Professions are notorious for the use of jargon and accounting and finance are no different. With this website we hope to clear away at least some of this confusion. Set out below are explanations of basic accounting definitions (with some economics thrown in) that we hope will help you along this learning path.
If there are other accounting or finance definitions you would like to see included please get in touch through our Contact Us page.
| 401(k) Plan |
| Governed by s.401(k) of the Internal Revenue Code, an employee benefit program allows the contribution of wages and salary regularly to retirement savings before income tax is deducted. Third parties generally provide these plans, while the employer manages the payments and any employer matching contributions. |
| Accounting |
| The process of identifying, measuring and disclosing financial information relating to the flow of economic benefits and obligations of an entity for the benefit of informing parties that need to make economic judgements and decisions about the entity. |
| Accumulated Depreciation |
| An accounting measurement of total depreciation, or consumption of economic benefits, from an asset as at a set date. Also see depreciation below. |
| Accrual Accounting |
| The recognition of transactions when economic benefits and/or obligations are created for a reporting entry, rather than when money is received or paid for goods and services. Often (incorrectly) associated with the now defunct “matching concept” in accounting. See also Cash Accounting below. |
| Accrued Revenue |
| The recognition of revenue (or income) when that revenue is earned by the reporting entity, rather than when it receives payment for the activities generating the revenue. |
| Adjunct Account |
| Supplements or is adjoined to a main account in the presentation of the latter in the financial statements – both accounts carry the same natural debit or credit balance. Normally associated with asset and liability accounts. For example the premium charged on a bond issue would be treated as a adjunct account in the balance sheet by being added to the balance of the bond liability figure. See also contra accounts and valuation accounts below. |
| Ageing Report |
| A report of the debtors or accounts receivable of an entity divided into length of time the debt is owed. For example, a typical report might list and summarise those debts owed 0 to 30 days, 31 to 60 days, 61 to 90 days, 91 to 120 days, 121 to 180 days, and then 180 days plus. Of course this depends on the type of industry the entity operates in and its terms of credit sales. The report will typically provide totals of each division but also list the individual debtors making up each total. |
| Amortisation |
| Only relates to intangible assets and liabilities (for physical assets the term used is depreciation). However, like depreciation, amortisation reflects the change in economic benefits to be gained by an entity, for an asset, or economic obligations for a liability. |
| Arbitrage |
| Is the process of taking advantage of a price difference of an identical or similar asset between two or more separate markets. Often used in financial instruments and currencies markets, including cryptocurrencies, an asset is purchased in one market and then sold at a higher price in another market. |
| Assets |
| Something that is owned or at least controlled by the firm that has already taken place and from which it expects to receive cash or some other economic benefit. Assets are disclosed on the statement of financial position. |
| Associate |
| An entity that an investor has significant control over. See significant control below. |
| Balance Day Adjustments |
| Sometimes referred to as adjusting entries, balance day adjustments are required in accrual accounting systems to ensure the reporting entity’s financial accounts are properly reflecting the flow of economic benefits and obligations. The four main adjustments are: accrued revenue (or unbilled revenue); accrued expenses (or accrued liabilities); prepayments (or payments in advance); and, revenue in advance (or unearned revenue). |
| Balance Sheet |
| A primary financial statement that discloses the assets, liabilities and capital (including retained earnings) of the reporting entity. This statement is also known as the Statement of Financial Position. |
| Body Language |
| How we use physical non-verbal movements to convey messages when we communicate with others. The movements include body posture, eye movement, facial expressions, etc. |
| Bonus Issue |
| An issue of ordinary shares to existing shareholders out of the company’s reserves. The number of shares received by a shareholder is normally in proportion to the number they hold at the time of the bonus issue. Generally no cash payment is made by shareholders as the bonus is funded from company reserves. |
| Books of Prime Entry |
| A generic term referring to accounting records recording sales, purchases, cash, sales returns, purchases and general journals. |
| Breakeven Analysis |
| In its simplest form break even analysis enables us to work out at what level of sales does the business start to make a profit. This is of course based on assumptions of sales price, variable costs per unit and fixed costs actually remaining fixed. |
| Business Plan |
| A written document that layouts what the goals are of a business, the objectives it needs to achieve to reach those goals and an operational plan in finance, marketing, production and human resources. Often associated with new businesses, but they are just as important for existing businesses – as a business plan provides the blue print from which success can be measured. |
| Capital Expenditure |
