Glossary of terms for FA2 and MA2

Accounting concepts - Accounting concepts are used as the basis for

development of accounting rules.

Accounting equation - The accounting equation is a formula underlying the

statement of financial position. It can be expressed most simply as: Assets –
liabilities = capital.

Accumulated depreciation - Accumulated depreciation is the total of the

depreciation charged on a tangible non-current asset from its date of purchase.

Accrual - An accrual is an expense of the business that has been incurred during
the financial period but which has not been paid for at the end of the financial
period. An accrual for an expense is recognised when a business pays for the
expense in arrears and at the year-end has incurred expense which has not been
invoiced or paid.

Accrued income - Accrued income arises when a business receives its income in
arrears of earning it and at the year-end has earned income which has not been
received.

Allowance for receivables - An allowance of receivables arises where there is

some uncertainty surrounding whether a receivable will pay.

Appropriation - The term appropriation refers to the allocation of profit for a

business. For example, the payment of drawings to a sole trader is a form of
appropriation of profit.

Appropriation of profit statement - The appropriation of profit is a statement

produced as a working after the net profit for the period has been calculated. It
shows how much of the net profit each partner is entitled to in accordance with the
profit sharing arrangements.

Asset - An asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity. This would
include all types of assets owned and used by an entity which can be reliably
measured.

Asset – alternative An asset is a resource that a business controls and which is

expected to bring economic benefits to it in the form of profit. An asset must be
capable of being measured reliably.

Asset expenditure - Asset expenditure relates to the assets of a business which will
be recorded in the statement of financial position.
AVCO - AVCO stands for Average Cost and is a method of inventory valuation. In
this method the purchase cost used to value inventory is an average for the
accounting period. There are two AVCO methods: the continuous weighted
average method and the periodic weighted average method. In the continuous
method the average cost per unit is recalculated each time a purchase or sale of
inventory is made. In the periodic method the average cost per unit is recalculated
at the period end.

Balance brought down – The balance brought down(also known as the balance
brought forward) is the balance on an account at the beginning of an accounting
period. It equals the balance carried down from the end of the last accounting
period.

Balance carried down – The balance carried down (also known as the balance
carried forward) is the balance on an account at the end of an accounting period. It
becomes the balance brought down at the start of the following accounting period.

Bank reconciliation - A bank reconciliation is a statement that reconciles the bank

account balance in the general ledger with the balance of cash held at the bank as
shown on the bank statement. Book keeper – A book keeper is a person who is
responsible for the recording of accounting transactions within a small business.

Book of prime entry – A book of prime entry is a book or electronic record in which
lists of transactions are recorded before they are posted to the general ledger.

Book value - Book value is the carrying value (also known as carrying amount) of
an asset or liability in the statement of financial position. It is the accounting value of
an asset or liability.

Capital - Capital is the owner’s interest in the business. It is made up of the cash or
assets introduced to the business by the owner (known as capital introduced), the
profits generated by the business in previous years less any amounts that the owner
has withdrawn from the business (known as drawings).

Capital account - The capital account of the business shows the amount of capital
belonging to the owner of the business. This is reflected in the closing balance on
the account.

Capital introduced - Capital introduced is cash or assets introduced into a

business by its owner.

Cash in hand and at bank - Cash in hand and at bank is the heading shown in the
current asset section of the statement of financial position reflecting the amount of
cash held at the bank on behalf of the business and in petty cash on the business
premises.
Cash at bank - Cash at bank is the balance of money held by the bank on behalf of
the business.

Cash book - The cash book is the book of prime entry in which the bank
transactions are recorded by the business. This may be divided into the cash
payments book and the cash receipts book.

Cash payments book - The cash payments book is the book of prime entry in
which the business records the payments made from the business bank account

Cash receipts book - The cash receipts book is the book of prime entry in which
the business records the receipts into the business bank account

Casting error – A casting error is an error made when adding up a list of numbers.

