Accounting for Business Terms with "A"

Glossary of Accounting for Business - Glossario Contabilità Imprese

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Abnormal Losses: losses arising in business that should have been avoided.

Absorption Costing: the method of allocating all indirect manufacturing costs to products (all fixed costs are allocated to cost units).

Account: part of the double entry records containing details of transactions for a specific item.

Accounts Payable: a record of money owed by a business for goods and services.

Accounts Receivable: a record of money owed to the business for goods and services that have been provided to its customers.

Accrual Basis Accounting: accrual-basis accounting records financial events based on events that change your net worth (the amount owed to you less the amount you owe others). Standard practice is to record expenses with the incomes they are associated with. For example, your landlord would record an income event on the day your rent comes due (you owe it to him). He records an expense event when the fee owed to the rental agent comes due for your apartment that month (he owes it to the agent). The details of the actual cash flows and their timing are tracked by bookkeeping.

Accounting: the process of identifying, measuring and communicating financial information to enable informed judgements and decisions.

Accounting Cycle: the sequence in which data is recorded and processed until it becomes part of the financial statements at the end of the period.

Accounting Equation: the formula that is the basis of double-entry bookkeeping. Assets = Source of Funds – Liabilities. Therefore an increase in assets must be accompanied by an equal increase in the liabilities and/or capital. This is the reason a Balance Sheet balances.

Accounting Periods: the period of time used by the business to process it's accounts to produce reports such as the Profit and Loss report and the balance sheet. For example, a company may run its accounts on a monthly basis, and produce 12 sets of reports in one year.

Accounting Policies: those principles, conventions, rules and practices applied by a business that specify how the effects of transactions and other events are to be reflected in its financial statements.

Accounts (or Final Accounts): this is a term used to refer to statements produced at the end of accounting periods, such as the trading and profit and loss account and the balance sheet. The term 'financial statements' is more commonly used.

Accountant’s Report: a report by a firm of accountants confirming that the annual accounts have been properly prepared. This is an alternative to an audit.

Accrual Accounting: an accounting method that tries to match the recognition of revenues earned with the expenses incurred in generating those revenues. It ignores the timing of the cash flows associated with revenues and expenses. With the accrual method, income and expenses are recorded as they occur, regardless of whether or not cash has actually changed hands. An example is a sale on credit. The sale is entered into the books when the invoice is generated rather than when the cash is collected. Likewise, an expense occurs when materials are ordered or when a workday has been logged in by an employee, not when the cheque is actually written. The disadvantage of this method is that you pay tax on revenue before you've actually received it.

Accrual: the accruals process allows a business to adjust the monthly accounts for payments made in arrears. This process is the reverse of prepayments. There are certain expenses that are paid quite some time after they have been used. Electricity is a good example. Whilst you are using electricity the cost is accruing. If the business does not account for these costs in the correct accounting periods that the expense is incurred then the account would be inaccurate. In most cases the electricity bill is sent every three months. If your business receives an electricity bill in April for electricity it has used in January to March and it has not been accounted for in the accounts, the accounts for January to March will be inaccurate. The profit in each of these months would have been overstated.

To account for this correctly, the business would set up an Accruals account, which is a liability account - this is money that the business owes but has not yet paid. Most businesses know from experience how much the quarterly electricity bill is likely to be. In view of this, a 1/3 of that quarterly electricity bill is allocated to the electricity expenses account for each month. The transactions would be a debit to the electricity account and a credit to the accruals account each month. The profit and loss report will show an expense for electricity costs and the balance sheet will show an accruals balance as a liability. This will increase each month until the electricity bill is received. Once the bill has been received there is no longer a liability, therefore the accrual can be reversed. To do this you would then debit the accruals account and credit the electricity account equal to the amount of the accrual, in order to clear down (reset to zero) the balance.

Then finally, the actual amount for the electricity bill would be paid by a debit to the electricity account and a credit to the bank account.

Accruals Concept: the accruals concept is that profit is the difference between revenue and the expenses incurred in generating that revenue.

Accrued Expense: this is an expense for which the benefit has been received, but has not been paid for by the end of the period. Examples are electricity or telephone use which are billed quarterly It is included in the balance sheet under current liabilities as 'accruals'.