| The spending of funds by an entity for the purpose of acquiring control over non-current (fixed assets). This may be in the form of building these assets or purchasing them as completed. In contrast to operating expenditure (see below), that is focused more on the day-to-day short term operations of the entity. |
| Cash Accounting |
| The recognition of accounting transactions only when money is exchanged between parties, rather than when economic benefits and/or obligations are created. See also Accrual Accounting above. |
| Cash and Carry Trade |
| An arbitrage opportunity where generally a long position (buy) is taken in a security at the current spot price, while a short (sell) position is taken with an associated derivate such as a futures or options contract. |
| Certified Public Accountants |
| A qualification issued by the American Institute of Certified Public Accountants (AICPA) to denote those individuals who have passed the required education, examination (the CPA exam) and are of appropriate ethical conduct to hold the CPA designation and undertaken the delivery of professional accounting services. With this membership CPAs are required to undertake regular continuing professional eduction and development each year and abide to set professional and ethical standards. |
| Ceteris Paribus |
| Other things remain equal. A term used in fields such as economics when the effect of changes in one variable are being measured all other variables are held constant; for example in measuring elasticity of supply. |
| Closely Held Company |
| Also often called a closed company, is a company with one or only a few shareholders. Most jurisdictions use five as a threshold for 50 percent or more of the common stock; ie where five or fewer shareholders control 50 per cent or more of the common stock, then a company is considered by the closely held. This criteria can have implications for both financial reporting and income tax treatments and disclosures. |
| Collateralised |
| Referring generally to a debt instrument that is issued with security backing it, for the benefit of the holder, in case of default by the borrower. For example in the case of the normal house loan the house is put up as collateral by the borrower, which is of greater value than the loan being taken out against it. If the borrow were to default the lender may take control the asset to help compensate their losses. |
| Computerised Accounting Systems |
| Double entry accounting systems that process transactions in the same manner as a manual system except that at the entry of data in the prime books of entry the ledgers are updated automatically. Transaction data may also be collected and entered in a more automated fashion. |
| Contingent Asset |
| Defined by International Accounting Standard 37 as “… a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non‑occurrence of one or more uncertain future events not wholly within the control of the entity” (para. 10). |
| Contra Account |
| An account maintained in the general ledger that is used to net-off against another in the financial statements. A contra account maintains an opposite balance to its related account. For example accumulated depreciation is contra account go fixed assets and has a natural credit balance. This is in contrast to an adjunct account, which would normally have the same natural debit or credit balance to the account is being adjoined to. See also valuation accounts. |
| Cost of Goods Available For Sale |
| Forming part of the initial part of Cost of Goods Sold (see below) calculation, being opening inventory plus purchases made during the reporting period. |
| Cost of Goods Sold |
| This figure represents the direct costs to the business for the goods and/or services that have been sold during the year. The formula involves opening stock plus purchases, forming Costs of Goods Available for Sale, less closing inventory. |
| Cost of Sales |
| Another terms used for cost of goods sold (see above). |
| Counterparty Credit Risk |
| A risk that a counterparty will not pay as obligated on a bond, derivative or insurance policy or other contract. Also known as counterparty risk or default risk. |
| Coupon Rate |
| The interest rate, expressed as an annualised percentage, that a fixed-income security will pay over its lifetime. This rate is stipulated at the date of issue and is used to then determine a security’s yield, which is calculated by dividing the interest payments into the current security price. |
| Credit |
| A transaction entry into a double entry accounting system that increases the balance of liabilities, revenue and capital (or equity). While at the same time reduces the balance of assets, expenses and drawings. See debit entry below. |
| Cryptocurrency |
| A token that is generated digitally forming a virtual currency. Generated through cryptography these tokens are maintained through an “accounting” ledger system known as a blockchain, which is a running decentralised record of transactions maintained across many computers rather than one single ledger owner. These currencies have the distinct feature of being both a method of payment, for example paypal, while also being a currency, such as the US dollar. |
| Crypto-mining |
| The process of applying dedicated computer power to the processing of a specific blockchain, for example bitcoin or ethereum. The mining process is at its simplest form the processing of the “debits and credits” on a blockchain, which is in substance computer ledger of the movements of a specific token on that chan. A crypto-miner is rewarded for the application of the computer power with block rewards and other fees. |
| Cryptocurrency Spoofing |
