Abridged accounts

Summary financial statements prepared by small companies.


The place where all of the transactions relating to any given liability, revenue or expense item are recorded together.

Accounting bases

The methods for expressing or applying fundamental accounting concepts to financial transactions and items, for the purpose of financial accounts. There may he more than one accounting basis for dealing with any particular item.

Accounting period

The period for which an entity chooses to prepare its final accounts. It is generally one year but can be set to any date range.

Accounting policies

The specific accounting bases selected and consistently followed by a business enterprise as being, in the opinion of the management, appropriate to its circumstances and financial position.

Accounting principles

Rules and conventions which ought to be followed when preparing financial statements.

Accounting records

The records, including books of original entry etc., kept by an enterprise showing details of its transactions. These records, which may he kept un paper or magnetic media, are summarised to provide information to permit final accounts to be prepared. The Companies Acts requires that a record of certain minimum details be kept and made available to auditors.


A term generally used to mean 'final accounts', 'financial statements' or 'annual report and financial statements'

Accrual accounting

A system of accounting, the objective of which is to show in an entity's final accounts for a period, the financial effects on that enterprise of all transactions and events which occurred during that period. An alternative to accrual accounting is the cash basis of accounting.


Expenses which have been incurred (that is, the benefit of which has been received), but which have not been paid at the end of an accounting period. They are shown as an expense in the Profit and Loss Account for the period in which they were incurred and as a current liability in the Balance Sheet as at the end of that period. Also known as 'Accrued expenses'

Accruals concept

The fundamental accounting concept (also known as the 'matching concept') which means that profit is the difference between revenues and expenses rather than the difference between money received and money paid. The accruals concept requires a business to show, in its final accounts for a period, all expenditure incurred in that period, whether or not it has actually been paid by the end of the period. The application of the concept means that revenue and costs are accrued that is, recognised as they are earned or incurred, not as money is paid or received), matched with one another where there is a relationship between them that allows this, and dealt with in the Profit and Loss Account of the period to which they relate.

Accumulated depreciation

The total amount of depreciation written off a fixed asset up to a particular time. It is shown as an expense over one or more Profit and Loss Accounts. Also known as 'Aggregate depreciation'.

Acid test ratio

A measure of short-term liquidity calculated as the ratio of current assets, excluding stock, to current liabilities.

Activity ratios

Ratios used to measure or analyse a firm's efficiency, for example, the stock turnover ratio.

Adjusted trial balance

A trial balance prepared after all 'adjusting entries' have been posted to the relevant ledger accounts.

Adjusting entries

Entries made to apply the principles of accrual accounting to transactions that span more than one accounting period.

Aged analysis of debtors or creditors

A list of amounts owed, by debtors or to creditors, showing separately for each debtor/creditor, and in total, how much of the amount owed has been owed for less than one month, between one and two months, between two and three months and so on.

Aggregate depredation

see 'Accumulated depreciation'.


The writing-off of an asset or liability over a period. The term is commonly used in relation to writing off goodwill or capital grants received.

Annual General Meeting (AGM)

A meeting held each year which all shareholders in a company are invited to attend. The normal business of an ACM includes considering the latest set of accounts and appointing or removing directors and/or auditors.

Annual report

A report issued each year by quoted companies containing the company's latest financial statements, the Directors' Report, the Auditor's Report, the Chairman's Statement etc. Also known as the annual report and accounts'.

Annual return

A document which must be sent each year by companies to the Companies Registration Office. The return gives the addresses of the company's registered office, the place at which the register of members and register of debenture holders (if any) are kept, details of the company's issued share capital, indebtedness, changes in shareholders in the company and its directors and secretary. The return must be completed within sixty days of the AGM for the year to which it relates. Companies which do not make an Annual Return may face penalties. Annual Returns will not be accepted by the Companies Office unless accompanied by the relevant set of accounts.

Apportionment of costs

The division of costs between, for example, two or more departments.

Appropriation account

An addendum to the Profit and Loss Account of partnerships and companies. The appropriation account shows how profit earned is divided. In the case of partnerships the profit, after charging partners' salaries, interest on capital and other entitlements, is divided between the partners in the profit-sharing ratio. In the case of companies, profit is divided between dividends, a provision for taxation, any transfers to reserves, profit used to issue bonus shares and retained profit.

Articles of Association

The legal document which details the internal regulations for the running of a company. The Companies Acts contain a 'model' Articles of Association known as 'Table A'. All companies must have 'Articles', whether they 'adopt' Table A, with or without modifications, or write a completely original document.


Resources owned by a business. Assets are shown in the Balance Sheet, unless they cannot be valued with reasonable accuracy. Assets are categorised in two different ways

(1) between fixed assets and current assets and (2) between tangible assets and intangible assets.

Asset turnover

An activity ratio that measures the efficiency with which assets are utilised to generate sales. It is calculated as sales divided, by average total assets.


The independent examination of the financial statements of an enterprise by an appointed auditor in order to form a professional opinion as to whether they have been presented fairly and prepared in conformity with generally accepted accounting practice.


The carrying out of audits or the subject concerned with the study of audits and audit practice.

Audit opinion

The conclusion arrived at by an auditor, on the basis of evidence gathered during the course of an audit, as to whether the financial statements concerned give a 'true and fair view'. The audit opinion Is expressed in an 'audit report'.


independent professionals who undertake audits and report to shareholders thereon, The fee they charge a company for an audit must be disclosed in its accounts.

Audit report

The document, prepared upon completion of an audit and addressed to shareholders, in which auditors express their audit opinion.

Authorised share capital

The maximum amount of share capital or number of shares which a company can have in issue at any given time. The amount, which can be altered by the shareholders at a general meeting, is stated in the memorandum of association and must be disclosed in the balance sheet.

Average collection period

The number of days, on average, which it takes a business to receive payment for sales made on credit. It is a measure of efficiency and is calculated as average debtors during a period divided by credit sales for that period x 365 (or the number of days in the accounting period if the period is not a calendar year). Average debtors is usually taken to be the average of trade debtors at the beginning and end of the period, although this is not strictly correct, particularly if sales are seasonal.

Average cost method of stock valuation

A method of stock valuation in which products sold, or in stock, are valued at their average (simple or weighted) cost.


Bad debts

Amounts owed by debtors which, it is expected, will not be received. Bad debts are
written off' (shown as an expense) in the Profit and Loss Account of the period in which they are
deemed to become 'bad'.


The balance on an account (T-account or ledger account) is the difference between the total of
the debit entries and the total of the credit entries in that account. The account is 'balanced' by inserting the balance on whichever side is the smaller at the date of the balancing. Balances may be either carried down (dd) or carried forward (c/f) at the end of one accounting period (e.g. month or year) and either brought down (bid) or brought forward (b/f) at the beginning of the next period. 'c/d' and 'bid' rather than 'c/f' and 'b/f' are used throughout
this book. Also known as 'account balance'.

Balance sheet

A financial statement showing the assets, liabilities and capital of a business at a
particular point in time. It does not necessarily show assets and liabilities at their respective 'values' as the figures in the balance sheet come primarily from the Trial Balance which is simply a list of the balances on the various ledger accounts at the date of the balance sheer. The Companies (Amendment) Act, 1986 prescribes specific formats for the presentation of company Balance Sheets from which companies may choose and also prescribes that every Balance Sheet should give a true and fair view
of the state of affairs of the company.

Bank reconciliation statement

A statement, prepared at the end of each period (usually a month), which
explains the difference between the balance shown by a business' cash hook (or bank account in the General Ledger) at a particular point in time and the balance shown on its bank statement as at the same date. Where a business has more than one account in a bank, it should have a separate account in its ledger and prepare a separate bank
reconciliation statement for each one.

Bonus issue

An issue of new shares in a company to existing shareholders without the shareholders
paying for them. An entry is made in the ledger crediting share capital and debiting reserves. Also known as 'Scrip issue' and 'Capitalisation issue'.

Book value

The book value of an asset or liability is the monetary amount shown for that asset or
liability in the balance sheet. The book value of an asset is usually its acquisition cost less the accumulated depreciation on that asset. The book value of an asset is rarely the same as the amount for which that asset could be sold. Also known as 'net book value', 'carrying value' and 'written down value'.

Books of original entry

The hooks of account (or computer records) in which the first record of
transactions is made. Examples of books of original entry include the Sales Journal (or Sales Daybook), the Purchases journal (or Purchases Daybook), the Returns Journals (or Returns Daybooks), the Cash Book (or Cheque Payments Book and Cash Receipts Book). The double entry accounts are posted from the monthly or annual totals of these books. Also
known as 'Books of Prime Entry' or 'Daybooks'.


Called-up share capital

when a company issues shares it may require those who buy the shares to pay in
full for them immediately or may 'call' for part-payment immediately and part later. At any point in time, a company's called-up share capital is the amount of money which it has 'called' for. Clearly, this may be less than, or equal to, either the authorised share capital (the maximum amount of share capital a company can issue) or the issued share capital (the amount of share capital actually issued) irrespective of whether payment has been 'called' or received. Money which has been 'called'
but not received is known as 'calls in arrear'.

