Glossary of Key Accounting Terms This Glossary Contains Most of

Glossary of Key
Accounting Terms
This glossary contains most of the key accounting terms that students are likely to encounter.
Words highlighted in bold are explained elsewhere in the glossary.
Acid test ratio

See quick ratio
Accounting
The provision of information to managers and owners so they can make business decisions.
Accounting concept
A principle underpinning the preparation of accounting information.
Accounting equation
The basic premise that assets equals liabilities.
Accounting period
The time period for which the accounts are prepared. Audited financial statements are usually
prepared for a year.
Accounting policies
The specific accounting methods selected and followed by a company in areas such as sales,
foreign currencies, stocks, goodwill and pensions.
Accounting standards
Accounting pronouncements which set out the disclosure and measurement rules businesses
must follow to give a true and fair view when drawing up accounts.
Accounting Standards Board (ASB)

The Accounting Standards Board sets the UK’s accounting standards.
Accruals
The amounts owed to the suppliers of services at the balance sheet date, for expenses such as
telephone or light and heat.
Accruals concept
See matching concept
402 GLOSSARY OF KEY ACCOUNTING TERMS
Accumulated depreciation
The total depreciation on tangible fixed assets including this year’s and prior years’ depreciation.
Annual report
A report produced annually by companies comprising both financial and non-financial infor-
mation.
Appropriation account
The sharing out of partners’ profit after net profit has been calculated in the profit and loss
account.
Asset turnover ratio

A ratio which compares sales to total assets employed.
Assets
Essentially, items owned or leased by a business. Assets may be tangible or intangible, current
or fixed. Assets bring economic benefits through either sale (for example, stock) or use (for
example, a car).
Associated company
A company in which 20–50 % of the shares are owned by another company or in which
another company has a significant influence.
Auditors
A team of professionally qualified accountants independent of a company. Appointed by the
shareholders on the recommendation of the directors, the auditors check and report on the
accounts prepared by the directors.
Auditors’ report
A statement in a company’s annual report which states whether the financial statements present
a ‘true and fair view’ of the company’s activities over the previous financial year.
Authorised share capital

The amount of share capital that a company is allowed to issue to its shareholders.
Bad debts
Those debts that will definitely not be paid. They are an expense in the profit and loss account
and are written off debtors in the balance sheet.
Balance off
In double-entry bookkeeping, the accounts are balanced off and, the figures for assets and
liabilities are carried forward to the next period. In effect, this signals the end of an accounting
period.
GLOSSARY OF KEY ACCOUNTING TERMS 403
Balance sheet
A financial statement which is a snapshot of a business at a particular point in time. It records
the assets, liabilities and capital of a business. Assets less liabilities equals capital. Capital is the
owners’ interest in the business.
Bank overdraft
A business or individual owes the bank money.
Bookkeeping
The preparation of the basic accounts. Monetary transactions are entered into the books of
account. A trial balance is then extracted, and a profit and loss account and a balance sheet are
prepared.
Budget
A future plan which sets out a business’s financial targets.
Budgeting
Budgeting involves setting future targets. Actual results are then compared with budgeted
results. Any variances are then investigated.
Called-up share capital

The amount of issued share capital that is fully paid up by shareholders. For example, a share
may be issued for £1.50 and paid in three equal instalments. After two instalments the called-up
share capital is £1.
Capital
Capital represents the owner’s interest in the business. In effect, capital is a liability as it is owed
by the business to the owner (e.g., sole trader, partner or shareholder). Capital is the assets of
a business less its liabilities to third parties. Capital is accumulated wealth and is increased by
profit, but reduced by losses. For listed companies capital is known as equity.
Capital expenditure
A payment to purchase an asset with a long life such as a fixed asset.
Capital expenditure and financial investment

In a cash flow statement, cash flows relating to the purchase and sale of fixed assets and
investments.
Capital investment appraisal

A method of evaluating long-term capital expenditure decisions.
Capital maintenance concept