Contra - When a business has a balance owed to a customer who is also a supplier
there will be a receivables account and a payables account for the same business in
the individual ledgers. The contra is to set off the two balances to recognise an
overall receivable or payable in the final accounts.

Cost of goods sold – The cost of goods sold is the purchase cost of the goods
sold by a business in the year.

Cost of inventory - The cost of inventory is defined as all expenditure incurred in

bringing an item of inventory to its present location and condition.

Cost of sales - The cost of sales is the total cost of the goods sold by a business in
the year. This will include the cost of goods sold and any additional costs incurred.

Cost structure - The cost structure is the basis of how a business includes profit in
its selling price.

Credit balance – A credit balance is a balancing amount on an account in which

the total of the credit entries exceeds the total of the debit entries.

Credit controller – A credit controller is a member of the finance department who is

responsible for collecting overdue amounts from credit customers.

Credit notes - A credit note is a document produced by a seller for a buyer

cancelling some or all of an invoice.

Current asset - Current assets are those assets that will be converted into money
or consumed by the business within the next 12 months.

Current liabilities - Current liabilities are those that will be settled (paid) in less than
12 months.
Day books - Day books are books of prime entry that record specific transactions.

Debit balance – A debit balance is a balancing amount on an account in which the

total of the debit entries exceeds the total of the credit entries.

Deferred income - Deferred income arises when a business receives its income in
advance of earning it and at the year-end has received income which relates to the
following year.

Depreciable amount - Depreciable amount is the cost of the tangible non-current

asset less any expected residual value.

Depreciation – Depreciation is the expense charged to the statement of profit or

loss in each accounting period to reflect how much of the economic benefit
associated with a tangible non-current asset has been used up in the accounting
period. It is the spreading of the depreciable amount of a tangible non-current asset
over its estimated useful economic life.

Depreciation charge - The depreciation charge is the amount of depreciation

expense that is included in the statement of profit or loss each year.

Disposal account – The disposal account is a ledger account within the general
ledger. It is used to record the disposal of tangible non-current assets. The entries
into the account are the sale proceeds and the carrying amount of the tangible non-
current asset. The balance on the disposal account will be the profit or loss on
disposal of the asset.

Double entry - Double entry is a method of recording transactions in the general

ledger. The process is called 'bookkeeping'.

Drawings - Drawings are cash or assets withdrawn from a business by the owner
for their own personal use.

Expenses - An expense is a cost incurred by a business on the day-to-day

running of the business. Relates to the expenses of a business and will be
deducted from income when calculating profit in the statement of profit or loss.

Extended trial balance - An extended trial balance is a method of completing the

final accounts. It starts with an initial trial balance and then makes the necessary
adjustments and correction of errors in one working paper.

FIFO - FIFO stands for first in, first out. It is a method of inventory valuation. In this
method it is assumed that inventory items are sold in strict rotation and that items
purchased first are sold first. Any inventory remaining at the year end should be
valued using the latest purchase costs.
Final accounts - The Final accounts of a business are prepared at the end of the
accounting period. They consist of the statement of financial position, the statement
of profit or loss, the statement of cash flows and supporting notes.

Financial period - The financial period is the period for which the final accounts of
a business are prepared. It is usually a year, but could be shorter or longer
depending on the circumstances of the business.

General ledger - The general ledger is a ledger containing the asset, liability,
capital, expense and income accounts of a business. It is also known as the
nominal ledger.

Going concern - Going concern is an accounting concept that assumes a business

will continue in operation for the foreseeable future without curtailing the scale of its
activities. The implication of this principle is that assets are recognised at cost in the
final accounts.

Goodwill - Goodwill is the difference between the value of the separable net assets
of the business and the total value of the business.

Gross - Gross is the term used to describe sales or purchase prices that are
inclusive of sales tax.

Gross profit - Gross profit is sales less cost of sales in a year.