Calls in arrear

The amount of called-up share capital which has not been received.


The amount of money invested in a business by its owner(s) or accumulated by not taking out
profits earned. The capital of a sole trader is the amount he/she has invested in the business plus accumulated profits to date less any withdrawals of capital (drawings) to date. The capital of a partner in a partnership business is the sum due to him/her by the partnership. This amount, however, may be shown by two separate accounts, a current account and a capital account. Therefore the balance on the capital account is not necessarily equal to the amount owed to the partner. The capital of a company is the nominal (or par) value of the shares

Capital employed

this term has many meanings which include the amount of money that is being used (or 'employed') in the business, the aggregate of shareholders funds plus long-terra debt and net assets.

Capital expenditure

Expenditure on the purchase or improvement of (by adding value to) fixed assets. Such expenditure will be debited to one or more fixed asset accounts rather than being charged as an expense in the Profit and Loss Account in the period in which the expenditure is incurred (as is the case for revenue' expenditure). The fixed assets purchased or improved (except most freehold land) must then be depreciated over their expected useful economic lives.

Capital reserves

Reserves, shown in the 'Capital and Reserves' or 'Financed by' section of the Balance Sheet of a company, which cannot he used for the payment of cash dividends. The two most common types of capital reserve are the share premium account, which arises because shares are issued at a price in excess of their nominal value, and a revaluation reserve, which arises because the net book value of an asset shown in the Balance Sheer is amended.

Carriage inwards

An expense item in the Profit and Loss Account of a business representing the cost, paid by the business, of transporting goods into the business. if the transport cost is paid by the supplier then the cost will appear as 'carriage outwards' in the Profit and Loss Account of the supplier.

Carriage outwards

An expense item in the Profit and Loss Account of a business representing the cost, paid by the business, of transporting goods from the business to its customers. If the transport cost is paid by the customer, and that customer is a business entity, then the cost will appear as 'carriage inwards' in the Profit and Loss Account of the customer.

Cash book

The book of original entry (whether on paper or a magnetic medium) in which all (or all except very small amounts if a separate petty cash book is kept) cash receipts and cash payments are first entered. The totals of the book will he recorded in a ledger account at periodic intervals (monthly or annually). Many businesses choose to record payments in a Cheque Payments Book and receipts in a Cash Receipts Book. A cash book will usually have analysis columns to facilitate posting to ledger accounts.

Cash discount

discount allowed to a debtor who pays within a specified period. Cash discount is shown in the Profit and Loss account as an expense. Cash discount is the same as 'settlement discount' hut is not the same as 'trade discount'.

Cash equivalents

in the context of Cash Flow

Statements prepared in accordance with PBS 1 cash equivalents ate short-term, highly-liquid investments that will revert to cash within ninety days of the investment being made.

Cash flow statement

A historic primary financial statement that shows the cash that has come into a business and the cash that has left it during an accounting period. Cash Flow Statements ate normally prepared in accordance with FRS 1. Sometimes the term is used to describe a forecast of cash flows, usually on a month-by-month or quarter-by-quarter basis.

Cash receipts book

The book of original entry in which all cash and cheques received by a business are first recorded (usually in chronological order).

Chart of Accounts

A listing of the titles and numbers of all accounts found in a double entry system.

Cheque payments book

The book of original entry in which details of all cheques issued by a business are first recorded (usually in cheque number order). The totals of the book ate posted to the General Ledger at periodic intervals (usually monthly or annually).

Closing stock

goods available for sale at the end of an accounting period. The closing stock at the end of one accounting period is the opening stock for the next accounting period.


A form of business organisation which, legally, is separate and distinct from its owners. A company can therefore have rights, privileges and liabilities of its own.

Compensating errors

two (or more) errors, the net effect of which, as regards the agreement of the
debit and credit totals of the Trial Balance, is zero. For example, if a transaction which should be entered as debit £10 and credit £10, is accidentally entered as debit £100 and credit £100, then both the debit and credit side of the Trial Balance will he overstated by £90 but, assuming there are no other errors, the Trial Balance will still balance. It can he seen that the two, separate errors of overstating the debit entries by £90 and overstating the credit entries by £90 'compensate' for each other as
regards causing the Trial Balance not to balance.


An accounting convention meaning essentially the same thing as the Prudence Concept,
that is, if the earning of revenue or profit is in any way doubtful it should not be shown in the Profit and Loss Account (until such time, that is, as it becomes certain) and provision should always be made for all known liabilities (expenses and losses) whether the amount of these is known with certainty or is a best estimate in the light of the information available. The practical effect of the convention is that assets are valued pessimistically rather than optimistically and, when faced with two or more equally acceptable alternatives, accountants should choose the one less likely to overstate assets
or income.

Consistency concept

one of the fundamental accounting concepts stated in SSAP 2 which
requires that similar items should normally be dealt with by a given entity in a consistent way in any particular accounting period and also from one accounting period to the next. The reason for this is to facilitate decision-makers in identifying trends. It does not mean that all entities must treat similar items in a similar way. In special cases similar items may be treated differently from one period to the next but the fact of the consistency must be
disclosed in the accounts.

Contingent liability

A potential obligation or liability, arising from transactions that have occurred on or
before the balance sheet date, that may, or may not, materialise. Whether a contingent liability actually becomes a liability depends upon some future event
outside of the control of the firm.

Contra entry

A double entry which is made to offset two amounts but has no net effect on the business.
For example, an amount due from a debtor of a business (who is also a creditor of that business) is set off by the business against a similar amount due by the business to the creditor/debtor. Obviously, the net debtors or creditors of the business does not change as a result of these entries. A contra entry can also arise where a cash hook is maintained

instead of a cash account and a bank account in the ledger or where these two accounts are kept. When cash is lodged, the cash column or account must be credited and the bank column or account must be debited. As above, these two entries have no net
effect on the cash/bank balances of the business.

Control account

An account, the balance on which should be the aggregate of the balances on runny
individual accounts in a subsidiary ledger, which is not part of the double entry system. By comparing the balance on the control account to the aggregate of the balances on the many subsidiary accounts the arithmetical accuracy of the subsidiary ledger is checked. A separate control account is usually kept for customers' (sales ledger) accounts and suppliers'
(purchases ledger) accounts.

Corporation tax

The tax payable by companies on their profits.

Cost convention

An accounting convention whereby goods, services and other resources acquired are entered in the accounting records at cost.
Cost of goods available for sale

The cost of goods purchased and not yet sold which were, therefore,
available for sale to customers during a particular period. It is calculated as opening stock + net purchases. Cost of goods available for sale less
closing stock cost of sales.

Cost of sales

The cost price of the goods sold during an accounting period. The cost of sales is calculated
as the value of the stock on hand at the beginning of the accounting period plus purchases during the period (and the cost of goods manufactured during the period if the business is a manufacturing firm) less the value of the stock on hand at the end of the accounting period. Also known as Cost of Goods Sold'.


A method of determining the selling price of an item by adding a fixed percentage of its cost
price to that cost. The percentage may vary for different types of goods or may vary over time. For example, a new pharmacy may decide that it is going to sell all its products at 60% above cost. However, it may later realise that its prices are not competitive and decide to sell all prescription drugs at 50% above cost and all other products at 40% above cost. The percentage added to the cost of
each item is known as the 'mark-up' on that item.


this term has several meanings

The credit side of a double entry ledger account or a Trial Balance
is the right-hand side (income and liabilities are shown on the credit side of the Trial Balance); to sell goods or services on credit means to sell them now and hope to get paid at some future date (within the period of credit allowed).

Credit control

A term meaning all the measures and procedures put in place by a firm that trades on credit to ensure that customers pay their accounts in full and on time. These include the evaluation of a customer's credit worthiness before selling to him on credit and follow-up once the sale is made to ensure payment.

Credit note

A document sent by a business to a customer, giving details of an allowance made by the business to him in respect of goods returned by him, unsatisfactory or damaged goods received by him, goods not received by him but invoiced to him, overcharging on an invoice sent to him etc. The amount owed by a debtor will be reduced by the amount of a credit note.


persons or businesses to whom money is owed by a business for goods and / or services supplied to it on credit. When shown in the balance sheet of a business, 'creditors' means the total amount owed by the business to its creditors.

Creditors settlement period

The amount of time, on average, that it takes a business to pay to its creditors the amount owed to them.

Credit transfer

An amount paid by one person or business directly into the bank account of another.

Cumulative preference shares

preference shares on which dividends due but not paid in any year(s) accumulate over time and must be paid before any dividend can be paid to ordinary shareholders. Any dividends due but unpaid will be shown as a current liability in the Balance Sheet. Arrears of dividends arise only on preference shares which are 'cumulative'; if the shares are 'non-cumulative' any dividends not paid when due do not have to be paid later.

Current account

An account in a bank used for regular lodgements and payments by cheque. Frequently interest is not paid on any balance on this type of account whereas it is always paid to a deposit account. 2. In a partnership business a current account, reflecting the sum due (excluding his capital) to or by a partner arising from his share of profits/losses, is drawn up for each partner.

