Glossary


Account number

The code number given to an account in the coding system.

Accounting bases

The methods developed for applying the accounting concepts to financial transactions and items, for example depreciation is a means of applying the matching concept to the purchase of fixed assets.See also Accounting policies

Accounting concepts

FRS 18 (Accounting policies) sets out the accounting concepts and desirable qualities that should be applied in the production of accounts.

  1. Going concern concept: an assessment should be made as to whether there are significant doubts about an entity's ability to continue as a going concern.

  2. Accruals concept (matching concept): revenues and costs are accrued (recognised when they are earned or incurred, not as they are received or paid). They are matched with one another as far as comparably possible and dealt with in the profit and loss of the period to which they relate.

  3. Consistency desirable quality: there is consistency of accounting treatment and disclosure of like items within each accounting period and from one period to the next.

  4. Prudence desirable quality: requires that accounting policies take account of uncertainty in recognising and measuring assets, liabilities, gains, losses and changes to shareholders' funds. It is not necessary to exercise prudence where there is no uncertainty.

  5. The Companies Act defines another concept: 'Disaggregation': Accounts are to be prepared with a minimum of netting off.

See also Statement of Standard Accounting Practice Accounting bases

Accounting equation

Capital = Assets – Liabilities or Capital + (Income – Expenses) = Assets – Liabilities

See also Balance sheet

Accounting policies

The specific accounting bases selected by a business and used in the preparation of their accounts, for example the method of depreciation in use.

The objective against which an entity should judge the appropriateness of accounting policies to its particular circumstances are:

  1. relevance;

  2. reliability;

  3. comparability; and

  4. understandability.

Accounting records

The formal recording of the transactions of a business. Depending on the size and type of the business these may take several different forms.

See also Manual records and Computerised records

Accounting year/year-end

Accounts are generally prepared for a year up to the same date each year. This date is the business's year-end. The period of a year from one year-end to another is the accounting year.

Accounts
  1. The profit and loss account and balance sheet of a business. Sometimes referred to as the final accounts.

  2. Often used to mean the ledger accounts.

Accruals

The profit and loss account should include all expenses incurred in the year whether or not they have been billed. Where an expense has been incurred, but not yet billed and therefore not yet included in the records, an adjustment must be made to include an estimate of the amount of the expense incurred. This extra amount included is an accrual or an accrued expense. The adjustment to include the accrual is to debit the expense account and credit the Accruals account (a current liability). The adjustment must be reversed in the following year - this will offset part of the amount of the invoice for the expense when it is received.

Accruals concept

See Accounting concepts

Accumulated depreciation

See Depreciation

AGM

See Annual General Meeting

Annual general meeting (AGM)

Many organisations will have AGM's, but this applies particularly to companies. At a company AGM the published accounts are presented to be approved by the shareholders.

Assets

The items owned by a business. These will include machinery, motor vehicles, stock, debtors and money at the bank. See also Fixed assets, Current assets and Balance sheet

Authorised share capital

The maximum amount of share capital that a company can issue, as set at the incorporation of the company. This can later be increased if necessary.

Bad debts

It sometimes happens that credit customers do not pay the invoices issued to them. At the point where it is known that a credit customer is never going to make payment, the balance should be written off as a bad debt. This becomes an expense of the business.

See also Provision for doubtful debts

Balance

The balance in account will be the difference between the total amounts debited to the account and the total amounts credited. An excess of debits over credits gives a debit balance (assets and expenses). An excess of credits over debits gives a credit balance (capital, liabilities, income). Some formats of ledger accounts show a running balance. In T account format no such running balance is shown - it must be calculated by balancing off the account. In so doing a balance will be inserted to be carried down (Bal c/d) and the calculated balance will be brought down in the account (Bal b/d). Sometimes the balance is brought forward from one page to another (Bal b/f).

Balance forward

See Open item

Balance sheet

A statement detailing the assets, liabilities and capital of the business. The two sections of the balance sheet, usually the assets section (assets less liabilities) and the capital section, should be equal. See also Financial accounts and Management accounts

Bank

A business should lodge all receipts in, and make all payments from, a business bank account (with the exception of sundry small payments to be made from petty cash). Reference to the bank account could mean either the account being run at the bank itself or the nominal ledger account for the bank.

