Carey, Knowles & Towers-Clark: Accounting - A Smart Approach Glossary terms Absorption costing A management accounting technique where

indirect or overhead costs are spread fairly across the range of products made by the business.

Accounting rate of return (ARR) An investment appraisal technique which calculates the average profit from a project given as a percentage of the average investment in the project.

Accrual This arises where an expense has been incurred but not paid for by the date when the statement of financial position is prepared.

Accumulated depreciation The total depreciation which has been charged on an asset since it was purchased. This is deducted from the cost of an asset to arrive at its net book value.

Activity-based costing A costing method which analyses the processes or activities needed to make a product. By understanding the cause (or driver) of those activities, it links the cause and effect of costs on a product.

Allocated costs The term for indirect costs directly associated with a department, such as a production supervisor working for one particular department.

Apportioned costs The term for indirect costs that cannot be directly associated with a department and need to be shared between departments on a fair basis, such as rent.

Asset Something which the business owns, which will bring financial benefits to the business in the future.

Bad debt Arises when a customer who owes money to the business for goods or services received on credit, becomes unable to pay the amount due. At that time it should no longer be included in the trade receivables figure as it does not represent an asset.

Balanced scorecard

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Carey, Knowles & Towers-Clark: Accounting - A Smart Approach Glossary terms A strategic management tool, linking financial and non-financial performance measures between four different business perspectives (financial, customer, internal processes and learning and growth).

Benchmarking This allows managers to compare the operational and financial performance of one business or operation against another by using key performance measures.

Bottom-up budget Built up from detail provided by each manager responsible for a budget with targets being agreed by all involved.

Break-even point The situation where neither a profit nor a loss is made.

Budget A financial plan, prepared and approved by management, usually for the year ahead.

Capital The amount the owner has invested in a business.

Capital expenditure Expenditure where the business will benefit from it for more than one accounting period. For example, the purchase of a delivery van or building.

Capital income This includes money invested by the owner of the business and loans from third parties.

Cash flows from financing activities Cash flows which alter the long-term financing of the company. This includes the proceeds of share issues or the amount paid out to redeem a loan.

Cash flows from investing activities Cash flows which include the amounts paid out to purchase non-current assets and the proceeds received from selling non-current assets.

Cash flows from operating activities Cash flows that arise from the normal trading activities of the business.

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Carey, Knowles & Towers-Clark: Accounting - A Smart Approach Glossary terms Cash purchases Purchases for which cash payment will be made at the same time as the goods or services are received.

Cash sales Made when the cash is received at the same time as the goods or services are delivered.

Committed cost A cost that has to be paid for, whether or not management make a specific decision. It is a non-relevant cost.

Contribution This is defined as the difference between the selling price of a product and the variable costs incurred in producing that product.

Contribution analysis This looks at what each sector of the business contributes to the overheads. This excludes any allocated fixed costs.

Corporate strategy Sets out the long-term plan of a busienss, assessing its competitive advantage by matching its internal strengths to external opportunities.

Cost driver The factor that causes the cost of the activity to change, such as the number of set-ups.

Cost plus pricing This method of pricing is where the product is priced to achieve a standard mark-up.

Cost pool The total estimated cost of one activity, such as machine set-up.

Credit purchases Purchases where the goods or services have been received by the business but for which payment is made at a date after the goods have been delivered.

Credit sales Made when the payment is received after the goods or services have been delivered.

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Carey, Knowles & Towers-Clark: Accounting - A Smart Approach Glossary terms Current assets Assets which will be held by the business for less than one year including inventory held for resale and cash balances.

Current liabilities Amounts which are due to be paid within a year. Amounts owed to suppliers.

Customer profitability analysis (CPA) This method often uses activity based cost information to assess the profitability of different customers or different distribution channels.

Debentures Long-term loans raised by a company where security is usually provided for the loan.

Depreciation charge The amount charged to the income statement so as to spread the cost of non-current assets over the life of those assets. Non-current assets have a finite useful life and they will be used in the business to help generate profits over that period.

Direct costs Costs directly associated with a product, such as material and labour costs.

Directors Employees elected by the shareholders to run the company. Every limited company must have at least one of these.

Dividend A payment made to a company's shareholders to reward them for investing.

Dividend cover Considers the extent to which available profits can meet dividend payments.

Dividend yield Compares the dividend received from a share with the market price of a share.

Double entry book-keeping system The method of recording two entries for each and every transaction.

Drawings Higher Education

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Carey, Knowles & Towers-Clark: Accounting - A Smart Approach Glossary terms The amount taken out of the business for the owners personal use.

Earnings per share Shows how much profit is being made for each share (a fundamental ratio).

Elastic prices Used where customers are sensitive to how high or low a selling price is set.

Entity concept This recognizes that the transactions of a business should be recorded separately from the transactions of its owner. This principle should be followed even if the business is not a separate legal entity.

