Industry Terms

Accounting terms explained
 

To start and run a business, you often need to understand business terms that may not be well defined in a standard dictionary. Our glossary of Industry Terms provides definitions for common terminology and acronyms in business plans, accounting, finance, and other aspects of small business.

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A

ACCOUNTS PAYABLE – The amount owed to suppliers for goods or services.

 

ACCOUNTING PERIOD – The time period of when financial statements are prepared. Most accounting periods are calculated on a monthly, quarterly or yearly basis.

 

ACCOUNTING – The process of recording and reporting financial transactions.

 

ACCOUNTS RECEIVABLE – The amount due from debtors, usually after a sale or service has been completed.

 

ACCRUAL METHOD – A system used to record revenue and expenses when a transaction occurs as opposed to when cash exchanges hands. When invoices are issued on credit they are subject to tax whether it has been paid or not. The accrual method is used by most businesses.

 

ACCRUALS – Expenses that have been incurred but not paid, such as salaries or the interest payable on a loan. Estimates of these items should be included in profit and loss accounts and adjusted when the invoice is received.

 

ASSETS – Things of value that a business either owns or is due, such as physical property, money, vehicles, stocks and certain rights.

B

BAD DEBT – Amounts owed to a company that is recognized, but cannot be paid. Sometimes bad debts can be deducted as an expense.

 

BALANCE SHEET – A statement that discloses the financial position of a business with a summary of the entity’s assets and liabilities. Balance sheets are usually prepared at the end of each financial year.

 

BALLOON PAYMENT – A final lump sum payment due on a loan agreement. Loans with a larger final ‘balloon payment’ have lower regular repayments over the term of the loan.

 

C

CAPITAL – Money invested by business owners in order to acquire assets and begin operation.

 

CAPITAL GAINS TAX – When a fixed price asset is sold for a profit, the profit may be subject to capital gains tax; however, when determining the final amount, allowances, inflation and other aspects relating to the age of the asset must be taken into account.

 

CASH FLOW – The amount of money that is generated by the business throughout a specific accounting period.

 

CASH FLOW FORECAST – The predicted cash flow of an upcoming financial period.

 

CHART OF ACCOUNTS – A list of all of the accounts that are held in which business transactions are classified and recorded.

 

CHATTEL MORTGAGE – Similar to a hire-purchase agreement although the business owns the asset from the start. Chattel mortgages require regular ongoing payments and typically provide the option of reducing the payments through the use of a final ‘balloon’ payment.

 

CONSOLIDATED FINANCIAL STATEMENTS – Combined financial statements of a parent company and all of its subsidiaries.

 

COST CENTRE – When companies split up expense accounts into separate departments to determine which department is spending the most money.

 

CREDIT – Bookkeeping credit represents decreasing an asset or expense account or increasing capital or liability.

 

CREDITORS – Suppliers that a business owes money to.

 

CURRENT ASSETS – Current Assets include cash, accounts receivable and inventory that can be turned into cash quickly.

 

CURRENT LIABILITIES – Obligations that must be settled within a year or are essential to the day-to-day operation of a business. Examples include bank overdrafts, short-term loans and credit owed to suppliers.

D

DEBTORS – Customers who owe money to a business.

 

DEFERRED INCOME – Income that is received or recorded before it is earned.

 

DEPRECIATION – When the value of an asset decreases with time. Depreciation is usually a percentage and calculated at the end of each financial year.

 

DIVIDEND – After tax profits which are distributed to shareholders. Most small companies distribute dividends at the end of each financial year; however, larger companies usually distribute on a quarterly basis.

 

DOUBLE-ENTRY BOOK-KEEPING – A system of accounting where every aspect of a transaction is recorded twice; as a debit and credit.

 

DRAWINGS – Money that is taken by a company owner for their own personal use. Not to be confused with wages.

E

EARNED INCOME – The amount of wages, salary or service fees earned as compensation for products or services.

 

EBIT – An abbreviation for “earnings before interest and tax.”

 

EBITA – An abbreviation for “interest, tax and amortization.”