See also Lodgement and Bank reconciliation

Bank overdraft

A business may have money at the bank, or as frequently happens, it may have agreed with the bank to spend more than it has deposited In this case the business will have overdrawn its account and will have a bank overdraft. Technically bank overdrafts are repayable on demand and are classed as current liabilities even though they may be ongoing for many years.

Bank reconciliation

In general, because of timing differences, the balance showing in the Bank account in the nominal ledger will be different to the balance showing on the bank statement. The process of agreeing the two figures, taking account of these timing differences, is the bank reconciliation.

See also Outstanding cheques and Outstanding lodgements

Bank statement

Periodically, usually once a month, banks send to their customers a statement showing the balance in the account and details of the transactions going through the account. This is the bank statement.

See also Bank reconciliation

Batch

In entering information into a computer system it is often the case that a series of items of the same type are processed together. These items are grouped together as a batch. The total of the items in a batch is the batch total which may be used for control purposes. Integration will often be carried out for a batch of items together.

Bookkeeping

The process of recording the transactions of a business in the books of the business. The process will vary from one business to another, but will usually consist of the books of original entry (cash book and daybooks) and the ledgers or a set of computerised ledgers.

Books of original entry

The books in which the first recording of business transactions are made. They are generally the sales daybook, purchase daybook and cash book. Also termed the books of prime entry.

Capital
  1. The amount invested in a business by its owner(s).

  2. The capital cost of an item is the cost of the item excluding any interest charges to be paid if the item is being purchased on some form of deferred credit.

See also Balance sheet

Capital employed

This term can be used with slightly different definitions corresponding to the different definitions of net assets, as:

Capital Employed = Net Assets

The capital employed is the finance being provided for the business. It can be taken as being that provided by the owner(s) only(the proprietor's capital employed), or it can be taken to include that provided by third parties as well, in which case long-term liabilities are also included.

The Proprietor's Capital Employed

will be the balance in the capital account of a sole trader, the shareholders' funds in a limited company.

Cash book

The cash book records all the transactions going through the business bank account. Note that in the case of payments, this means cheque payments, not as the name suggests cash payments. Payments made in cash should come from petty cash and would be recorded in the petty cash book. The cash book is often kept is an analysed format.

Receipts and payments may be recorded on the two sides of the one book or the Cash Book may be split into the cash receipts book and the cash payments book.

See also Cross-add

Cash flow forecast

A projection of the receipts and payments and bank balance for a future period. Not to be confused with the historic cash flow statement.

Cash flow statement

A statement in published accounts, required by FRS1, showing the flow of cash for the year just finished. Not to be confused with a cash flow forecast.

Cash payments book

See Cash book

Cash receipts book

See Cash book

Cash sales

When a cash sale is made the customer is not given any credit, but is required to make payment immediately. Note that the term cash sale does not mean that the payment was made in cash rather than cheque. It really means non-credit sales.

See also Credit sales

Coding system

In a computer system accounts are given codes by which they will be accessed. It is important to code accounts in a logical manner to get meaningful reports from the system. In a manual system accounts may also be given codes to make locating them easier. In the sales ledger and purchase ledger the coding will probably be by alphabetic reference to the name. In the nominal ledger however the coding will probably be by reference to the category of account, for example all fixed assets may well be coded together.

Companies Acts

The legislation governing the running and reporting of limited companies.

See also Published accounts

Comparability

See Accounting concepts

Consistency concept

See Accounting concepts

Contra

Where the same body is both a customer and a supplier of a business it will have an account in both the sales ledger and the purchase ledger. A contra adjustment sets one balance against the other.

Control account

In the nominal ledger there will usually be various control accounts. In some way these accounts are providing a check on some aspect of the accounting system. The most common control accounts are the sales ledger control account and the purchase ledger control account.

Corporation tax

The tax levied on the profits of a company. It is an appropriation of the profits and a liability of the company.

Cost of sales

In a retail business the cost of sales will simply be the cost of buying in the items to be sold. In a manufacturing business the cost of sales will be the cost of making the items to be sold. This will be the cost of materials bought in together with the work done to the materials - this will include manufacturing wages and various expenses relating to production.

See also Gross profit and Trading account

Cr

or Cr: abbreviation for credit.

Credit
  1. The right hand side of the double entry system. Often denoted as Cr.

    See also Debit

  2. The allowance of a period of ime before payment is required.

    See also Credit sales

Credit customer

A person or body to whom a business has sold goods or services on credit.

