Accounts Glossary

Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.

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The Accounting Equation can be expressed as:
Assets = Capital + Liabilities

Assets are the actual resources that are in the business and consist of property of all kinds, such as buildings, machinery, stocks (inventories) of goods and motor vehicles. Other assets include debts owed by customers and the amount of money in the organisation's bank account. The two major asset classes are tangible assets and intangible assets:

• Tangible assets contain various subclasses, including financial assets and fixed assets. Financial assets include such items as accounts receivable, bonds, stocks and cash; while fixed assets include such items as buildings and equipment.
• Intangible assets are non-physical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place. Examples of intangible assets are goodwill, copyrights, franchises, trademarks, patents and computer programs. Lacking physical substance these assets usually are very hard to evaluate and, with the exception of goodwill, are typically depreciated over a period of between five and 40 years.

Capital is the amount of the resources supplied by the business' owner(s) and is often called the owner's equity or net worth. It comprises the funds invested in the business by the owner plus any profits retained for use in the business less any share of profits paid out of the business to the owner.
Liabilities is the name given to the amounts owing to people (other than the owner) for the assets. Liabilities include amounts owed by the business for goods and services supplied to the business that have not yet been paid for. They also include funds borrowed by the business.

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Account: Part of double-entry records, containing details of transactions for a specific item.

Accrual concept: The concept that profit is the difference between revenue and expenses.

Accrued expense: An expense which the firm has used up, but which has not yet been paid for.

Appreciation: A value representing an increase in the value of fixed assets (in normal accounting practice the cost concept and prudence result in appreciation being ignored, although this is not always the case in partnerships and limited companies). See also depreciation.

Amortisation: A term used instead of depreciation when assets are used up simply because of the time factor.

Bad debt: A debt we will not be able to collect.

Bad debt expense: An item in the income statement of a reporting entity, reflecting the total amount of losses from irrecoverable trade receivables during the accounting period under review.

Bad debt provision: An item in the balance sheet of a reporting entity, reflecting the estimated amount of total trade receivables which are expected to be irrecoverable. In plain English: an account showing the expected amounts of debtors at the balance sheet date who will not be able to pay their accounts.

Bad debts: In accounting terms, bad debts are a potential source of overstatement of assets as a result of credit customers being unable to pay their debts to the company. In commercial terms, bad debts are a potential source of losses.

Balance sheet: a balance sheet is a snapshot of a business' financial condition at a specific moment in time, usually at the close of an accounting period. A balance sheet comprises assets, liabilities and owners' or stockholders' equity. Assets and liabilities are divided into short- and long-term obligations.

Bank statement: Copy of our current account given to us by our bank.

Bill of materials (BOM): a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, components, parts and the quantities of each needed to manufacture an end product.

Brokerage allowance: From the point of view of the manufacturer, any brokerage fee paid is similar to a promotional allowance. It is usually based on a percentage of the sales generated by the broker.

Business entity concept: Assumption that only transactions that affect the firm, and not the owner's private transactions, will be recorded.

Capital expenditure: When a firm spends money to buy or add value to a fixed asset.

Carriage inwards: cost of transport of goods into a business.

Carriage outwards: cost of transport of goods out to the customers of a business.

Chart of Accounts: an unstructured list of all the individual nominal accounts that make up the overall accounts of a business. A chart of accounts normally contains balance sheet items (such as assets and liabilities) and profit and loss items (such as income and expenses).

Note: Always seek the advice of your Accountant (or Auditor) when establishing or changing your business' nominal accounts.

Consistency: Keeping to the same method of recording transactions, except in special cases.

Contra: a contra, for cash book terms, is where both the debit and credit entries are shown in the cash book.

Contra account: a contra account is used to "set off" the inter-debtedness that arises in situations when you both invoice a customer and also receive a bill from them, such that only the difference is paid. It can be simulated in Khaos Control.

Cost concept: Assets are normally shown at cost price.

Cost of Sales (Cost of Goods Sold): the total cost to the business of the goods sold or service provided. Accountants call this revenues. Cost of Sales are found on the Profit and Loss report.