Current assets

cash and other assets, such as debtors and stock, which can reasonably be expected to become cash, be sold or be consumed in the normal course of business within one year from the date of the balance sheet. They should he shown in the Balance Sheet at the amount of cash they are expected to realise. Alternatively, current assets may be defined as all assets other than fixed assets.

Current liabilities

liabilities, for example, creditors, which are due to be discharged (paid) within one year from the date of the Balance Sheet.

Current ratio

A measure of liquidity calculated as the value of current assets divided by the value of

current liabilities. It is often suggested that the current ratio of a healthy business should be approximately 2 1 i.e. current assets be twice current liabilities. However, there are many successful businesses whose current ratio is considerably less. The optimal value of the ratio will depend on many factors including the type of business, for example, whether it is a manufacturing, wholesale/retail or service organisation. Also known as the 'Working Capital Ratio'.



Another name for the 'Books of Original Entry' or 'Books of Prime Entry',


strictly speaking, a debenture is a legal document evidencing a loan to a company and having clauses concerning the payment of interest, the repayment of the capital element of the loan, security etc. However, the term is commonly used to refer to the debt itself. Such a loan is normally of a large amount, given for a specified medium- to long-term and carries a fixed rate of interest.

Debenture holders

persons, businesses or, more commonly, financial institutions, who have lent money to a company where the terms and conditions of the loan are specified in a debenture document.


The debit side of a double entry ledger account or a Trial Balance is the left-hand side. Expenses and assets are shown cm the debit side of the Trial Balance.

Debit note

A document sent by a business to a supplier giving details of a claim for an allowance in respect of damaged goods received, goods not received, overcharging etc. It is called a debit note as, in the books of the business, the supplier's account will be debited. In this context a debit note is really a claim for a credit note from the supplier. By convention, when the credit note is received it is entered in the books rather than the debit note having been entered when it was prepared. Clearly, if both were entered two debit entries would be made in respect of the same items. Therefore, the only function of a debit note in this context is as a record of credit notes due and a check against credit notes received. Alternatively, a debit note may be sent by a supplier to a customer if an invoice issued did not charge the full amount due because of, for example, incorrect pricing or quantities, to charge carriage or insurance etc. In this context it is essentially a supplementary invoice and many businesses choose to issue another invoice instead.


A debt is any sum due by a debtor to a creditor. 'Debt' is another word for a company's borrowings.

Debt to equity ratio

A ratio that examines the capital structure of a business by measuring the relationship between assets provided by creditors and those provided by the owners of a business.


persons or businesses who owe money to a business for goods and / or services supplied to them on credit. When shown in the Balance Sheet of a business, under the heading of 'current assets', 'debtors' means the total amount owed to the business by its debtors, net of any 'provision' for doubtful debts (known as 'trade debtors'), plus any prepayments or other miscellaneous amounts of money receivable.

Debtors' ledger

see 'Sales ledger'

Debtors payment period

The average time taken by credit customers to pay their debts. It is calculated as average debtors during an accounting period * 365 divided by credit sales for that period to give a result in days.

Depletion unit method of calculating depreciation

A method of depreciation applicable to 'wasting' assets such as mines or quarries. The depreciation charge for a given year is dependant on the quantity of material extracted in that year relative to the total amount available.

Depreciable assets

fixed assets which should be depreciated, i.e. all fixed assets except freehold land. Depreciable assets are shown in the Balance Sheet at their net book value, i.e. their cost (or valuation) less the total amount of depreciation charged against them up to the date of the Balance Sheet.


A measure of the wearing out, consumption or other loss of value of a depreciable fixed asset whether arising from use, the passage of time or obsolescence through technology and market changes. An expense should be shown in the Profit and Loss Account to reflect this. This expense, known as a depreciation charge, should be allocated to accounting periods so as to charge a fair proportion of the cost of fixed assets, less any scrap value, to cash accounting period during the expected useful life of the assets. There are several methods of allocation, the principal ones being the straight line method and the reducing balance method.

Diminishing balance method of calculating depreciation

see 'Reducing balance method of calculating depreciation'.

Direct costs

costs, such as the cost of materials or labour, which can be directly identified with specific jobs, products or services.

Direct debit

A facility offered by banks which permits a creditor, with written permission from his debtor, to extract money directly from his debtor's bank account. Such transactions are usually shown On bank statements as 'DD'.

Direct method of preparing a cash flow statement

A method of preparing a Cash Flow Statement (recommended by FRS1) which gives more detailed information than the more common 'indirect' method.


individuals elected by the shareholders of a company to manage the company on their behalf.

Directors' report

A report written by the directors of a company and required by law to be seat to all shareholders with each set of financial statements. The Companies Acts prescribe that certain matters must be commented upon by the directors in their report.


see 'Cash discount', 'Trade discount', 'Discount allowed' or 'Discount received'.

Discount allowed

An allowance given by a business to any of its debtors who pay the amount they owe within a specified time.

Discount received

An allowance received by a business from any of its creditors for paying the amount it owed within a specified time.


when a bank dishonours a cheque it does not pay up on the cheque because the person / business which wrote the cheque (the drawer) does not have sufficient money in the particular account to meet the cheque.

Dishonoured cheque

A cheque which a bank dishonors (see above).

Dissolution of a partnership

The cessation of operations and sale of assets usually by agreement amongst the partners.


that part of the profits of a company which is distributed to the shareholders in cash. There are two types of dividend

1. interim dividends are those dividends paid during an accounting period;

2. final dividends are those recommended by the directors for approval by the shareholders at the Annual General Meeting.

Dividend cover

A measure of the proportion of profit which is paid in the form of dividends. For example, if a company has €100,000 profit which it could pay out as dividends but pays out only €25,000 its dividend cover is 4 times.

Dividends in arrears

dividends on cumulative preference shares that are nor paid in the year they are due.

Dividend yield

A percentage measure of the return earned by a shareholder by investing in shares. It is calculated by dividing the dividend per share by the market value of the share.

Double entry

The essential principle of bookkeeping whereby every transaction must be recorded by equal debit and credit entries in the ledger accounts.

Double entry bookkeeping

bookkeeping by applying the double entry principle (see above). Broadly, increases in assets and decreases in liabilities and capital items are debits, and increases in liabilities and capital items and decreases in assets are credits.

Doubtful debts

Amounts owed to a business by its debtors which it is unlikely to receive. An expense is shown in the Profit and Loss Account to recognise the probable loss that will be incurred as a result. Such debts remain in the ledger accounts (unlike actual bad debts) until they are declared 'bad debts' but are offset by an account with a credit balance called a 'provision for doubtful debts'.


The amount of money and/or goods taken out of a sole trader or partnership business by a proprietor for his)her own use.

Dual aspect concept or principle

The principle underlying double entry bookkeeping whereby all transactions are seen to have two aspects and thus affect two double entry accounts. This principle is not being followed when full double entry records are not kept by a business.
Earnings Per Share (EPS)

An important performance measure used particularly by investment analysts. It is calculated as the profit of a company after tax (and preference share dividends, if applicable) attributable to the ordinary shareholders divided by the number of ordinary shares issued.


Earnings yield

An investment ratio calculated as earnings per share as a percentage of the market value of one share.

Entity (or business entity)

A business that is treated as being distinct from its creditors, customers and owners.

Entity concept

An accounting concept, the effect of which, is that a business entity is considered as being separate from its owners and therefore, its accounts show only those transactions affecting the business and not the private transactions of the owners.


Another name for the capital of the owner(s) of a business.

Error of commission

An error resulting from entering something on the correct side of the wrong double entry account. Such an error does not affect the agreement of the Trial Balance as, assuming no other errors, total debit balances will still he equal to total credit balances.

Error of omission

An error resulting from omitting Lo enter a transaction in the double entry accounts at all. Such an error does not affect the agreement of the Trial Balance as, assuming no other errors, trial debit balances will still be equal to total credit balances.

Error of original entry

An error resulting from entering the same incorrect amount on both sides of the correct double entry account, resulting from, for example, the wrong total on a source document. Such an error does not affect the agreement of the Trial Balance as, assuming no other errors, total

debit balances will still be equal to total credit balances.

Error of principle

An error resulting from entering the correct amounts on both sides of the wrong type of double entry account. Such an error does not affect the agreement of the Trial Balance as, assuming no other errors, total debit balances will still be equal to total credit balances.

Estimated useful economic life of an asset

The period of time during which a fixed asset is expected to provide benefits to the business which owns it. An estimate of the useful economic life of fixed assets (except freehold land) must be made for the purpose of calculating depreciation.

Exempted firms

firms which do not have to add VAT to the price of goods and services supplied by them and which cannot obtain a refund of VAT paid on goods and services purchased by them.


payment for, or obligation to pay for at some future time, an asset or a service received. If goods are purchased on credit expenditure has been incurred even though no payment has been made. Such expenditure results in a creditor being shown in the Balance Sheet until such time as the expenditure incurred is paid.


The cost of goods and services, except the cost of sales, necessary to run a business, used up in the course of earning revenue. Expenses are debited to the Profit and Loss Account.