See also Customer, Credit sales and Sales ledger

Credit note

When goods are sold on credit an invoice is issued. If the sale is later cancelled for some reason, for example if the goods are returned as being faulty, a credit note will be issued. This may cancel a whole invoice or part of an invoice. Sales credit notes arise where a sale to a customer is being cancelled, purchase credit notes arise where a supplier has sent a credit note for the cancellation of a purchase invoice.

Credit sales

When a business makes a credit sale, the customer is not required to pay immediately. An invoice is issued requesting payment in perhaps 30 days (the customer is given 30 days credit). Once the invoice is issued the customer becomes a debtor of the business.

See also Cash sales and Debtors

Credit supplier

A person or body from whom the business has bought goods or services on credit.

See also Purchase ledger

Creditors

Persons or bodies to whom the business owes money.

The main creditors of a business will usually be the suppliers from whom the business has received goods or services on credit. These are sometimes termed the trade creditors.

See also Current liabilities and Purchase ledger

Cross-add

Where columns of figures consist of a total column and other columns analysing that total, the figures produced on summing the columns should cross-add that is, the total of the Total column should equal the sum of the totals of the analysis columns. Checking this cross-add checks that columns have been summed correctly and that individual lines have been analysed correctly. This applies to analysed Sales daybooks, Purchase daybooks and Cash books.

Current assets

Assets held in the form of cash or with a view to converting them into cash. These include stock of goods for resale, debtors and money at the bank or in cash.

See also Assets, Fixed assets and Balance sheet

Current liabilities

Amounts owed by the business and due to be paid over within one year. These will include trade creditors and bank overdrafts.

See also Liabilities, Long-term liabilities and Balance sheet

Customer

A customer is a person or body to whom the business sells goods or for whom it provides services.See also Cash sales and Credit sales

Debentures

A formal loan to a company at a stated rate of interest. Debentures may be redeemable, in which case the money will be repaid, or irredeemable, in which case they are only repaid on liquidation of the company (if there are funds available). They may be secured over the assets of the company. A fixed charge gives security over specific assets while a floating charge gives security over the assets in general. If the business founders, or if it cannot redeem the debentures at the specified time, the debenture holders have the right to recover the amounts due out of the sale proceeds of the secured assets.

Debit

The left hand side of the double entry system. Often denoted as Dr.

See also Credit

Debtors

Debtors are persons or entities who owe money to a business. The main debtors of a business will be customers to whom the business has sold on credit. These are sometimes termed the trade debtors.

See also Credit sales and Sales ledger

Depreciation

The cost of a fixed asset, (less any estimated residual value) is spread over the expected useful life of the asset by the process of depreciation. Each year's depreciation is charged in the profit and loss account. The total depreciation charged to date is recorded in the Accumulated (or Aggregate) Depreciation account.

Disaggregation concept

See Accounting concepts

Directors

The owners of a company, the shareholders, elect a board of directors to run the company on their behalf. The directors may work full time in the company, executive directors, or they may be outsiders (non-executive directors).

Dividend

The shareholders of a company receive a share of the profits in the form of a dividend. The rate of dividend is usually expressed as an amount per share or as a percentage (of the nominal value). The rate of preference dividend is fixed, the rate of ordinary dividend is decided on by the directors, to be confirmed by the shareholders. An ordinary dividend paid during the year is an interim dividend, the dividend based on the profits for the year proposed by the directors is a final proposed dividend. Dividends can only be paid if there are profits available to pay them.

See also Share capital, Ordinary shares and Preference shares

Double entry

A system of recording transactions by increasing the amount on the debit (left) side of some account(s) and increasing the amount on the credit (right) side of some other account(s) by exactly the same amount.

Debit entries Increase assets, expenses, Decrease liabilities, capital, income

Credit entries Decrease assets, expenses Increase liabilities, capital, income

Dr

or Dr: Abbreviation for debit.

Drawings

For a sole-trader or partnership, the amounts taken out of the business by its owner(s). Drawings could be in the form of cash, goods taken for own use or private bills paid by the business. Drawing go to reduce the owner's capital.

Earnings per share

A figure required by FRS14 to be disclosed for quoted companies = Number of ordinary shares Profit after tax and preference dividend

See also Financial Reporting Standards

Expenses

The ongoing costs of running a business. One of the main expenses of a business will usually be the wages and salaries costs. Others will include such things as telephone costs, rent, electricity charges, motor costs, advertising.

