely revenues and costs generated by an investment are evaluated
over the life of the pro#ect.. 'uch appraisal includes the assessment of the ris!s of, and the sensitivity of the pro#ect3s
viability to, forecasting errors. The appraisal enables a #udgement to be made whether to commit resources to the
pro#ect.
131. +n&oice discounting
nvoice discounting is used by some businesses as a way of raising wor!ing capital. t involves the purchase +by the
provider of the invoice discounting service, of trade debtors at a discount to their boo! value. nvoice discounting
enables the business from which the debts are purchased to raise wor!ing capital by swapping trade debtors into
cash. +'ee also invoice factoring,.
132. <ob costing
Lob costing is a method of costing which identifies the individual costs of performing each #ob.
133. =ast in *irst out (=+:7
9ast)in, first out +9F4, is a method of valuing stoc!s +inventory,. 9F4 assumes that the last item of stoc! received
is the first to be used.
134. =easing
9easing relates to a contract between a lessor and a lessee for hire of a specific asset selected from a manufacturer
or vendor of such assets by the lessee. The lessor has ownership of the assets. The lessee has possession of the
asset on payment of specified lease rentals over a period. +'ee also finance lease and operating lease,
135. =iabilities
9iabilities represent amounts owed by a business to the third)party providers of finance other than the equity
shareholders. The main examples of liabilities include trade creditors +suppliers who sell goods to the business on
credit, and ban! loans and overdrafts. 9iabilities that are due to be repaid within one year are shown in the balance
sheet under the heading 6reditors due within one year. 'imilarly, liabilities that are not due for more than one year
are separately disclosed.
136. =i)ited liability co)pany
A limited liability company is one in which the liability of shareholders for the company2s debts is limited to the amount
paid and, if any, unpaid on the shares ta!en up by them. The important point about a limited liability company is that
the shareholders are protected against claims against the company, which is treated by law as a separate legal
personality.
13!. =i)iting *actor
n the preparation of budgets, account should be ta!en of limiting factors. A limiting factor is a constraint which limits
business activities, for example, labour or materials which are in short supply. (udgets should bear limiting factors in
mind.
13". =i%uidation
9iquidation is the formal procedure for closing down a company or partnership including realisation and distribution of
assets
13#. =i%uidator
A liquidator is the 4fficial *eceiver or an insolvency practitioner who is appointed to attend to the liquidation of a
company or partnership.
14$. =i%uid resources
9iquid resources are alternative terms for the liquid assets of a business. These are the cash balances and other
assets readily convertible into cash, for example short)term investments.
141. =i%uidity ratios
There are various accounting ratios that relate to the financial resources of a business. These are !nown as liquidity
ratios. The main two statistics are the current ratio and the acid test ratios which measure the relationship between
current assets and current liabilities.
142. =oan stoc-
9oan stoc! is long)term business finance on which interest is paid, usually at a fixed rate. "olders of loan stoc! are,
therefore, long)term creditors of a business.
143. =ong'ter) capital
6apital invested or lent and borrowed for a period of five years or more
144. ,anage)ent accounting
8anagement accounting is a broad term to describe the techniques used to collect, process, and present financial
and quantitative data within a business to enable effective score!eeping, cost control, planning, pricing, and decision
ma!ing to ta!e place.
145. ,anage)ent buy'out (,B7
The acquisition of a business by its existing management. 8(42s are usually funded by venture capitalists
146. ,arginal cost
The variable costs per unit of production. The variable costs are usually regarded as the direct costs plus the variable
overheads. 8arginal cost represents the additional cost incurred as a result of the production of one additional unit of
production
14!. ,arginal costing
8arginal costing is a costing method whereby each unit of output is charged with only the directly)attributable variable
production costs. $sing this method, fixed production costs +such as the factory rent and rates, are not considered to
be real costs of production, but costs which provide the facilities for an accounting period that enable production to
ta!e place.