Coupon: See Vouchers.

Credit: The right-hand side of the accounts in double entry.

Credit Note: you may agree to your customer returning goods, perhaps because they were faulty, or for other reasons. Occasionally your courier might lose a consignment. In each of these cases a document, known as a credit note, will be sent to the customer showing the allowance given for the faulty/missing goods. In Khaos Control a sales order of this type is called a credit note because the customer's account will be credited with the amount of the allowance, to show the reduction in the amount s/he owes.

Current asset: assets that are expected to be converted to cash within one year. These include cash, accounts receivable, and inventory. Current assets are found on the balance sheet. Within Khaos Control they are used only for bank account nominal codes.

Current liability: the sum of all money owed by a company and due within one year. Current Liabilities are found on the balance sheet.

Customer opening balance: customer opening balances are used to generate opening debtor balances and are found on the balance sheet.

Debit: The left-hand side of the accounts in double entry.

Debit note: A document sent to a supplier showing allowance to be given for unsatisfactory goods.

Deferred payment: This type of card transaction/payment type allows a merchant to hold onto an authorised transaction (ie obtain authorisation for a transaction without actually taking any money from their customer's credit card) and then send it for settlement at a later date.

Depletion: The wasting away of an asset as it is used up.

Depreciation: The part of the cost of the fixed asset consumed during its period of use by the firm. Depreciation is an expense of the business (caused mostly by physical deterioration, economic factors, the time factor and depletion and should be charged against any period in which depreciation occurs. Many businesses use either the straight-line method or reducing balance method methods for calculating depreciation.

Discounts allowed: A reduction given to customers who pay their accounts within the time allowed. Such cash discounts are shown in double entry accounts. See settlement discount for VAT treatment.

Discounts given: A reduction given to us by a supplier when we pay their account before the time allowed has elapsed. Such cash discounts are shown in double entry accounts. See settlement discount for VAT treatment.

Double entry bookkeeping: A system where each transaction is entered twice, once on the debit side and once on the credit side. Double entry maintains the principle that every debit has a corresponding credit entry.

Drawings: Cash or goods taken out of a business by the owner for his private use.

Dual aspect concept: The concept of dealing with both aspects of a transaction.

Exempted firms: Firms which do not have to add VAT to the price of goods and services sold to them, but which cannot obtain a refund of VAT paid on goods and services received by them (eg small firms under the VAT registration threshold).

Expense: costs incurred in the process of earning revenue, measured by the cost of goods and services consumed in the operation of the business. Expenses are found on the Profit and Loss report.

Final accounts: Term that includes the trading and profit and loss accounts and balance sheet.

Finance: appears in the "Financed By" section of the balance sheet; examples are Share Capital and Investment Capital.

Fixed asset: a tangible long-term asset such as land, buildings or machinery, held for use rather than for processing or resale. Fixed assets are found on the balance sheet.

Gift vouchers: See Vouchers.

Going concern concept: Assumption that a business is to continue for a long time.

Goodwill is an accounting term used to reflect the portion of the book value of a business entity not directly attributable to its assets and liabilities; it normally arises only in case of an acquisition. It reflects the ability of the entity to make a higher profit than would be derived from selling the tangible assets. Goodwill is also known as an intangible asset.

Gross loss: Where the cost of goods sold exceeds the sales figure.

Gross profit (total): found by deducting cost of goods sold from the figure of sales.

Gross sales: the sales your business have made, including delivery charges, minus any discounts given, which gives the total Net Sales.

Imprest system: A system where a refund is made of the total paid out in a period (eg petty cash book).

Inputs: Value of goods and services received by our firm from others (VAT related).

Input tax: VAT added on to the price of inputs received.

Long-term liabilities: Liabilities that do not have to be paid within the next twelve months.

Materiality: Recording something in a special way only if the amount is not a small one.