| Takes two forms in cryptocurrency markets. The first Is the placement of buy or sell orders on a cryptocurrency exchange by a party that does not have the intention to have those trades fulfilled but rather the sole intention of moving the price of a particular market in their desired direction. The second form is for large holders (often referred to as whales) of a particular cryptocurrency to move coins onto an exchange for the purpose of creating an impression of a pending sale order, however no such order is ever placed. |
| Cryptocurrency Whale |
| An individual or entity that holds a large amount of a particular cryptocurrency. For example, bitcoin whale is a common term used referring to large holders of BTC, generally a single holding of 1,000 BTC or more. |
| Current Assets |
| A classification of assets used in financial reporting to denote those assets the business does not intend to still be controlling after 12 months. |
| Debit |
| An entry or transaction made into a double entry accounting system that increases the balance or assets, expenses and drawings. While at the same time a debit decreases the balance of liabilities, revenue and equity (or capital). See credit entry above. |
| Debtor Aging Report |
| An internal document that ranks debtors (accounts receivable) by how long they are taking to pay their account. Generally starting with the quickest through to the slowest. These reports will often group debtors into 0 – 30 days, 31 – 60 days, 61 – 90 days, 91 – 120 days and the 120 days plus. This enables a business to determine which debtors to focus on and assist in calculation of bad debt expenses and doubtful debt provisions. |
| Default Risk |
| See above for counterparty credit risk. |
| Depreciation |
| An accounting measure that reflects the consumption of economics benefits of an asset over the reporting period. Also see accumulated depreciation above. |
| Direct Tax |
| A tax paid directly by a taxpaying individual or entity on their respective income or property. The most common forms of direct tax are income tax (individual and corporation) and property tax (often administered at local government level). This is contrast to indirect tax, which is generally related to tax collected by a third party in the sale of goods and services. |
| Distributable Profits |
| Reserves that can be used by the company to pay cash dividends. In general the balance of retained earnings, general reserves and other revenue reserves are classified as distributable reserves. |
| Diversification |
| An often used finance term that refers to a risk strategy that attempts to control or reduce the level of risk of a portfolio through holding different asset classes, different liquidities, different time frames, and even different geo-policital exposures. |
| Dividends |
| Are a distribution of all or part of a company’s earnings in the form of cash or shares, after corporation tax, to a specific class or classes of shareholders at a specific date. The amount and timing of distribution is determined by the Board of Directors. |
| Dividend Yield |
| A financial ratio calculated by dividing the dividend per share (DPS) into the share price. For example a DPS of $0.075 / share of $2.25 would produce a dividend yield of 3.3 per cent. |
| Double Entry Accounting |
| A system of recording the flow of cash (cash accounting) or economic benefits and obligations (accrual accounting) where the accounting equation must always remain in balance. The balance of the natural debit accounts (assets, expenses and drawings) being equal to the natural credit accounts (liabilities, revenue and capital). |
| Drawings |
| The reduction in owners contributions or capital as a result of making a specific withdrawal of funds from the business. Drawings are reflected in the statement of financial position. |
| Economic Benefits |
| An accounting terms that refers to the gains, or avoidance of losses, a reporting entity can reliability identity and measure as a result of specific events. For example, in the normal sale of goods and services, the economic benefit is the money received from a sale. Or when a debt might be forgiven by a creditor, the economic benefit is no longer having to pay the debt off. The gain or avoidance of loss may not even be for the entity’s direct benefit, if could be for another party, but it needs to have control over who receives those benefits. |
| Economic Obligation |
| The commitment to transfer economic benefits to a third party for a known amount, within a known timeframe and a transfer that is intended to be carried out (ie a future decision cannot be easily made that would involve cancelling the transfer). In accounting speak an economic obligation is known as a liability. |
| Effective Interest Method |
| A technique that allows us to more accurately reflect the borrowing costs of a firm by factoring in premiums or discounts costs – which reflect prevailing interest costs rather than purely coupon payments. This method is also useful in the accounting of costs associated with issuance of debt and stock. We have a whole article looking into this very topic. |
| Effective Marginal Rate |
| The overall income tax rate or percentage a tax payer pays taking into the total tax and total assessable income. For example, a tax payer may pay different marginal tax rates (under progressive tax systems this rate increases with the increase in income), but when the tax paid from each of these brackets is added together and then divided into the total assessable income, we end up with the overall effective rate of income tax paid – expressed as a percentage. This calculation provides a more effective comparison of tax burden between tax payers within a tax jurisdiction and then between tax jurisdiction themselves. |