14". ,atc(ing concept
The matching concept is an alternative term for the accruals concept ) one of the fundamental accounting concepts
+'ee also accruals concept,
14#. ,ateriality
8ateriality is the concept that is used to evaluate whether accounting information is sufficiently significant to users of
accounts such that it should not be omitted or misstated in the accounts. 8ateriality depends on the si>e of the item
or error #udged in the particular circumstances of its omission or misstatement. The concept of materiality is
particularly important for auditors who must assess whether errors they find in accounts need to be ad#usted before
the accounts are finalised. +'ee also audit,
15$. ,e)orandu) o* association
The 8emorandum of Association is a constitutional document of a company that deals with matters such as the
company name, registered office, that it has limited liability, its trading ob#ects and other relevant facts. The other main
constitutional document of a business is the Articles of Association.
151. ,erc(ant ban-s
8erchant ban!s are financing institutions that carry out a variety of financial services, including the acceptance of bills
of exchange, the issue and placing of loans and securities, portfolio and unit trust management and some ban!ing
services.
152. ,e>>anine debt
8e>>anine debt is a !ind of loan finance where there is little or no security left after the main ban! loan debt has been
secured. To reflect the higher ris! of me>>anine funds, the lender will charge a rate of interest of perhaps four to eight
per cent over ban! base rate, may ta!e an option to acquire some equity and may require repayment over a shorter
term.
153. ,inority interests
8inority interests arise when a company has a subsidiary company in which it does not own all of the shares. The
shareholders apart from the holding company are referred to as the minority interests. For example, where a holding
company owns P0D of the shares in a subsidiary company, the remaining A0D of shareholders are the minority
interests.
154. ?et assets
<et assets are disclosed as part of the balance sheet. <et assets equals total assets on the balance sheet less total
liabilities.
155. ?et assets per s(are
<et assets per share is an accounting ratio. t is defined as net assets divided by the number of shares in issue. t is
also !nown as net worth per share. The purpose of the ratio is to compare the net assets per share with the share
price. The share price will either be at a premium to net asset value or a discount.
156. ?et current assets
<et current assets are disclosed as part of the balance sheet. <et current assets equal total current assets less total
creditors falling due within one year. t is also more commonly !nown as wor!ing capital. %hen short term creditors
exceed current assets, it is referred to as net current liabilities.
15!. ?et boo- &alue
<et boo! value is the difference between the original purchase cost of a fixed asset less the cumulative amount of
depreciation that has been charged to the profit and loss account in relation to that asset. For example, if a piece of
machinery had a purchase cost of @Q:,000 and depreciation of @:0,000 had been charged on that asset, the net boo!
value of the machinery in the balance sheet would be @A:,000.
15". ?et present &alue (?/@
<et present value is the value obtained by discounting all cash outflows and inflows of a capital investment by a
chosen target rate of return or cost of capital
15#. ?e0 issues
A new issue relates to the listing of a company2s shares onto the stoc! exchange for the first time
16$. ?on'e2ecuti&e director
A non)executive director is part of a company2s board of directors. "owever, the non)executive director does not
have any executive responsibility in the business. n other words, he or she does not get involved in the day)to)day
management of the business. The purpose of non)executives is to act as an independent reviewer of the activities of
the executive directors and to safeguard the interests of the shareholders.
161. 7perating cycle
The operating cycle, or wor!ing capital cycle, is calculated by deducting creditor days from stoc! days plus debtor
days. t represents the period of time which elapses between the point at which cash begins to be expended on the
production of a product and the collection of cash from the customer.
162. 7perating lease
An operating lease is a lease where the lessor retains most of the ris!s and rewards of ownership. +'ee also finance
lease,
163. 7perating )argin
4perating margin is an accounting ratio that is concerned with the level of profitability. t is calculated by dividing
operating profit by total sales and expressing the result as a percentage.
164. 7perating pro*it
4perating profit is the net profit that is earned by a business before any exceptional items, finance costs or tax
charges. t can be calculated by ta!ing gross profit +or gross margin, plusCless all operating revenues and costs.
