Glossary
Words have meaning – literally
Welcome to the business glossary
There are so many words that you will come across when running your business. Here we try and capture and reference the ones that we have come across. Whilst you can read this from top to bottom there really here for reference to give definition to words we use on this site
A
ABC or Activity Based Costing or ABC Costing (which would be be ABCC) – see Activity Based Costing.
Absorption Costing (AC)
A costing technique to calculate the overall spread of costs of a business against the products and services provided to calculate the cost of making that product or providing that service. To calculate the operating profit of a business the gross profit (sales revenue – cost of sales) has to subtract the overall operating costs of the business normally through fixed costs – ones that can not be divided directly and easily to a sale. To better understand which products or services use which cost the fixed costs are divided e.g. Product A = 50% and Product B = 50%. If Product A has a higher operating cost (expensive machinery) then it would absorb a fairer share say 60%. This would make it less operationally profitable than product B (who now has 40%) allowing the business to focus on B rather than A. How a business divides its costs is part of Management Accounting and is an internal report. External or Financial Management the method is not as relevant as its the same number going out at the end of the day that affects the business’s net profit. see ABC below for an alternative method.
ACA
Associate Chartered Accountant chartered (given) by ICAEW. A person who is ACA will give confidence that they know what they are doing with ICAEW Chartered Accountant used in the accountants title and details.
ACCA
Association of Chartered Accountants – global body professional accountants. ACCA offer accountancy courses for accountants and chartering. Founded in 1904.
Accounting
Counting stuff in business. More precisely the process of collecting, measuring/counting, analysing, reporting, and communicating business information to business owners, tax authorities, and if an incorporated, shareholders, and the public. Accounting is not just about finance but covers both financial and, at times, non-financial information that shows the position of a business at a point-in time. When yearly this is called the Accounting Period or, more commonly financial year end. Most businesses will do yearly accounts as there is a yearly tax cycle where taxes will have to be paid on the profit/income the business has made. Business use accounting all the time to allow internal management accounting decisions or external financial accounting to show other than how the business did and is likely to perform in the future. Accountants are put together through four common
Accounting is a professional job. Accountants are qualified to prepare business accounts.
Accountants
A qualified person who prepares financial accountants for a business. They are often accredited by accounting standard bodies (ACCA, IEACA, and CIMA)
Accounting reporting principles
All accounting reports should follow the following principles:
- Relevance – only report information that helps explain a situation or help make a decision.
- Reliability – the information is from trusted sources and is reported in good faith and is truthful.
- Comparability – information across different reports and different versions needs to be comparable to allow comparison and decision making.
- Understandability – the information is clear, concise and easy to interpret
There are standard documents that need to be prepared depending on the type of business structure. Large incorporated business or corporations report using guidelines and standards set by GAAP.
Accounting Information System (AIS)
The system and process for building accounting material to allow information to be seen and decision to be made. Data is a record taken either directly counted as an actual at a point in time e.g. 5005ml pints of milk before breakfast or an estimate measurement e.g. 5l of milk. Data in itself is useless. It needs a context. When data is used in context that is information – it informs. The four common steps of an AIS are:
- Data identification – What needs to be accounted for? Why would it be helpful? Where does the information come from?
- Data recording and gathering – How to get first record the information somewhere, at a standard and method that is understood, and gathered in a single place. Commonly computer software is used to help record and track information but paper and a pencil works in the short term and small scale (keeping things simple is important – KTSIT!)
- Data analysis – rational breakdown of gathered data to create information. Information is created by adding context to the data with models, assumptions, timings.
- Information Reporting – the publication of information for users to take positions and make decisions.
Accounting Period
The span of time that a business a prepares its financial statements. Typical a year for all business to meet tax reports. In the UK Can also be quarterly if a large publicly traded company.
*Accounting Rate of Return (ACC)
The average profit from an investment shown as a percentage of the average investment made.