A way of determining whether the ‘capital’ of a business has improved, deteriorated or stayed
the same over a period of time. There is both financial and physical capital maintenance.
Capital reserves
Reserves not distributable to shareholders as dividends (e.g., the share premium account or
revaluation reserve).
Carriage inwards
The cost of delivering raw materials. Refers to the days when goods were delivered by
horse-and-carriage.
Carriage outwards
The cost of delivering the finished goods. Refers to the days when goods were delivered by
horse-and-carriage.
Cash and bank

The actual money held by the business either at the business as cash or at the bank.
Cash at bank
Money deposited with a bank.
Cash book
In large businesses, a separate book which records cash and cheque transactions.
Cash budget
This budget records the projected inflows and outflows of cash.
Cash flow statement

A financial statement which shows the cash inflows and outflows of a business.
Chairman’s statement
A statement in a company’s annual report which provides a personalised overview of the
company’s performance over the past year. It generally covers strategy, financial performance
and future prospects.
Companies Acts
Acts of Parliament which lay down the legal requirements for companies including accounting
regulations.
Company
A business enterprise where the shareholders have limited liability.
Conceptual framework
A coherent and consistent set of accounting principles which underpin the preparation and
presentation of financial statements.
Consistency concept
An accounting principle which states similar items should be treated similarly from year to year.
Corporate governance
The system by which companies are directed and controlled. The financial aspects of corporate
governance relate principally to internal control and the way in which the board of directors
functions and reports to the shareholders on the activities and progress of the company.
Cost
An item of expenditure (planned or actually incurred).
Cost accounting
Essentially, costing and planning and control.
Cost of capital
The interest rate at which a business raises funds.
Cost of sales
Essentially the cost of directly providing the sales.
Costing
Recovering costs as a basis for pricing and stock valuation.
Creative accounting
Using the flexibility within accounting to manage the measurement and presentation of the
accounts so that they serve the interests of the preparers.
Credit
An entry on the right-hand side of a ‘T’ account. Records principally increases in liabilities,
capital or income. May also record decreases in assets or expenses.
Credit control
Controlling debtors by establishing credit limits for new customers, monitoring the age of debts
and chasing up bad debts.
Creditors
Amounts owed to trade suppliers for goods supplied on credit, but not yet paid. Known as
trade payables for listed companies.
Creditors collection period

Measures how long a business takes to pay its creditors by relating creditors to cost of sales.
Current assets
Those assets (e.g., stocks, debtors and cash) that a company uses in its day-to-day operations.
Current liabilities
The liabilities that a business uses in its day-to-day operations (e.g., creditors (trade payables)).
Current purchasing power

A measurement system where historical cost is adjusted by general changes in the purchasing
power of money (e.g., inflation), often measured using the retail price index (RPI).
Current ratio
A short-term test of liquidity which determines whether short-term assets cover short-term
liabilities.
Debenture
Another name for a long-term loan. Debentures may be secured or unsecured loans.
Debit
An entry on the left-hand side of a ‘T’ account. Records principally increases in either assets or
expenses. May also record decreases in liabilities, capital or income.
Debt factoring
Where the debtors are subcontracted to a third party who are paid to manage them.
Debtors
When sales are made on credit, but the customers have not yet paid. Known as trade receivables
for listed companies.
Debtors age schedule

A credit control technique which profiles the age of the debts and allow old debts to be quickly
identified.
Debtors collection model

A technique for managing working capital which seeks to maintain the most efficient level of
debtors for a company. It balances the extra revenue generated by increased sales with the
increased costs associated with extra sales (e.g., credit control costs, bad debts and the delay in
receiving money).
Debtors collection period

A ratio which measures how long customers take to pay their debts by relating debtors to sales.
Decision-making objective of financial reporting

Providing users, especially shareholders, with financial information so that they can make
decisions such as whether to buy or sell shares.
Depreciation
Depreciation attempts to match a proportion of the original cost of the fixed assets to the
accounting period in which the fixed assets were used up as an annual expense.
Direct method of preparing cash flow statement

Classifies operating cash flows by function or type of activity (e.g., receipts from customers).
Directors
Those responsible for running the business. Accountable to the shareholders who, in theory,
appoint and dismiss them.
Directors’ remuneration report