165. 7perational gearing
4perational gearing refers to the relationship of fixed costs to total costs. The greater the proportion of fixed costs, the
higher the operating gearing, and the greater the advantage to the business of increasing sales volume. f sales drop,
a business with high operating gearing may face a problem from its high level of fixed costs.
166. 7pportunity cost
4pportunity cost is an important concept 7 particularly in the context of investment or pro#ect appraisal. The
opportunity cost is the value of the benefit sacrificed when one course of action is chosen, in preference to an
alternative. The opportunity cost is represented by the forgone potential benefit from the best re#ected course of
action.
16!. 7ptions
4ptions are found in most areas of finance. For example, options are used in convertible shares and warrants,
insurance, currency arrangements and interest rate management. The two main types of option are call options and
put options.
16". 7rdinary s(ares
4rdinary shares are part of the equity finance of a business. 4rdinary shares entitle the holders to the remaining
divisible profits +and, in a liquidation, the assets, after prior interests, for example creditors and prior charge capital,
have been satisfied
16#. 7&erdra*t *inancing
4verdraft financing is provided when businesses ma!e payments from their business current account exceeding the
available cash balance. An overdraft facility enables businesses to obtain short)term funding 7 although in theory the
amount loaned is repayable on demand by the ban!.
1!$. 7&er(ead
An overhead is a cost that is not directly related to the production of a specific good or service but that is indirectly
related to a variety of goods or services. For example, the cost of maintaining and insuring a large factory is an
indirect production cost that must be spread over a number of products or services.
1!1. 7&er(ead absorption rate
The overhead absorption rate provides a means of attributing overhead to a product or service, based, for example,
on direct labour hours, direct labour cost or machine hours. 4verhead absorption rates are required by the full cost
method of pricing products and services. +'ee also marginal costing,
1!2. 7&ertrading
4vertrading occurs when a business expands too rapidly, putting a strain on its financial resources. This can lead to
liquidity problems.
1!3. /aybac-
-aybac! is a method of investment appraisal. The paybac! period represents the number of years it ta!es the cash
inflows from a capital investment pro#ect to equal the cash outflows. A business may have a target paybac! period,
above which pro#ects are re#ected. The main drawbac! with the paybac! method is that it does not reflect the time)
value of money. Accordingly, it does not discriminate between receiving cash now as compared with receiving the
same amount of cash in several years time. Another criticism of the paybac! method is that it ignores cash flows that
arise after the paybac! has been completed.
1!4. /ost balance s(eet e&ents
-ost balance sheet events are those favourable and unfavourable events, which occur between the balance sheet
date and the date on which the financial statements are approved by the board of directors. The directors must
decide whether the financial statements should either reflect post)balance sheet events or whether they simply need
to be mentioned +without ad#usting the accounts,. An event which might require the accounts to be ad#usted would be
one which provides evidence about conditions existing at the balance sheet date. For example, the insolvency of a
ma#or trade debtor would suggest that the debtor balance at the year)end should be provided for as a bad debt.
1!5. /re*erence s(ares
-reference shares are part of the equity finance of a company. -reference shares usually receive a fixed dividend
each year and which, if redeemed, are redeemed at par value. Although the dividend is fixed, it is not guaranteed.
"owever, if the company fails to pay +3passes3, the preference dividend for the year to ordinary shareholders. %here
the preference shares are cumulative, any arrears of preference dividend will also have to be paid prior to the ordinary
dividend being paid in any year. -reference shares may be redeemable, when they will be redeemed at a set date.
They may also be convertible. Finally, they may be participating, which means that in addition to the fixed dividend,
they will receive a variable dividend dependent on the performance of the company. +'ee also ordinary shares,
1!6. /re*erential creditor
A preferential creditor is a creditor who is entitled to receive certain payments in priority to other unsecured creditors.
'uch creditors include government departments, occupational pension schemes and employees.
1!!. /repay)ents
-repayments are classified as current assets in the balance sheet. -repayments include prepaid expenses for
services not yet used, for example rent in advance or electricity charges in advance, and also accrued income.