Accrued Income: accrued income is normally from a source of income, outside of the main source of business income, such as rent receivable on an unused office that was due to be received by the end of the period, but which has not been received by that date. It is added to debtors in the balance sheet.

Accumulated Depreciation Account: this account is used to accumulate depreciation for balance sheet purposes. It is used in order to leave the cost (or valuation) figure as the balance in the fixed asset account. It is sometimes confusingly referred to as the 'provision for depreciation account'.

Acid Test Ratio: this shows that, provided creditors and debtors are paid at approximately the same time, a view might be made as to whether the business has sufficient liquid resources to meet its current liabilities. Also referred to as the Quick Ratio.

Acid Test Ratio = (Current Assets - Stock) ÷ Current Liabilities: this ratio is probably the most important business test of all. It is an attempt to indicate how easily a company could pay its debts without selling its stock. Stock is not always easy to sell. See Current Ratio for a comparison with the inclusion of stock.

Adverse Variance: a difference arising that is apparently 'bad' from the perspective of the organisation. For example, when the total actual materials cost exceeds the total standard cost due to more materials having been used than anticipated. Whether it is indeed 'bad' will be revealed only when the cause of the variance is identified. It may, for example, have arisen as a result of an unexpected rise in demand for the product being produced.

AER: stands for Annual Equivalent Rate. See What is AER, APR, EAR Interest for detailed information.

Aged Debtors: debtors who have owed money to the business for a defined period of time.

Aged Debtors Analysis: a report that analyses amounts owed by customers according to the length of time that those amounts have remained unpaid. For example, all customers who have outstanding invoices that are over a month old.

Allocation: the process of matching payments against purchase invoices and receipts against sales invoices raised.

Amortisation: spreading the cost of an intangible asset, such as a lease, over the years in which it is used. It is usual to divide the cost of the lease by the number of years that the lease is held for, and then use that figure as the annual charge. This is similar to depreciation except that depreciation deals with tangible or fixed assets such as motor vehicles or plant and equipment.

Analysis: a breakdown or summary of what is included in a figure in the accounts.

Annual Report and Accounts: a document containing the financial statements and Directors’ Report.

Annuity: an income-generating investment whereby, in return for the payment of a single lump sum, the annuitant receives regular amounts of income over a predefined period.

Annulment: cancellation usually of a bankruptcy.

Appropriation Accounts: these show the way that net profit is distributed (usually in the form of cash dividends) between partners in a partnership or between shareholders and reserve funds in a company.

APR: stands for Annual Percentage Rate. Please see What is AER, APR, EAR Interest for detailed information.

Arbitration: in arbitration an independent third party considers both sides in a dispute, and makes a decision to resolve it. The arbitrator is impartial, means he or she does not take sides. In most cases the arbitrator's decision is legally binding on both sides, so it is not possible to go to court if you are unhappy with the decision.

Most types of arbitration have the following in common:

  • Both parties must agree to use the process

  • It is private

  • The decision is made by a third party, not the people involved

  • The arbitrator often decides on the basis of written information

  • If there is a hearing, it is likely to be less formal than court

  • The process is final and legally binding

  • There are limited grounds for challenging the decision

Articles of Association: for UK limited companies. This is the document that arranges the internal relationships, for example, between members of the company, and the duties of directors. The Companies Act 1985 gives a model known as Table A.

Assets: generally, an asset is something that is of value to a company. An asset can then be broken down further into Tangible and Intangible assets. Examples of tangible assets include property, vehicles, stock, cash, money held in the bank and Debtors (as they owe money from sales made by the company). However, these can be broken down still further into Fixed Assets and Current Assets Examples of intangible assets include patents, copyrights, trademarks and goodwill. While these may not have value to the man on the street, these generate income for the company.

Auditor: a person qualified to inspect, correct and verify business accounts.

Audit Trail: a register of the details of all accounting transactions. This register shows how a transaction was dealt with from start to finish.

Authorised (Or Licensed) Insolvency Practitioner: the person (usually an accountant or solicitor) or a recognised professional body formally authorised to act as trustee, nominee, supervisor, liquidator, administrative receiver or administrator.

Authorised Share Capital: the total value of shares that the company could issue, as distinct from the up and paid up share capital.