Merchant number: This is the link that allows your payment services provider (PSP) to communicate with your bankers.
To obtain a Merchant number you will need to contact one of the acquiring banks associated with your PSP. It is important that when you start your search for a merchant account, that you research all the acquiring banks as you will find they each will provide you with competitive rates for you to choose from. Once you have chosen which acquiring bank is best for your business they will enter you into one or more Internet Merchant agreements, dependent upon the type of merchant number(s) they are providing to you:

• Ecommerce
  The banks will provide standard Internet Merchant agreements to all online Vendors, allowing them to process standard credit and debit card transactions online through an API set-up or via the sagepay® payment pages.
• MOTO
  MOTO stands for 'Mail Order Telephone Orders'. This is specifically for card details that are taken via telephone or mail order by the Vendor.
  These transactions can be processed online, but because they are processed differently by the banks and are charged at a different rate, sagepay® flags all these transactions as MOTO. They will not be accepted by the bank via the ecommerce channel. MOTO transactions can be processed using our MOTO service and also through the Direct integration method . Many banks require a separate merchant number for this, however others don't, please consult your merchant bank on this.
• Direct refunds
  Direct Refunds allow vendors to refund any card for any amount. Normally you cannot refund more than the original amount of the original transaction that was placed via sagepay®. The merchant banks are slightly more reluctant to issue Direct Refund merchant numbers due their risk factor and a lengthy validation process may take place.
• Continuous authority
  This Internet Merchant Number is for Vendors that run subscription services and regularly take funds from a shopper's card, this is otherwise known as Recurring billing or REPEAT transactions.

Mis-postings: this nominal has now been deprecated.

Money measurement concept: The concept that accounting is concerned only with facts measurable in money, and for which measurements can obtain general agreement.

Money-off coupons: See Vouchers.

Narrative: A description and explanation of the transaction recorded in the journal.

Net current assets: current assets minus current liabilities. It is used to measure the liquid assets a company has available for business growth. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. Sometimes referred to as working capital or current capital.

Net loss: Where the cost of goods sold plus expenses is greater than the revenue.

Net profit (total): gross profit minus the expense total. Net Profit is found on the Profit and Loss report.

Objectivity: Using a method that everyone can agree to.

Obsolescence: Becoming out-of-date.

Other Income: income from activities not in the normal course of business; such as interest income or profit from sale of assets.

Outputs: Value of goods and services supplied to our firm by others (VAT related).

Output tax: VAT added on to the price of outputs by our firm.

Payment Card: a generic term encompassing credit and debit cards.

Payment Services Provider: an intermediary service company that processes electronic payments from credit and debit cards on your behalf, examples of which are Commidea, DataCash and sagepay® (formerly Protx).

Petty cash book: A cash book for small payments. Petty cash books commonly use the imprest system.

Posting: The act of using one book as a means of entering the transactions to another account.

Prepaid expense: An expense to be used up in a following period, but which has been paid for in advance.

Profit: Result of selling goods or services for more than they cost. See also gross profit.

Profit and loss account: Account in which net profit is calculated.

Profit and Loss (P&L) report: the profit and loss report categorises the income and expenditure of the business over an accounting period.

Proforma Invoice: If you need to issue a sales document for goods or services you haven't supplied yet, you can issue a 'pro-forma' invoice or a similar document to offer goods or services to customers. A pro-forma invoice is not a VAT invoice, and you should clearly mark it as such with the words "This is not a VAT invoice". If your potential customer accepts the goods or services you're offering them and if you actually supply them, or the customer makes a payment, then a transaction has taken place for VAT purposes and, if your customer is registered for VAT, you'll need to issue a VAT invoice.^[1]

Note: Despite its name, a Proforma Invoice is a sales order document, NOT a sales invoice. The tax point occurs whenever goods are supplied or payment made, whichever occurs first. To achieve this in Khaos Control, simply ensure that the System Values setting'Invoice Date based on when invoice was printed' is ticked and print the Sales Invoice on the same day you receive payment, regardless of whether or not you would normally print the Sales Invoice at this stage. The act of printing the Sales Invoice (and telling Khaos Control that it has been printed) sets the Tax Point.

Promotional allowances: These are price reductions given to the buyer for performing some promotional activity. These include an allowance for creating and maintaining an in-store display or a co-op advertising allowance.