 

EBITDA – An abbreviation for “earnings before interest, tax, depreciation and amortization.”

 

EQUITY – The owners’ share of a company. On a balance sheet equity represents the stockholders’ investment and retained earnings or losses. Or it represents the net worth of a company or person minus the total liabilities.

 

EXCISE DUTY – An indirect tax levied on certain types of goods produced or manufactured in Australia including petrol, alcohol, tobacco and coal.

 

EXPENDITURE – Anything that is purchased for a business –stock, payment of salaries, etc. Expenditure affects income and profits and usually involves cash transactions.

F

FINANCIAL STATEMENTS – Documents that present financial data such as balance sheets, income statements and cash flow.

 

FISCAL YEAR – A period of 12 consecutive months chosen by a business as their accounting year. A fiscal year can begin on any date.

 

FIXED ASSETS – Fixed Assets include land, buildings, machinery, vehicles and long-term investments that can’t be turned into cash without affecting the day-to-day operation of a business.

 

FIXED COST – A cost that remains the same, such as salaries and rental agreements.

 

FORECAST – An estimate of the future finances of a company based on assumptions of past performance. A forecast usually includes a quantified amount.

G

GENERAL LEDGER – A repository for compiling all of a company’s accounting information. Also known as the book of entry, it provides all of the required data for preparing financial statements.

 

GOODWILL – The difference between the fair value and book value of an asset. Examples of goodwill involve overpayment by way of upholding a company’s reputation or rewarding customers for their loyalty.

 

GROSS MARGIN – The difference between the cost of a product or service and the selling price. For example, if a product is sold for $100, but costs $70 for manufacture the gross margin would be 30%.

H

HIRE-PURCHASE – A type of contract where you purchase a good through an initial deposit. You then rent it and pay the balance off in instalments plus interest charges. When you make the final payment, ownership of the good transfers to the purchaser.

 

HISTORICAL COST – The original price of an asset, stock or material – often used in price change accounting to replace current prices.

I

IMPAIRMENT – A reduction in the carrying value of an asset that has exceeded its depreciation period.

 

INCOME – The money a business receives for its commercial activities.

 

INCOME STATEMENT – A financial statement that summarizes revenue, expenses and profit. Also known as a profit and loss account.

 

INCORPORATION – The date in which a business is legally established.

 

INTANGIBLE ASSETS – Intangible Assets include patients, copyright, trademarks, licenses or anything that has value but can’t be touched physically.

 

INTEREST – A payment to the lender of money. Usually calculated by percentage.

 

INVENTORY – The supply of stock or goods that a business has for sale.

 

INVESTMENT – The purchase of products or services that could increase profit.

J

JOURNAL – A book or set of books used to record chronological business transactions.

 

JOINT VENTURE – When persons or businesses gather capital to provide products or services. Most joint ventures are carried out as business partnerships and make both parties responsible for the whole operation.

K

KEY PERFORMANCE INDICATORS – A quantified measurement used to calculate the performance of a business.

L

LEASING – A rental agreement that grants a person or business the use of an asset for a certain amount of time.

 

LEDGER – A financial record that keeps track of business transactions. Journal entries are posted to be re-organized into accounts.

 

LIABILITIES – Debts or obligations that are owed from one entity to another for money, goods or services.

 

LOSS – When expenditure exceeds revenue.

M

MANAGEMENT ACCOUNTING – When reports are tailored to suit the needs of company managers or directors instead of organizations that are not directly associated with the business. The purpose of management accounting is to help management make better decisions.

 

MARGIN – The difference between revenue and expenses.

N

NET ASSETS – The value of cash and assets minus company liabilities.

 

NON-CURRENT ASSETS – Assets that don’t meet the criteria of a fixed or current asset. Non-current assets can’t be touched. Examples include trademarks and copyrights, etc.

 

NON-CURRENT LIABILITIES – Long-term liabilities are obligations that aren’t due for more than one year such as mortgages and bonds.

O

OPERATING ACTIVITIES – The principal non-investment activities that keep a business operational.

