Accounting for Business Terms with "P"

Glossary of Accounting for Business - Glossario Contabilità Imprese

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Paid-Up Share Capital: the amount that shareholders of a company have paid to the company for their fully-paid shares.

Parent Undertaking: an undertaking which controls or has a dominating influence over the affairs of another undertaking. The terms 'parent undertaking' and 'subsidiary undertaking' have been in use for only a few years. Previously, a parent undertaking was called a 'holding company', and a subsidiary undertaking was called a 'subsidiary company'. One of the reasons these terms have been changed was that consolidated financial statements used to be concerned only with companies. Now, subsidiary undertakings can include unincorporated businesses as well.

Pareto Principle: also known as the 80/20 Rule, states that, for many events, 80% of the effects come from 20% of the causes. It is a common rule of thumb in business; e.g., "80% of your sales comes from 20% of your clients."

Partnership: a partnership is a group of individuals who are trading together with the intention of making a profit. Partnerships are often created when a sole trader's business expands and more capital and more expertise is needed. Typical partnerships are those of accountants, solicitors and dentists and usually comprise between 2 and 20 partners. A partnership will tend to be larger than sole traders; there will tend to be more employees and a greater likelihood of a bookkeeper being employed to maintain the accounting records. Each of the partners will contribute capital to the business and will normally take part in the business activities. The profits of the business will be shared between the partners; setting up a partnership agreement whereby the financial rights of each partner are set out normally does this. Just as with sole traders the partners will tend to withdraw the profits due to them from the business in the form of drawings, although in some cases partners may also be paid a salary by the business.

Partnership Return (Form SA800): this shows each partner’s share of profits (or losses) and must be filed with HMRC annually.

PAYE (Pay As You Earn): the system whereby income tax is deducted from wages and salaries by employers and sent to HM Revenue & Customs.

Payee: the person / company to who a cheque is being paid.

Payroll: the process of paying employees by calculating the gross remuneration due less statutory deductions for tax and National Insurance (NI) and other deductions.

P/E Ratio (Price per Earnings): the P/E ratio is an important indicator showing how the investing market views the health, performance, prospects and investment risk of a public company listed on a stock exchange (a listed company). The P/E ratio is also a highly complex concept - it's a guide to use alongside other indicators, not an absolute measure to rely on by itself. The P/E ratio is arrived at by dividing the stock or share price by the earnings per share (profit after tax and interest divided by the number of ordinary shares in issue). As earnings per share are a yearly total, the P/E ratio is also an expression of how many years it will take for earnings to cover the stock price investment. P/E ratios are best viewed over time so that they can be seen as a trend. A steadily increasing P/E ratio is seen by the investors as increasingly speculative (high risk) because it takes longer for earnings to cover the stock price. Obviously whenever the stock price changes, so does the P/E ratio. More meaningful P/E analysis is conducted by looking at earnings over a period of several years. P/E ratios should also be compared over time, with other company's P/E ratios in the same market sector, and with the market as a whole.

Step by step, to calculate the P/E ratio:

  1. Establish total profit after tax and interest for the past year.

  2. Divide this by the number of shares issued.

  3. This gives you the earnings per share.

  4. Divide the price of the stock or share by the earnings per share.

  5. This gives the Price/Earnings or P/E ratio.

Personal Allowances: amounts that may subtract from income in order to arrive at taxable income. The value of each allowance is set by the government following the Budget each year.

Petty Cash: businesses often need small amounts of cash, known as petty cash, for expenditures where it is not practical to make the payment by other means.

Petty Cash Book: a Cash Book to record petty cash payments.

Posting: the process of entering a transaction on your accounts record.

Preference Shares: shares that are entitled to an agreed rate of dividend before the ordinary shareholders receive anything.

Preliminary Expenses: all the costs that are incurred when a company is formed.

Prepayments: a payment for goods or services before they are received. e.g. Insurance paid 1 year in advance and accounted for over 12 months. A prepayment is an asset because is something that has been paid for but not yet used.

Present Value: the amount that a future cash flow is worth in terms of today's money.

Prime Cost: direct materials plus direct labour plus direct expenses.

Principal: the loan amount, or the part of the loan amount that remains unpaid (excluding interest) (also called principal amount).

Private Ledger: a ledger for capital and drawings accounts.

Process Costing: a costing system that is applied when goods or services are produced in a continuous flow.

Production Cost: prime cost plus indirect manufacturing costs.

Profit: the excess of revenues over costs in a business.

Profit and Loss Report: a report that categorises the income and expenditure of a business over an accounting period. The profit (or loss) of a business is its income less its expenditure; profit is analysed, along with gross profit (sales less the cost of those sales) and net profit (all income less all expenditure, before and after tax has been deducted).

Provision: an amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with "substantial accuracy".

Provision for Bad Debt: an amount put by for those debts which may not be paid. It appears as an expense on the profit and loss account and is deducted from the debtors control account.

Prudence: ensuring that profit is not shown as being too high, or that assets are not shown at too high a value and that the financial statements are neutral: that is, that neither gains nor losses are understated or overstated.

Public Company: a company that can issue its shares publicly, and for which there is no maximum number of shareholders.

Purchases: goods or services bought for the purpose of making a direct sale. e.g. Material costs such as stationary that is resold, hardware that is resold etc.

Purchase Credit Notes: these are issued by suppliers in order to cancel purchase invoices either in full or in part. They are normally issued when goods or services are faulty or when the purchase invoice was incorrect.

Purchase Discounts: Purchase Discounts may be given for a variety of reasons, e.g. buying in bulk, spending large amounts, being a preferred customer or settlement discount.

Purchase Invoices: these are issued by suppliers as a request for payment in respect of the supply of goods or services.

Purchase Ledger: the purchase ledger keeps track, in account order, of all invoices, credit notes and discounts received from suppliers and all payments to suppliers. It can be quickly referred to if you want to find the current status of any of the supplier accounts. The total balance outstanding should equal the balance of the creditors control account in the nominal ledger.

Purchase Payments: payments made to suppliers in respect of invoices for the goods and/or services supplied.

Purchases Day Book: book of original entry for credit purchases. Also called the Purchases Journal.