See also Profit and loss account

Finance charges

When an asset is purchased with payment being made over a long period under an arrangement such as hire purchase or a finance lease, there will usually be extra charges levied for this extended credit. These are the finance charges or interest charges. Such charges are an expense of the business making the purchase.

Finance lease

Under this type of lease the leasee effectively pays for the asset over the period of the lease. In this case the asset being leased is recorded as an asset of the business and the capital amount outstanding is recorded as a long-term liability. Lease payments are split into the capital repayment and the finance charges. Only the finance charges appear as an expense in the profit and loss account.

Financial accounts

The annual profit and loss account and balance sheet prepared for use outside the business. See also Management accounts and Published accounts

Financial Reporting Standards (FRS's)

Statements produced by the Accounting Standards Board (ASB) giving requirements for the production of published accounts.

See also Statements of Standard Accounting Practice

Fixed assets

Assets held by a business for use in the business rather than for resale. They are usually held for a number of years. Examples are property, machinery, fixtures and fittings, motor vehicles. See also Assets, Current assets and Balance sheet

Fixed charge

See Debentures

Floating charge

See Debentures

FRS's

See Financial Reporting Standards

General ledger

Another name for the Nominal ledger.

Going concern concept

See Accounting concepts

Gross profit

The profit on trading - Sales less Cost of Sales

See also Gross profit percentage and Net profit

Gross profit percentage

Gross Profit expressed as a percentage of Sales Sales

Gross profit × 100%

Different businesses of the same type will generally have similar gross profit percentages.

Hire purchase

A hire purchase contract is a contract for the hire of an asset with legal ownership of the asset being transferred with the last payment. This however is accounted for as the acquisition of the asset at the start of the agreement with a corresponding long-term liability of the capital amount on hire purchase. Subsequent payments are split into the charges (an expense) and repayment of the capital outstanding.

Historical cost (convention)

The usual basis for the statement of figures in the records and accounts. The main common exception is the revaluation of property, where the property is stated in the balance sheet at its current valuation rather than its historic cost.

See also Revaluation reserve

Holding company

A company which controls another company, its subsidiary.

Imprest system

A system of keeping petty cash where the cash float is set up at a certain specified level. Periodically the level of cash is made up to that same level again - this is the level of the imprest. At any point, the cash balance + the cash spent since the last reimbursement of the float should equal the value of the imprest.

Income

The monies earned by a business. These will usually be in the form of sales income, but there may also be sundry other receipts such as rents or interest received.

See also Profit and loss account

Income tax

Income tax is charged to individuals on their earnings. Where people are employed in a business income tax is deducted from their pay under the PAYE system. A person running his own business, either as a sole trader or as a partner in a partnership, is charged income tax on the profits of the business. This is a private responsibility of the individual, it is not a liability of the business.

See also Corporation tax

Incomplete records

In some businesses a complete double-entry set of records is not kept. In addition, there may or may not be some missing figures, for example an unknown figure of cash sales paid out as wages. The set of records in this situation is known as incomplete records.

Input VAT

See Value Added Tax

Integration

Integration is the automatic transfer of information from one module of a computerised accounting system to another. Thus an invoice entered in a supplier account in a purchase ledger would, on integration with the nominal ledger, update automatically the Purchase ledger control account, the VAT account and the appropriate expense account(s).

See also Modular computer system

Interest

Where money is lent by one body to another it is usual for the borrower to pay to the lender monetary compensation for the use of the money. This is interest payable by the borrower (an expense), interest receivable by the lender (income).

Internal accounts

A limited company must prepare its annual accounts is a specified format for issuing to the shareholders. The accounts to be used within the company, the internal accounts, can be produced in whatever format the company wishes.

See also Published accounts

Invoice

When a business sells goods or provides services on credit an invoice is issued detailing the amount being charged. The net amount of the invoice is the amount being charged by the business, to this is added VAT to give the gross amount. The invoice will usually specify when payment is due.

See also Sales invoice and Purchase invoice

Issued share capital

The amount of share capital that a company has issued. This is the amount that will appear in the balance sheet.

Journal

The journal is a book used for the original recording of transactions for which there is no other suitable book of original entry. This could be for the correction of a previous entry or the recording of adjustments such as depreciation.