Accounts Payable (AP)
The money owed by the business to suppliers. As the money is payable (going out of the business) its a liability. The people that need to be paid are not always external. Expense payments to internal people also fall under AP. Example invoices for equipment with the equipment either already supplied or in the process of being supplied. A real world example would be tab in a bar that has to be settled at some point – it’s a current debt. In larger organisations there is often an AP team as part of the finance term. People working in AP are the ones you are probably chasing for payment so always be nice to them. Compare Accounts Receivable for the opposite position (people owning your business money in their Accounts Payable team).
Accounts Receivable
The money that is owed to the business having either already invoiced for a product or services that may or may not be already used. Example: giving a customer materials worth £100 and then giving them 30 days to pay. £100 would be in accounts receivable on your side and £100 accounts payable on their side.
Accrual – Accruals
Accrual means to accumulate or increase over time from accrue: to natural grow. In business “accruals” is short for accrual accounting (see next definition) which is the process of recording expense and payment when they are committed not when they are paid out – that is cash accounting.
Accruals Accounting or Accruals Method of Accounting
A method of accounting for a business that states its cash position after committed costs and revenues. More precisely accruals accounting follows the accruals convention (see below).
Detailed Description
Accruals accounting is the most common form of accounting as it gives the fairest view of a businesses position when compared to using cash accounting. In cash accounting you state the amount of money/cash you have that you have at the time of asking normally through a bank statement. Although this is a simple view it doesn’t reflect the dynamic position of a business in the near past or near future where businesses operate. In the near past things will have been bought on credit which will have to be paid back and work done or items sold that haven’t been paid for. In cash accounting as there is no cash payment these are not included but in accruals these are as they better reflect the cash going out and coming in therefore what the current business position is. Accruals can be done at any time but it often done monthly to accrue the work of that month with the previous months and at the end of the accounting period known as year end. It can get complicated especially when the transactions are close the reporting period deadline as it can take time to write the report in which transactions are taking place.
Accruals Convention
“Profit is the excess of revenue over expenses, not the excess of cash receipts over cash payments”. What does this mean? Accruals takes the position that it doesn’t matter how much cash you have but the balance of revenue (credits) against cost (debts). If you are running your business you have to choose an accounting method and if you are going to have money owed to you and you will owe money for more than a week then you are likely to be applying the accruals convention using the Accruals Accounting.
Acid Test Ratio
Another crucial ratio on the liquidity, typically cash, of a business at a point in time. The ratio is between current (short term) assets EXCLUDING inventories against current (short term) liabilities (current ratio includes inventory and other current assets). This strips down a business to what it’s worth in terms of cash against what it has to pay off. Inventories are excluded as although they are current assets (they can be quickly sold) they are not directly transferable – they are only valuable if they can be sold.
Example:
Acid Test = £100 current assets – £0 inventory / £50 loan = 2 = 200% – amazing but why no stock/inventory? How is the business going to make money in the short term?
Acid Test = (£100 current assets – £60 stock) / £50 loan = 40/50 = 0.8 = 80% – this is very healthy. There are more liquid assets than liabilities so we can pay our current debts if needed and have stock to less at a profit to generate higher current assets.
Acid Test = (£100 current assets – £100 stock) / £50 = 0/50 = 0 = 0 – this is very bad. There is no money (current assets) to pay off current liabilities as it is all held in inventory. The inventory will have to be sold quickly and completely to pay the loan otherwise the business becomes insolvent and is heading to bankruptcy if it can not pay its debts.
In summary if you want to know if you are still going to operating in the near future do the acid ratio test. Compare Current Ratio for another liquidity ratio.
Activity Based Costing (ABC)
A costing technique used to try and accurately relate overheads to specific production activities or provisions of a defined service. The idea is based on the acceptance of the fact that overheads can be linked to specific activities that used shared materials or resources e.g. electricity, rent, rather than absorbing costs across all activities to come up with an average number. ABC is more accurate than absorption costing (AC) but it takes long and can be difficult to find the edges of an activity. The idea is to identify specifically where costs are being spent and can these be better used and/or reduced.
Asset (Tangible and Intangible, Liquid and Fixed, Short term)
Something that has value in the opinion of somebody and is owned by a business. An asset is one of the three fundamental parts of a business with other two being liability (liabilities) (some value the business owes to someone else normally another business) and shareholder equity which is the difference between what the business value has and what it owes.
There are three views on assets: 1) physicality, 2) time and, swapability or 3) liquidity.
Physical or Tangible (real) Assets– something of value with physical properties. Cash, gold, stock, building, artwork etc. Tangible can
Current Assets (Tangible)
Assets that will be converted to cash in the short term and return to the business owner. Current assets contain liquid assets or ones that can be converted to cash quickly. The longer it takes to convert to cash the less liquid the asset is. Examples: cash, accounts receivable, inventory/stock.
Long term (Tangible and Intangible) Assets
Assets that will be used by the business for over a year to generate profit. Examples: buildings, machinery, Land, Trademarks. Longterm assets can be sold to generate current assets i.e. cash.
Amortisation
The process or spreading payments over multiple periods that involves payments of the principal (original loaned amount) and an interest amount. Amortisation applies to intangible assets to look to fairly state the value of the asset over time. This can be continue to reduce the value to the asset over time as the asset becomes less valuable for its economic life. For example the cost and value of obtaining a trademark can be recovered by stating it fairly as an intangible asset. Over the economic life of the trademark (10 years) the value is amortised to zero. This allows the business to fairly show the value of an intangible asset and how its value is reducing. There are different rules for different intangible assets for business which your accountant and auditor will be able to account.
Tangible assets are reduced in value through depreciation. Same principle but different rules as the physical asset can wear out with use.
Auditor
A person external to the business who is appointed to check, or audit, the accounts of a business to reassure external stakeholders. An auditor is certified by a regulatory authority to ensure neutrality (in theory) so they can express their opinions on the financial position of the business. Auditors work only with incorporated businesses or company and big companies due to the cost of the using an auditor.
Auditors are often but don’t have to be qualified accountants as they are checking the work of accountants. There are two main types: external auditors who audit organisations they don’t work for these are also called statutory auditors as they sign of a companies accounts needed by law (statute). and, internal auditors who audit organisations they work for (these are common in government organisations or very large companies).
B
Balance Sheet
(see page: Balance Sheet for detailed explanation)
A single view of a business wealth position where wealth is defined as the shareholder equity. The Balance Sheet is there to answer the question: how much wealth is in this business? Some times called the Statement of Financial Position.
One of the three documents of a business along with the Income Statement (old Profit and Loss Statement), and the Cash Flow Statement.
Bank Rate (national central bank interest rate)
The interest rate a national central bank sets to commercial banks who then lend the money out to customers at an additional commercial rate. The interest rate controls how expensive the money is to borrow (low interest reate – cheap money, high interest rate – expensive money). At low rates institutions will want to borrow more driving up spending. But greater spending creates higher demand, then higher prices, and inflation which decreases the amount of things people can buy. The balance between spending (growth) and inflation is the key responsibility of the a countries central bank.
How do For example the Bank of England set the (Great) British pound (GBP) at 1%. This
Bankrupt
A legal position in which person(s) (individual persons or partnerships) where they are obliged to repay debts in an order or rate agreed. The idea is that creditors (who own the debt) get back all or some of the money that the person(s) owes them. Example: Sam has been made bankrupt so he can keep his house but will have to sell his car to pay off his debts.
Bankruptcy
The process of being made bankrupt generally through the legal framework where person being made bankrupt lives (domiciled)
Bookkeeper
Budget
A proportion of money from a whole allocated to a particular activity e.g. marketing budget.
C
Capitalisation
Cash
A physical form of money normally in the form of coins or paper notes. Cash is form of current asset and is the most liquid as it is value is very easy identifiable and transferable. Due to this nature cash is also commonly forged. Compare cash-less payment.
Cash-less (payment, society, economy)
A payment system of goods and services based on direct transfer of money from one digital store to another typically one cash-based bank account to another. Commonly done via electronic channel through payment cards or smart mobile/cell phones.