A statement in an annual report in which companies include details of their directors’ pay.
Directors’ report
A narrative statement in an annual report. It supplements the financial information with
information considered important for a full appreciation of a company’s activities.
Discount allowed
A reduction in the selling price of a good or service allowed by the business to customers for
prompt payment. Treated as an expense.
Discount received
A reduction in the purchase price of a good or service granted to a business from the supplier
for paying promptly. Treated as an income.
Dividend cover
A ratio showing how many times profit available to pay ordinary dividends covers actual
dividends.
Dividend yield
A ratio showing how much dividend ordinary shares earn as a proportion of market price.
Dividends
A cash payment to shareholders rewarding them for investing money in a company.
Double-entry bookkeeping
A way of systematically recording the financial transactions of a company so that each
transaction is recorded twice.
Doubtful debts
Debts which may or may not be paid. Usually, businesses estimate a certain proportion of their
debts as doubtful.
Drawings
Money which a sole trader or partner takes out of a business as living expenses. It is, in effect,
the owner’s salary and is really a withdrawal of capital.
Earnings per share (EPS)

A key ratio by which investors measure the performance of a company.
Economic order quantity (EOQ)

A technique for managing working capital. The optimal EOQ is calculated so as to minimise
the costs of ordering and holding stock.
Efficiency ratios
Ratios which show how efficiently a business uses its assets.
Entity concept
A business has a distinct and separate identity from its owner. This is obvious in the case
of a large limited company where shareholders own the company and managers manage the
company. However, there is also a distinction between a sole trader’s or partnership’s personal
and business assets.
Equity
The term used for capital for a listed company.
Expenses
The day-to-day costs incurred in running a business, e.g., telephone, business rates and wages.
Expenses are expenses even if goods and services are consumed, but not yet paid. Expenses are,
therefore, different from cash paid.
Financial accounting
The provision of financial information on a business’s financial performance targeted at
external users, such as shareholders. It includes not only double-entry bookkeeping, but also
the preparation and interpretation of the financial accounts.
Financial capital maintenance concept

This concept is primarily concerned with monetary measurement, in particular, the measurement
of the net assets.
Financial Reporting Council (FRC)

A UK supervisory body which ensures that the overall accounting standard-setting system is
working.
Financial Reporting Review Panel (FRRP)

The FRRP investigates contentious departures from accounting standards and is part of the
UK’s standard-setting regime.
Financing cash flows

In a cash flow statement, they relate to the issuing or buying back of shares or loan capital.
Finished goods stock

The final stock after the manufacturing process is completed, for example, finished tables.
The cost includes materials and other manufacturing costs (e.g., labour and manufacturing
overheads).
First-in-first-out (FIFO)
A method of stock valuation where the stock bought first is the first to be sold. See also average
cost and last-in-first-out.
Fixed assets
Infrastructure assets used to run the business long-term and not used in day-to-day production.
Includes tangible fixed assets (e.g., motor vehicles, land and buildings, fixtures and fittings,
plant and machinery) and intangible fixed assets (e.g., goodwill). Fixed assets are known as
property, plant and equipment for a listed company.
Fixed costs
Costs that do not vary with production or sales (for example, insurance) in an accounting
period and are not affected by short-term decisions. Often called fixed overheads.
Fixed overheads
See fixed costs.
Gearing
The relationship between a company’s ordinary shareholders’ funds and the debt capital.
General reserve
A revenue reserve created to deal with general, unspecified contingencies such as inflation.
Going concern concept

The business will continue into the foreseeable future. Assets, liabilities, incomes and expenses
are measured on this basis.
Goodwill
In takeovers, the purchase price less the amount paid for the net assets. It represents the value
placed on the earning power of a business over and above its net asset value.
Gross profit
Sales less cost of sales.
Gross profit ratio

This ratio relates the profit earned through trading to sales.
Historical cost
A measurement system where monetary amounts are recorded at the date of original transaction.
Historical cost convention