Guaranteed Minimum Share (Partnership agreement) It is possible to include a

section in the profit sharing agreement that specifies that a certain partner should
have at minimum profit from the business. The profits will be shared out in the
normal manner, and then the totals allocated to each will be considered. If one
partner has a guaranteed minimum, and the initial share gives him less than this,
then an adjustment will be made. Each of the other partners will contribute, in their
profit sharing ratio, an amount to this partner to bring his share up to the minimum
agreed. For example, if C has a guaranteed minimum of 20,000 dollars, and the
initial share only allocates 15,000 to him then he is entitled to a further 5,000. If the
profit sharing ratio is 3:2:1 for partners A, B and C, then 3,000 of B's initial share
and 2,000 of C's initial share will be reallocated to A.

IAS - IAS is an abbreviation forInternational Accounting Standards. These contain

specific rules in respect of accounting for transactions. IAS’s were written many
years ago and are being replaced by IFRSs.

IFRS - IFRS stands for International Financial Reporting Stand ards. These contain
specific rules in respect of accounting for transactions. IFRS’s are the most recently
written accounting standards.

Income - Income is economic benefit received by a business either in the form of

cash or assets.
Initial trial balance – The initial trial balance is the list of closing balances taken
directly from the accounts in the general ledger.

Input tax - Input tax is sales tax payable on a purchase of goods or services.

Interest - Interest is a sum paid by a borrower of cash to a lender of cash. A

business may have interest payments and interest receipts in its accounts.

Inventory - Inventory is the value of the goods that a business holds at a point of
time for sale to its customers.

Irrecoverable debt - An irrecoverable debt is a debt due from a customer which it

is considered will not be recovered.

Lease - A lease is a contractual arrangement between two parties for the use of an
asset.

Ledger - A ledger is a collection of accounts that are of a similar type. In modern

accounting systems these will be computerised, but traditionally they were large
books with separate pages for each account.

Ledger account - A ledger account is an account in a ledger that holds records of

transactions.

Liability - A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits. This would include balances owed to suppliers,
banks and other business entities who are external to the business.

Liability – alternative A liability is an amount that is owed by the business, which

will result in an outflow (or payment) of money at some point in the future.

Limited company – A limited company is a business that is legally separate from its
owner/(s).

Liquidation - Liquidation occurs when a business fails and is forced to cease

operations. Also known as receivership or bankruptcy.

Lodgement – A lodgement is an amount of cash paid into the business’s bank

account held at the bank.

Margin – A margin is the amount of profit expressed as a percentage based on the

sales value of a transaction. Mark-up - A mark-up is the amount of profit expressed
as a percentage based on the cost value of a transaction.

Net - A term used to describe sales or purchase prices that are exclusive of sales
tax.
Net assets - Net assets are total assets less total liabilities.

Net book value - Net book value is a term used in connection with tangible non-
current assets. It is the difference between the cost of the asset and its
accumulated depreciation. Net book value is also known as carrying value or
carrying amount.

Netting off - Netting off is the deduction of one number from another.

Net realisable value (NRV) - The net realisable value of an item of inventory is what
it could be sold for after all further costs to complete the item and to then sell it
have been taken into account.

Non-current asset - Non-current assets are those that are purchased for use
within the business and which will be used to generate profits over more than 12
months.

Non-current liabilities - Non-current liabilities are those that will be settled (paid) in
more than 12 months.

Opening net assets - Opening net assets is the total of assets minus liabilities at
the start of the accounting year.

Overdraft – An overdraft occurs when the cash held at the bank on behalf of the
business falls below zero as a result of cash being withdrawn that exceeds the
amount of deposits.

Other income - Other income is income generated by a business other than from
their normal trading activities.

Other payables - Other payables arise from situations where a business owes
money which is not as a result of normal trade. For example, amounts owed to the
tax authority.

Other receivables - Other receivables arise from situations where a business is

owed money but not from normal trade. For example, from an employee.

Output tax - Output tax is sales tax chargeable on a sale of goods or services.