Extraordinary General Meeting (EGM)

Any general meeting of shareholders in a company except for the Annual General Meeting (AGM).



A method for a business to improve its cash flow by 'selling' its debtors to a factoring company (a factor) which pays the business a percentage (usually between 80% and 90%) of the face value of the debtors immediately. The factoring company then becomes responsible for collecting the full debts on the due dates. Depending on the type of factoring either the business or the factor may ultimately beat the cost of bad debts.

Factory overhead costs

costs arising in a factory and related to the production of goods, but not directly traceable to the items being manufactured e.g. insurance on a factory building. Also known as Indirect Factory Costs.

Final accounts

The accounting statements which a firm produces at the end of each accounting period. Final accounts include, but need not be confined to, a Trading and Profit and Loss Account, a Balance Sheet and a Cash Flow Statement.

Final dividend

A dividend paid to shareholders after the year end when the results are known.

Financial fixed assets

fixed assets other than tangible or intangible fixed assets, such as long-term investments.

Glossary 707

Financial Reporting Council (FRC)

A UK body which oversees the setting of Financial Reporting Standards
and other professional pronouncements and monitors their operation. It appoints the members of the Accounting Standards Board, the Urgent Issues Task Force and the Review Panel, ensures that they are
adequately financed and guides their activities.

Financial Reporting Exposure Draft (FRED)

documents issued by the Accounting Standards Board (ASS) on a specific accounting topic on which it intends to issue a Financial Reporting
Standard (FRS). A FRED is essentially a 'draft' FRS.

Financial Reporting Standards (FRSs)

statements issued by the Accounting Standards Board (ASB)
prescribing specific ways of dealing with certain issues in accounting. For example, FRS 1 prescribes the way in which a Cash Flow Statement should be prepared. In order for a set of accounts to give a 'true and fair view' FRS' must normally be followed
in their preparation.

Financial statements

The Balance Sheet, Profit and Loss Account, Cash Flow Statement, notes to all the
foregoing and any other statements and notes identified in the audit report. Published annual reports of public companies are not the same as financial statements as, although the financial statements are contained in the annual report, a lot of other information may be as well. The financial statements are subject to an audit whereas the other information is not. Also known as 'Final Accounts'
or simply 'Accounts'.

Financial year

The financial year of a business is any twelve month accounting period for which the business chooses to prepare its final accounts,

First-in, First-out (FIFO) method of stock valuation

A method of stock valuation in which the first goods to he received are deemed to be the first to be sold and therefore the unit cost for the first sale is the unit cost of the earliest purchase for which goods still remain in stock. This is done solely for valuation purposes - in reality the goods sold may he a mixture of several different purchases or even from the latest purchase.

Fixed assets

Assets which have an expected useful life of greater than one year from the date of the
Balance Sheet in which they are shown under the heading 'fixed assets', are used in the business on an ongoing basis for the purpose of earning income and are not intended for resale to customers. Examples include land, buildings, plant, machinery, vehicles (except where these are held as stock in a garage). There are three categories of fixed assets

1. Tangible fixed assets; 2. Intangible fixed assets, and 3. Financial fixed assets. All tangible fixed assets, except freehold land, must be depreciated.

Fixed capital accounts

capital accounts which consist only of the amounts of capital actually paid into them.

Fixed costs

costs which, in the short term, remain the came at different levels of business activity.

Fluctuating capital accounts

capital accounts, the balances on which can change from one period to the next.


The number of a page in a ledger or daybook.

Folio columns

columns used for entering references to page numbers in ledgers and daybooks.

Folio numbers

Reference numbers to enable transactions to be cross-referenced between ledger accounts or between a subsidiary ledger and the General Ledger.

Foreseeable Future

A term which, when used in the context of the application of the Going Concern Concept, means a period of at least one year from the balance sheet date or six months from the dare of the audit report, whichever is the later.


A form of ownership (usually of land or buildings) in which the owner has absolute title for all time. The alternative to freehold is 'leasehold' meaning that the land or buildings are leased from whoever owns the freehold. Freehold land is not depreciated although freehold buildings and leasehold land are.

Fundamental accounting concepts

The broad basic assumptions which underlie the preparation of periodic financial accounts of business enterprises. The four fundamental accounting concepts, listed in SSAI' 2 are the 'going concern' concept, the 'accruals' concept, the 'consistency' concept and the 'prudence' concept. In general, 'accounting convention' has the same meaning as accounting concept.


Garner v Murray rule

A rule derived from a 1904 UK legal case relating to the dissolution of partnerships.
The effect of the rule is that if one partner is unable to pay a debit balance on his capital account the remaining partners will share the resulting loss in proportion to their last agreed capitals not in their
profit / loss sharing ratios.


The relationship between debt (or fixed interest capital) and equity in the financing structure
of a business. A company which is heavily reliant on borrowing is said to be 'highly-geared' whereas one which is financed largely by equity is said to be

General ledger

The book of account (probably a computer file) in which all double entry accounts
are recorded. Usually, a business will also have subsidiary ledgers for individual debtors and creditors and have a single account in the General Ledger for total debtors and another for total creditors. Also known as the 'Nominal' ledger or simply 'Ledger'.

Generally Accepted Accounting Practices (GAAP)

The conventions, rules and procedures that, together, constitute what is accepted accounting practice at a particular time.

Going concern concept

A fundamental accounting concept, normally adopted when preparing the accounts of a business, which assumes that the business will continue to operate for the 'foreseeable future' (at least one year after the Balance Sheet date or six months after the date of the audit report, whichever is the later) in the absence of information to the contrary. It is assumed that there is no intention, or necessity, to liquidate assets or liabilities prematurely or to curtail significantly the scale of operation. If the final accounts of a business are prepared on the going concern basis it means that assets and liabilities are valued on the assumption that the business will continue in operation for the next year. The alternative would be to assume that the business will not continue in operation for that period and value assets at what they could be sold for in the short-term and show all liabilities as current liabilities (i.e. no long-term liabilities).


The products manufactured or bought for resale or services for sale in the normal course of business. 'Goods' does ant include fixed assets sold as they were not bought for the purpose of re-selling them. However, what is a fixed asset to one business may be a 'good' in another business. For example, is most businesses cars are fixed assets but in a garage they are goods as they are bought to re-sell to customers.


The value of a business over and above the total value of its individual net assets. This excess may arise because of, for example, the reputation of the business, the fact that it has a skilled, well-motivated workforce or loyal customers.

Gross loss

see 'Gross profit'.

Gross profit

The amount by which the 'sales' figure exceeds the 'cost of sales' figure. It is the amount of profit earned from trading before taking account of the expenses of running a business. If 'cost of sales' exceeds 'sales' then the business has incurred a Gross Loss.

Gross profit margin or ratio

see 'Profit margin'.


Historical Cost

The usual basis of valuation, whereby assets are recorded at cost in financial statements. It is used because it is more objective than others and easily verifiable by an auditor. It may not be the best method in times of inflation.



A sum of money set aside for a particular purpose, such as to pay for miscellaneous minor expenses over a period. At the end of the period the imprest is restored to its original figure by paying in the exact amount spent.

Imprest system

A system for maintaining control over small cash payments by establishing a fund at a fixed amount and periodically reimbursing the fund

by the amount necessary to bring it back to that fixed amount.

Income and expenditure account, an accounting report, prepared for a non-profit organisation such at a club, society, charity or professional body, which shows both the income earned, and the expenditure incurred during a period, and the excess of one over the other.

Income tax

A tax payable by individuals, sole traders and partnerships on their income. The tax is collected from employees by means of the PAYE (pay as you earn) system.

incomplete records

A system of keeping accounting records which does not involve double entry accounting. The records are 'incomplete' in the sense that the dual aspect of the double entry system is not adhered to when recording transactions and events. Also known as 'single entry'


The avoidance of relationships that impair or appear to impair an accountant's or auditor's objectivity.

Indirect factory costs

see 'Factory overhead costs'.

Indirect method of preparing a cash flow statement

A method of preparing a cash flow statement in accordance with FRS I which results in less information being shown than would be the case if the 'Direct' method, recommended by ERS 1, was used. The indirect method, although not recommended, is permitted by FRS 1.

Input credit

The amount by which a business can reduce the amount of VAT it has to pay to the Collector-General by offsetting the VAT it has been charged on purchases against the VAT which it is liable to pay on its sales.


A company is legally insolvent when its liabilities exceed its assets, in accounting, it is normally considered insolvent (or illiquid) when it is unable to pay its debts when they are due to be paid.
Intangible fixed assets

Assets which have long-term value to a business hut which, physically, do not exist. Their value is based on rights or privileges that accrue to the owner. Examples are goodwill, copyright, patents and trademarks.

Interest on capital

An amount, based on the amount of capital invested by him and the rate of interest stated in the partnership agreement, which is allowed to a partner by the partnership firm by crediting his current account.

Interest on drawings

An amount, based on the amount of drawings taken out by him and the rate of interest stated in the partnership agreement, which is charged to a partner by the partnership firm by debiting his current account.