The amount recorded in the accounts will be the original amount paid for a good or service.
Horizontal analysis
A form of ratio analysis which compares the figures in the accounts across time. It is used to
investigate trends in the data.
Impression management
Managers try to influence the financial reporting process in their own favour. Includes both
creative accounting and narrative enhancement.
Income
The revenue earned by a business, e.g., sales. Income is income, even if goods and services have
been delivered but customers have yet to pay. Income thus differs from cash received.
Income receivable
Receivable by the business from a third party, e.g., dividends receivable (from companies) or
interest receivable (from the bank).
Income statement
The term used in listed companies for the profit and loss account.
Indirect method of preparing cash flow statement

Operating cash flow is derived from the profit and loss account and balance sheet and not
classified directly by function (such as receipts from sales).
Indirect overheads
See indirect costs.
Intangible assets
Fixed assets one cannot touch, unlike tangible fixed assets (such as land and buildings). Most
common in companies.
Interest cover
A ratio showing the amount of profit available to cover the interest payable on long-term
borrowings.
Interest payable
An expense related especially to bank loans. When paid becomes interest paid.
International Accounting Standards Board (IASB)

An international body founded in 1973 to work for the improvement and harmonisation
of accounting standards worldwide. Originally called the International Accounting Standards
Committee.
Interpretation of accounts
The evaluation of financial information, principally from the profit and loss account and balance
sheet, so as to make judgements about profitability, efficiency, liquidity, gearing, cash flow, and
the success of a financial investment. Sometimes called ratio analysis.
Inventory
The term used for stock in a listed company.
Investment ratios
Measures the returns to the shareholder (dividend yield, earnings per share and price/earnings
ratio) or the ability of a company to sustain its dividend or interest payments (dividend cover
and interest cover).
Investments
Assets such as stocks and shares.
Invoice discounting
The sale of debts to a third party for immediate cash.
Issued share capital

The share capital actually issued by a company.
Just-in-time
A method of stock control developed in Japan. It seeks to minimise stock holding costs by
the careful timing of deliveries and efficient organisation of production schedules. At its best,
just-in-time delivers stock just before it is used.
Last-in-first-out (LIFO)
A method of stock valuation where the last stock purchased is the first sold. See also average
cost and first-in-first-out.
Leasing
Where the assets are owned by a third party which the business pays to use them.
Liabilities
Amounts the business owes (e.g., creditors, bank loan). They can be short-term or long-term,
third party liabilities or capital (i.e., liability owed by the business to the owner).
Limited liability
Shareholders are only liable to lose the amount of money they initially invested.
Liquidity ratios
Ratios derived from the balance sheet that measure how easily a firm can pay its debts.
Listed company
A company quoted on a stock exchange.
Loan capital
Money loaned to a company by third parties who do not own the company and are entitled to
interest not dividends.
Loans
Amounts borrowed from third parties, such as a bank.
Long-term creditors
Amounts borrowed from third parties and repayable after a year. The most common are
long-term loans. Known as non-current liabilities for listed companies.
Long-term loan
A loan, such as a bank loan, not repayable within a year. Sometimes called a debenture.
Management accounting
The provision of both financial and non-financial information to managers for cost accounting,
planning, control and performance, and decision making. It is thus concerned with the internal
accounting of a business.
Market value
The value shares fetch on the open market, i.e., their trading value. This may differ significantly
from their nominal value.
Matching concept
Recognises income and expenses when accrued (i.e., earned or incurred) rather than when
money is received or paid. Income is matched with any associated expenses to determine the
appropriate profit or loss. Also known as the accruals concept.
Measurement systems
The processes by which the monetary amounts of items in the financial statements are
determined. Such systems are fundamental to the determination of profit and to the measurement
of net assets. There are five major measurement systems: historical cost, current purchasing
power, replacement cost, realisable value and present value.
Monetary measurement convention

Only items measurable in financial terms (for example, pounds or dollars) are included in the
accounts. Atmospheric pollution is thus excluded, as it has no measurable financial value.
Narrative enhancement
Managers use the narrative parts of the annual report to convey a more favourable impression
of performance than is actually warranted, e.g., by omitting key data or stressing certain
elements.
Net assets
Total assets less long-term loans and current liabilities.
Net book value