Accrued income relates to sales of goods or services that have occurred and have been included in the profit and loss
account for the trading period but have not yet been invoiced to the customer.
1!". /resent &alue
-resent value is the cash equivalent now of a sum of money receivable or payable at stated future date, discounted at
a specified rate of return. +'ee also net present value,
1!#. /rice'to'earnings ratio (pAe ratio
The price)earnings +pCe, ratio is an accounting ratio that is concerned with measuring the overall profitability of a
business based in relation to the equity shareholders who will share in that profit. The pCe ratio is defined as the share
price divided by the earnings per share. (roadly spea!ing, the higher a business2s -C5 ratio, the more expensive the
business and the more highly rated it is. +'ee also earnings per share,
1"$. /ro*it and loss account
The profit and loss account is one of the primary financial statements. t shows a business2s income and expenditure
over a period of time, usually one year. The term profit and loss account is also used in the shareholders funds part
of the balance sheet. n this context, the term represents accumulated profits which a business has generated since
its incorporation.
1"1. /ro*it be*ore ta2 (/B3
-rofit before tax is a separate line in the profit and loss account. t is calculated by ta!ing operating profit plus or
minus net interest.
1"2. /ro*it centre
A profit centre is a part of the business that is accountable for both costs and revenues 7 the manager is responsible
for revenues and costs.
1"3. /ro&isions
-rovisions are liabilities where the business is uncertain as to the amount or timing of the expected future costs. For
example, if a business is sub#ect to a law suit, it may provide now for the expected liability on loss of the law suit. This
is an example of the prudence concept. +'ee also liabilities,
1"4. /rudence
The prudence concept is one of the fundamental accounting concepts. t is important that financial statements are
prepared on a prudent basis. *evenue must not be shown in the accounts until the cash realisation of the revenue is
reasonably certain. 4n the other hand, costs arising as a result of past actions should be provided for immediately,
even if the cash will not be paid over until the future.
1"5. /ublic li)ited co)pany (/=1
A public limited company plc, is a company which, by registering as a plc and adhering to strict legal requirements
as a result, has the ability to issue shares to the public. 6ontrast this with a -rivate 9imited 6ompany, which is not
permitted to issue shares to the public. A public limited company should not be confused with a 9isted 6ompany. A
listed company is a public limited company which has obtained a listing from the $& 9isting Authority and not all public
limited companies do this.
1"6. /ut option
A put option gives the holder of the option the right to sell a share +or other asset, at the exercise price at some future
time. +'ee also call option,
1"!. 8uic- ratio
A measure of liquidity, similar to the current ratio except that stoc!s are excluded from the calculation of net current
assets +since it may be some time before stoc!s can be converted bac! into cash,.
1"". ;atio analysis
*atio analysis is the study of the relationships between financial variables. *atios of one business are often compared
with the same ratios of similar businesses or of all operators in a single industry. This comparison indicates if a
particular business2 financial statistics are suspect. 9i!ewise, a particular ratio for a business may be evaluated over a
period of time to determine if any special trend exists.
1"#. ;eser&es
*eserves are part of shareholders2 funds on the balance sheet. All parts of shareholders2 funds apart from share
capital are reserves, such as the share premium account, the profit and loss account and the revaluation reserve.
1#$. ;esidual &alue
The residual value of an asset is the expected proceeds from the sale of the asset, net of the costs of sale, at the end
of its estimated useful life. *esidual value is used for computing the straight)line method and diminishing)balance
method of depreciation, and also for inclusion in the final year3s cash inflow in a discounted cash flow appraisal.
1#1. ;etained pro*its
*etained profits are those profits that have not been paid out as dividends to shareholders, but retained for future
investment by the company.
1#2. ;eturn on capital e)ployed
*eturn on capital employed +*465, is an accounting ratio designed to assess the profit)generating capacity of
capital employed . t is defined as profits before interest and tax divided by capital employed, expressed as a
percentage. (roadly spea!ing, the higher the return on capital employed, the more successful the business.