Interim dividend

A dividend paid to shareholders during a financial year, usually after the results for the first half of the year are known.

Interim report

A financial report, required by the Stock Exchange, issued to shareholders in quoted companies half way through each financial year.

A class of asset consisting of shares or loan stock of companies, financial institutions or
the government. Investments for the long-term will be shown as a financial fixed asset and those for the
short-term as a current asset.


see 'Sales invoice' or 'Purchase invoice'.

Invoice discounting

The same as factoring, except for the fact that the business remains responsible for
collecting the debts itself, so its customers are not aware that a factor is involved.
Issued share capital

The amount of the authorised share capital of a company which has already been issued to shareholders.

Issued shares

shares which have been sold to shareholders.



The book of original entry for all items other than those for cash or goods. 'Journals' means the main journal and subsidiary journals such as the Sales journal (Sales Daybook) or Purchases Journal (Purchases Daybook).

Journal entry

The double entry recording of a transaction in the Journal.

Leasehold land (or buildings)

land (or buildings) leased from the owner of the freehold. It is possible to buy a leasehold interest in the property and, when this has occurred, the cost is shown on the Balance Sheet. It is then amortised (depreciated) over the length of the lease.




A contractual arrangement in which one party (the lessee) has the use of an asset while another party (the lessor) continues to own it.


see 'General Ledger', 'Nominal ledger' or 'Subsidiary Ledger'

Ledger account

see 'Account'


A liability of a business is any money owed by it, so its liabilities are the total amount of money owed by it. Liabilities arise from purchasing goods

And services on credit, borrowing money etc. The amounts due may be payable within twelve months of the balance sheet date (current liabilities) or after
twelve months (long-term liabilities).

Limited company

companies in which the liability of individual shareholders is limited to the amount (if
any) which they owe in respect of share capital they have purchased.

Limited liability

The liability of shareholders in a company is limited to any amount they have agreed to invest hut have not yet paid in cash.

Limited life

A characteristic of a partnership - any event that breaches the partnership agreement,
including the admission, withdrawal or death of a partner terminates the partnership. This is not so with a company which continues to exist although existing shareholders may sell their shares or other people may become shareholders.

Limited partner

A partner whose liability is limited to the capital he has invested in a partnership firm.

Limited partnership

A form of partnership in which limited partners' liabilities are limited to their investment and in which general partners with unlimited liability operate the business.


A business is liquid if it can easily pay its debts as they are due for payment.

Liquid assets

Assets which are readily available to pay liabilities, for example, cash on hand or money in a bank account.


one method of 'winding up' a company, in which its assets are sold, its liabilities paid and any money remaining is distributed amongst shareholders. A liquidation may be voluntary or compulsory.


The aspect of the analysis of a business concerned with whether the business has the ability to pay its debts when they are due as well as cope with unexpected needs for cash and the ease with which this can be managed either using cash flow arising from trading or by the sale of assets. A business is liquid if this is easy; otherwise it is iliquid.

Liquidity ratios

Ratios that attempt to indicate the ability of a business to meet its debts as they fall due, for example, the creditors settlement period, the current ratio and the acid test ratio. Liquidity ratios may be divided into long-term and short-term liquidity ratios.

Listed companies

companies whose shares are quoted on the Stock Exchange. Also known as 'quoted companies'

Loan stock

A form of debt finance in a company which is traded on the Stock Exchange.

Long-term liabilities

debts of a business that are due to be paid more than one year after the balance sheet date. For example, a term loan from a bank on which only interest is payable in the next year. In published company accounts long-term liabilities are shown under the heading creditors amounts falling due after more than one year'.

Lower of cost and Net Realisable Value (NRV)

A rule for stock valuation where each item of stock (or group of similar items) is valued at cost or NRV, whichever is the lower, and the total value of stock is the aggregate of the value (thus determined) of each item (or group of items).


Machine hour method of calculating depreciation

A method of calculating depreciation on a machine where the depreciation charge for a period is based on the number of hours the machine has been used during that period relative to its estimated useful life.

Manufacturing account; an accounting statement, prepared by manufacturing firms at the end of each accounting period, in which the cost of producing goods for that period is calculated.


see 'Profit margin'.

Market value of an asset

The amount for which an asset could be sold on a completely open market.
The market value of a share in a quoted company is the price at which it is quoted on the Stock


The mark-up on a product is the gross profit on it, shown as a percentage of its cost price. The
average mark-up percentage, [or a business as a whole, is its gross profit expressed as a percentage
of its cost of sales.

Matching concept

An accounting concept, the effect of which is that revenue and costs are accrued, matched
with one another insofar as their relationship can he established or justifiably assumed, and dealt with in the Profit and Loss Account of the period to which
they relate. See also 'Accruals concept'.


An item is material if its non-disclosure in, mis-statement in, or omission from a set of accounts
would be likely to result in the accounts not giving a true and fair view.

Material error

An error in financial statements which is of such importance as to cause them not to give a true and fair view.


An accounting convention, the effect of which, is that accountants must judge the impact
on, and importance to, the financial statements, of each transaction and event to determine how it should be correctly recorded and disclosed. Accounting Standards and Financial Reporting Standards apply only to material figures. Thus, the guidance given in them does not apply to
immaterial (relatively small) amounts.

Medium sized company

As defined by the Companies (Amendment) Act, 1986 (amended with effect from
1 January, 1994), for the purposes of the preparation and publication of accounts, a medium- sized company is a private company which, in the current year and in the immediately preceding year, satisfies at least two of the following three conditions

1) its balance sheet totals do not exceed £6m; 2) its annual turnover does not exceed £12m, and 3) its average number of employees does not exceed 250.

Members of a company

shareholders in a company.

Memorandum of Association

A legal document, which every company must have, outlining its constitution, defining the scope of its powers and giving details of the conditions governing its relationship with third parties. It includes details concerning the objects of the company (i.e. what the company is entitled to do in terms of trading) and its authorised share capital.

Modified accounts

shortened versions of full financial statements. The Companies (Amendment) Act, 1986 permits small and medium-sized companies to file modified accounts instead of full accounts with the Companies Registration Office. Full accounts must always be produced for presentation to shareholders.

Money measurement concept

An accounting concept, the effect of which is, that only transactions and
events capable of being measured in terms of money and whose monetary value can he assessed with reasonable objectivity are entered in the accounting


Net assets

total assets less liabilities. It is equivalent to equity capital. Also known as 'Net Worth'.

Net assets per share

The value of a company's net assets divided by the number of ordinary shares issued. Also known as 'Asset Value'

Net Book Value (NBV) of an asset

The cost (or valuation) of a fixed asset less accumulated depreciation thereon. Since freehold land is not depreciated its NBV is simply its cost nr valuation. Fixed assets are shown in the Balance Sheet at their NBV. Also known as 'Carrying Value', 'Written Down Value' or simply 'Book Value'.

Net current assets

The value of current assets less that of current liabilities (this will be net current liabilities if the result is negative). Also known as 'Working Capital'.

Net current liabilities

see 'Net current assets'.

Net loss

see 'Net profit'.

Net profit

gross profit (sales less cost of sales) less all expenses - if the result is positive. If the result is negative then a net loss has been incurred.

Net purchases

total purchases less the aggregate of purchases returns (returns outwards) and discount received.

Net sales

total sales less the aggregate of sales returns (returns inwards) and discount allowed.

Net Realisable Value (NRV) of stock

The value of stock calculated at its estimated selling price (after deducting trade discount but before deducting cash discount) less all costs yet to be incurred in marketing, selling and distributing the products (and less all costs yet to be incurred to complete the manufacture of the products in the case of work in progress). Stock must be valued at the lower of its cost and its NRV.

Nominal accounts

double entry accounts in which expenses, revenue and capital are recorded.

Nominal ledger

see 'General ledger'.

Nominal value of a share

see 'Par value of a share'.

Non-cumulative preference shares

preference shares which, if the dividend due on them is not paid when due, forfeit the right to that dividend, i.e. the unpaid dividends do not accumulate.

Notes to, and forming pan of, the accounts information about a business made available with its financial statements which expands upon, or explains, data found in those statements.



A principle fundamental to accounting, requiring that accounting information be free from bias and be verifiable by an independent party. It is because of this principle that accountants have adopted the cost convention and formulated rules for recording financial transactions and events which, so far as is possible, do nor depend upon personal judgement.


The process of becoming obsolete, that is, a reduction in the estimated useful life of an asset for reasons other than deterioration. For a fixed asset, becoming obsolete means that its actual useful life is less than its estimated useful life and therefore, when the asset is sold it may still have a substantial net hook value, which, in turn, means that a Loss on its sale is likely as the proceeds will be relatively little.

Opening entries

The entries in the double entry records to set up a General Ledger for a business previously operating without one.

Opening stock

goods available for sale at the beginning of an accounting period. The opening stock at the beginning of an accounting period is the same as the closing stock for the previous accounting period.
Operating expenses

Expenses, other than cost of sales (or cost of goods sold), that are incurred in running a business as opposed to financing it. Therefore, interest payable is nor an operating expense. Dividends are an appropriation of profit, not an expense.