| Elasticity of Supply |
| An economic term that measures the relationship between the proportionate change in the quantity of supply for any good or service and the proportionate change in the price for the same good or service. |
| Enrolled Agent |
| A United States based qualification administered by the US Internal Revenue Service (IRS). Holders of an EA status are able to represent any US tax payer before the IRS on any tax matter. Once the qualification has been obtained there is ongoing required continuing professional education hours to be maintained, along with a commitment to a set ethical code of conduct. |
| Equity Accounting |
| A method of accounting to account for an investment in an associate that brings to account in the financial statements of the investor the fair share of their initial investment and then ongoing profits from their holdings in the associate. |
| Expenses |
| The outflow of money or some other form of economic benefit to a third party, excluding distributions of owners capital, that has already happened and results in the reduction in assets and/or increase in liabilities. Expenses are disclosed in the statement of financial performance. |
| Externalities |
| Those costs and benefits that are generated through production and consumption of goods and services within society that are not directly born by the entity doing the producing or consuming, but by the society at large. |
| Fiat Money |
| A government issued legal tender that is not back or convertible into something with intrinsic value, such as gold or silver. |
| Financial Independence |
| The title is claimed by those who can cover their day-to-day living costs from income sources other than employment or contracting. Often referred to as being able to live off one’s passive income, i.e. income from dividends, interest, rent, etc. |
| Fixed Asset |
| An asset classification, also often referred to as a non-current asset (see below), that reflects the intention of the reporting entity to control the economic benefits from an asset for a period of greater than 12 months, or at least beyond the current financial reporting period. |
| Fixed Costs |
| Production costs remain the same no matter the level of production or sales. See also semi-fixed and variable costs. |
| Fixed-Income Security |
| Generally a form of long-term debt financing issued by both private and government bodies that provide the holder with set interest payments. Principle repayment is made at the maturity date, also set out at the time of the debt being issued. Fixed-income securities form part of the issuer’s liabilities and so do not form part of the capital or ownership of the entity. However, some instruments do have convertibility options for the holder – often at maturity. |
| Flat Tax Rate |
| A tax system that imposes a single rate of income tax upon taxpayers within a jurisdiction, irrespective of their assessable income level. This system may be used in junction with certain allowed deductions or “tax-free” allowances or thresholds. Flat taxes are common in many jurisdictions for corporation income tax, but very uncommon for personal income tax. Also, see progressive tax rates below. |
| Form 1099 |
| A form used in the US tax code titled “1099-Misc, Miscellaneous Income, that is used to report payments that otherwise are not separately reported, eg salary and wages. The types of payments include rents, prizes and awards, payment to someone who isn’t an employee for services, medical and health care payments, payments to attorneys and “any fishing boat proceeds”. |
| Franchise |
| Stemming from the French verb “franchir”, meaning “to free, a franchise is a contract that grants the payer (franchisee) access to specific franchisor’s intellectual property. This may include financing, operations, marketing, and products and services. The franchisee is normally allowed to sell these goods or services to customers within a specified geographical area. The payment provided is often made up of two parts, the first being a one-off upfront payment and the second an ongoing monthly or annual fee. |
| Franking Credits |
| See imputation credits below. |
| Futures Contract |
| A derivative financial instrument where a buyer (the long position) agrees with a seller (the short position) to buy an underlying asset, physical or another security, at a specified price and date. Most futures contracts require the seller to deliver and for the buyer to take delivery of the underlying asset at the set date. |
| Gearing Ratio |
| A financial investment analysis tool looks at the amount of leverage a business is using to fund its activities. In general the formula looks at the amount of long-term debt compared to shareholders funds. The higher this figure the greater the leverage being used. |
| General Ledger |
| The central record of accounts for a reporting entity used in cash and accrual double entry accounting systems. Individual transactions are performed in and between the accounts, while the general ledger maintains the running balances or all accounts held. The general ledger may also be linked to subsidiary ledgers that are used to reduce transactional volume for a general ledger system; for example payroll or non-current assets. |
| Generally Accepted Accounting Principles (GAAP) |
| A mix of pronounced accounting standards by the issuing authority within that reporting jurisdiction, which for many jurisdictions will include International Financial Reporting Standards, and those commonly accepted methods of recognition, measurement and disclosure. |
| Heterodox Economics |
