Important
The information in this glossary has been sourced from general accounting references and may not always align directly with Khaos Control terminology or functionality.
Some accounting terms may not be supported within Khaos Control, or may be interpreted differently within the software.
Always consult your accountant or auditor when making accounting decisions or changes to your chart of accounts.

Introduction

Accounting is the process of identifying, measuring and communicating financial information so that informed business decisions can be made.

This glossary explains common accounting terms you may encounter when using Khaos Control and discussing financial information with accountants, auditors or financial advisers.

The Accounting Equation

The fundamental accounting equation is:

Assets = Capital + Liabilities

Assets

Assets are resources owned by a business. Examples include:

Buildings
Machinery
Vehicles
Inventory (stock)
Cash
Bank balances
Money owed by customers

Assets are generally classified as either:

Tangible Assets

Physical assets that can be seen or touched.

Examples include:

Land
Buildings
Equipment
Machinery
Cash
Accounts receivable

Intangible Assets

Non-physical assets that provide value to the business.

Examples include:

Goodwill
Copyrights
Trademarks
Patents
Franchises
Software

Capital

Capital represents the resources provided by the business owner(s).

It consists of:

Funds invested into the business.
Retained profits.
Less any drawings or profit distributions taken by the owner.

Capital is often referred to as:

Owner's equity
Net worth

Liabilities

Liabilities are amounts owed by a business.

Examples include:

Supplier invoices
Loans
Creditors
Finance agreements
Taxes payable

Accounting Terms A-Z

Account

A record used within a double-entry accounting system to store transactions relating to a specific item or category.

Accrual Concept

The principle that profit is calculated as the difference between revenue earned and expenses incurred during a period.

Accrued Expense

An expense that has been incurred but not yet paid.

Amortisation

The gradual reduction in value of an intangible asset over time.

Appreciation

An increase in the value of an asset.

In traditional accounting, appreciation is often ignored due to the principles of cost and prudence.

Bad Debt

A customer debt that is unlikely to be collected.

Bad Debt Expense

The value of irrecoverable debts recognised within the Profit and Loss account.

Bad Debt Provision

An estimate of future bad debts shown within the Balance Sheet.

It represents the expected value of customer debts that may never be recovered.

Balance Sheet

A financial statement showing the financial position of a business at a specific point in time.

A Balance Sheet includes:

Assets
Liabilities
Capital or Equity

See Balance Sheet.

Bank Statement

A record of transactions provided by a bank for a specific account.

Bill of Materials (BOM)

A list of all components, raw materials, assemblies and quantities required to manufacture a finished product.

Brokerage Allowance

A commission paid to a broker, usually calculated as a percentage of sales generated.

Business Entity Concept

The principle that business transactions should be recorded separately from the owner's personal finances.

Capital Expenditure

Money spent purchasing or improving a fixed asset.

Examples include:

Buildings
Machinery
Vehicles
Equipment

Carriage Inwards

The cost of transporting goods into a business.

Carriage Outwards

The cost of delivering goods to customers.

Chart of Accounts

A structured list of a company's nominal accounts.

It normally includes:

Balance Sheet accounts
Profit and Loss accounts

See:

Important
Always consult your accountant before creating, changing or removing nominal accounts.

Consistency

Applying the same accounting methods over time unless there is a valid reason to change them.

Contra

A transaction where both sides of the accounting entry appear within the cash book.

Contra Account

An account used to offset amounts where a business is both a customer and supplier of another organisation.

See How To: Simulate a Contra Account.

Cost Concept

The principle that assets are normally recorded at their original cost.

Cost of Sales (Cost of Goods Sold)

The direct cost associated with goods or services sold.

This value appears on the Profit and Loss report.

Credit

The right-hand side of a double-entry accounting entry.

Credit Note

A document issued to reduce the value of a customer's account.

Typical reasons include:

Returned goods
Faulty products
Lost consignments
Pricing corrections

See How To: Create and Process a Manual Credit Note.

Current Asset

An asset expected to be converted into cash within twelve months.

Examples include:

Cash
Inventory
Debtors

Current assets appear on the Balance Sheet.

Current Liability

A liability due within twelve months.

Examples include:

Trade creditors
VAT liabilities
Short-term borrowing

Customer Opening Balance

Used to create opening debtor balances when introducing existing customer balances into the system.

Debit

The left-hand side of a double-entry accounting entry.

Debit Note

A document issued to a supplier requesting a reduction in the amount payable due to unsatisfactory goods or services.

Deferred Payment

A card payment that has been authorised but not yet settled.

Depletion

The reduction in value of an asset as it is consumed.

Depreciation

The reduction in value of a fixed asset over time due to:

Usage
Wear and tear
Time
Economic factors

Common depreciation methods include:

Straight Line Method
Reducing Balance Method

Discounts Allowed

Discounts given to customers for early payment.

Discounts Received

Discounts granted by suppliers when accounts are paid early.

Double Entry Bookkeeping

A system where every transaction has both:

A debit entry
A corresponding credit entry

Drawings

Cash or goods taken from a business by its owner for personal use.

Dual Aspect Concept

The principle that every transaction affects at least two accounts.

Exempt Firms

Businesses that:

Do not charge VAT.
Cannot reclaim VAT on purchases.