Partner – A partner is one of the owners of a partnership.

Partner’s capital account - The partner’s capital account is a general ledger

account that records the capital introduced and withdrawn by a partner.

Partner’s current account - The partner’s current account is a general ledger

account that records the profit share and drawings of a partner.
Partnership - A partnership is a business where two or more individuals carry on a
trade jointly with a view to making a profit.

Partnership agreement – A partnership agreement is an agreement made between

partners of a partnership. It contains, among other provisions, details of how the
partnership profits will be shared between the partners.

Partnership loan - A partnership loan is one made to the partnership by a partner.

It is not capital as it will be repaid to the partner in the future.

Payables - A payables balance arises when a business owes money. Payables may
be trade payables or other payables.

Payables ledger - The payables ledger is a memorandum ledger in which individual

payables’ accounts are recorded. The total of all individual balances in this ledger
will equal the balance of the payables ledger control account in the general ledger.
Any differences will be investigated. Refer to the definition of the payables ledger
control account reconciliation. The payables ledger is sometimes called the
purchase ledger or the personal ledger for suppliers.

Payables ledger control account - The payables ledger control account is a

general ledger account that records the total entries made to the individual
payables ledger. It is also known as the purchase ledger control account.

Payables ledger control account reconciliation - A payables ledger control

account reconciliation is where the payables ledger control account balance from
the general ledger is compared and reconciled to the total of the individual
accounts in the payables ledger on a particular date.

Personal accounts - Personal accounts are used to record outstanding balances

with credit customers and credit suppliers (receivables and payables).

Petty cash book – The petty cash book is a book of prime entry that records the
petty cash transactions for the business.

Plant – Plant is a category of tangible non-current asset. It means any such asset
which is fixed into place and is part of the operations of an organisation. An
example of plant would be a production line in a manufacturing business.

Prepayment - A prepayment arises where a business has already paid for an

expense which relates to the next accounting period. A prepayment for an expense
is recognised when a business pays for expenses in advance and at the year-end
paid for expenses that relate to the following year.

Proforma - A proforma is a prescribed format for any of the financial statements.

Profit or loss account - The profit or loss account is the financial statement that
shows the financial performance of the business, as shown by the profit or loss that
it has made for the accounting period. It includes the income and expenses of the
business.

Profit-sharing arrangements - Profit-sharing arrangements are set out in the

partnership agreement and prescribe how the profit or loss of the partnership for an
accounting period will be shared between the partners. They may include amounts
for salary, interest on capital and drawings and the profit-sharing ratio.

Proprietor – A proprietor is the owner of a business.

Pro rata - The term pro rata describes a proportionate allocation.

Provisions - A provision is a liability of uncertain timing or amount.

Purchase cost - The purchase cost of goods is the price paid to acquire them.

Purchase day book - The purchase day book is the book of prime entry in which
the business records the credit purchases made.

Purchase ledger - The purchase ledger is another name for the payables ledger.

Purchase returns day book - The purchase returns day book is the book of prime
entry in which the business records the return of goods made to suppliers.

Receivable - A receivable balance arises when a business is owed money.

Receivable balances may be trade receivables or other receivables.

Receivables ledger – The receivables ledger is a memorandum ledger in which

individual receivables’ accounts are recorded. The total of all individual balances in
this ledger will equal the balance of the receivables ledger control account in the
general ledger. Any differences will be investigated. Refer to the definition of the
receivables ledger control account reconciliation. The receivables ledger is
sometimes called the sales ledger or the personal ledger for customers.

Receivables ledger control account - The receivables ledger control account is a

general ledger account that records the total amount owed to the business by its
credit customers. It is also known as the sales ledger control account.

Receivables ledger control account - A receivables ledger control account

reconciliation is where the receivables ledger control account balance from the
general ledger is reconciliation compared and reconciled to the total of the
individual accounts in the receivables ledger on a particular date.

