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Glossary of Accounting Terms N to Z

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Narrative: A comment appended to an entry in a journal. It can be used to describe the nature of the transaction, and often in particular, where the other side of the entry went to (or came from).

Net loss: The value of expenses less sales assuming that the expenses are greater (ie. if the profit and loss account shows a debit balance).

Net of Tax: The price less any tax. Eg. if you sold some goods for $12 inclusive of $2 sales tax, then the 'net of tax' price would be $10

Net profit: The value of sales less expenses assuming that the sales are greater (ie. if the profit and loss account shows a credit balance).

Net worth: See Equity.

Nominal Accounts: A set of accounts held in the nominal ledger. They are termed 'nominal' because they don't usually relate to an individual person. The accounts which make up a Profit and Loss account are nominal accounts (as is the Profit and Loss account itself), whereas an account opened for a specific customer is usually held in a subsidiary ledger (the sales ledger in this case) and these are referred to as personal accounts.

Nominal Ledger: A ledger which holds all the nominal accounts of a business. Where the business uses a subsidiary ledger like the sales ledger to hold customer details, the nominal ledger will usually include a control account to show the total balance of the subsidiary ledger (a control account can be termed 'nominal' because it doesn't relate to a specific person).

Normalize: This term can be applied to many aspects of accounting. It means to average or smooth out a set of figures so they are more consistent with the general trend of the business. This is usually done using a Moving average.

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Opening the books: Every time a business closes the books for a year, it opens a new set. The new set of books will be empty, therefore the balances from the last balance sheet must be copied into them (via journal entries) so that the business is ready to start the new year.

Ordinary Share: This is a type of share issued by a limited company. It carries the highest risk but usually attracts the highest rewards.

Original book of entry: A book which contains the details of the day to day transactions of a business (see Journal).

Overheads: These are the costs involved in running a business. They consist entirely of expense accounts (eg. rent, insurance, petrol, staff wages etc.).

P.A.Y.E (UK only): 'Pay as you earn'. The name given to the income tax system where an employee's tax and national insurance contributions are deducted before the wages are paid.

P&L: See Profit and Loss Account

Paid-up Share capital: The value of issued shares which have been paid for. See Called-up Share capital.

Pareto optimum: An economic theory by Vilfredo Pareto. It states that the optimum allocation of a society's resources will not happen whilst at least one person thinks he is better off and where others perceive themselves to be no worse.

Pay on delivery: The buyer pays the cost of the goods (to the carrier) on receipt of them.

Periodic inventory: A Periodic Inventory is one whose balance is updated on a periodic basis, ie. every week/month/year. See Inventory.

PE ratio: An equation which gives you a very rough estimate as to how much confidence there is in a company's shares (the higher it is the more confidence). The equation is: current share price multiplied by earnings and divided by the number of shares. 'Earnings' means the last published net profit of the company.

Perpetual inventory: A Perpetual Inventory is one whose balance is updated after each and every transaction. See Inventory.

Personal Accounts: These are the accounts of a business's customers and suppliers. They are usually held in the Sales and Purchase Ledgers.

Petty Cash: A small amount of money held in reserve (normally used to purchase items of small value where a cheque or other form of payment is not suitable).

Petty Cash Slip: A document used to record petty cash payments where an original receipt was not obtained (sometimes called a petty cash voucher).

Phoenix Firms: If a firm is about to become insolvent but is then repackaged, restructured and sold back to the managment, it is said to be called a 'Phoenix Firm' (i.e it has risen out of the ashes of itself).

Point of Sale (POS): The place where a sale of goods takes place, eg. a shop counter.

Post Closing Trial Balance: This is a trial balance prepared after the balance sheet has been drawn up, and only includes balance sheet accounts.

Posting: The copying of entries from the journals to the ledgers.

Preference Shares: This is a type of share issued by a limited company. It carries a medium risk but has the advantage over ordinary shares in that preference shareholders get the first slice of the dividend 'pie' (but usually at a fixed rate).

Pre-payments: One or more accounts set up to account for money paid in advance (eg. insurance, where part of the premium applies to the current financial year, and the remainder to the following year).

Price change accounting: Accounting for the value of assets, stock, raw materials etc. by their current market value instead of the more traditional Historic Cost.

Prime book of entry: See Original book of entry.

Profit: See Gross profit, Net profit, and Profit and Loss Account.

Profit and Loss Account: An account made up of revenue and expense accounts which shows the current profit or loss of a business (ie. whether a business has earned more than it has spent in the current year). Often referred to as a P&L.

Profit margin: The percentage difference between the costs of a product and the price you sell it for. Eg. if a product costs you $10 to buy and you sell it for $20, then you have a 100% profit margin. This is also known as your 'mark-up'.

Pro-forma accounts (pro-forma financial statements): A set of accounts prepared before the accounts have been officially audited. Often done for internal purposes or to brief shareholders or the press.