No entries for 'K'

Lease

A contract, usually long-term, which allows for the use of an asset in return for a periodic leasing payment. The contract does not give ownership, but may contain terms for the acquisition of the asset at the end of the period of the lease.

There are two main types of leases - Operating leases and Finance leases

Leasee

The person or body to whom as asset is leased.

See also Lease

Ledger

A book containing accounts to record the transactions of a business. Ledgers may be in manual form or may be computerised.

See also Manual records, Computerised records, Nominal ledger, Sales ledger and Purchase ledger

Ledger accounts

The individual sub-divisions of ledger, for example the Sales account or the Debtors account in the nominal ledger or accounts for each individual credit customer in the sales ledger

See also T Accounts

Liabilities

Amounts that are owed by the business. These will include loans that have been made to the business, amounts owed to trade creditors and bank overdrafts.

See also Current liabilities, Long-term liabilities and Balance sheet

Limited company

A formal business entity set up under the rules of the Companies Acts. The entity has a separate legal existence to that of the owners (the shareholders). The liability of the owners for the debts of the company is limited to the amount of their share capital.

See also Sole-trader and Partnership

Listed company

A company whose shares are traded in on the Stock Exchange.

Lodgement

Money deposited in the bank.

See also Outstanding lodgement

Long-term liabilities

Amounts owed by the business, but not due to be paid over within one year. These will usually be loans of some kind or could be the capital amount outstanding under some deferred purchase agreement such as hire purchase.

See also Liabilities, Current liabilities and Balance sheet

Management accounts

Statements prepared to help those running a business, for use within the business. They take whatever form is felt useful, but will often consist of a monthly profit and loss account and balance sheet.

See also Financial accounts

Manual records

The process of recording the transactions of a business in written (manual) records.

See also Accounting records and Computerised records

Matching concept

See Accounting concepts

Modular computer system

Most computerised accounting systems come as different modules where the user can purchase whatever combination of modules is required. Modules will usually include nominal ledger, sales ledger, purchase ledger, cash book, invoicing, stock control and many others.

National insurance

When wages and salaries are paid, a deduction is made from the employees' pay for National insurance. In addition, the employer must also pay a contribution to National insurance. Both employees' and employer's contributions are calculated as a percentage of pay. National insurance applies where the pay is over a certain threshold. Contributions are paid over the following month with PAYE.

Net assets

Net Assets = Total assets less Total liabilities.

Where a balance sheet is drawn up with long-term liabilities deducted from the Assets section this will be the total of the Assets section of the balance sheet.

Where a balance sheet is drawn up with long-term liabilities being added to the Capital section, the total of the Assets section is: Total assets less Current liabilities

This can also sometimes be referred to as the net assets.

Net book value

The net book value of a fixed asset or class of assets = Cost - Accumulated depreciation

Net current assets

Current Assets - Current Liabilities

This figure gives some indication of the liquidity of the business. If negative, it become net current liabilities.

Net profit

The figure left after deducting all expenses from total income - the figure (I - E) in the accounting equation

C + (I - E) = A - L

This is the figure calculated in the profit and loss account - it is found by subtracting all expenses, other than cost of sales from the gross profit

See also Net Profit Percentage

Net profit percentage

Net profit expressed as a percentage of sales

Sales

Net profit × 100%

Nominal ledger

The book containing accounts for each sub-division of assets, liabilities, capital, income and expenses, for example there will be accounts for property, creditors, sales (or for several different types of sales) and accounts for whatever sub-division of expenses is required.

See also Ledger, Sales ledger, Purchase ledger and Control accounts

Nominal value

See Share capital

Notes to the accounts

In a set of published accounts there will be several pages of notes to the accounts. These notes contain information as required by the Companies Act.

Open item

When a clear-down of transactions is run in a computerised Sales ledger or Purchase ledger, details of invoices that are now paid, and the payments settling those invoices are often dropped from the system. In an open-item system all unmatched transactions (unpaid invoices and any unallocated payments) are carried forward. In a balance forward system only the balance, with possibly an ageing of the balance, is carried forward.

Operating lease

This type of lease is effectively the rental of an asset. Ownership of the asset does not pass to the leasee. Lease costs are charged as an expense in the profit and loss account.

Ordinary shares

The ordinary shares are the main class of shares of a company. The ordinary shareholders are the owners or members of the company and have the right to vote at general meetings. Their return on their investment, the ordinary dividend, is at the discretion of the directors and will only be possible as long as preference dividends have been met in full.