| The study and analysis of economies through a paradigms outside of traditional economic schools of thought and models. The traditional economic paradigms came from the Keynesian and Austrian schools. However, in more modern times anything not following Keynesian economic models is increasingly being seen as heterodox economics. |
| Imputation Credit |
| A tax credit (also known as an a franking credit) earned by a company paying corporation income tax; with this credit being able to be passed onto shareholders by being attached to the distributed dividends. A taxpayer in receipt of dividends with attached imputation credits can use the credits to offset any income tax they may owe on dividend income. The purpose of this system is to reduce or eliminate the double taxation of dividends in the hands of tax residents. |
| Income |
| Money or some other economic benefit that a firm receives control over as a result of an event that has already happened and increases its balance of assets or reduces its balance of liabilities. Income is disclosed in the statement of financial performance. |
| Income Statement |
| A name previously used for the now named Statement of Financial Performance (see below). Also referred to as the Profit and Loss Statement. |
| Indirect Tax |
| A tax is generally levied through goods and services paid by one person or entity but collected and paid to the tax authority by the provider of those goods or services. Examples of indirect taxes include sales tax in the United States, Value Added Tax in the United Kingdom and Goods and Services Tax in New Zealand and Australia. |
| Individual Retirement Account (IRA) |
| A US-based tax-advantaged account that individual taxpayers can use to accumulate funds for retirement. At the moment there are four different types of IRA accounts, being: Roth, SEP, Simple and Traditional. |
| Internal Rate of Return |
| A finance tool that helps investors to evaluate the potential profitability of a project, providing use in both longitudinal and cross-project cash flow analysis. At its most basic level, the method is used to discover the discount rate of a project through establishing a rate of return that brings the net present value of project future cash flows to zero. |
| International Accounting Standards |
| Issued by the IFRS Foundation and the International Accounting Standards Board (IASB) these standards are slowly being replaced by IFRS (International Financial Reporting Standards). If a country follows standards issued by the IASB then IAS’s form part of the GAAP of that jurisdiction and must be followed in external financial reporting. International standards assist in the better comparison of financial reporting across different jurisdictions through harmonising the recognition, measurement and disclosure of financial information. |
| Joint Venture |
| A business arrangement where two or more parties agree to bring their resources together for a specific project or task. Often holding equal shares, the parties will form a separate legal entity to hold the resources. |
| Letter of Engagement |
| An agreement between a provider of professional services and a client, setting out the scope of work, compensation due and other general terms and conditions. |
| Liabilities |
| Debts or loans or other forms of financial arrangements that create an obligation on the firm to repay another party. For the debt to be recognized on the firm’s statement of financial position it must have already taken place and its repayment will be in the form cash or some other outflow of economic benefits leaving the firm. |
| Manual Accounting System |
| A double-entry accounting system where transactions are recorded manually in the books of prime entry and ledgers. |
| Market Risk |
| The risk of losses in positions arising from movement in market prices. |
| Matching Concept |
| An accounting concept or convention that is no longer applicable under new conceptual frameworks. It postulated that income and expenses should be matched in their respective accounting period. However, with the frameworks moving away from an income and expense focus to that of assets and liabilities, this concept is no longer valid in financial reporting. |
| Minimum Viable Product (MVP) |
| A product that has developed to a sufficient level of basic functionality that it can be released on a limited basis to the market. From this interaction with the market with an early version of the product, improvements and changes can be made enabling a better market fit with subsequent models. |
| Mixed Economy |
| An economy that has a combination of both free enterprise and the operation of markets and state central planning in the allocation of resources. To varying degrees an individual still has the ability to decide on their personal resource decisions, however these decisions are shaped and controlled by state players. |
| Modern Monetary Theory (MMT) |
| A complex but growing economic and political movement that sees sovereign governments as special when it comes to the normal rules that govern other economic actors (such as corporations and people). Traditionally economic actors operated on the basis their spending (both capital and operating) was constrained by their ability to earn, with shortfalls made up by borrowing. With borrowings meant to be largely used either for short-term operating funding shortfalls or for long-term capital investment. However, MMT sees sovereign states as different in that as they can create their own money out of nothing they are in fact not normal economic actors and should not constrain their spending in the traditional sense. |
| Money |
| Any unit of exchange that helps to facilitate the exchange of goods and services in a society. Generally thought of dollars and cents, however, over human history money has included seashells, precious metals, cigarettes, sea salt, beans, animals, farm produce and in more modern times crypto currencies (see above). |