Pro-forma invoice: An invoice sent that requires payment before any goods or services have been despatched.

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Provisions: One or more accounts set up to account for expected future payments (eg. where a business is expecting a bill, but hasn't yet received it).

Purchase Invoice: See Invoice.

Purchase Ledger: A subsidiary ledger which holds the accounts of a business's suppliers. A single control account is held in the nominal ledger which shows the total balance of all the accounts in the purchase ledger.

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Raw Materials: This refers to the materials bought by a manufacturing business in order to manufacture its products.

Real accounts: These are accounts which deal with money such as bank and cash accounts. They also include those dealing with property and investments. In the case of bank and cash accounts they can be held in the nominal ledger, or balanced in a journal (eg. the cash book) where they can then be looked upon as a part of the nominal ledger when compiling a balance sheet. Property and investments can be held in subsidiary ledgers (with associated control accounts if necessary) or directly in the nominal ledger itself.

Realisation principle: The principle whereby the value of an asset can only be determined when it is sold or otherwise disposed of, ie. its 'real' (or realised) value.

Rebate: If you pay for a service, then cancel it, you may receive a 'rebate'. That is, you may be refunded some of the money you paid for the service. (eg. if you cancel a 1 year insurance policy after 3 months, you may get a rebate for the remaining 9 months)

Receipt: A term typically used to describe confirmation of a payment - if you buy some petrol you will normally ask for a receipt to prove that the money was spent legitimately.

Reconciling: The procedure of checking entries made in a business's books with those on a statement sent by a third person (eg. checking a bank statement against your own records).

Refund: If you return some goods you have just bought (for whatever reason), the company you bought them from may give you your money back. This is called a 'refund'.

Reserve accounts: Reserve accounts are usually set up to make a balance sheet clearer by reserving or apportioning some of a business's capital against future purchases or liabilities (such as the replacement of capital equipment or estimates of bad debts).

A typical example is a company where they are used to hold the residue of any profit after all the dividends have been paid. This balance is then carried forward to the following year to be considered, together with the profits for that year, for any further dividends.

Retail: A term usually applied to a shop which re-sells other people's goods. This type of business will require a trading account as well as a profit and loss account.

Retained earnings: This is the amount of money held in a business after its owner(s) have taken their share of the profits.

Retainer: A sum of money paid in order to ensure a person or company is available when required.

Retention ratio: The proportion of the profits retained in a business after all the expenses (usually including tax and interest) are taken into account. The algorithm is retained profits divided by profits available for ordinary shareholders (or available for the proprietor/partners in the case of unincorporated companies).

Revenue: The sales and any other taxable income of a business (eg. interest earned from money on deposit).

Run Rate: A forecast for the year based on the current year to date figures. If a company's 1st quarter profits were, say, $25m, they may announce that the run rate for the year is $100m.

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Sales: Income received from selling goods or a service. See Revenue.

Sales Invoice: See Invoice.

Sales Ledger: A subsidiary ledger which holds the accounts of a business's customers. A control account is held in the nominal ledger (usually called a debtors' control account) which shows the total balance of all the accounts in the sales ledger.

Self Assessment (UK only): A new style of income tax return introduced for the 1996/1997 tax year. If you are self-employed, or receive an income which is un-taxed at source, you will need to register with the Inland Revenue so that the relevant self assessment forms can be sent to you. The idea of self assessment is to allow you to calculate your own income tax.

Self-balancing ledgers: A system which makes use of control accounts so that each ledger will balance on its own. A control account in a subsidiary ledger will be mirrored with a control account in the nominal ledger.

Self-employed: The owner (or partner) of a business who is legally liable for all the debts of the business (ie. the owner(s) of a non-limited company).

Selling, General & Administrative expense (SG & A): The expenses involved in running a business.

Service: A term usually applied to a business which sells a service rather than manufactures or sells goods (eg. an architect or a window cleaner).

Shareholders: The owners of a limited company or corporation.

Share premium: The extra paid above the face value of a share. Example: if a company issues its shares at $10 each, and later on you buy 1 share on the open market at $12, you will be paying a share premium of $2

Shares: These are documents issued by a company to its owners (the shareholders) which state how many shares in the company each shareholder has bought and what percentage of the company the shareholder owns. Shares can also be called 'Stock'.

Shares issued (aka Shares outstanding): The number of shares a company has issued to shareholders.

Simple interest: Interest applied to the original sum invested (as opposed to compound interest). Eg. 1000 invested over two years at 10% per year simple interest will yield a gross total of 1200 at the end of the period (10% of 1000=100 per year).

Single-step income statement: An income statement where all the revenues are shown as a single total rather than being split up into different types of revenue (this is the most common format for very small businesses). See Profit and Loss, Multiple-step income statement.