Reducing balance depreciation - Reducing balance is a method of calculating

depreciation. In this method, the depreciation charge is calculated as the carrying
value of the asset at the start of the year multiplied by the depreciation percentage.
In the reducing balance method, depreciation charges are higher in early years.

Returns - Returns are goods sold that have been returned to a business.

Revenue – Revenue is the income generated by a business from its normal trading
activities, also known as sales.

Sales - Sales is the income generated by a business from its normal trading
activities, also known as revenue.

Sales day book - The sales day book is the book of prime entry in which the
business records the credit sales made.

Sales returns day book - The sales returns day book is the book of prime entry in
which the business records the return of goods sold by the customer.

Sales tax - Sales tax is a tax imposed at the point that goods and services are sold.

Security - Security is usually required when a business borrows money. The

security will usually take the form of an asset. If the business does not repay the
borrowings then the lender can sell the asset to settle the amount due.

Settlement discount - A settlement discount is a discount given to a customer in

return for settling their outstanding receivable earlier than the usual credit terms.

SFP - SFP stands for statement of financial position.

Sole trader - A sole trader describes a business that is owned and controlled by
one person.

SPL - SPL stands for statement of profit or loss.

Standing order - is a way of paying a regular amount to someone, without having

to take action every time that it needs to be paid. For example, if you are due pay
30 each month then you can set this up with your bank for them to pay this amount
for you automatically.

Statement of financial position - The statement of financial position is a primary

statement that shows the financial position of a business. This includes the assets
owned, liabilities owed and capital balance.
Statement of profit or loss - The statement of profit or loss is a primary statement
that shows the financial performance of a business. This is the reported profit or
loss for the year.

Straight line depreciation - Straight line is a method of calculating depreciation. In

this method, the deprecation charge is calculated as the cost of the asset less any
depreciation divided by the useful economic life of the asset. The depreciation
charge will be the same in each year under this method.

Supplier statement – A supplier statement is a statement from the supplier to a

business which shows the balance outstanding at a point in time (usually a month
end). It usually includes the opening balance for the month, plus the invoices raised
by the supplier, less the amounts of money that the supplier has received in
settlement.

Supplier statement reconciliation - A supplier statement Reconciliation is a

reconciliation between a third party supplier statement and the balance of that
supplier's individual account in the purchase ledger.

Suspense account – A suspense account is a temporary account that an entry is

posted to when a bookkeeper is unsure where an entry should be debited or
credited. It may also be created when there is a difference on the trial balance and
the suspense account is opened to post the difference so the trial balance agrees.
Once the posting errors in the general ledger are found and corrected, the suspense
account should be cleared to a balance of zero.

Tangible non-current asset register – The tangible non-current asset register can
be defined as a memorandum document where each individual asset is listed and
which will include detailed information about each asset.

Tangible non-current assets - Tangible non-current assets are those assets which
have physical form and which are used by the business to generate economic
benefit over more than 12 months.

The accounting equation - The accounting equation is total assets minus total
liabilities equals capital.

Third party - A third party a person or group who is acting from outside the
business and who is involved in a transaction or event.

Trade discount – A trade discount is one given to a customer at the point of sale. It
is often given for buying a bulk order.

Trade payables – A trade payables balance arises when a business buys goods (or
services) from its suppliers on credit. The balance represents the amount owed by
the business to the supplier.
Trade receivable – A trade receivable balance arises when a business has sold
goods to its customers on credit. The balance represents the amount owed to the
business from the customer. Trading account - The trading account is the section of
the statement of profit or loss in which the cost of goods sold is compared to the
revenue in order to arrive at the gross profit for the accounting period.

Trial balance - The trial balance is a list of balances extracted from the accounts in
the general ledger, with debit balances in one column and credit balances in the
other.

Working paper - Working papers are documents used to prepare accounting

records.

Write off - Write off is a term used when an asset is no longer recognised in the
statement of financial position and is expensed in the statement of profit or loss.