See also Share capital and Preference shares

Output VAT

See Value Added Tax

Outstanding cheques

It is often the case that there will be some time between the issue of a cheque and the date on which it actually comes out of the payer's account at the bank. At any point, cheques that have been issued and recorded in the cash book but have not yet reached the account at the bank are said to be outstanding or unpresented. Outstanding cheques will usually be the major reconciling item in the bank reconciliation.

See also Outstanding lodgements

Outstanding lodgements

Where a lodgement is made at business's own branch of the bank it will appear on the bank statement on the same date. Where however it is paid in through a different branch it will take a few days to reach the business's own branch. Thus at any time there may be lodgements recorded in the cash book that are not on the bank statement - these are outstanding lodgements and will form part of the bank reconciliation.

See also Outstanding cheques

Partnership

An association of between 2 and 20 persons (or possibly more in the case of certain professional partnerships) carrying on business together. The business is owned by the partners and they will share the profits.

See also Sole-trader, Limited company and Profit sharing ratios

Pay As You Earn (PAYE)

When wages and salaries are paid, a deduction is made from the employees' pay to cover their income tax liability. This tax deducted (PAYE) is paid over the following month to the Inland Revenue.

See also National insurance

Payments

Apart from sundry small payments made by petty cash, the payments made by a business should go through the bank account - by cheque or some kind of direct bank transfer. Such payments will be recorded in the cash payments book and will consist of such things as the payment of creditors, for previously received purchase invoices, wages and salaries, drawings, etc.

See also Receipts

Period-end

Computer systems are often run on a monthly basis, with a monthly profit and loss account and balance sheet being produced. In such systems there will usually be a period-end routine to be run. The effect of this will vary from one system to another, but it may indicate to the system that a new month is being entered and it may clear down some of the transaction listings.

See also Open item and Balance forward

Petty cash

It is often the case that a business will want to have some cash available for making small payments such as the purchase of stamps or milk. Cash kept for such purposes is known as petty cash. The payments will be recorded in the petty cash book which is often kept in an analysed format.

Petty cash book

See Petty cash

Posting

The process of transferring figures into ledger accounts.

Preference shares

A company may or may not have preference shares. The rate of dividend on preference shares is fixed and must be paid as long as there are profits available to do so.

See also Share capital and Ordinary shares

Prepayments

The expenses in the profit and loss account should exclude any that relate to the following year. Often items such as rent and insurance are billed in advance. The portion included in the expense accounts relating to the next year (the amount prepaid) should be removed by crediting the expense account. The debit is to the Prepayments account (a current asset). The adjustment will be reversed in the following year - this effectively carries the expense forward to the year to which it relates.

Private limited company (Ltd)

A company where there are restrictions on the transfer of shares - they cannot be made freely available for sale to the public.

See also Public limited company

Profit and loss account

A statement in which the expenses of a business are deducted from the income of the business. An excess of income over expenses gives a profit while an excess of expenses over income gives a loss.

See also Financial accounts and Management accounts

Profit sharing ratios

In a partnership the profits (or losses) must be split amongst the partners. They may have various allocations such as salaries and interest on capital. It is usual to apportion any profits remaining after such allocations in an agreed ratio - the profit sharing ratios. As this also applies to the allocation of losses the ratios are sometimes referred to as the profit/loss sharing ratios.

Proprietor

The owner of the business.

See also Capital

Provision

An amount set aside from profits for some expected future loss or expense.

See also Provision for doubtful debts

Provision for doubtful debts

Where it is thought that the full amount outstanding by credit customers will not be paid, but there are no definite bad debts to be written off, a provision should be made for doubtful debtors. This provision is set against the balance in the Debtors account to reduce the value to the amount expected to be recoverable from debtors.

Prudence concept

See Accounting concepts

Public limited company (plc)

A company, set up as being a public company, where the shares can be freely transferred from one person to any other.

See also Private limited company

Published accounts

A limited company is required to send to its shareholders, debenture holders and the Registrar of Companies a set of accounts each year. The content of these accounts is laid down in the Companies Act and consists of much more than the profit and loss account and balance sheet. These accounts are referred to as the Published Accounts.

See also Notes to the accounts

Purchase daybook

The book in which purchase invoices are recorded. The book will usually be analysed with columns for Gross Amount, VAT and columns for all the common categories of expenses.