| Net Income |
| Another name for net profit or net earnings. Net income is calculated by deducting expenses from income. Net income can be a positive (profit) or negative (loss) number. |
| Net Present Value |
| A finance technique that establishes the value of future cash flows from a project or investment in today’s money. By applying an appropriate discount rate, a stream of future cash flow can be presented in today’s money (reflecting the purchasing power today from potential future earnings). This enables a more sound method of investment choice analysis by providing a common value of varying future cash flow streams. |
| Net Worth |
| The difference between total assets less total liabilities of an individual or business. For a business this would be the “owners equity”. |
| Nominal Ledger |
| See General Ledger. |
| Non-Current Asset |
| A classification of assets used in financial reporting to denote those assets the business intends to still be controlling after 12 months, or at least beyond the current reporting period. Also commonly referred to as fixed assets (see above). |
| Non-Fungible Tokens |
| Are tokens that are largely based on the Ethereum blockchain (but are also available on TRON and NEO), that can be used to represent almost anything the creator wishes. For example many are pictures, or JPEGs, others are short videos, while others are rendered 3-d models of physical items such as action figures. They are referred to as Non-Fungible Tokens (or NFTs) because they are unique, in that they cannot be easily substituted or replaced with another. Unlike say Bitcoin, where one bitcoin is pretty much the same as the other and therefore easily substituted. |
| Non-Government Organisation (NGO) |
| Also known as a non-governmental organisation, any organisation that is not controlled by a government body, and is normally not-for-profit; as opposed to the for-profit organisations (often called the private sector). NGOs can operate at the local, national or international level. Some of the more famous NGOs would include the World Wildlife Fund (WWF) and Save the Children. |
| Opportunity Cost |
| A term from economics that refers to the benefits missed out on from alternatives as a result of a particular choice made. For example, a dollar invested in shares is then not available to invest in real estate. |
| Options Contract |
| A legal agreement between two parties to provide an option to to buy or sell an underlying asset (often another financial security) at a specified price (the strike price) at or before a specified date (the expiration date). Put options give the holder the right to buy at the strike price before the expiration date. While a put option gives the holder the right to sell at the strike price before the expiration date. Options, like futures, are referred to as derivative contracts as their value is derived from an underlying asset, for example a company share or gold. |
| Original Issue Discount |
| The difference between the lower price paid for a debt instrument and the instrument’s face value. For example an entity issuing a debt instrument with a par value of $1.00 but at a 10 per cent discount would only receive $0.90. The level of discount being offered is affected by such factors as prevailing interest rates and the credit worthiness of the issuer. |
| Outsourcing |
| The process of using outside suppliers or goods and services for business functions that have been traditionally performed in-house, either within that industry or business. For example many small businesses now use third parties for their human resources function. |
| Overhead Costs |
| An expense incurred by a business not directly related to the production of a good or service. Often referred to as “indirect costs”. They are generally split into two groups, production or manufacturing overheads and administrative overheads. |
| Overhead Cost Allocation |
| Is simply a methodology to allocate or apportion the indirect expenses incurred (referred to as overheads) to the goods and services being produced. For example allocating the costs of a manufacturing cost such as maintenance personal wages or administrative costs such as the accounting staff wages. These costs are allocated to work-in-progress and finished goods. |
| Owner Financing |
| In the sale of an asset to the purchaser the seller also provides the financing arrangements. This type of agreement may provide greater flexibility in financing, cheaper transaction costs or enable a buyer to obtain funding that may have not been easily available from normal lending institutions. This form of financing is also known as “seller financing”. |
| Paradigm |
| Stemming from the greek word “paradeigma” it descirbes framework through which an issue or problem can be viewed, tested or otherwise examined. |
| Posting |
| A term used to describe the process of entering transactions into a book of entry (eg the cash receipts book) or the general ledger (eg by making a general journal entry). When a transaction is posted it updates the accounting records either through manual input and calculation or more commonly these days through computerised recording and updating. |
| Prepayments |
| Also known as prepaid expenses are operating expenditures paid in advance of the accounting period to which it relates. The reporting entity in substance is paying for a good or service in advance of their receipt of the economic benefits to be gained from that good or service, for example, prepaid insurance. |
| Present Value |