Expense

A cost incurred while generating business revenue.

Examples include:

Wages
Rent
Utilities
Insurance

Final Accounts

Collectively refers to:

Trading Account
Profit and Loss Account
Balance Sheet

Fixed Asset

A long-term asset used in business operations and not intended for resale.

Examples include:

Land
Buildings
Machinery
Vehicles

Going Concern Concept

The assumption that a business will continue trading into the foreseeable future.

Goodwill

An intangible asset representing the value of a business beyond its physical assets.

Typically arises during acquisitions.

Gross Loss

When Cost of Sales exceeds Sales Revenue.

Gross Profit

The difference between Sales Revenue and Cost of Sales.

Gross Sales

Total sales value before adjustments such as discounts.

Imprest System

A method commonly used for petty cash where funds are replenished back to a fixed amount.

Input Tax

VAT paid on purchases.

Long-term Liabilities

Liabilities that do not fall due within twelve months.

Materiality

The principle of giving greater attention to significant financial items.

Merchant Number

A unique identifier linking a business, payment provider and acquiring bank for card payment processing.

Common merchant account types include:

Ecommerce
MOTO (Mail Order / Telephone Order)
Direct Refund
Continuous Authority

Money Measurement Concept

The principle that only items measurable in monetary terms are recorded in accounts.

Narrative

A description explaining the purpose of a financial transaction.

Net Current Assets

Current Assets less Current Liabilities.

Also known as:

Working Capital
Current Capital

Net Loss

Occurs when expenses exceed revenue.

Net Profit

Gross Profit minus Expenses.

Appears on the Profit and Loss report.

Objectivity

Using evidence-based accounting methods that can be independently verified.

Obsolescence

When an asset becomes outdated or no longer useful.

Other Income

Income generated outside normal trading activities.

Examples include:

Interest received
Profit on asset disposals

Output Tax

VAT charged on sales.

Payment Card

A generic term covering:

Credit cards
Debit cards

Payment Services Provider (PSP)

An organisation that processes electronic card payments.

Examples include:

Commidea
DataCash
Sage Pay

Petty Cash Book

A record used to manage small cash transactions.

Posting

The process of entering transactions into an account.

Prepaid Expense

An expense paid in advance that relates to a future period.

Profit

The surplus remaining after costs have been deducted from revenue.

Profit and Loss Account

The account used to calculate business profit or loss.

Profit and Loss (P&L) Report

A report showing business income and expenditure across a specified accounting period.

See Profit and Loss.

Proforma Invoice

A sales document issued before goods or services have been supplied.

A Proforma Invoice:

Is not a VAT invoice.
Does not create a tax point on its own.
Should clearly state: "This is not a VAT invoice."

See How To: Process a Proforma Invoice Payment.

Note
In Khaos Control, a Proforma Invoice is effectively a sales order document rather than a sales invoice.

Prudence

The principle of avoiding overstating profits or asset values.

Purchase

The acquisition of goods or services.

Note
This nominal account type is no longer used within Khaos Control.

Purchase Invoice

A document received from a supplier detailing goods or services purchased.

Realisation Concept

The principle that profit should only be recognised when earned.

Reducing Balance Method

A depreciation method where the depreciation value decreases over time.

Remittance Advice

A document sent to a supplier advising which invoices have been paid.

See Remittance Advice Reports.

Revenue Expenditure

Everyday operating costs required to run the business.

Sale

The supply of goods or services to a customer.

Sales Discount

A reduction in the selling price of goods or services.

Sales Invoice

A document detailing goods or services sold and the amount payable.

Settlement Discount

A discount offered for prompt payment of an invoice.

Also known as a Prompt Payment Discount.

Statement

A summary of transactions and balances relating to a customer account.

Straight Line Method

A depreciation method where the same amount is charged each accounting period.

Subjectivity

Using judgement-based accounting methods where different people may reach different conclusions.

Substance Over Form

The principle that the economic reality of a transaction should take precedence over its legal form.

Supplier Opening Balance

Used to create opening creditor balances when introducing existing supplier balances into the system.

Tax Reference

The VAT registration number recorded against a customer or supplier.

Time Interval Concept

The principle that accounts should be prepared at regular intervals.

Trade Discount

A reduction in selling price used when calculating customer prices.

Unlike settlement discounts, trade discounts are not normally recorded separately in accounting records.

Trading Account

An account used to calculate Gross Profit.

Trial Balance

A list of all account balances displayed in debit and credit columns.

Value Added Tax (VAT)

A tax charged on most goods and services supplied within the UK.

Vouchers

Money-Off Coupons

Coupons that provide a discount against a future purchase.

Note
This voucher type is not currently supported in Khaos Control.

Gift Vouchers

Vouchers with a monetary face value that can be used instead of cash.

If you wish to issue and redeem gift vouchers through Khaos Control, please contact Support.

Written-Off Stock

Stock that has no recoverable value and is removed from inventory.

Common reasons include:

Damage
Loss
Obsolescence
Non-saleable condition

For information on stock write-offs, see How To: Write Off Quarantined Stock Items.

Zero Rated Firms

Businesses that:

Do not charge VAT on applicable sales.
Can reclaim VAT paid on purchases where eligible.