Here are some words that you should understand
The Balance Sheet Words
Is a useful rule which helps when assembling the balance sheet figures. The rule which is always true is that:
Assets - Liabilities =Capital
Fixed Assets + Current Assets
-Current Liabilities - Long term Liabilities = Capital + profit - drawings
This means that when preparing a balance sheet there will always be two figures which are the same and we refer to this state as the
the balance sheet balancing
Used to help make sense of the figures and include the following categories:
Profitability ratios , used to compare the profitability of one company with another or of one company over time.
Liquidity ratios, used to compare the liquidity of one company with another or of one company over time.
Investment ratios, used by potential investors when making investment decisions.
Efficiency ratios, used to compare company efficiency with others or with itself from one year to another.
Accounting ratios are only useful when used to compare:
one company's results over a period of time.
one company's results with another company. It is best to compare with the best ,such as a world class company, or to compare with the industry standard for that type of business.
the company's results with those expected. It is useful to use budgets for this purpose.
An amount unaccounted for, yet still owed at the year end. The amount needs to be estimated and then added to the expenses deducted from the profit in the
Profit and Loss account
. The same amount also needs to be added to
in the Current Liabilities section of the
Learn more about this
An item of value owned by the business
A financial statement that shows what the business is worth. This is a very simple definition as the valuation of a business is a very complex topic. It shows the business assets and liabilities at one point in time and is sometimes referred to as the "snap shot".
Bank & Cash
Amounts held in the bank and in cash. Found in the
section of the Balance Sheet.
If the amounts are in deficit, then the bank account is said to be an
and will not appear in current assets but will be found in the Current Liabilities section of the balance sheet.
Items, usually cash or other assets introduced into the business by the owners. Sometimes referred to as Capital Introduced. For companies this is referred to as share capital and Capital Employed is the term given to the total of:
Capital (which comes in two varieties ordinary and preference)
capital (which is simply a grand name for long term loans)
Money. Can be in the petty cash tin in the office or at the bank.
Assets which are expected to be used up and replaced within one year. Sometimes referred to as
short term assets
.They can be :
or partially finished good known as
. This amount is also referred to as
and can be found in the Trading account section of the Profit and loss Account. It is important to remember that Closing stock appears both in the Balance sheet and in the Profit and Loss Account.
amounts owed to the business from its customers and known as
. Customers come in two varieties:
Cash customers which pay for goods at the time of sale
Credit customers which pay for goods at a later date. It is from these sales that debtors arises i.e. amounts owed from customers.
This amount is usually shown net of
(which means having the amount of doubtful debts deducted from the total figure for debtors) The deduction for Doubtful debts is usually an estimate and is known as a
It represents amounts under dispute with customers or amounts which customers are having difficulty in paying because of cash flow problems. Income arising from these amounts is therefore considered doubtful.
amounts paid in advance (at the end of the accounting year) of goods and services received and referred to as
Prepayments are shown as added to debtors.
cash and bank
Amounts owed (within one year) for goods and services purchased on credit terms. This means payment for goods and services is due at a date later than the date of sale. Current liabilities can be:
, which is the name we give to amounts owed to suppliers.
Accruals, which is the name we give to amounts still owed at the year end and not yet recorded in the books of account.
Proposed items such as
, which means amounts the business promises to pay in the coming year.
Payable items such as
which is payable within the coming year.
, which is amounts owed to the bank.
Short term loans
Is the measure of wearing out of a fixed asset. All fixed assets are expected to wear out, become less efficient and to get "tired". Depreciation is calculated as the estimate of this measure of wearing out and is a charge in the
Profit and loss Account
is the total depreciation charges to date deducted from the cost of the fixed assets to show
Net Book Value
in the Balance Sheet
learn more about depreciation
Watch a car becoming more worn out over time
When you have finished you need to press escape and return.
Assets withdrawn from the business by the owners. These assets are usually cash but can be any asset withdrawn. In company accounts the withdrawal of assets by the owners is either called :
if it is payment for work done by the owner or
if it is for a share of the profits
Assets used within the business and not acquired for the purposes of resale. Examples include:
Land and buildings
Plant and machinery, such as knitting machines and cup making machinery
Fixtures and fittings, such as light fittings and shelving
Motor vehicles, such as vans and cars.
Fixed assets must be shown at original cost(purchase price) or valuation. Valuation is preferred in the case of assets which have changed significantly in value since original purchase. For example the current value of land and buildings can be quite different from the original cost.
Accumulated Depreciation must also be shown, which is deducted from cost (or valuation) to give
net book value
comes in two flavours:
Inherent goodwill, which is supposed to reflect the reputation and other positive characteristics of the business which are all difficult to put a value on. This type of goodwill should not appear on the Balance Sheet
Purchased goodwill, which is the excess of purchase price over
of the net assets of the business acquired by the purchaser.
learn more about goodwill
The law controls what kinds of books, records and systems of internal controls that must be maintained by companies which are subject to an annual examination by external auditors. You will learn much more about these in your studies.
