Accounting (Subject) / Accounting Definitions (Lesson)

Accounting Definitions

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• Accounting The summarizing of numerical data relating to past events and presenting this data as information to managers and other interested parties as a basis for both decision making and control purposes.
• Profit: The surplus remaining after all expenses are deducted from sales revenue
• Directors Persons appointed by the shareholders at the annual general meeting to run a limited company on their behalf.
• Shareholders: Owners of share capital in limited companies. Shareholders may be either ordinary shareholders or preference shareholders
• Dividend: A distribution of profits to shareholders.
• Stewardship: The process of looking after resources entrusted to a person
• Relevance A requisite quality of financial information. To be relevant, information must possess the ability to influence users’ economic decisions and be timely. Relevant information may be predictive and assist users in making predictions about the future or it may be confirmatory by assisting users to assess the accuracy of past predictions.
• Reliability: A quality of accounting information. Accounting information should be free of significant error or bias. Information is reliable if it can be depended upon to represent faithfully the transactions or events it claims to represent.
• Comparability: A quality of accounting information. To be useful, accounting information has to be presented in such a way that it can be compared with information from different accounting periods. Accounting measurements have to be made on a consistent basis in order for accounting information to be comparable.
• Understandability: A requisite quality of accounting information. Accounting information should be presented in such a way that those making use of it can understand what it represents. Readers of financial reports are assumed to have sufficient knowledge of business and economic events in order to make sense of what they are presented with. 
• Materiality The IASB Framework defines materiality thus: “Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements.”
• Financial Accounting The reporting of past information to parties external to the organization.
• Creditors: Persons to whom entities owe money. See also trade payables.
• Management Accounting Cost and management accounting is concerned with reporting accounting and cost information to users within an organization to assist those internal users in making decisions and managing the business
• Statement of Financial Position A summary of the assets and liabilities of an entity at a particular point in time.
• Assets Defined by the IASB as “a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to that entity”.
• Liabilities Defined by the IASB as “a present obligation of an entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economics factors.
• Current Assets Short-term assets that will be used up in the business within one year. Examples include inventory, trade receivables, prepayments and cash
• Current liabilities: Short-term liabilities that are due for payment within one year. Examples include trade payables, taxation and accruals.
• Non-Current Assets: Assets held within the business for the long term for use in the production of goods and services. Non-current assets are retained within the business for periods of more than one year and are not acquired with the intention of reselling them immediately or in the near future.
• Non-Current Liabilities Liabilities due for payment more than 12 months from the statement of financial position date.
• Balance Sheet A statement of financial position.
• Payables: Amounts owed to suppliers and other creditors for goods and services supplied on credit.
• Inventory A stock of goods held by a business.
• Receivables Amounts owed to an entity by customers for goods and services supplied on credit.
• Debtors Persons who owe money to an entity. See also trade receivables
• Accounting Equation Assets – liabilities = equity or assets = liabilities + equity
• Equity : The capital of an entity on its statement of financial position. Equity is, in theory, the amount the owners of the business would receive if all the business assets and liabilities were sold and settled at the amounts stated in the statement of financial position
• Share Capital A source of very long-term financing for limited companies. All limited companies must issue share capital which will remain in issue for as long as the company exists.
• Par Value The face value or nominal value of a share
• Share Premium The amount subscribed for shares in a limited company over and above the par value of each share.
• Capital Account The equity part of the statement of financial position for sole traders. The capital account is the sum of the opening capital balance plus the profit for the year (minus a loss for the year) minus any drawings made by the sole trader during the year
• Drawings Amounts taken out of a business by a sole trader for personal rather than business use. Drawings are in effect a repayment of the amounts owed by the business to the owner. Drawings are not permitted in limited liability companies.
• