Bookkeeping and Accounting Terms
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| Accounting Standard |
Standards issued by a national or international accounting standards body
which stipulate how published accounts must be drawn up. Accounting standards aim to
make published accounts understandable, comparable with those of other businesses
free from misleading errors and
relevant to a wide range of users. Accounts submitted by UK companies
to Companies House required by law to conform to those accounting standards specified in
the Companies Act 2006. |
| Balance Sheet (Statement of Financial Position) |
A list of the assets and liabilities of a firm and their valuations on a particular date.
The date chosen is often the last day of an accounting year and represents a 'snapshot' of the
firm's financial position on this day. The excess of the assets over
the liabilities is the "Capital" of a firm. |
| Bank Reconciliation |
In a firm's accounts payments and receipts of money are recorded at the
time they are processed in the office. However there is a delay between a firm issuing
a cheque to one of its creditors and the money leaving the firm's bank account.
There may also be a delay between
receiving a cheque and the amount being recorded as a deposit in the firm's bank account.
The bank reconciliation compares the bank balance in the accounts with that on the bank
statement and accounts for the differences as the result of the above delays.
Any other differences are due to bank transactions not entered in the accounts (such as
bank interest or bank charges, or even direct debit payments or receipts) or may be due to
errors which require investigation. Ideally bank reconciliations should be carried out
at regular intervals as they enable:
- The firm's own estimates of available funds in the bank account to be corrected
- The firm's accounts to be updated with bank transactions only recorded on bank statements
- for example customers' payments of their invoices
- Unexpected payments or receipts to be identified and investigated
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| Capital Allowance |
A deduction from trading profit assessable for tax purposes available to firms with
capital expenditure. The amount that can be deducted is governed by the type of capital
spend, the amount of capital expenditure and the rates in force in the relevant tax year.
The rates are set by the Chancellor of the Exchequer each year in an annual Finance Act.
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| Capital Expenditure |
Significant sums of money spent on items which will benefit a firm for several years.
Such items include cars, vans, buildings, computers, office fittings and machinery.
Money spent on everyday purchased goods or services counts as an immediate expense
which is subtracted from sales income in the same year
to obtain the profit for that year. However capital expenditure is treated differently on
account of its longer-term benefit. The cost of the capital item is spread over its expected
useful life so that only part of the cost may be deducted from sales income in any one year.
This fraction of the cost forms an annual 'depreciation' charge. Depreciation charges are
not deductible from sales revenue for tax purposes: instead capital allowances set by HM
Revenue and Customs must be used.
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| Cash Flow statement |
Financial statement giving a summary of the cash spending and cash inflow of a firm during an
accounting year. Cash inflow and outflow is split into the following categories: operating activities
(those due to normal trading activities of the firm), investing activities (capital expenditure as well as
actual investments) and financing activities (e.g. loans acquired or paid off and money raised by issue of new
shares). Net cash inflow is NOT the same as profit. For example the firm may be owed a lot of money at the end
of the year. This has not yet been translated into cash but nevertheless counts towards the annual profit. |
| Cost analysis |
An examination of the types and likely behaviour of the main costs incurred by a firm.
Some costs tend not to change whatever the volume of sales (e.g. building rent), others will
rise significantly as a firm grows its business. Some costs fall somewhere in the middle
having both a 'fixed' and a 'variable' part. Analysing the types of costs faced by a firm
can enable the impact of a growth in customers or a business downturn on profits to be forecast.
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| Credits and Debits |
These are the 'pluses and minuses' of accounting figures. In the most common form of bookkeeping - double entry
bookkeeping - the sum of the credits always equals the sum of the debits. The meaning of credit and debit does
not always correspond to the popular use of the word. For example a credit to a firm's bank account as shown in its own
accounts is actually a payment out of the account which reduces its balance, not a receipt. |
| Current Assets |
Assets under the control of a firm from which financial benefit is expected to be obtained within
one year. Stock purchased for resale is an example. It is expected to be sold to a customer within weeks
of purchase releasing the financial benefits of revenue and profit. Current assets are usually obtained
by revenue expenditure. |
| Depreciation |
That portion of past capital expenditure which is subtracted from sales income in any year
when calculating annual profits |
| Discounted Cashflow |
Predictions of cash inflows and outflows from a business which take into account the diminishing
purchasing power of money with time. An estimated inflation rate is applied to predicted cash receipts and payments
in future years and these sums are 'discounted' to their equivalent value this year. This method is used in
capital investment appraisals to ensure a predicted future receipt of one pound in, say, five years time is
equivalent in value to one pound received today. Present cash outflows can then be compared with future cash
inflows on a like-for-like basis. This helps decide whether an investment will generate a worthwhile future return.
Often the rate of return that capital could receive in the bank, on an alternative project or invested elsewhere is used as the 'inflation'
rate. |
| Fixed Assets |
Assets under the control of a firm from which benefit can be derived over an extended period
lasting years. Fixed assets are usually acquired by capital expenditure |
| Flexed Budget |
A budget that has been adjusted to take into account changed circumstances. Volumes of production or sales may differ
from those forecast when the budget was drawn up or the cost of raw materials may have increased. Flexing budgets allows profit forecasts to be altered
when levels of business and/or costs are higher or lower than expected. It also enables the performance of key staff
or departments of a business to be fairly assessed in the light of altered trading conditions. |
| General Ledger |
The main part of a firm's accounts which deals with categories of income or expenditure.