Prudence: Ensuring that profit is not shown as being too high, or that assets are shown at too high a value.

Purchase: the act of providing a payment in exchange for a product or service. Purchases are found on the Profit and Loss report.

Note: this nominal code type is no longer used in Khaos Control.

Purchase invoice: A document received by a purchaser showing details of goods bought and their prices.

Realisation concept: The concept of profit being earned at a particular point.

Reducing balance method: Depreciation calculation which is at a lesser amount every following period.

Remittance advice: A note sent from a customer to their supplier, informing the supplier that they have paid their invoice. In addition to providing details of the payment remitted and the invoice(s) the customer is paying, the advice should allow both customer and supplier to be identified. Remittance advice reports can be printed from several places in Khaos Control (eg during the statement run).

Revenue expenditure: Expenses needed for the day-to-day running of the business.

Revenues: Monetary value of goods and services supplied to the customer. Khaos Control uses the more meaningful term cost of sales.

Sale: a sale of goods or services; found on the profit and loss report.

Sales discount: the amount of a reduction of goods or service. Sales Discounts are found on the profit and loss report.

Sales invoice: A document showing details of goods sold and the prices of those goods.

Settlement discount: Also known as a "prompt payment discount", this is where a supplier allows a customer to discount (ie reduce) the total amount owing by a small percentage (commonly 2%) when they pay promptly. Where an invoice shows a settlement discount, the VAT due should be calculated on the discounted net value (even when the settlement discount is not taken).

Statement: A copy of a customer's personal account taken from the supplier's books.

Straight line method: Depreciation calculation which remains at an equal amount each year.

Subjectivity: Using a method that other people may not agree to, derived from one's own personal preferences.

Substance over form: Where real substance takes precedence over legal form.

Supplier Opening Balance: supplier opening balances are used to generate opening creditor balances and are found on the balance sheet.

Tax reference: The VAT reference issued by the tax authorities and recorded against the customer's /supplier's record.

Time interval concept: Final accounts are prepared at regular intervals.

Trade discount: A reduction (discount) given to a customer when calculating the selling prices of goods. Because, unlike cash discounts, a trade discount is simply a way of calculating sales prices, no entry for trade discount should be made in the double entry records nor in the sales journal.

Trading account: Account in which gross profit is calculated.

Trial balance: A list of account titles and their balances in the books, on a specific date, shown in the debit and credit columns.

Value Added Tax: A tax charged on the supply of most goods and services.

Vouchers: The two common types of voucher are:

• Money-off coupons:
  Money-off coupons, vouchers or similar, offer customers a discount off a future purchase. This type of voucher is not currently supported by Khaos Control.
• Gift vouchers:
  Gift vouchers, also known as face value vouchers, have a monetary face value. These are used instead of money for a future purchase. If you sell them at or below their monetary value, no VAT is due.
  When a customer redeems a face value voucher, the transaction is treated as though the face value voucher was cash, and VAT is due on the full value of the transaction. If you would like to use Khaos Control to issue and redeem face value vouchers, please email Support.
  

Written-Off: An item of stock may be written off (ie disposed of without income) where the item is considered to be beyond economic repair or has no saleable value. There are two common approaches to dealing with written-off stock:

1. Ignore individual stock losses^[2] until stocktake time. So, for example, in the case of customer refunds:
   1. Credit the customer with the value^[3] of returned goods.
   2. Debit "sales" and "Tax on Sales" and credit "debtors".
2. Record written-off stock in the P&L account as you discover it (eg by moving lost stock into Quarantine before writing-off Quarantined items.

Zero rated firms: Firms which do not have to add VAT to goods and services supplied by them to others, but which also receive a refund of VAT on goods and services received by them.

References

1. ? "When transactions take place for VAT purposes - Pro-forma invoices". HM Revenue & Customs. Retrieved on 2009-04-15.
2. ? This is what happens when the Stock Missing processing type is associated with a Return Reason - see How To: Configure Return Reasons.
3. ? Provided your cost of sales correctly reflected the sale in the first place, the cost of the goods will be in the Sales account already.

See Also

• Accounts Overview