See also Purchase ledger and Cross-add

Purchase invoice

When a business buys goods or receives services on credit, it will receive a purchase invoice from the supplier. Note that the term applies to all items purchased on credit not just the purchase of goods for resale.

See also Purchase ledger

Purchase ledger

The book containing accounts for each different credit supplier (the suppliers of both goods and services). Invoices received will increase the amount due to the supplier (credit) and payments will decrease the balance due (debit). The total of all the balances from the purchase ledger should equal the balance in the Purchase ledger control account in the nominal ledger.

Purchase ledger control account

This account is used where a subsidiary purchase ledger is being kept. Individual invoices and payments are posted to the individual supplier accounts in the purchase ledger. This is purely memorandum information. The double entry takes place in the Purchase ledger control account in the nominal ledger, usually by the posting of totals of invoices and payments. The balance in the Purchase ledger control account should equal the total of the balances in the individual supplier accounts in the purchase ledger.

See also Control accounts and Sales ledger control account

Quoted company

Same as Listed company

Receipts

The monies received by the business. These will be recorded in the cash receipts book and will consist mainly of money received from cash sales and from debtors, for previous credit sales. There may also be some other sundry receipts such as rents or interest received.

See also Payments

Reducing balance depreciation

The depreciation charge is calculated by applying a percentage to the net book value of the asset, for example 25% reducing balance will apply depreciation each year of 25% of the current net book value. Thus the depreciation charge decreases each year.

See also Straight line depreciation

Relevance

Financial information is relevant if it has the ability to influence the economic decisions of users and is provided in time to influence those decisions.

Reliability

Financial information is reliable if:

  1. it can be depended upon by users to represent faithfully what it either purports to represent or could reasonably be expected to represent, and therefore reflects the substance of the transactions and other events that have taken place;

  2. it is free from deliberate or systematic bias;

  3. it is free from material error;

  4. it is complete within the bounds of materiality;

  5. under conditions of uncertainty, it has been prudently prepared.

Remittance advice

When a payment is being made to a credit supplier it is useful to send with the payment a statement detailing the invoice numbers and amounts that are being paid. This may be done in the form of a note or a more official statement may be drawn up - a remittance advice.

Reserves

A category of accounts in a company, of a capital nature, but separate from the share capital. Reserves are of two types -

  1. Distributable, having been created out of profits- principally the profit and loss account balance

  2. Non-distributable, not having been created out of profits, for example

    1. Share premium account

    2. Revaluation reserve

Residual value

The residual value of an asset is its value at the end of the its useful life.

Revaluation

See Historical cost

Revenue

Another term for Income.

Reversal

Some adjustments that are made in the preparation of a set of accounts must be reversed in the next year. The reversal will be the exact opposite of the original adjustment. For example, to include an accrual, the adjustment is Debit : Expense Credit : Accruals the reversal is Debit : Accruals Credit : Expense

Reversing journal

Often computer systems have the ability to record journal entries as reversing. When the period-end is run these entries will reverse automatically. This is useful for entries like monthly accruals.

Revaluation reserve

When property is revalued in a company the gain is credited to Revaluation reserve. This is not a realised gain and so cannot be distributed as dividends.

See also Reserves

Sales

A business will usually operate by either buying goods and selling them on at a higher figure or by providing services. The Sales of the business are the amounts charged for the goods sold or for the services provided.

See also Cash sales, Credit sales and Customer

Sales daybook

The book in which sales invoices are recorded. The book will often be analysed - the total amount of the invoice will recorded together with the breakdown into VAT and an analysis into the type of sale.

See also Sales ledger and Cross-add

Sales invoice

A sales invoice is issued by a business when it provides services or sells goods on credit.

See also Sales daybook

Sales ledger

The book containing accounts for each different credit customer. Invoices issued will increase the amount due by the customer (debit) and receipts will decrease the balance due (credit). The total of all the balances from the sales ledger should equal the balance in the Sales ledger control account in the nominal ledger.

Sales ledger control account

This account is used where a subsidiary sales ledger is being kept. Individual invoices and receipts are posted to the individual customer accounts in the sales ledger. This is purely memorandum information. The double entry takes place in the Sales ledger control account in the nominal ledger, usually by the posting of totals of invoices and receipts. The balance in the Sales ledger control account should equal the total of the balances in the individual customer accounts in the sales ledger.