Sinking fund: An account set up to reduce another account to zero over time (using the principles of amortization or straight line depreciation). Once the sinking fund reaches the same value as the other account, both can be removed from the balance sheet.

SME: Small and Medium Enterprises (ie. small and medium size businesses). The distinction between what is 'small' and what is 'medium' varies depending on where you are and who you talk to.

Sole trader: See Sole-proprietor.

Sole-proprietor: The self-employed owner of a business (see Self-employed).

Source document: An original invoice, bill or receipt to which journal entries refer.

Stock: This can refer to the shares of a limited company (see Shares) or goods manufactured or bought for re-sale by a business.

Stock control account: An account held in the nominal ledger which holds the value of all the stock held in the inventory subsidiary ledger.

Stockholders: See Shareholders.

Stock Taking: Physically checking a business's stock for total quantities and value.

Stock valuation: Valuing a stock of goods bought for manufacturing or re-sale.

Straight-line depreciation: Depreciating something by the same (ie. fixed) amount every year rather than as a percentage of its previous value. Example: a vehicle initially costs $10,000. If you depreciate it at a rate of $2000 a year, it will depreciate to zero in exactly 5 years. See Depreciation.

Subordinated debt: If a company is liquidated (i.e. becomes insolvent), the secured creditors are paid first. If any money is left, the unsecured creditors are then paid. The amount of money owed to the unsecured creditors is termed the 'subordinated debt' of the company.

Subsidiary ledgers: Ledgers opened in addition to a business's nominal ledger. They are used to keep sections of a business separate from each other (eg. a Sales ledger for the customers, and a Purchase ledger for the suppliers). (See Control Accounts)

Suspense Account: A temporary account used to force a trial balance to balance if there is only a small discrepancy (or if an account's balance is simply wrong, and you don't know why). A typical example would be a small error in petty cash. In this case a transfer would be made to a suspense account to balance the cash account. Once the person knows what happened to the money, a transfer entry will be made in the journal to credit or debit the suspense account back to zero and debit or credit the correct account.

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T Account: A particular method of displaying an account where the debits and associated information are shown on the left, and credits and associated information on the right.

Tangible assets: Assets of a physical nature. Examples include buildings, motor vehicles, plant and equipment, fixtures and fittings. See Intangible assets.

Three column cash book: A journal which deals with the day to day cash and bank transactions of a business. The side of a transaction which relates directly to the cash or bank account is usually balanced within the journal and used as a part of the nominal ledger when compiling a balance sheet (ie. only the side which details the sale or purchase needs to be posted to the nominal ledger).

Total Cost of Ownership (TCO): The real amount an asset will cost. Example: An accounting application retails at $1000. Support - which is mandatory, costs a further $200 per annum. Assuming the software will be in use for 5 years, TCO will be $2000 (1000+5x200=2000).

Trading account: An account which shows the gross profit or loss of a manufacturing or retail business, i.e. sales less the cost of sales.

Transaction: Two or more entries made in a journal which when looked at together reflect an original document such as a sales invoice or purchase receipt.

Trial Balance: A statement showing all the accounts used in a business and their balances.

Turnover: The income of a business over a period of time (usually a year).

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Undeposited Funds Account: An account used to show the current total of money received (ie. not yet banked or spent). The 'funds' can include money, cheques, credit card payments, bankers drafts etc. This type of account is also commonly referred to as a 'cash in hand' account.

Value Added Tax (VAT - applies to many countries): Value Added Tax, or VAT as it is usually called is a sales tax which increases the price of goods. At the time of writing the UK VAT standard rate is 17.5%, there is also a rate for fuel which is 5% (this refers to heating fuels like coal, electricity and gas and not 'road fuels' like petrol which is still rated at 17.5%).

VAT is added to the price of goods so in the UK, an item that sells at £10 will be priced £11.75 when 17.5% VAT is added.

Wages: Payments made to the employees of a business for their work on behalf of the business. These are classed as expense items and must not be confused with 'drawings' taken by sole-proprietors and partnerships (see Drawings).

Work in Progress: The value of partly finished (ie. partly manufactured) goods.

Write-off: Depreciating an asset to zero in one go.

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Zero Based Account (ZBA): Usually applied to a personal account (checking) where the balance is kept as close to zero as possible by transferring money between that account and, say, a deposit account.

Zero Based Budget (ZBB): Starting a budget at zero and justifying every cost that increases that budget.

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ess for their work on behalf of the business. These are classed as expense items and must not be confused with 'drawings' taken by sole-proprietors and partnerships (see Drawings).

 

Work in Progress: The value of partly finished (ie. partly manufactured) goods.

Write-off: Depreciating an asset to zero in one go.

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Zero Based Account (ZBA): Usually applied to a personal account (checking) where the balance is kept as close to zero as possible by transferring money between that account and, say, a deposit account.

Zero Based Budget (ZBB): Starting a budget at zero and justifying every cost that increases that budget.

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