Ordinary shares

shares which carry voting rights, the dividend on which depends on how much profit
remains after debenture interest and preference dividends have been paid and how much of this the directors decide to pay out. If a company is wound-up persons who own ordinary shares in it can recoup their investment only if there is money left, when the company's assets are sold, after paying debenture holders, preference shareholders and creditors. Ordinary shares means the same as equity shares but not the same as equity capital as
the latter also includes reserves.


A column of figures is overcast if the total arrived at when they are added exceeds the correct total.


A business is overtrading when it is trading at a level beyond that which it can finance. If a business is very successful it may have to increase stocks to keep pace with demand and debtors may increase because of lots of credit sales. This may lead to the business owing money for stock purchased on credit but not having the cash to pay for it because it is waiting for its debtors to pay.

Owners' equity

The value of the proprietor's interest in the net assets of a business.


Paid-up share capital

that part of a company's authorised and issued share capital which has been called-up by the company and paid for in full by the shareholders.

Partnership (business)

Any business, other than a company, owned by two or more people.

Partnership agreement

The contractual relationship, either written or verbal, between partners usually covering details such as the way in which profit is to be shared and the relative responsibilities of various partners.

Partnership salaries

Agreed amounts payable to individual partners in respect of duties undertaken by them. Partners' salaries are deducted before sharing profit between partners in their profit- sharing ratio.

Par value of a share

The arbitrary value of a share specified in the company's memorandum of association and printed on each share certificate. The number of shares issued multiplied by the par value of each share is the figure which appears in the Balance Sheer for share capital. The par value of a share bears no relationship to its market value. Its only significance is that a share cannot be issued for less than its par value. Also known as the 'nominal
value of a share'.

PAVE (Pay As You Earn)

A form of income tax paid by most employees. PAYE is deducted from an employee's gross pay by his/her employer.

Ordinary share capital

that part of a company's share capital consisting of ordinary shares.

Ordinary shareholders

persons, companies or institutions who own ordinary shares.


The person to whom a cheque is paid.

Paying-in slip

A form used when lodging money into a bank account. The person lodging the money will keep part of the slip, known as the counterfoil.

Period of credit

The time within which a debtor should pay the amount owed to a creditor.

Personal accounts

double entry accounts for individual debtors and creditors.

Petty cash

An amount of cash set aside by a business for making small (petty) payments in cash to avoid having to write many cheques. It is usually kept control of by using the 'imprest system'. Any amount of cash on hand at the balance sheet date is shown as an asset.

Petty cash book

The Book of Original Entry for small payments. it usually has analysis columns. The totals of the columns at the end of each month are posted to the General Ledger. The source documents for the book are petty cash vouchers.

Petty cash voucher

A form signed by each person requesting a payment from petty cash and authorised for payment by a superior showing the dare, amount and purpose of the expenditure. it is the source document for the petty cash book.

Piecemeal realisation

A method of accounting for the dissolution of a partnership which calculates how much each partner can be paid as soon as is possible without paying them more than they may ultimately be due.

Piece work

A system of paying employees in which they are paid a certain amount per item produced or job performed.


Entering information, from sources such as the Books of Original Entry, into the General Ledger by means of double entry accounting.

Preference share capital

The part of a company's share capital which consists of preference shares (of all types).

Preference shareholders

persons, businesses or institutions who own preference shares.

Preference shares

shares which usually command a fixed percentage rate of dividend in priority to any dividend being paid on ordinary shares. Preference shareholders are also entitled to repayment of their investment if the company is wound up before
ordinary shareholders receive any money.

Pre-incorporation profit or loss

profits or losses which arise in a business before it becomes a company. this may happen when a new business incurs legal and other expenses before it is registered in the Companies Office as a company or may be because an existing business converts from being a sole trader or a partnership to being a company.

Prepaid expenses

see 'Prepayments'.


Expenditure on services and products (other than goods for resale) which has been paid (or shown as a creditor) in one accounting period,

The benefit of which will not be received until a subsequent period. Because money has been paid there will be an entry in the Trial Balance but an adjustment must be made when preparing final accounts to ensure that only the amount of the expense relevant to the current accounting period is shown in the Profit and Loss Account (in accordance with the accruals concept) and the balance is shown as a current asset in the Balance Sheet. For example, rates paid during an accounting period ending in December up to March of the next year. Also known as Prepaid Expenses'.

Price Earnings (PIE) ratio

The price of a share in a company quoted on the Stock Exchange divided by its earnings per share (EPS). The ratio is of much interest to investment analysts and is given in the financial pages of the press.

Prime cost

A subtotal shown in a Manufacturing Account, being the total of direct costs i.e. direct material costs + direct labour costs + direct expenses.

Private company

A company with a share capital and between two and fifty shareholders (excluding employees and ex-employees) who are restricted in terms of who they can transfer their shares to and which cannot invite the public to subscribe for
shares or loan stock in it.

Professional pronouncements

The collective term for all documents required to be followed by accountants issued by the bodies which regulate the accounting profession. These include Financial Reporting Standards and Statements of Standard Accounting Practice but exclude legislation and Stock Exchange rules.

Profitability ratios

Ratios that measure a business' success (or lack of it) during an accounting period in terms of its profit. Profit and loss account

An accounting statement in which the profit for an accounting period is
calculated. It shows details of revenues and expenses for that period. Companies are required by law to prepare a Profit and Loss Account for each accounting period.

Profit margin

The profit margin on a product is the gross profit on it expressed as a percentage of its selling price. The profit margin for a business as a whole may be expressed in terms of either gross profit or net profit. its gross profit margin (or gross profit ratio) is its gross profit as a percentage of its sales and its net profit margin (or net profit ratio) is
its net profit as a percentage of its sales.


pro-forma has two main meanings. 1. A pro-forma invoice is a draft invoice issued by a vendor to a customer to inform him of the amount due in respect of a transaction, If this amount is paid the goods concerned will be dispatched and a formal invoice will be issued. Sometimes a pro-forma invoice simply means that the customer cannot (for the time being) claim the VAT shown on it. 2. A pro-forma set of accounts (or just Profit and Loss Account or Balance Sheet) means a forecast set of accounts for one or more future accounting periods.


Adjustments made at the end of an accounting period, usually to provide for costs which have accrued or liabilities which are likely or certain to be incurred and would not otherwise be included in the financial statements. A provision is 'made' by debiting the Profit and Loss Account and crediting an asset or liability account. Provisions are made for depreciation, doubtful debts, discounts on debtors etc.

Provision for bad or doubtful debts

An amount charged in the Profit and Loss Account of a firm and deducted from the figure for debtors in its Balance Sheet in accordance with the prudence concept, to allow for possible non-payment by some of the firm's current debtors. Often, the provision is a fixed percentage of debtors (say 5%). The rate is usually determined from the past experience of the business.

Provision for discounts on debtors

An amount charged in the Profit and Loss Account and deducted from the figure for debtors in the Balance Sheer to reflect the fact that some debtors, who would be entitled to a cash discount if they paid on time, might pay on time. In accordance with the accruals or matching concept the charge in the Profit and Loss Account must be shown in the same period as that in which the sales revenue is shown.

PRSI (Pay Related Social Insurance)

A form of insurance required to be paid by most employees to
the government. The amount paid depends on the type of employment and the amount earned. Employees are entitled to certain medical and other benefits in return.

Prudence concept

Aim accounting convention, the effect of which, is to ensure that profit and assets are nor shown at figures higher than they should be.

Public company

A term loosely used to mean either a Public Limited Company (plc) or a Quoted Company. However, care should be taken with this term as its two supposed meanings are not the same, as, while every quoted company must be a 'plc', every 'plc' need not be quoted on the Stock Exchange.

Public limited company (plc)

A public limited company is a company which states in its memorandum that it is a public company, ends its name with the words 'public limited company' or the abbreviation 'plc' has a minimum authorised share capital of £30,000 and at least seven shareholders. Sometimes referred to as simply 'public company' although this is not strictly correct (see above).

Purchase discounts

see 'Discount received'.

Purchase invoice

A document received from a vendor (seller) whenever a business purchases goods on
credit. It gives details of the vendor, the business purchasing the goods, a description of the goods, the quantity being purchased, their value, the vendor's
terms and conditions of sale and VAT.


goods bought solely for the purpose of re-selling them to customers.

Purchases daybook

see 'Purchases journal'.

Purchases journal

The hook of original entry in which details of all goods purchased on credit for re-sale are recorded (usually chronologically or in order of the reference numbers allocated to purchase invoices). From the Purchases Journal, entries are posted to the suppliers' accounts and, in total, to the purchases account. Also known as a 'Purchases

Purchases ledger

A ledger (often known as a subsidiary ledger), separate from the General Ledger with a separate account for each creditor. A single account, known as a 'Control Account' is then kept in the General Ledger for all creditors.


Qualified audit report

An audit report in which the audit opinion expressed is that the financial
statements, the subject of the report, may not, or do not, give a true and fair view, or have not been prepared in accordance with relevant accounting or
other requirements.