Equity of a company Comprises the ordinary share capital and all the reserves, including the share premium and retained profits.

Estimated useful life The expected length of time that a non-current asset will be used in the business.

Expenses Costs incurred by the business or organization in order to enable the business to trade.

Favourable variance This occurs when sales value is more or expenditure is less than budget. This will result in a profit higher than budget.

Fixed costs Those costs that remain the same whatever the level of output (over a limited range of output). For example, rent payable will be unchanged regardless of the number of units produced.

Full costing This takes into account both direct and indirect costs associated with the manufacture of a product.

Functional budget The individual departmental budget, such as that of the sales, production and finance departments. Higher Education
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Carey, Knowles & Towers-Clark: Accounting - A Smart Approach Glossary terms

Gearing Measures the extent to which a business is financed by debt rather than equity capital.

Going concern concept This means that when producing accounts, there is an assumption that the business will continue to operate for the foreseeable future unless there is any evidence to suggest that it will not.

Historic cost concept This requires transactions to be recorded at their original cost to the business and, as a result, the assets of a business are included at their historic cost on the statement of financial position.

Income statement Shows the revenue income less the revenue expenditure for a financial period and computes the profit or loss generated.

Incremental budget Calculated by taking the previous years actual figures and adjusting for changes, such as price inflation.

Indirect costs Costs which cannot be directly associated with a product, such as rent and depreciation. They are often called overheads.

Inelastic prices Used where customers are not sensitive to how high or low a selling price is set.

Intangible asset An asset without any physical substance. Examples include goodwill and brand names.

Interest cover This considers the number of times that operating profit covers the interest expense.

Internal rate of return (IRR) The discount rate which, when applied to a project's cash flows, will yield an NPV of zero.

Inventories (stock) Goods for re-sale held in stock by the business. Higher Education
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Carey, Knowles & Towers-Clark: Accounting - A Smart Approach Glossary terms

Liability An amount owed by the business where the business has an obligation to make a payment.

Life-cycle costing Considers the costs through out the life of the product, including the pre-manufacturing, manufacturing and post-manufacturing costs.

Limited liability This means that, should the company be wound up, shareholders only stand to lose the amount that they have invested in the business. (This assumes that their shares have been fully paid for.) short-term liabilities.

Limiting factor This is the constraint which will limit the businesss growth in the following year. For example, the expected level of sales often determines how a business should start to plan its operations.

Liquidity This is the level of cash, bank, and other liquid assets available to the business. A measure of the ability of a business to pay their debts as they fall due.

Margin pricing This method of pricing is where the product is priced to achieve a standard margin based on the selling price.

Master budget The overall business financial plan, made up of a budgeted income statement, cash budget and budgeted statement of financial position.

Matching concept This requires expenses to be matched to the revenue that they have generated, in order to arrive at the profit for the year.

Net book value (NBV) Found by taking the cost of an asset and deducting the accumulated depreciation, which has been charged on that asset since it was purchased. This is the value of the asset shown on the statement of financial position.

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Carey, Knowles & Towers-Clark: Accounting - A Smart Approach Glossary terms Net present value (NPV) An investment appraisal technique which calculates the present values of all the cash flows associated with a project and totals them.

Nominal value Represents the face value of shares and is nearly always the amount at which the shares are issued when the company is formed.

Non-current assets Assets intended for long-term use in the business.

Non-current liabilities Amounts which are due to be paid after a year, including long-term loans.

Non-relevant revenue or costs These will remain unchanged, following a specific management decision.

Operational plan Translates the corporate strategy of a business into sets of financial and non-financial objectives for managers in the short term.

Opportunity cost Refers to the amount of benefit lost when a certain course of action is taken. This is a relevant cost for decision making purposes.

Ordinary shares Entitle their owner to receive an ordinary dividend from the company. They are the owners of the company and are entitled to vote at general meetings, which gives them control over the business.

Overhead costs The indirect costs of a business which cannot be associated directly with a product.

Over recovery of overheads This occurs after an absorption rate has been applied throughout the year and products have been charged with more than the actual overhead incurred by the year-end.

Payback period This is the length of time that the cash inflows from a project will take to cover the initial cash outlays. Higher Education
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Carey, Knowles & Towers-Clark: Accounting - A Smart Approach Glossary terms

Penetrating price strategy Often used where prices are elastic, setting prices low to take advantage of customers being sensitive to prices.

Preference shares Entitle their owner to receive dividends at a fixed rate before the ordinary dividend can be paid. They are not generally entitled to vote at general meetings.

Prepayment This arises where an expense has been paid before the statement of financial position date but the benefit of that expense will be experienced in the following financial year.

Present value (PV) The value today of an amount which will be received in the future. To find this for a future cash flow, it has to be discounted using an appropriate discount rate.

Price skimming Strategy Often used where prices are inelastic, setting prices high to take advantage of customers not being sensitive to prices.