The cost of tangible fixed assets less accumulated depreciation.
Net cash flow from operating activities

In a cash flow statement, cash flows from the normal trading activities of a business.
Net profit
Sales less cost of sales less expenses.
Net profit ratio

A ratio which relates profit after expenses (i.e., net profit) to sales.
Nominal value
The face value of the shares when originally issued.
Non-current liabilities
The term used for long-term creditors in a listed company.
Note on historical cost profits and losses

A statement in the annual report which records any differences caused by departures from the
historical cost convention (e.g., revaluation and subsequent depreciation of fixed assets).
Notes to the accounts

In a company’s annual report, they provide additional information about items in the accounts.
Objective of financial statements

To provide information about the financial position, performance and changes in financial
position of an enterprise useful to a wide range of users in making decisions.
Operating and financial review

A statement in a company’s annual report which enables companies to provide a formalised,
structured and narrative explanation of financial performance. It has two parts. First, the
operating review covers items such as a company’s operating results, profit and dividends.
Second, the financial review discusses items such as capital structure and treasury policy. The
operating and financial review was introduced as a voluntary statement in 1993. It may be
replaced by a business review in future. The business review is likely to be similar, but less
detailed and structured.
Operating cash flow

In a cash flow statement, operating profit adjusted for movements in working capital and
non-cash flow items such as depreciation.
Operating profit
Net profit before taxation adjusted for interest paid and interest received.
Ordinary (equity) share capital

Share capital issued to the shareholders, who own the company and are entitled to ordinary
dividends.
Partnership
Business enterprises run by more than one person, whose liability is normally unlimited.
Partnership capital accounts

The long-term capital invested into a partnership by the individual partners.
Partnership current accounts

The partners’ share of the profits of the business. The main elements are the opening balances,
salaries, profit for year, drawings and closing balances.
Patents
An intangible asset resulting from expenditure to protect rights to an invention.
Performance evaluation
The monitoring and motivation of individuals often in responsibility accounting systems.
Periodicity convention
Accounts are prepared for a set period of time, i.e., an accounting period.
Physical capital maintenance concept

This concept is concerned with maintaining the physical productive capacity (i.e., operating
capacity) of the business.
Planning, control and performance

The planning and control of future costs as well as the evaluation of performance using
budgeting and standard costing. An abbreviated form of planning, control and performance
evaluation.
Preference share capital

Share capital issued to shareholders who are not owners of the company and who are entitled
to fixed dividends.
Prepayment
The amount paid in advance to the suppliers of services, e.g., prepaid insurance.
Present value
A measurement system where future cash inflows are discounted back to present-day values.
Price/earnings ratio
A ratio which measures earnings per share against share price.
Private limited company

A company where trading in shares is restricted.
Profit
Sales less purchases and expenses.
Profit and loss account

A financial statement which records the income and expenses of a business over the accounting
period, normally a year. Income less expenses equals profit. By contrast, where expenses
are greater than income, losses will occur. The balance from the profit and loss account is
transferred annually to the balance sheet where it becomes part of revenue reserves. The term
income statement is used for a listed company.
Profitability ratios
They establish how profitably a business is performing.
Property, plant and equipment

The term used for fixed assets in a listed company.
Provision for doubtful debts

Those debts a business is dubious of collecting. Deducted from debtors in the balance sheet.
Only increases or decreases in the provision are entered in the profit and loss account.
Prudence concept
Income and profit should only be recorded in the books when an inflow of cash is certain.
By contrast, any liabilities should be provided as soon as they are recognised even though the
amount may be uncertain. Introduces an element of caution into accounting.
Public limited company

A company where shares are bought and sold by the general public.
Quick ratio
Measures extreme short-term liquidity, i.e., current assets (excluding stock) against current
liabilities. Sometimes called the ‘acid test ratio’.
Ratio analysis
See interpretation of accounts.
Raw material stock

Stock purchased and ready for use, e.g., a carpenter with wood awaiting manufacture into
tables.
Realisable value
A measurement system where assets are valued at what they would fetch in an orderly sale.
Also known as net realisable value.
Reconciliation of movements in shareholders’ funds

