FAQ

Financial Glossary

Baffled by budgets?

Don’t know your debits from your credits?

This financial glossary explains financial terms referred to throughout the pages of our website. If we’re doing our job right, then these snippets should clarify your understanding without being too technical or confusing you even more.

Account – An account is the place in a financial ledger where all transactions of a similar nature are recorded.

Accounting Formulas are computations that use different aspects of a business’s balance sheet and income statement to aid financial analysis

Accounts Receivable Turnover – a computation of the average number of days that it takes to collect credit sales, or the number of times accounts receivable are collected within the year. Determines the burden of credit sales on the working capital of a business.

Asset – In it’s purest form an asset is something that provides you with a financial return. For example, a tenanted property. See also fixed asset

Budget – A budget is a document or spreadsheet that details expected financial expenditure or income for each different activity and cost. Find out more about budget planning

Capital – the amount of money invested in the business. This can take the form of investors capital (equity), loans, issued debt, etc. It’s long term in nature.

Chart of Accounts – a structured presentation of the accounts required to peform the bookkeeping activities of a business. Shows someone who is not familiar with the business, the accounts in their place within the financial statements.

Cost of Sales – the costs associated with making a sale. They vary directly with the amount of items produced. In a retail business this might just be the purchase price of the product. In a manufacturing business, this can include materials, labour, power etc

Credit – One of the two essential foundations of double entry bookkeeping. A Credit is an amount you owe, cash you’ve paid out, or the amount invested in your business (Capital). (The other of the pair is Debit)

Credit is also the term used by financial institutions and businesses for when they lend you money, or give you time between the use of goods, and the payment for the use of those goods.

Creditor – a person or business who you owe money to in respect of goods or services you received.

Credit Rating – a grading of an individual, organisation or debt instrument based upon scored criteria, such as cash flow, capital, collateral, conditions, and character, and often performed by a credit rating agency. e.g. Moody’s

Current Assets – the assets of a business that are cash, or can be readily turned into cash. For example, debtors, inventory(stock), work-in-progress, marketable securities such as stocks, gilts etc.

Current Liabilities – items that are due for payment within 12 months or as called by the lender. Typically includes trade creditors (accounts payable), tax duties such as sales tax, employment taxes etc, and bank overdrafts.

Debit – One of the two essential foundations of double entry bookkeeping. A Debit is an amount owed to you, an asset you own, or cash you have in your hand. (The other of the pair is Credit

Debtor – a person or business who owes you money for goods or services provided. Read more about Managing Debtors

Depreciation – The allocation of costs relating to the use of strategic business assets, into the accounting period when the economic benefits from using those assets was realised.

Double Entry – An accounting concept that there are two sides to every transaction. For example, for you to have receive cash (debit) it must be in respect of something (usually a sale – credit). In bookkeeping both sides of the transaction are recorded, which then balance against each other, giving an extra degree of control. Read more about Double Entry Bookkeeping

Financial Ratio Analysis – understand the profitablity, liquidity, indebtedness and operating efficiency of one or more businesses by the application of standardized formulae to monitor their relative strengths and weaknesses over time.

Fixed Asset – is anything which a business owns (e.g. Land, Property, Machinery, Technology), that is used regularly in the business to support profit making activities, but whose lifespan would normally extend beyond a calendar year

Goodwill – Goodwill is the excess of business value, over and above the fair value of it’s assets. It usually occurs when a business acquires another business. Generally accepted accounting practice is to amortize the goodwill over 20 years.

Gross Profit – Sales(also known as Turnover) – Cost of Sales

Gross Profit Margin – is the percentage Gross profit of each currency unit of sales, Gross profit / Sales. Go here for a worked Gross Profit Margin example.

Ledger – A collection of accounts of a similar purpose to assist with the management of bookkeeping activities of a business. Typically, Sales Ledger, Purchase Ledger and Nominal Ledger.

Net Present Value – a value derived from discounting cash flows of a project at a required rate of return. If the value is greater than zero, then the project is desirable otherwise it isn’t!

Net Profit is Gross Profit – Overheads, and is the famous, or infamous “bottom line”. Net Profit Margin is a leading indicator of the quality of a business.

Overheads – are costs that are fixed or semi fixed in nature and do not directly vary with production or sales volume. Such things as rent, stationary etc are overheads. For more information about costs and their nature goto variable costing

Petty Cash – Cash normally held on the premises for spending on small one-off items, usually in a secure location (under lock and key within a cash box, maybe in a safe), the transactions of which are accounted for in a cash book.

Profit – is all income less all expenditure. You can measure it a few different levels to help you manage your business appropriately.

Working Capital is Current Assets – Current Liabilities. In general use it is a term used to explain the monetary value of the items managed in day to day operations. It is the money you have tied up in keeping your business running. Read more about Working Capital Management

Work-in-Progress – Represents the lower of cost or net realisable value of products at each of the various stages of production within a manufacturing business

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