| The value today from a stream of future money and/or a lump sum discounted at a given rate applied over that period of time. It provides us with an easy means to reflect in mathematical terms that $1 now is worth more than the same $1 in the future; due to the rate of return that could be earned on it. Therefore, that future dollar is “discounted” back to give us what its value would be today (assuming that rate of return was earned). |
| Privately Held Company |
| A company whose shares are not traded on a public exchange. Often these companies are owned by a small number of shareholders. Because the company’s shares are not publicly traded the financial disclosure requirements are a lot less onerous. |
| Profit and Loss Statement |
| One of the primary financial statements disclosing the expenses and revenues, operating and non-operating, of a reporting entity. Also known as the Income Statement and Statement of Financial Performance. |
| Progressive Tax Rates |
| Used in an income tax system where the rate of income tax charged increases with the increase in assessable income. Using marginal tax rates, as opposed to flat or single rate systems, as a taxpayer earns more a higher percentage of tax is deducted, generally at specified thresholds. |
| Proof of Stake |
| Developed as an alternative to proof of work systems, see below, proof of stake focuses on the number tokens that are held on the blockchain and committed to a validator. So rather then replying upon the amount of power that is committed to the process as proof of work does, proof of stake relies upon the value of tokens at stake by validators, to keep them “in-check”. The greater value of tokens staked the greater the amount of work that can be validated and staking earnings made. |
| Proof of Work |
| The most famous application of this concept is Bitcoin, where its blockchain transactions are processed by miners. Each block involved a competition to solve a cryptographic puzzle, the miner that solves this puzzle first, gains the right to process the next block in the block chain and earn the attached fees and rewards. |
| Recognition |
| An accounting term defined in the IFRS Conceptual Framework para. 5.1 as a process that brings into the accounting records and therefore to be disclosed in the financial statements a transaction that meets one of the five elements of those statements, being either part of revenue, expenses, assets, liabilities or equity. |
| Recoverable Amount |
| The higher value of an asset’s fair value less cost to sell or an asset’s value in use. The fair value less cost to sale is an amount that could be obtained in the open market from the sale of that asset (or similar asset) less the costs of bringing it to market. While the value in use is the present value of future cash flows generated from the use and, if any, sale at the end of its useful life. |
| Retained Earnings |
| The accumulated profits of a business that have not been distributed in tax to government or withdrawals to owners (for example dividends paid to shareholders). |
| Revenue |
| Another name for income. See “Income” above. |
| Rights Issue |
| An issue to existing shareholders of a company at a price that is less than the existing market price of the share. |
| Roth IRA |
| An Individual Retirement Account (IRA) whereby the owner can with funds tax-free, as opposed to tax being liable from a traditional IRA account on the withdrawal of funds. This account can be useful where the individual expects to have a higher rate of income tax at retirement, compared to when the money was deposited into the fund. |
| SaaS |
| Software-as-a-Service (SaaS) is generally recognised as a business model that provides software services on a subscription basis. Typically, the software is web-based and so served from off-site computers. |
| Seller Financing |
| See “Owner Financing” above. |
| Semi-Fixed Costs |
| Production costs that remain fixed within a given range of unit production or sales. For example between 0 and 10,000 units, the costs are X. Bit between 10,000 and 20,000 the particular costs are Y. As opposed to variable costs that change as production or sales change. And fixed costs, which remain the same no matter the production or sales volumes. |
| Share Premium Reserve |
| A capital account disclosed on the balance sheet is used to record shareholder payments for shares issued above par value. |
| Shareholder Funds |
| The value of owners’ money invested in a company at a specific point in time. Another term used is that of Net Assets, ie the amount of money left after deducting total liabilities from total assets. It is the residual amount in a company once all lenders have been repaid. This is then available for distribution to shareholders. |
| Significant Influence |
| The ability of an investor to be involved in the creation and/or execution of the operating and financial policy of an investee. See above for the term associate. |
| SME |
| Defined as Small and Medium Enterprises, a loose definition that captures private business up to a certain size based on income, assets and or number of employees. The level of income, size of assets or the number of employees has no widely accepted threshold. |
| Sole Trader |
| Also often referred to as a sole proprietorship, a business structure with only one owner that is unincorporated. This means the business and the sole owner are one and the same for legal and tax purposes. The owner carries the full risks and benefits with no legal separation between them and their other personal assets. |
| Statement of Cash Flows |
| A summary of the cash flows generated within the specified period by the entity in three areas, being operations, financing and investing. The statement brings together the flow in cash within the statement of financial performance and the statement of financial position and so provides the user with a clearer picture of where cash is coming from and what it is being applied too. |