Long term Liability
Amounts owed to someone else which are payable after one year. Examples include:
, which are long term loans secured on the business assets. This means if the business fails to repay back the loan on time the business assets are at risk.
Net current assets
Sometimes referred to as working capital, this is the difference between total current assets and total current liabilities and is what finances the business on a day to basis.
Is the difference between the total assets and total liabilities.
There are many types of profit:
Cash surplus, which is the difference between receipts and payments.
Taxable profit, which is the business profit adjusted for tax purposes.
Accounting profit, which is the difference between:
Income received or receivable and
Expenditure paid or payable
Often referred to as
Accounting profit is calculated using the
. Which means that the total income includes not only cash received but also amounts owed by credit customers (debtors) for sales made within the
. The total costs incurred to achieve these sales include not just actual payments made , but also amounts still owing to suppliers. Accounting profit is normally referred to as
amounts retained in the business and not distributed to owners. Reserves can be:
Profits made and not passed on to owners. These are some times known as retained earnings.
Capital reserves which can not be passed on to owners and represent the perceived increase in valuation of some fixed assets.
Amounts invested in a company by its owners. Owners of companies are called
The profit and loss account words
Is the period under examination and usually refers to a year. We therefore refer to a
Profit and loss Account
for the year ended
so and so or a
so and so.
Accruals or Matching concept
Is the reason why
net profit made is not the same as the cash
surplus generated. This is a critical concept for you to understand. It is a fundamental concept upon which the accounts are prepared. You will learn in your studies that profit is not cash for a number of reasons:
because of applying the accruals concept to preparation of accounts. This is where we deduct from sales the amounts we have incurred to achieve those sales - WHETHER WE HAVE PAID FOR THEM OR STILL OWE FOR THEM is irrelevant. In other words we count all costs incurred including those still owing to trade creditors at the end of the year. The costs deducted in the accounts will therefore be greater than the actual cash payments made where amounts are still owed at the end of the year. Similarly the sales figure is not made up of cash received from customers but is made up of cash received together with that still
because of accounting for
which is a deduction against profits for the measure of wearing out of a
and therefore does not involve a cash payment
because of the way we value
which can be by using average unit costs, the last unit costs or the earliest unit costs. None of these methods reflect the actual flow of cash because they are all estimates only. You will learn that this is where we consider FIFO (first in first out) and LIFO (last in first out) valuations of closing stock.
learn more about the matching concept
learn more about stock valuation
Referred to as
and including examples such as:
rent and rates
wages and salaries
light and heat
Provision for doubtful debts . This represents an estimate of amounts customers have difficulty paying due to their cash flow problems. This figure will be deducted from the profit in the
Profit and loss Accoun
t and will also be deducted from the
figure in the
bad debts written off
Amounts owed by customers that cannot afford to pay because they have gone into liquidation. These amounts need to be deducted from the profit in the
Profit and Loss Account
and also from the
figure which is found in the
section of the
Accruals are amounts unaccounted for yet still owing at the year end . Estimates need to be made and then added to the expenses deducted in the
Profit and Loss
account. This amount also needs to be added to
s in the Current liabilities section of the Balance Sheet . Prepayments are amounts paid for by the business in advance of goods and services received. These amounts need to be deducted from expenses in the
Profit and Loss a
ccount and will also appear in the
t section of the
Is calculated by deducting
Cost of Sales
(sometimes referred to as Cost of goods sold) from
. Cost Of Sales is calculated by taking:
, which is the value of stock which exists at the beginning of the
of goods for resale, made during the
One common mistake made by students is to confuse purchases with stocks.
Purchases of stocks are dealt with through the purchases account
Opening and closing stocks.
, which is the value of stock which exists at the end of the
In other words, it is the value of goods purchased during the year and in stock at the beginning of the year, less those items sold during the year. This is the figure which also appears in the balance sheet as stocks and can be found in the current assets section.
learn more about cost of sales
The method used for preparing accounts which estimates the actual purchase price of all items purchased. This is as opposed to the alternatives which could be to use instead the:
cost of replacing items when they are sold or disposed of .Known as the Replacement cost or net realizable value
income expected if items were sold. Known as the Realization cost
cost of sales
= net profit.
cost of sales =
Therefore Net Profit = gross profit
In other words Net Profit represents the surplus of sales made over expenditure during the accounting period. If a deficit is made(i.e if expenditure is greater than sales) then this results in a
and not a
Profit and Loss Account
Shows what net profit or loss the business has made within an
after deducting all expenditure from the income. A net profit is earned if total expenditure is less than the sales figure. A net loss is made if it is greater. Comes underneath the
Income received or receivable for the
. Sometimes referred to as Turnover.It represents the sales value of goods and services made to customers during the year.
the business has made within an
It comes on top of the
Profit and Loss Account