A financial statement in the annual report which highlights major changes to the wealth of
shareholders such as profit (or loss) for the year, annual dividends and new share capital.
Reducing balance method of depreciation

A set percentage of depreciation is written off the net book value of tangible fixed assets every
year.
Regulatory framework
The set of rules and regulations which govern accounting practice, mainly prescribed by
government and the accounting standard-setting bodies.
Relevance
Relevant information affects users’ economic decisions. Relevance is a prerequisite of usefulness
and, for example, helps to predict future events or to confirm or correct past events.
Reliability
Reliable information is free from material error and is unbiased.
Replacement cost
A measurement system where assets are valued at the amounts needed to replace them with an
equivalent asset.
Reserves
The accumulated profits (revenue reserves) or capital gains (capital reserves) to shareholders.
Retained profits
The profit a company has not distributed via dividends. An alternative to external financing. In
effect, the business finances itself from its past successes.
Return on capital employed

A ratio looking at how effectively a company uses its capital. It compares net profit to capital
employed. The most common definition measures profit before tax and debenture interest
against long-term capital (i.e., ordinary share capital and reserves, preference share capital,
long-term loans).
Return on investment
A ratio often used in performance evaluation which relates income to investment.
Returns on investments and servicing of finance

In a cash flow statement, cash received from investments or paid on loans.
Revaluation reserve
A capital reserve created when fixed assets are revalued to more than the original amount for
which they were purchased. The revaluation is a gain to the shareholders.
Revenue expenditure
Payments for a current year’s good or service such as purchases for resale or telephone expenses.
Revenue reserves
Reserves potentially distributable to shareholders as dividends, e.g., the profit and loss account,
general reserve.
Review of operations
In a company’s annual report, a narrative where the chief executive reviews the individual
business operations.
Rights issue
Current shareholders are given the right to subscribe to new shares in proportion to their
current holdings.
Sale and leaseback

Companies sell their tangible fixed assets to a third party and then lease them back.
Sales
Income earned from selling goods.
Secured loans
Loans guaranteed (i.e., secured) by the assets of the company.
Securities Exchange Commission (SEC)

An independent regulatory institution in the US with quasi-judicial powers. US listed companies
must file a detailed annual form, called the 10–K, with the SEC.
Share capital
The total capital of the business is divided into shares. Literally a ‘share’ in the capital of the
business.
Share options
Directors or employees are allowed to buy shares at a set price. They can then sell them for a
higher price at a future date if the share price rises.
Share premium account

A capital reserve created when new shares are issued for more than their nominal value. For
example, for shares issued for £150,000 with a nominal value of £100,000, the share premium
account is £50,000.
Shareholders
The owners of the company who provide share capital by way of shares.
Social and environmental accounting statement

A voluntary statement produced by companies in their annual report dealing with social and
environmental issues such as sustainable development.
Sole trader
A business enterprise run by a sole owner whose liability is unlimited.
Standard costing
A standardised version of budgeting. Standard costing uses preset costs for direct labour, direct
materials and overheads. Actual costs are then compared with the standard costs. Any variances
are then investigated.
Statement of changes in equity

An alternative term to the statement of total recognised gains and losses and reconciliation of
movements in shareholders’ funds as produced by a listed company.
Statement of directors’ responsibilities for the financial statements

A statement in a company’s annual report where directors spell out their responsibilities
including (i) keeping proper accounting records; (ii) preparing financial statements in accordance
with the Companies Act 1985; (iii) applying appropriate accounting policies; and (iv) following
all applicable accounting standards.
Statement of total recognised gains and losses (STRGL)

A financial statement in the annual report which attempts to highlight all shareholder gains and
losses and not just those from trading. The STRGL begins with the profit from the profit and
loss account and then adjusts for non-trading gains and losses.
Stewardship
Making individuals accountable for assets and liabilities. Stewardship focuses on the physical
monitoring of assets and the prevention of loss and fraud rather than evaluating how efficiently
the assets are used.
Stock
Goods purchased and awaiting use (raw materials) or produced and awaiting sale (finished
goods). Inventory is the term used for stock in a listed company.
Stock turnover ratio