For example a 'purchases' account which totalled the amount purchased from all the firm's
suppliers would be a general ledger account: it does not identify the purchases from any
specific supplier. It is therefore an impersonal or 'general' account. |
| Gross Profit |
The profit figure obtained when only direct selling costs are deducted from sales revenue. Direct
selling costs, for example, include the cost of purchasing goods for resale in a shop but does not include administrative
or "overhead" costs such as rent for shop premises. |
| IRR (Internal Rate of Return) |
The discounted cashflow rate (see Discounted Cashflow) which, if applied to the predicted cashflows
of a capital investment, would result in a nil return on the investment, so that the real value of the money generated from
the investment would just cover the cost of the capital outlay. This rate of discount can then be compared
with the rate of return generated by alternative uses of the capital to assess whether it would be the most profitable
use of the capital. |
| Lower Earnings Limit |
Level of earnings below which an employee is unable to accrue any state pension entitlement under the National
Insurance system. |
| Net Profit |
The profit figure obtained when all the costs have been deducted from sales revenue, both direct
selling costs and administrative or overhead costs. |
| Personal Ledger |
That part of a firm's accounts which records transactions with individual named
customers or suppliers. These accounts record sales, purchases, sales returns, sales credit notes,
purchase returns, purchase credit notes, payments received from customers, payments sent to
suppliers and bad debt write-offs |
| Primary Earnings Threshold (PET) |
Level of earnings below which an employee pays no Class 1 National Insurance contributions out
of their salary. Provided the earnings do not fall below the Lower Earnings Limit (LEL) the employee
continues to accrue an entitlement to the basic state pension. |
| Profit and Loss Account |
A financial statement which shows the breakdown of the profit for an accounting year. It
starts with the sales revenue then lists all the expenses which have been deducted from the
revenue to arrive at the profit. The first deductions are those directly associated
with the trading activities of the
business, for example the cost of the goods which were sold to customers. These are followed by
the "indirect" or costs or "overheads" of the business such as administrative expenses. The final figure to be shown
is the profit for the year. |
| Purchase Ledger |
That part of the firm's Personal Ledger which records transactions with suppliers. |
| Real Time Information (RTI) |
New system of reporting payroll information to HMRC being piloted during the 2012/13 tax year and expected
to be in general use from April 2013. Instead of reported cumulative PAYE income tax paid and PAYE National Insurance paid
at the end of a tax year, amounts of income tax and National Insurance deducted from each employee will be reported to
HMRC every month (or week if the payroll is weekly). Under RTI other information will be reported for the first time
including employees' normal working hours and amounts paid to employees whose earnings are below the Lower Earnings Limit(LEL). |
| Revenue |
Another word for Sales Income. |
| Revenue expenditure |
Costs incurred by a firm which are not capital expenditure. |
| Sales Ledger |
That part of the firm's Personal Ledger which records transactions with customers. |
| Secondary Earnings Threshold (SET) |
Level of earnings below which the employer pays no Class 1 Employer's National Insurance contributions in
respect of an employee's salary. |
| Statement of Financial Position (SoFP) |
Modern term for a balance sheet. |
| Stock valuation |
Calculation of the value of goods for sale in stock at the end of an accounting year.
At the end of an accounting year there will be goods in stock which will not be sold until
the following year. The cost of purchasing unsold stock cannot be deducted from the sales
revenue for the accounting year now ending: only the purchase cost of stock actually sold in this year
may be deducted from the profits for the same year. Purchase
records show the cost of purchases made during the year without regard for whether they
were sold or not, so require an adjustment equal to the value of unsold stock at the end of the
year. A similar adjustment is also required for stock sold this year which was purchased last year.
Both adjustments require a stock valuation at year end. The value of stock is not necessarily the
same as the cost of purchasing it. For example the market value of goods may have decreased since they
were purchased. In this case the year end valuation may be less than the original purchase price. Another
example is where the purchase price of stock has risen during the year and it is not possible to identify
whether the unsold stock represents items purchased more cheaply at the beginning of the year or more
expensively at the end of the year. Rules for valuing stock under these circumstances are prescribed
by accounting standards. |
| Tax Code |
Code comprising one or two letters and usually three to four numbers which denotes a taxpayer's tax
free allowance. Although a general personal tax-free allowance is set every year each individual has different
circumstances. Some may owe tax from previous years or have received taxable benefits in kind and so their
personal allowance is reduced until the unpaid tax is recovered. Individuals earning over £100,000 in a tax year
automatically have their personal allowance reduced. Since the 2015/16 tax year some unused tax free allowance may be
transferred by a spouse to a higher earning partner (the Marriage Allowance is set at £1,100 in 2015/16 tax year).
If the number in the tax code is multiplied by 10 this will be
within a few pounds of that person's tax free allowance for the year. The main exception to this rule of thumb is
where a tax code is prefixed with the letter "K". Then the number indicates a negative allowance - in other words
so much tax is owed to HMRC that not only has all the personal allowance gone but taxable income exceeds actual income.
People who are employed in more than one job may have two different tax codes, one for each job. |
| Taxable Profit |
That portion of a firm's actual profit from which tax is deductible. Not all profit is taxable. For example
unincorporated traders will only be taxed on profits in excess of their personal tax-free allowances.
Capital allowances will also reduce the amount of profit which can be taxed. |
| Trial Balance |
The sum of all the credit balances showing on the General Ledger accounts should equal
the sum of all the debit balances at all times. Before accounts are drawn up at the end of an accounting period trial balances
are extracted and checked. If the Trial Balance credits and debits do not sum to the same number
then this is a sign that there is an error in
the accounts which requires investigation before the final accounts are prepared. Extracting a trial
balance is a stage in the preparation of a firm's annual accounts.
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