1#3. ;eturn on e%uity
*eturn on equity +usually shortened to *45, is a measure of investment return that compares the profit earned by a
business with the amount invested in the business by shareholders.
1#4. ;e&enue e2penditure
*evenue expenditure is charged to the profit and loss account. t is expenditure that is incurred +., for the purpose of
the trade of the business +e.g. selling costs, administration costs, or +A, to maintain the existing earning capacity of
fixed assets
1#5. ;ig(ts issue
A rights issue is an issue of shares for cash by a company to its existing shareholders on a basis pro rata to their
existing shareholdings. The rights issue will normally be at a substantial discount to the current share price +often
between A0D and M0D discount,.
1#6. ;is- capital
An alternative term for venture capital
1#!. Sale and leasebac-
The sale of a fixed asset that is then leased by the former owner from the new owner. A sale and leasebac! permits a
firm to withdraw its equity in an asset without giving up use of the asset. 'ale and leasebac!s are popular methods of
raising cash by businesses that own property assets.
1#". Scrip di&idend
A scrip dividend is an issue of shares to an investor in lieu of a cash dividend. The value of the shares will be
designed to equal the value of the cash dividend foregone. This may be useful for investors who wish to increase their
investment in a company without incurring the costs of buying shares in the mar!et.
1##. Secured creditor
A secured creditor is a creditor who holds security, such as a mortgage, over a debtor3s assets
2$$. Seg)ental reporting
The inclusion in a business2s report and accounts of analysis of turnover, profits and net assets by class of business
and by geographical segments +6ompanies Acts ./P:CP/ and ''A- A:,.
2$1. Sensiti&ity analysis
A modelling and ris! assessment technique in which changes are made to significant variables in order to determine
the effect of these changes on the planned outcome. -articular attention is thereafter paid to variables identified as
being of special significance.
2$2. S(are capital
6apital is the number of existing shares in the business multiplied by the nominal value of the shares.
2$3. S(are(older
A shareholder is an owner of shares in a limited company or limited partnership. A shareholder is a member of the
company.
2$4. S(are(older &alue
'hareholder value is an approach to business valuation and management that focuses on maximising the value of a
shareholder3s equity above other business ob#ectives. <ormally, shareholder value can be increased in three waysH
dividend payments, appreciation in the value of the shares, and cash repayments.
2$5. S(are pre)iu) account
-art of shareholders3 funds in a business2s balance sheet. Arises when shares are issued at a premium to their
nominal value. For example, if shares with a nominal value of .00p are issued at a price of .:0p, the share capital of
the business will increase by the nominal value of .00p per share and the share premium account will increase by
:0p per share. The total of share capital plus share premium account therefore represents the total cash raised from
shareholders by the business in the past.
2$6. S(ort'ter) capital
6apital that is lent or borrowed for a period which might range from as short as overnight up to about one year
2$!. Sta-e(older t(eory
An approach to business that incorporates all the interests of sta!eholders in a business. t widens the view that a firm
is responsible only to its owners? instead it includes other interested groups, such as its employees, customers,
suppliers, and the wider community, which could be influenced by environmental issues. t thus attempts to adopt an
inclusive rather than a narrow approach to business responsibility.
2$". Standard cost
The planned unit cost of the products, components or services produced in a period. The standard cost may be
determined on a number of bases. The main uses of standard costs are in performance measurement, control, stoc!
valuation and in the establishment of selling prices.
2$#. Stoc-s
;oods purchased by a business to resell on to its customers. ncluded as part of current assets in the business2s
balance sheet. Also !nown as inventories in the $'A.
21$. Stoc- turno&er
An alternative term for inventory turnover, measuring how quic!ly stoc!s are converted into finished goods and sales.
211. Stoc- &aluation
'toc! valuation refers to the valuation of stoc!s of raw material, wor! in progress, and finished goods. According to
generally accepted accounting practice, stoc!s should be valued at the lower of cost or net realisable value and the
costs incurred up to the stage of production reached.