Cash Flow Statement
A statement that shows the amount of
Cash Accounting or Cash-basis accounting
Accounting for your business cash position when the cash is paid into or out of the business accounts rather than when the commitment to be paid or pay is made. Cash accounting is what most people and small businesses do as it is the simplest way to track your money – the amount of money you have in your bank or business is how much money you have. The reason why it’s common for small business is that they are less likely to have made cash spending commitments in the form of buying inventory to sell in the future and are less likely to have outstanding credit (money owed) that will be paid in the future.
For example if asked ‘what is your financial position?’ you may say ‘I have £200′. Which is true. If then asked can I borrow £ 100?’ you reply ‘No, as I have to pay my mum £ 110 next week’. This is where another method is used called accruals accounting where you would have said ‘Today I have £200 with £110 going out giving a cash position of £ 90’. The £110 is debt that has to be paid so should come off the accounts. So if you’re a small business working in cash this works but gets complicated once you own or others owe you money as this has to be shown.
Central Bank Interest Rate
see Bank Rate
Charity
An organisation that is eligible and registered with the national charity organisation. In the UK this is The Charity Commission. The main thing a charity can do that a non-charity does is exceptions from tax be that from contributions or other purchases (equipment, rent etc). This doesn’t mean that any business can chance it and register as a charity. There is strict oversight to ensure that charities are fulfilling their obligations and not defrauding donors. There are four types of charity structure which can be setup depending on how the organisation wants to be governed and how it handles its assets.
Chartered Accountant
An accountant that is registered with a chartering organisation that validates their qualifications and behaviour. In England and Wales this is the ICAEW or ACCA which is more international.
Claim
An obligation on the part of a business to provide a benefit to someone or something outside of the business. Commonly claims are legal liabilities in the form of cash payments and equity that is owed to the business owners. Although cash is common there could be claims that are not but these would not show up in the balance sheet that just shows money-based valued assets and claims.
Current Assets
Things of value a business owns/is owed that will/could be used converted into cash in the short term. See assets for more details.
D
Debt (same a liabilities)
An asset that is owed to a creditor by a person or business. Debts of a business are liabilities as the business is liable – responsible by law to pay them (not to be confused with libel – publishing a false statement about someone which can create a liability if money needs to be paid – English huh?!). Debt is often seen as a form of liability that is not planned or sustainable e.g. the debts of the business are what caused it to fold.
Depreciation
The process of reducing the value of a tangible asset over time to reflect the reduction in the physical quality of the asset over time (it’s “fair value”) and to reduce the value in an ordered way over the same period.
To work out the depreciate of a tangible asset the economic life of the asset needs to be stated and then a method to reduce the assets value over time. The method can be complex but straight-line depreciate is common as it’s the easiest.
For example a van bought for £10,000 would be reduced in value by £2,000 over 5 years to reflect the value of the asset in the balance sheet. The value to the asset may be worth more than this but this is only realised when sold and turned into cash. The asset may also be very useful. The van after 5 years could be doing valuable work for the business it’s just you can’t claim the intrinsic value as an asset it has to have a fair market value.
Compare to amortisation used to revalue intangible assets.
E
Economic Life
The time span of time that a tangible asset is deemed to be able to generate wealth e.g. a computer = 3years, car = 5years.
F
Fiat Money
Money that is given value through a country’s government via the central bank. Fiat money is the basis for national currencies like the United States Dollar (USD) or the European Union Euro (EUR). As a country creates the money they can also control the interest rate they loan the money out on . This is called the Bank Rate and it is this rate the commercial banks borrow the money on which they pass onto people who want to borrow money. Compare to commodity money that is linked to a physical object commonly a precious metal that a country owns like gold reserve.
Finance
Money associated with running a business through the buying of materials to achieving profits through selling products.
Financial Accounting
An accounting practice designed to help external users of the financial information understand the position of the business. Financial accounting produces the three key filings: Balance Sheet, Income Statement, and Cash Flow Statement.
G
GAAP – Generally Accepted Accounting Principles
Accepted international accounting principles that set standard practices used across incorporated business across the world. Small businesses that are not incorporated (registered companies) can follow less detailed principles and reports. However, the principles are good for any sized business for good governance.