Price to earnings (PE) ratio Compares the market price of a share with the profit earned per share. It therefore is a reflection of the markets expectations for the companys shares.

Price variance The difference between budget and actual price multiplied by the actual sales volume. The same principle can be applied to material costs or labour rate variances.

Private company A company which is restricted from issuing its shares to the general public.

Profitability analysis This looks at the profitability of a sector of the business, such as its products or operations. This usually includes an allocation of shared costs.

Profit for the year Profit which a company has made after taxation. This profit can either be used to pay dividends to shareholders or be retained by the business. Higher Education
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Carey, Knowles & Towers-Clark: Accounting - A Smart Approach Glossary terms

Provision for doubtful debts An amount deducted from trade receivables to recognize the fact that a proportion of those amounts will eventually not be received by the business.

Prudence concept Requires that when accounts are being prepared, income should never be anticipated but all possible costs should be taken into account. That means that a cautious, but realistic, approach should be taken to ensure that profits are not over-estimated.

Public company A company which can offer its shares for sale to the general public.

Purchases Costs incurred by the business or organization in buying the goods it plans to sell to its customers. A purchase is made when the goods or services are received from the supplier.

Ratio analysis Can be used to highlight underlying trends not always immediately obvious from the figures themselves.

Re-apportioned costs The indirect costs of a service department (such as the canteen or maintenance departments), which are shared out between production departments on a fair basis.

Reducing balance method This method of providing for depreciation applies the depreciation rate to the NBV of the asset, so that the depreciation expense is greatest in the first year of ownership and falls every year thereafter.

Relevant cost Results from a specific management decision and will affect the future cash position of the company by incurring incremental costs.

Relevant revenue Results from a specific management decision and will affect the future cash position of the company by receiving incremental revenue.

Residual value The estimated amount that a non-current asset will be worth at the end of its useful life. Higher Education
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Carey, Knowles & Towers-Clark: Accounting - A Smart Approach Glossary terms

Retained profit The profit which remains once taxation and dividends have been deducted and retained profits enable the company to fund its growth in the future.

Revenue expenditure Expenditure on day-to-day expenses. For example, telephone or staff salary costs.

Revenue income This is mainly income from sales. Other examples are rent received and interest received.

Sales Income earned from selling goods or services. A sale is made when the goods or services are invoiced to the customer, which is usually at the point the goods or services are delivered to the customer.

Semi-variable costs These are costs that contain both a fixed and variable element. For example, telephone charges include a fixed rental cost plus a charge linked to telephone usage.

Shareholders' equity The share capital and reserves of the company. The main reserve is usually the company's retained profits.

Share premium A reserve that records the premium amounts raised when a company makes a share issue. The premium is the difference between the issue price and the nominal value of the shares issued.

Step-fixed costs These are costs that will remain fixed as output increases until the activity reaches a level where the costs have to increase sharply. For example, supervision costs where an additional supervisor is required once a certain level of output is exceeded.

Stock Exchange A market where new capital can be raised and existing shares can be bought and sold.

Straight line method This method of providing for depreciation, charges an equal annual amount as an expense so that the asset falls in value evenly throughout its useful life. Higher Education
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Carey, Knowles & Towers-Clark: Accounting - A Smart Approach Glossary terms

Sunk cost A cost that has already been spent and is not a relevant cost as it will not change as a result of a management decision.

Target costing Compares the selling price less the desired profit to the costed specification of the product before it is manufactured.

Top-down budget Imposed by management from above, with little discussion about how targets are set.

Trade payables Amounts owed to suppliers of the business who, having supplied goods or services on credit, have not yet been paid by the business.

Trade receivables Amounts owed by customers of the business who, having been sold goods or services on credit, have not yet paid the business.

Transfer price The internal price set for the sale of goods from one division of a business to another. This can be a market-based price, set in line with the external market prices or a cost based price, calculated from the internal costs of the business.

Trial balance This is a record of all account balances at a point in time and is used to prepare the final accounts.

Under recovery of overheads Occurs after an absorption rate has been applied throughout the year and products have been charged with less than the actual overhead incurred by the year-end.

Unfavourable variance Occurs when sales value is less or expenditure is greater than budget. This will result in a profit lower than budget.

Variable costs These vary directly with the number of units produced. For example, the cost of materials in making a product would be a variable cost. Higher Education
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Carey, Knowles & Towers-Clark: Accounting - A Smart Approach Glossary terms

Variance The difference between budget and actual sales or expenditure.

Venture capital Long-term funding, usually equity capital, provided to small and medium sized businesses to enable them to grow.

Volume variance The difference between the budgeted and actual volume, multiplied by the budget selling price. A similar principle applies to material usage and labour efficiency variances.

Working capital This is the amount invested in the short-term assets of a business. It is represented by inventories, short-term receivables and cash balances less short term liabilities.

Zero-based budget Starts from first principles and calculates every number from scratch.

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