See also Control accounts and Purchase ledger control account

Share capital

A company's capital is split into a number of shares of a certain specified denomination - the nominal value, for example shares of 25p or £1 nominal value. The main types of shares are ordinary shares and preference shares.

Shareholders

The persons or bodies owning the shares of a company.

Shareholders' funds

Share capital and reserves of a company.

Shareholders' equity

Same as Shareholders' funds

Share premium

When shares are issued at some point later than the start of the company, they will usually be issued at a price greater than their nominal value. The difference between the issue price and the nominal value is the premium on the shares. The nominal value of such shares is credited to the share capital account while the premium is credited to the share premium account.

See also Reserves

Sole trader

A person carrying on a business on his own account. He may have people working for him but he owns the business solely himself.

See also Partnership and Limited company

SSAPs

See Statements of Standard Accounting Practice

Statements of Standard Accounting Practice (SSAPs)

Statements produced by the now disbanded Accounting Standards Committee (ASC.) giving some standardisation of matters which could be treated in different ways in the accounts. The ASC has now been superseded by the Accounting Standards Board.

See also Financial Reporting Standards

Statutory regulations

There are various obligations placed on a business by law. This applies particularly to a limited company whose dealings will be governed by the Companies Acts.

Stock

Goods for resale, or raw materials and goods in the process of manufacture, being held and not yet sold. They will be valued at cost, unless their expected resale value is lower, in which case this figure will be used.

See also Current assets

Straight line depreciation

The depreciation charge is calculated by spreading the cost of the asset (less any estimated residual value) evenly over the expected useful life of the asset. The rate is usually expressed as a percentage, for example 25% cost spreads the cost of the asset over 4 years.

See also Reducing balance depreciation

Subsidiary

A company controlled by another company, its holding company.

Supplier

A person or body who has sold goods or provided services to the business.

Suspense account

A suspense account is a nominal ledger account that should be used on a temporary basis. A figure is posted to the Suspense account if, at the time of posting, it cannot be established which account the figure should in fact be posted to. At the earliest opportunity the correct posting should be established and the figure should be transferred there from the Suspense account.

T accounts

The symbolic representation of ledger accounts in the form of a T with debits showing on the left hand side of the T, and credits on the right.

See also Double entry

Tax point

The tax point on an invoice is the date when VAT is due to be accounted for. In general this is the same as the invoice date.

Time-apportion

It is sometimes necessary to apportion expenses over a period of time. By dividing the amount of the expense by the length of time it is covering, the expense can be apportioned as appropriate. This will be done in calculating the amount of a prepayment.

Trading account

In the trading account the cost of sales is deducted from the sales figure to give the gross profit or the profit on trading. Sometimes the profit and loss account is headed Trading and profit and loss account, but usually the reference to the trading account is omitted.

Transaction

The transactions of a business are mainly the issuing and receiving of invoices and the receipts and payments of cash. The financial effect of these transactions is recorded in the books of account of the business.

See also Accounting records and Bookkeeping

Trial balance

A listing of the balances in all the nominal ledger accounts. The total of the debit balances should equal the total of the credit balances.

Understandability

Information provided by financial statements needs to be capable of being understood by users having a reasonable knowledge of business and economic activities and accounting, and a willingness to study with reasonable diligence the information provided.

Unpresented cheques

See Outstanding cheques

VAT

Abbreviation for Value Added Tax.

Value Added Tax (VAT)

A tax levied on the price of many goods and services. It is calculated as a percentage of the sales value. The VAT added to its sales by a business is termed its output VAT. It collects output VAT from its customers on behalf of HM Revenue & Customs. Input VAT is the amount of VAT suffered by a business on the goods and services it buys. The business pays over periodically, usually quarterly, the output VAT less input VAT. Where input VAT exceeds output VAT, the difference will be recovered from Revenue & Customs.

Working capital

Another term for net current assets

Write-off

Assets will be written off when they are considered not to have any value. This will apply to debtors, where any debt that is thought not to be recoverable will be written off as a bad debt. It will also apply to fixed assets - where an asset has been fully depreciated (accumulated depreciation = cost) the asset is said to be fully written off. Note however that the asset could still be in use even if fully written off - it simply means that the original estimate of the useful life of the asset was incorrect.

Written down value

Another term for net book value.

No entries for 'X'

Year-end

See Accounting year

No entries for 'Z'