Accounting for Business Terms with "D"

Glossary of Accounting for Business - Glossario Contabilità Imprese

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Day Book: a book that lists all transactions in the order that they arise. There is often a day book for different types of transaction, e.g. a sales day book and a purchase day book.

Debenture: the term debenture is used when a limited company receives money on loan, and certificates called debenture certificates are issued to the lender. Interest will be paid to the holder, the rate of interest being shown on the certificate. They are not always called debentures; they are often known as loan stock or as loan capital. Debenture interest has to be paid whether profits are made or not. They are therefore different from shares where dividends depend on profits being made. A debenture may be either

  • Redeemable, i.e repayable at or by a particular date, or

  • Irredeemable, normally repayable only when the company is officially terminated by its going into liquidation. (Also sometimes referred to as 'perpetual' debentures).

Debit: it is an accounting and bookkeeping term that comes from the Latin word debere which means "to owe". The opposite of a debit is a credit. Debit is abbreviated Dr while credit is abbreviated Cr. A debit can be either a positive or negative entry to an account depending on what type of account is being debited. Asset and expense accounts increase in value when debited, whereas liability, capital, and revenue accounts decrease in value when debited.

Debit Card: a card linked to a bank or building society account and used to pay for goods and services by debiting the holders account. Debit cards are usually combined with other facilities such as ATM and cheque guarantee card functions.

Debit Note: a document sent to supplier showing allowance to be given for unsatisfactory goods.

Debt: debt is money that is owed. People or organisations often enter into agreements to borrow something. Both parties must agree on some standard of deferred payment. Usually a sum of money is denominated as the unit of currency, but sometimes a like good. For example, shares might be borrowed and then repaid later with the shares plus a premium for borrowing, or the sum of money required to buy them in the market at that time. There are numerous types of debt obligations. They include loans, bonds, mortgages, promisary notes, and debentures.

Debtors: people and businesses who owe your business money for goods or for services you have supplied.

Debtor / Sales Ratio: a ratio assessing how long it takes debtors to pay their debts.

Deferred Taxation: timing differences arise between the accounting treatment of events and their taxation results. Deferred taxation accounting adjusts the differences so that the accounts are not misleading.

Deficit: a deficit is where more money has been spent than received by an organisation in a given period.

Depletion: the wasting away of an asset as it is used up.

Deposit Account: a bank account for money to be kept in for a long time. Deposit accounts normally pay a higher rate of interest when compared to a than current accounts.

Depreciation: a figure representing the reduction in value of a fixed asset through use, obsolescence etc, in the calculation of Net profit. This involves dividing the value of the asset into instalments to each accounting period of its useful life. Depreciation involves estimates of life and residual values. It is common that an asset will be worth less at the end of its life expectancy than when the business first started using it, so in affect, it has cost the business money. If it has cost the business money, then it must be an expense and will therefore affect the profit and loss. The asset is also expected to be worth less, and thus also affect the balance sheet. There are various methods of depreciation, Straight Line and Reducing Balance:

  • Straight Line Depreciation Method

To use the Straight Line method, you need to know:

  • The initial cost of an asset.

  • The useful life of the asset and the residual value of the asset, (what it will be worth at the end of its useful life) or scrap value.

As an example, the business has a vehicle worth £10,000 that is expected to last 5 years and is estimated to be valued at £4,000 after that time. This means it will be worth £6,000 less in 5 years time and the £6,000 will be a cost to the business and therefore needs to be apportioned to the depreciation expense account. £6,000 divided by 60 months = £100 depreciation cost per month. To account for this the business would set up a depreciation account as an expense account. A debit of £100 would be made to this account monthly and a credit would go to the vehicle account reducing the value of the asset each month.

Using this method the value left in the vehicle account by the end of 5 years would be £4000.

  • Reducing Balance Depreciation Method

The other method of accounting for depreciation is called Reducing Balance.

The asset is not reduced by the same fixed amount each year but instead by a fixed percentage, which is calculated on the asset balance at the end of each year once depreciation has been applied.

For example, let’s assume that a veehicle will depreciate by 20% every year over the life of 5 years:

  • Year 1 Original Cost Depreciation = £10,000 - £2,000

  • Year 2 Balance Depreciation = £8,000 - £1,600

  • Year 3 Balance Depreciation = £6,400 - £1,280

  • Year 4 Balance Depreciation = £5,120 - £1,024

  • Year 5 Balance Depreciation = £4,096 - £819

  • Balance = £3,277

As you can see, the depreciation for year 1 has been calculated as 20% of £10,000, but in year 2 the depreciation has been calculated as 20% of the reduced balance which is £8,000 - £1,600 depreciation in year 2 which differs from the depreciation amount in year 1.

Direct Costs: costs that can be traced to the item being manufactured.

Direct Debit: an instruction from a customer to their bank or building society authorising an organisation to collect money from their account, as long as the customer has been given advance notice of the collection amounts and dates. The Direct Debit Scheme also protects you and your money by means of the Direct Debit Guarantee. All banks and building societies that take part in the Direct Debit Scheme operate this Guarantee. The efficiency and security of the Scheme is monitored and protected by your own bank or building society.

Direct Expenses: those expenses that are incurred in the actual manufacture and sale of the product or the sale and provision of the service, i.e. the expenses incurred by the business actually trading. For example, the wages of the machine operators, the power to run the machines, the wages and commission of the sales staff, the cost of advertising and any sales promotions. Directors Officials appointed by shareholders to manage the company for them.

Discount: the amount by which a bill is reduced. Discounts can be given for a variety of reasons, e.g. buying in bulk, spending large amounts, trade discount, early settlement discount.

Dishonoured Cheque: a cheque which the drawer's bank has refused to allow payment.

Dissolution: when a partnership firm ceases operations and its assets are disposed of.

Distributable Profits: in company accounts these are the sums that are available for dividends to shareholders. While based on the net profit, they may be increased by undistributed profits from the previous year or reduced by the need to retain some for the reserves.

Dividend: a dividend is the distribution of profits to a company's shareholders. When a company earns a profit, some of this money is typically reinvested in the business (retained earnings), and some of it can be paid to its shareholders as a dividend. Paying dividends reduces the amount of cash available to the business, but the distribution of profit to the owners is the purpose of the business. The amount paid out per share. Usually described as a percentage of the face value (the original price) of one share. So a 10% dividend on a £2.00 share would be 20p.

Double Entry: a system of bookkeeping in which every transaction of a business is entered as a debit in one account and as a credit in another. As every transaction must have an equal or zero effect on both sides of the accounting equation, every positive amount entered (debit) must be mirrored by a negative amount or amounts (credit).

Drawings: cash or goods taken from the business for the owners’ personal use. Drawings only apply to sole traders and partnerships. Drawings do not count as an expense in the Profit and Loss account and must be included in the financed by section of the Balance Sheet.