Measures the time taken for stock to move through a business.
Straight-line method of depreciation

The same amount of depreciation is written off the tangible fixed assets every year.
Strategic management accounting

A form of management accounting which considers an organisation’s internal and external
environments.
Subsidiary company
A company where more than half of the shares are owned by another company or which is
effectively controlled by another company, or is a subsidiary of a subsidiary.
‘T’ account (ledger account)

Each page of each book of account has a debit side (left-hand side) and a credit side (right-hand
side). This division of the page is called a ‘T’ account.
‘T’ Account (ledger account)

Assets and expenses on Incomes, liabilities and
the left-hand side capital on the right-hand side
DEBIT CREDIT
Tangible fixed assets

Fixed assets one can touch (e.g., land and buildings, plant and machinery, motor vehicles,
fixtures and fittings). Tangible fixed assets are known as property, plant and equipment in listed
companies.
Third party liabilities

Amounts owing to third parties. They can be short-term (e.g., creditors, bank overdraft) or
long-term (e.g., a bank loan).
Total shareholders’ funds

The share capital and reserves owned by both the ordinary and preference shareholders.
Trade payables
The term used for creditors in a listed company.
Trade receivables
The term used for debtors in a listed company.
Trading and profit and loss account

The formal name for the full profit and loss account prepared by a sole trader.
Trading and profit and loss and appropriation account

The formal name for the profit and loss account prepared by a company or a partnership.
Trial balance
A listing of debit and credit balances to check the correctness of the double-entry bookkeep-
ing system.
True and fair view

Difficult to define but, essentially, a set of financial statements which faithfully, accurately and
truly reflect the underlying economic transactions of the organisation.
Unsecured loans
Loans which are not guaranteed (i.e., secured) by a company’s assets.
Urgent Issues Task Force (UITF)

The UITF is part of the UK’s standard-setting process. It makes recommendations to curb
undesirable interpretations of existing accounting standards or prevent accounting practices
which the Accounting Standards Board considers undesirable.
Users
Those with an interest in using accounting information, such as shareholders, lenders, suppliers
and other trade creditors, customers, government, the public, management and employees.
Vertical analysis
In ratio analysis, vertical analysis is where key figures in the accounts (such as sales, balance
sheet totals) are set to 100 %.
Work-in-progress stock
Partially completed stock (sometimes called stock in process) which is neither raw materials nor
finished goods.
Working capital
Current assets less current liabilities (in effect, the operating capital of a business).

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Glossary of Key

Acid test ratio

Accounting Standards Board (ASB)

Asset turnover ratio

Authorised share capital

Called-up share capital

Capital expenditure and financial investment

Capital investment appraisal

Capital maintenance concept

Cash and bank

Cash flow statement

Creditors collection period

Current purchasing power

Debtors age schedule

Debtors collection model

Debtors collection period

Decision-making objective of financial reporting

Direct method of preparing cash flow statement

Directors’ remuneration report

Earnings per share (EPS)

Economic order quantity (EOQ)

Financial capital maintenance concept

Financial Reporting Council (FRC)

Financial Reporting Review Panel (FRRP)

Financing cash flows

Finished goods stock

Going concern concept

Gross profit ratio

Historical cost convention

Indirect method of preparing cash flow statement

International Accounting Standards Board (IASB)

Issued share capital

Monetary measurement convention

Net book value

Net cash flow from operating activities

Net profit ratio

Note on historical cost profits and losses

Notes to the accounts

Objective of financial statements

Operating and financial review

Operating cash flow

Ordinary (equity) share capital

Partnership capital accounts

Partnership current accounts

Physical capital maintenance concept

Planning, control and performance

Preference share capital

Private limited company

Profit and loss account

Property, plant and equipment

Provision for doubtful debts

Public limited company

Raw material stock

Reconciliation of movements in shareholders’ funds

Reducing balance method of depreciation

Return on capital employed

Returns on investments and servicing of finance

Sale and leaseback

Securities Exchange Commission (SEC)

Share premium account

Social and environmental accounting statement

Statement of changes in equity