Qualitative characteristics of financial information

standards for judging the quality of information that accountants provide.

Quick ratio

see 'Acid test ratio'.

Quoted companies

public limited companies (PLCs) whose shares are traded on the Stock Exchange. Also known as 'listed companies'.

Quoted investments

investments in shares or loan stock which are quoted on the Stock Exchange.


Ratio analysis

A method of analysing the financial statements of a business with a view to evaluating its liquidity, profitability etc. It involves comparisons of actual relationships between figures in financial statements (ratios) to relationships reasonably expected to exist (standards). These standards may be based on, for example, ratios for prior periods, ratios for competitors or targets set,

Real accounts

The category of double entry account used for assets with physical existence, for example, stock or fixed assets.

Realisable value of an asset

The amount for which an asset can be sold.

Realisation account

A double entry account in which the entries necessary to record the dissolution of a partnership are made.

714 Glossary

Realisation concept

An accounting convention, the effect of which, is that profit should not be included in the Profit and Loss Account until it is reasonably certain of being earned.

Receipts and payments account

A summary of the cash book of a non-profit organisation.

Recommended Retail Price (RRP)

The price at which the manufacturer of a product recommends it should be sold. Trade discount is based on RRP.

Reducing balance method of calculating depreciation

An accelerated method of calculating depreciation in which the depreciation charge is calculated by applying a fixed percentage to the carrying value or net book value (the reducing balance) of a tangible fixed asset giving rise to a depreciation charge which declines over time. Also known as the 'declining balance' or 'diminishing balance' method of calculating depreciation.

Register of members

see 'Register of Shareholders'

Register of shareholders

The record, required by law to be kept by all companies, which gives details of the names of persons owning shares in a company and the number of shares each owns. Also known as the 'Register of Members'.

Registrar of companies

The person in charge of the Companies Registration Office.

Replacement cost of stock

The amount which it would cost to purchase or manufacture the items currently in stock. According to SSAP 9 stock should not be valued at its replacement cost.


The aggregate of Capital Reserves and Revenue Reserves.

Residual value of a fixed asset

The amount that a business expects to receive for a fixed asset when it sells it at the end of its expected useful life. Also known as 'salvage value'.

Retained earnings

means the same as 'Retained Profit'.

Retained profit

The retained profit for a particular accounting period is the profit which could be paid out in the form of dividends but is withheld in the business instead. Retained profit can also mean the accumulated retained profit of a business since it began operation.

Return on assets

A measure of profitability that shows how efficiently a business is using its assets by comparing profit to average assets owned.
Return on Capital Employed (ROCE)

A measure of profitability in terms of profit expressed as a percentage of the capital used in earning it.

Return on equity

A measure of profitability which shows the amount of profit earned by a business in relation to the investment by its owners in it.

Return on investment

A profitability measure which shows the amount of profit earned by a business in relation to the total investment in it.


this term has several meanings including 1. profits or gains resulting from the ownership of assets, for example return on capital employed or returns from investments; 2. goods sent back to a vendor or received back from a customer (See 'Returns inwards' or 'Returns outwards') and 3. documents required to be submitted to some authority, for example, the annual return of a company or a tax return.

Returns inwards

goods returned to a business by its customers. Also known as 'Sales Returns'.

Returns inwards journal

The book of original entry for goods returned to a business by its customers.

Returns outwards, goods, originally purchased for resale, which are returned by a business to its suppliers. Also known as 'Purchases Returns'.

Returns outwards journal

The book of original entry for goods returned to suppliers,


The process of changing the amount at which a fixed asset is shown in a Balance Sheet. It usually involves Increasing the book value from cost less accumulated depreciation to a figure approximating current market value. However, a revaluation can also mean reducing the book value of an asset.

Revaluation account

A double entry account used to record the profits or losses arising when assets or liabilities are re-valued in an event such as a change of partners in a partnership.


The sales of a business plus any money coming into it from other sources such as the return it earns on its investments. It is not the same as profit.

Revenue expenditure

Expenditure incurred in the day-to-day running of a business the benefit of which arises only in the current accounting period. It includes expenditure on repairing and maintaining fixed assets as distinct from capital expenditure, which is expenditure incurred in acquiring or adding value to them. Revenue expenditure is recorded by debiting expense accounts - it is not depreciated.

Revenue reserves

Reserves of a company which are available for distribution as dividends. The principal revenue reserve is retained profit (shown in a Balance Sheet as the 'Profit and Loss Account').

Rights issue

An issue of new shares in a company to existing shareholders at a price below the current market price.


Sale or return

goods supplied to a business on 'sale or return' may, if not sold, be returned to the supplier without obligation. Therefore, if a business acquires goods on such terms it does not have to worry about whether it can sell them. In the books of the seller, goods sold on sale or return should be treated as stock and not as a sale until the customer has agreed to purchase and pay for them, although they have physically left the vendor's premises before that time- In the hooks of the business receiving the goods, they should not be included as stock until purchase is agreed, as they do not belong to it.

Sales daybook

see 'Sales journal'.

Sales discounts

see 'Discount allowed'.

Sales invoice; a document which is prepared whenever a business sells goods on credit. It gives details of the vendor and the customer, the goods being sold arid their value, the terms and conditions of sale and VAT.

Sales journal

The book of original entry in which details of all sales on credit of goods purchased for re-sale are recorded (usually in invoice number order). From the Sales Journal, entries are posted to the double entry records and to individual customer 'accounts' in the Debtors' (or sales) (subsidiary) Ledger. Also known as a 'Sales Daybook'.

Sales ledger

A ledger, separate from the General Ledger (often known as a subsidiary ledger) with a separate account for each debtor. A single account, known as a Control Account is then kept in the General Ledger for all debtors. Also known as a 'Debtors' Ledger'.

Sales returns

see 'Returns inwards'.

Salvage value

see 'Residual value of a fixed asset'.

Scrip issue

see Bonus issue'.

Share capital

The capital of a company which is divided into shares owned by shareholders. There are many possible meanings of share capital including 'authorised share capital' and 'issued share capital'. Share capital is stated in the Balance Sheet at its par (nominal) value.

Share certificate

A document issued to a shareholder indicating the number of shares which he/she owns.


persons, companies, institutions etc. who own one or more shares in one or more companies. Every shareholder will be issued with a share certificate showing the number of shares they own and their name must be recorded in the register of shareholders. Also known as 'members' of a company.

Shareholders' funds

The amount of a company's share capital and reserves 'owned' by the shareholders. It includes the share capital and equity reserves but excludes debt finance.

Share premium

when a share is issued at a price above its par (or nominal) value, the excess is known as a share premium. The total share

premium is the premium on each individual share issued multiplied by the number of shares issued. This amount is credited to a share premium account.

Share premium account

A reserve account which is part of 'shareholders funds' and which is shown in the 'capital and reserves' section of the Balance Sheet. It is credited with the aggregate amount for which shares are issued in excess of their par (or nominal) value.


units of ownership of capital in a company. A company's capital may be divided into shares of different types, for example, ordinary shares and preference shares. Each share of a particular type is of equal value.

Single entry

see 'Incomplete records'.

Small company

As defined by the Companies (Amendment) Act 1986 (amended with effect from 1 January 1994), for the purposes of the preparation and publication of accounts, a small company is a private company which, in the current year and in the immediately preceding year, satisfies at least two of the following three conditions

1. its balance sheet totals do not exceed £1.Sm; 2. its annual turnover does not exceed £3m, and 3. its average number of employees does not exceed 50.

Sole trader

A business owned by one person only, rather than being owned by partners or shareholders.

Source documents

documents which are the basis for entries in a particular Book of Original Entry. For example, sales invoices are the source document for the Sales (journal.

Standing order

An instruction to a bank to make specific payments from a particular bank account at specified intervals, for example, monthly rent payments.


A term generally used to mean 'Bank Statement' or, more commonly, 'Statement of Account'.

Statement of account

A document sent our by a business at the end of each month to each of its debtors showing the amount owed at that date and its composition in terms of invoices not paid. It shows the details contained in a debtor's personal account in the business' Sales (or Debtors') Ledger (or General Ledger). Often referred to simply as 'Statement'.

Statement of affairs

A listing of assets and liabilities showing their values.

Statements of Standard Accounting Practice (SSAPs)

documents prescribing particular methods of accounting for certain types of transactions. SSAPs must be followed by accountants who are members of the professional accountancy bodies who issued them (including the Institute of Chartered Accountants in Ireland (ICAT)) when preparing

financial statements intended to give a true and fair view. SSAPs are no longer being issued and will, over time, be replaced by Financial Reporting Standards issued in the UK by the Accounting Standards Board and modified, where necessary, for issue in Ireland by the Technical Committee of the ICAI.

Statutory books

The records and registers that a company is required to keep by law. They include the register of shareholders and the register of directors and secretaries.


goods purchased by a business for resale, hut not yet sold, and therefore on hand and available for sale to customers. In a manufacturing business stock would consist of raw materials, work-in- progress and finished goods ready for sale.