H
I
ICAEW – Institute of Chartered Accountants of England and Wales
England and Wales national body of chartered accountants and part of Chartered Accountants Worldwide. If you are going to use an accountant in the UK the ICAEW will tell you if they are chartered accountants with the marker ACA. Other countries have other chartering organisations. ACCA is the other big chartered accountant body that is not related to ACA.
Income Statement (also known as the Profit and Loss Account)
Also known as the profit and loss (PnL) account as it shows how much profit has been generated and how much loss has been incurred to generated those profits. Internal management accounting uses a similar structure to show how profitable a division or region is. A senior management would have PnL responsibility and would be rewarded on how well the account (division) has performed.
Incorporated Business
A business that is registered with a national body to conduct business under the conditions of that body. Once registered that business becomes a company and a company is a legal entity where ‘business’ is done between it and other businesses not between individual people. In the UK an incorporated company is Limited (Ltd) and is registered at Companies House. The protection of being incorporated (the debt is owned by the company, liability is up to the value to shareholder equity which is the value of shares in the company that divides the value. The obligation of a limited company is to register directors, an address, and fill in yearly reports that are public. Other operating positions not the assets of individuals who own the business as is the case with sole traders and partnerships.
Insolvent
A person or business that does not have enough to pay its debts when it needs to. Example: Sam is insolvent so will struggle to pay her bills at the end of the month.
Insolvency
The state of being insolvent. Two main types: 1) cash-flow insolvency – not enough cash (liquid assets) to pay a debt (current liabilities or accounts payable – staff salaries, suppliers invoices, etc). They may have other assets but these can not be sold (liquidated – changed to cash) either quick enough or voluntarily (the person doesn’t want to sell the asset). 2) Balance-sheet (asset) insolvency – not enough assets to pay of debts in total. It’s not good.
Intangible Asset
An asset of a business that has no physical properties. Intangible assets used to quite rare as they only covered legal agreements such as patents, trademarks, and copyright. However, with many businesses based on software intangible assets are more common.
Inventory
Physical things of value that are planned to be sold to customers to generate cash.
Invoice
A record of a transaction between a buyer and seller stating the amount and date of the transaction. The invoice can state details of the transaction through a breakdown or itemisation of charges that make up the total invoice amount along with payment terms (how to pay), payment details (bank account details) and, contact details for queries. Invoicing is a declaration that a payment is needed. When payment is made a receipt is given to acknowledge payment. Receipts are used to claim expenses. Invoice is part of the payment process.
J
Just-in-Time (JIT)
A form of supply change management where materials and/or components are sources just before the stored materials are exhausted/run out.
K
Accounting
L
Liability (Liabilities)
Money owed to another business that has to be paid in the future. Also called debt. Like assets liabilities are divided into current (short-term) liabilities and long-term liabilities. Current liabilities have to be paid within the next financial year. If these are not paid then legal action can start affecting the businesses credit rating. so show how much the business is in debt in the short term so immediate risk. Long-term liabilities are to be paid longer than a year so they are not as much of a risk however do affect the value of the company. Liabilities make up core information about a business. The view of how much value a business has (assets) against how value a business owes (liabilities) makes up many fundamental ratios.
M
Management Accounting
Management accounting is the practice of preparing business information for the management to make decisions on. Example including the costs incurred by a divisions, the pricing of a product, the impact of taking on a loan. Compare to financial management which is focussed largely on the external financial performance and position.
Matching Principle
The time in which an expense is incurred needs to match to the same time in which an earning is made. The matching principle come from accrual accounting where transactions of sales/revenue and costs/expenses are recorded when they are committed to not when the money turns up which is called cash accounting. Using accruals the matching means that if you have made a sale and invoiced for it you can claim that as a sale or if you have agreed to pay someone then you must state you have agreed to pay them and record the money as being taken out even if you haven’t actually paid them. The expenses and revenues must match.
Money
Value broken down into tradable amounts or denominations agreed between buyer (has money) and seller (has product). Money is commonly a form of national currency e.g. US Dollar, Euro that is controlled by the national bank through interest rates or bank rates.