| Statement of Changes in Equity |
| A summary of the movements in reserve accounts that make up the equity of a business. For example changes in share capital and dividend payments to shareholders. This account is also known as the Statement of Retained Earnings. |
| Statement of Financial Performance |
| A summary of the income, expenses and resulting profit of the business over a set period of time. |
| Statement of Financial Position |
| A snap-shot of the assets, liabilities and equity of a business at a particular point in time. |
| Statement of Retained Earnings |
| See “Statement of Changes in Equity” above. |
| Supply Chain |
| Generally recognised as the steps or processes involved for an entity to achieve the delivery of its goods and/or services to its ultimate customer from its original point of manufacture or generation. |
| Surety Bond |
| From the French sûreté, this is an agreement, promise or contact between three parties to ensure a certain action is performed by the principal to the contract. The principal purchases the bond (for a fee) from a surety provider for the benefit of a third party, the obligee. The surety takes on the risk that the principal fails to comply with a certain action or standard of performance, for which the obligee would normally receive the benefit of the bond in the case of the principal’s failure. Often with these bonds the obligee is a government agency that require a principal to hold certain levels of a surety bond in order for them to be allow them to undertake certain activities within their jurisdiction – for example a tax preparer surety bond in California, USA. |
| Tangible Fixed Asset |
| Are all assets that have a physical form and which a business plans to derive economic benefits from beyond the next accounting period. As opposed to intangible assets that have no material substance. For example a building would normally be categorised as a tangible fixed asset because: a) it has physical form and substance; and b) the economic benefits controlled from it would normally stretch beyond the next accounting period. |
| Taxable Event |
| An income or gain that occurs resulting in the creation of a tax liability for the recipient. For example the payment of wages, the earning of interest or payment of dividends are some of the most common taxable events. |
| Trading Account |
| In accounting and finance this term has different definitions. In accounting it is a financial statement, often forming the initial part of a statement of financial performance, that determines the gross profit for a business, or business unit, over a period of time. Starting with sales, less the cost of goods sold, provides a gross operating profit. In finance it refers to an account held by a client with a firm for the purpose of acting trades in financial instruments, such as shares, currencies or derivatives. |
| Transition Curve |
| A model that helps to explain change by setting out seven stages people go through as they experience change either in the workplace or their personal lives. |
| Trial Balance |
| A list of all the general ledger accounts maintained in a business double-entry ledger system. The purpose of bringing all of the accounts together is to test that accounting equation is in balance, ie all debit nominated accounts are equal to all credit nominated accounts. |
| Uncollateralised |
| Referring to debt instruments that are issued without security being held to back them. Originally from the Latin debentur, meaning “written acknowledgement of a debt”. |
| Valuation Account |
| A group term used to generally describe contra or adjunct accounts that alter the disclosed balance of an asset or liability in the balance sheet. For example, accumulated depreciation is a contra account, while the premium on bond issue is an adjunct account. However, both are sometimes referred to as valuation accounts. |
| Variable Costs |
| Production costs of a business that change in relation to the production or sale of the underlying goods or services. See also fixed costs and semi-fixed costs. |
| Warrant |
| A financial instrument that provides the holder with a right to buy or sell a security at a specific price (the exercise or strike price) before or on a specific date. Warrants that allow the holder to buy are referred as call warrants, while the right to sell warrants are called put warrants. |
| Warranty |
| An agreement normally between the seller and the buyer of a good or service, that provides specific remedies, within a specified period of time, the seller will undertake if the good or service has been found defective in some way. This may be in the form of repair, replacement or some other form of compensation. |
| Working Capital |
| In accounting definitions this refers to net current assets, ie current assets less current liabilities. This is the amount of liquid assets that can be applied to the normal operations of the business. In particular during start-up and the early years of a new business this is one metric that will often spell the ruin of otherwise quite profitable businesses. |
| Withholding Tax |
| A tax collection system whereby the payer (acting as an agent of the tax authority) withholds a specific percentage of a payment to a payee and passes this on to the respective tax authority. This withheld amount is then credited to the payee’s tax obligation at year-end with any over collection being refunded or with any balance owing demand is made for payment by the tax authority to the payee. |
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