Stock Exchange

An organised market for shares in quoted companies. Any companies whose shares are traded on the Stock Exchange must adhere to Stock Exchange regulations including, for example, publishing certain information not required by law or by Generally Accepted Accounting Practice in its annual report.

Stock turnover

A measure of performance or efficiency which shows the relationship between a business' sales during an accounting period and its average stock during that period in terms of what multiple of its average stock is its sales. It is calculated as the Cost of Sales' for an accounting period divided by the average value of goods in stock during that period.

Straight line method of calculating depreciation

A method of calculating depreciation based on the assumption that the value of a fixed asset decreases at a constant rate over time and is not dependant on any other factor, for example, usage. Therefore, the cost of a depreciable asset, less its residual value, is allocated to each accounting period (of equal length) over its estimated useful economic life in equal instalments. Often, this method is used for convenience rather than because it is felt to he the most accurate. Sometimes, if an asset is bought or sold during an accounting period it is depreciated only for the period for which it was owned rather than for the whole period.

Subsidiary ledger

A ledger separate from the General (or nominal) Ledger that contains a group of related accounts, for example, all individual debtors' accounts or all individual creditors' accounts. All of the individual accounts in the subsidiary ledger are represented by a single 'control' account in the General Ledger. The total of the balances in the Subsidiary Ledger accounts should equal the balance on the relevant control account in the General Ledger. Subsidiary ledgers ate generally maintained so as to avoid entering lots of detail in the General Ledger and as an independent record of

transactions - they are usually nor part of the double entry system. The Subsidiary Ledger is 'posted' from the individual lines in the Sales journal, Purchases Journal etc. whereas the General Ledger is posted from the monthly totals in these books of original entry.

Substance over form concept

The accounting concept which gives rise to transactions being accounted for in accordance with their true substance (commercial reality) rather than their legal form. Leasing is a good example of the difference between substance and legal form. If a business leases a car from a financial institution, then, for all practical purposes, the business owns the car. However, legally the financial institution owns it. If this transaction was accounted for in accordance with the substance over form concept the leased car would be shown as a fixed asset in the business' balance sheet and would therefore be depreciated.

Sum of the digits method of calculating depreciation

A method of calculating depreciation that allocates the cost of a depreciable asset, less its residual value, over its estimated useful economic life in steadily declining amounts.

Super profit

The profit remaining after deducting an allowance for the owner's services arid a charge for the use of his capital from the net profit shown in the Profit and Loss Account.

Suspense account

when a Trial Balance is prepared its totals should be equal is. it should 'balance'. However, if errors have been made in the double- entry records, it may not. If a Trial Balance does not balance and the errors which cause it not to balance cannot be found a suspense account (a double entry account) is opened and the difference between the debit and credit totals in the Trial Balance is entered in it, on whichever side is necessary an that when another Trial Balance is prepared including the suspense account that Trial Balance will balance.


Tangible fixed assets

fixed assets that have physical substance, for example, land or vehicles.

Taxable profit

The amount of profit on which tax is assessed. The taxable profit of a business is not the same as the profit calculated in its Profit and Loss Account because taxable profit is calculated under tax rules as well as accounting rules.

Tax year

The period for which both personal and business Income Tax returns must be made. Each tax year runs from the 6th of April in one year to the 5th of April in the following year. For example, the tax year 1998199 commenced on 614/98 and
ended on 5/4/99.

Time interval concept

The accounting concept which gives rise to the life of a business being arbitrarily divided up into accounting periods and final accounts being prepared at the end of each such period.

Trade creditors

The amount of the total creditors shown in a balance sheet, which relates to creditors resulting from the trading activities of the firm i.e. the purchase of goods and services on credit. The figure for trade creditors, therefore, does not
include accruals or other miscellaneous creditors.

Trade debtors

The amount of the total debtors shown in a balance sheet, which relates to debtors resulting from the trading activities of the firm i.e. the sale of goods and services on credit. The figure for trade debtors, therefore, does not include prepayments or
other miscellaneous debtors.

Trade discount

An amount deducted by a manufacturer or wholesaler from the Recommended Retail Price (RRII, or list price, of a product when calculating the price at which it is to be sold to a retailer to enable him to make a profit when he sells at RRP, or list price, to his customer. This is distinct from discount given to customers who pay quickly (cash discount) or discounts for large purchases etc. Sales are recorded in the Sales journal at the net amount of the invoice i.e. after
deducting trade discount.

Trading account

An account which shows the financial effects of trading and in which the gross profit earned (or gross loss incurred) for an accounting period is calculated.

Trading and profit and loss account

A combined account in which both gross profit and net profit are calculated. In the case of company accounts prepared in accordance with the Companies Acts the two accounts together are simply known as a Profit and Loss Account.

Transposition errors

Errors which occur when transactions are being posted whereby the digits in the amounts involved are transposed. For example, '69' entered as '96'.

Trend analysis

A method of analysing financial statements involving comparison of the same item or ratio over two or more years to highlight a trend.

Trial balance

A list of all the balances on double entry (or ledger) accounts (and the cash book if this is used in place of ledger accounts for cash and bank) at a particular point in time, for example, the end of an accounting period. The Trial Balance lists the name of each account, with the balance on that account opposite it in either the debit column or the credit column. The purpose of preparing a Trial Balance is to see whether the total of the debit balances equals that of the credit balances, as it should if all double-entries have been correctly made, and also to facilitate the preparation of final accounts, If the two totals are not equal there must be one or more errors in the double- entry records. Even if the totals are equal this is not conclusive proof that the double entry records are error free as 'errors of original entry', 'errors of omission', 'errors of commission', 'errors of principle' or 'compensating
errors will not be detected.

True and fair view

The Companies Acts require that the Balance Sheet and Profit and Loss Account of a
company must give a 'true and fair view'. Broadly speaking, this means that they must not contain any significant errors, must be presented in accordance with the formats prescribed in the Companies (Amendment) Act 1986 and must adhere to the requirements of Statements of Standard Accounting Practice, Financial Reporting Standards and other
professional pronouncements.


The total value of sales during an accounting period.


UTTF abstract

A document issued by the Urgent Issues Task Force giving guidance on the accounting
treatment of particular items in the same way as Statements of Standard Accounting Practice and
Financial Reporting Standards do.


if a column of figures, for example in a Daybook, are undercast the total arrived at is less than the correct total.
Unlimited liability

A characteristic of the partnership and sole trader forms of business organisation
meaning that each partner (except limited partners) or the sole trader, is personally liable for all the
debts of the business.

Unpresented cheque

A cheque which has been sent to the payee (the party to whom the cheque is payable)
but has nor yet hem debited on the bank statement of the drawer (the party issuing the cheque) usually either because it has nor been cashed or, if so, has
not yet been processed by the drawer's bank.

Unqualified audit report

An audit report in which the audit opinion expressed is that the financial
statements, the subject of the report, give a true and fair view and have been prepared in accordance with relevant accounting or other requirements.

Unquoted investments

investments in shares or loan stock which are not quoted on the Stock Exchange.

Urgent Issues Task Force (UITF)

A subcommittee of the Accounting Standards Board (ASB) set up to provide guidance on accounting issues faster than the ASS could issue or amend a Financial Reporting Standard.


Value Added Tax (VAT)

A tax charged on the supply of most goods and services. The tax is borne by the ultimate consumer of the goods or services, not by the business selling them to that customer.

Variable costs

costs which increase- Or decrease in proportion to changes in the level of business activity. For example, the cost of raw materials increases or decreases in line with increases or decreases in the number of units produced.


The vendor of a product is the seller of it.


Any document supporting transactions entered in a journal, ledger or book of original entry.

Weighted average method of stock valuation

The valuation of stock by reference to the weighted average of the costs of all items in stock.



The liquidation, or cessation of the life of a company, when its assets are sold and the proceeds distributed to those entitled to then,.


The manipulation of figures in the financial statements so as to show a business' financial performance, position and/or adaptability in a more favourable light than would be the case if such manipulation did not take place. The objective of such manipulation may be to encourage investors to invest in the business. There are illegal or fraudulent ways of manipulating figures in financial statements, though these are generally not what is meant by the term.

Working capital

The amount by which current assets exceed current liabilities. Also known as 'net current assets'.

Work in progress; work on manufacturing or processing goods, which, at a given point in time, for example, the last day of an accounting period, is incomplete or 'in progress'. An adjustment for the value of these partly-completed goods is made when preparing a manufacturing account. The value of work in progress is shown as part of the stock figure in the Balance Sheet.


to 'write off' something means to debit (charge) it to the Profit and Loss Account. Expenses are 'written off' in the period to which they relate. Items of continuing value, for example fixed assets, because the benefits of owning them last over several accounting periods are 'written off', by means of depreciation, over the period for which they are expected to provide benefits to the firm which owns them.




The rare of return on an investment, usually expressed as a percentage. For example, dividend yield is the rate of return on an investment in shares.


Zero-rated firms

firms which do not have to add VAT to goods and services supplied by them, to others, and which receive a refund of VAT paid on goods and services purchased by them.