Money Laundering
The process of swapping or cleaning money received from illegal activity through a legal business. The business is normally cash based allowing for additional money to enter the business and then be deposited without easy detection. Money laundering is not limited to cash business but can be used in large illegal activities. Whatever the level at the end the money is available for use without suspicion.
N
Non-governmental organisation (NGO)
A organisation that if formed outside of a government’s governance or control but does work that a government would normally be involved in. NGOs are commonly charities that receive funding from governments or other funding bodies however they don’t have to be. The United Nations, an organisation made up for government representatives is an NGO. NGO are often found in areas of world where they can provide services
Not-for-profit organisation
A business that invests its profits back into the goal of the organisation rather than pay any profits (money) to business owners. As Not-for-profit organisation do not pay out money they are commonly charities working to improve a situation or environment. Not-for-profit organisation are still a business as they have to control costs, generate revenue even if that is simply through people giving them money (nothing is sold), and common to anything that involves money – tax, even if this means not paying them as a [for]-profit would.
Organisations have to register as non-profit commonly as a charity but not always e.g. schools can be non-profit
O
Accounting
P
Payment Process
The process of requesting a payment for a product or service through to sending a receipt. The process varies depending on transaction. Single step payment process are common in retail either through direct payment of cash or an electronic payment transfer at a point of sale (POS). After payment has been accepted (it’s complicated if it’s not cash) a receipt is issued confirming payment. Multi step payment involves the issuing more steps such as a requested for product through a pro-forma [invoice], invoicing, then receipting. In these scenarios the payment may not happen before the product or services is received. Payment is made within payment terms set out in the invoice. If you are clever you can sell the products you bought before paying the invoice maximising cashflow. If you are really clever you can sell the goods before even getting invoiced (significant buyer power is needed here).
Point-of-Sale (POS)
A physical system that takes payment for a product and issues issue a receipt on completion.
(Electronic) Point-of-Sale (EPOS)
A POS that takes electronic payment commonly in the form of debit or credit cards. Typically includes all the equipment to record a transaction but can be separate if no receipt is required or it’s a single item purchase.
Q
Quote or Quotation
An informal estimated cost of a product or service that may be requested. There are no obligations on a quote unlike an invoice which is a legal obligation to pay for product or service that has been provided.
R
Accounting
S
Statement of Financial Management
Another name for Balance Sheet.
Strategic Management
A management style that links the actions of management to agreed strategic long-term goal of the business. The strategy will divide responsibility of results into trackable outcomes from decisions made and change in the business operating environment.
T
Trademarks
An intangible asset recognised by a distinct mark or shape associated with an organisation. The mark is commonly legally registered with a registration agency to allow people to check their marks against others and to register new ones that are not similar to existing ones. Trademarks are intellectual property of a business with the business having exclusive right to use them themselves or allow others to use with a licence or just buy them from the owning business.
As trademarks are intangible assets they are not depreciated like tangible assets but are amortised which is the process of revaluing intangible assets.
True and Fair
A principle in financial accounting where the preparation of financial statements in the UK (also other countries) are publishing information that they and others, including authorities, will be seen as truth and a fair position of the business. There is no statutory definition for true and fair however there are standards that prevent businesses defining things that are not accurate or producing fraudulent accounts. It’s worth remembering that True and Fair is only for external and published accounts. How an organisation wants to manage their internal management accounting is up to them as it only hurts them. For more information read here at the Financial Reporting Council.
U
Accounting
V
Accounting
W
Wealth
The residual profit a business makes after its transactions after a period of time (a year) or for life of the business e.g. a wealthy year, wealthy life. Typically wealth is seen as an excess over competition and therefore more successful e.g. a wealthy company. The accumulated wealthy of a business is displayed in the business’s balance sheet.
X
Accounting
Y
Year End (Annual, Financial)
A point in time every year where a business reports into financial and, where appropriate, non-financial position to a tax, corporate, or business owner authority. Many businesses report from April 1st to March 31st as this is the same as the UK financial year.
Z
Accounting
SYMBOLS
Accounting
NUMBERS
Accounting
Compsortia 