212. Straig(t'line depreciation
A method of depreciation that charges equal amounts of depreciation to the -rofit R 9oss Account during the useful
life of an asset.
213. Subsidiary business
A subsidiary business is a business which is controlled by another business, referred to as its holding business.
6ontrol is usually achieved either by owning shares with more than :0D of the voting rights in the subsidiary, or by
having the right to appoint directors to the (oard who have a ma#ority of voting rights on the (oard.
214. Sun- cost
'un! costs are those costs which have already been incurred and which cannot now be recovered.
215. 3a2able pro*its
Taxable profits are the profits on which a business calculates its corporation tax charge for a year. <ote that the
definition of taxable profits is not the same as accounting profits before tax. The reason for this is that the business
has considerable flexibility in the way it calculates its accounting profit before tax. As a result, the nland *evenue has
different rules in some areas for the calculation of taxable profits.
216. 3rue and *air &ie0
The requirement for financial statements prepared in compliance with the 6ompanies Act to 1give a true and fair view2
overrides any other requirements. Although not precisely defined in the 6ompanies Act this is generally accepted to
mean that accounts show a true and fair view if they are unli!ely to mislead a user of financial information in giving a
false impression of the business.
21!. 3urno&er
An alternative term for sales or revenue.
21". 9rgent +ssues 3as- :orce
The $rgent ssues Tas! Force +$TF, is a sub)committee of the Accounting 'tandards (oard which is set up to deal
with urgent accounting issues on an ad hoc basis. t produces Abstracts, which are essentially mini Accounting
'tandards and must be followed by companies when preparing their accounts. +'ee also accounting standards,.
21#. @ariable cost
Sariable costs are those costs that vary in direct proportion to the volume of activity.
22$. @ariance
A variance is the difference between a planned, budgeted or standard cost and the actual cost incurred. The same
comparisons may be made for revenues.
221. @ariance analysis
Sariance analysis is a process where the financial and operational performance of a business is evaluated in terms of
variances against budgets or standards. The purpose of analysing variances is to ensure timely identification of areas
for managerial action. These variances will be either favourable variances +F, or adverse variances +A,.
222. @enture capital
Senture 6apital is a form of Tris! capitalT. n other words, capital that is invested in a business where there is a
substantial element of ris! relating to the future creation of profits and cash flows. *is! capital is invested as shares
+equity, rather than as a loan and the investor requires a higher Trate of returnT to compensate him for his ris!. The
main sources of venture capital in the $& are venture capital firms and Tbusiness angelsT ) private investors.
223. Barrant
A warrant is a right given by a company to an investor, allowing him to subscribe for new shares at a future date at a
fixed, pre)determined price +the exercise price,
224. Beig(ted a&erage cost o* capital (BA11
The weighted average cost of capital +%A66, is the average cost of the business2s finance. This is calculated by
applying a weighting to the different costs of finance according to the relative si>e of each element in the financial
structure of a business.
225. Bindo0 dressing
%indow dressing is a creative accounting practice in which changes in short)term funding have the effect of disguising
or improving the reported liquidity position of the business.
226. Bor- in progress
%or!)in)progress is a term used to describe products or services which are in the process of completion.
22!. Bor-ing capital
%or!ing capital is also !nown as net current assets. t is the capital available for conducting day)to)day operations of
a business. <ormally wor!ing capital will be positive 7 i.e. there is an excess of current assets over current liabilities 7
which therefore needs to be funded.
22". Bor-ing capital cycle
The wor!ing capital cycle is another term for the cash operating cycle. t refers to the period of time which elapses
between the point at which cash begins to be spent on the production of a product and the collection of cash from a
customer.
22#. Cero'based budgeting
Uero)based budgeting is a method of producing a budget which ignores what has happened in the past. nstead,
each element of the budget is built up from a new set of assumptions. This process is inevitably more time)
consuming but is often used where previous budgets in a business have proved significantly different from actual
results.