 

OPERATING CYCLE – The period of time between the purchase of goods or services and the final delivery.

 

OVERHEADS – The cost of running a business. Costs associated with production or sales are not included in overheads, only costs that consist of expense accounts, such as salary and rent.

P

PETTY CASH – A small sum of money that’s held in reserve. Petty cash is usually used for items of small value when another form of payment wouldn’t be suitable.

 

PRE-PAYMENTS – An amount paid for in advance, such as insurance or rent for the forthcoming year. Pre-payments usually last for a certain period of time and will expire on a fixed date.

 

PROFIT – The overall revenue of a business minus expenses.

 

PROFIT AND LOSS ACCOUNT – A financial statement which shows the revenue, expenses and profit for a certain financial period. Also known as an income statement.

 

PROFIT MARGIN – The percentage difference between the cost of a product or service and the price it’s sold for. The profit margin is also known as markup.

 

PROJECTION – Hypothetical assumptions used to estimate future financial statements.

 

PROVISIONS – An account that is set up to accommodate a future payment, such as a bill that is yet to be received.

R

RAW MATERIALS – Materials purchased in order to manufacture products.

 

RECEIPT – A confirmation of payment, usually in written form.

 

RETAINED EARNINGS – Net income that is retained by a company rather than distributed to shareholders as dividends. Retained earnings are not spendable.

 

REVENUE – The income of a business. Examples include sales from goods or services, and earnings from interest and dividends.

 

RISK – The possibility of financial loss. High risk investments require a higher return than low risk investments.

S

SALES – The total income received from selling goods or services.

 

SELF-EMPLOYED – Working for one’s self as either a freelancer or business owner.

 

SHAREHOLDER – The owner of shares in a limited company or corporation.

 

SHARES – A part of a company. After purchasing shares the buyer will receive a document stating what percentage of the company they own.

 

SOLE TRADER – An individual who is a self-employed owner of a business.

 

START-UP COSTS – The up-front capital that’s required to start a new business.

 

STATEMENT OF CASH FLOWS – A basic financial statement that shows how changes in the balance sheet affects cash. The statement of cash flows is used to break down operating, investing and other financial activities.

 

SUNK COSTS – Money that has already been spent and cannot be recovered.

 

SUSPENSE ACCOUNT – A temporary account with which funds are deposited before allocation to the correct place. For example, if there is too much money in one account, it will be transferred to a suspense account until its correct location is discovered.

T

TANGIBLE ASSETS – An asset of a physical nature, such as buildings, vehicles and machinery.

 

TAX – A compulsory contribution to state revenue based on income and business profits, etc.

 

TAXATION – The levying of tax by the government against a person or business.

 

TURNOVER – The income of a business over a particular period of time.

U

UNSECURED CREDITOR – A creditor who doesn’t have a claim against a particular asset. If a company dissolves, an unsecured creditor must take their share of whatever is left.

 

UNSECURED LOAN – A debt without any collateral attached to it.

V

VALUATION – A process which involves determining the worth of a company’s assets.

 

VARIANCE – The difference between the estimated cost and the actual cost. An adverse variance is when the actual cost exceeds the planned cost; while a favourable variance is when the actual cost is cheaper than the planned cost.

W

WAGES – Payments made to employees for their services. Wages are classified as business expenses.

 

WITHHOLDINGS – The amount of money that’s withheld from an employees salary and paid (by the employer) to the correct authority. Such examples include pension schemes and national insurance.

 

WORKING CAPITAL – The excess of current assets minus current liabilities. In most circumstances, working capital is defined as the cash, accounts receivable and stock, minus the accounts payable. As a business grows the need for more working capital is, therefore, increased.

 

WORKING CAPITAL CYCLE – The total stockholding and customer collection period, minus the supplier payment period.

 

WORK-IN-PROGRESS – Partially completed goods or services that will be recorded as an asset upon completion.

 

WRITE-DOWN – A partial value reduction of an asset. A write-down is a non-cash expense that affects profits.

 

WRITE-OFF – The total value reduction of an asset. A write-off is a non-cash expense that affects profits.

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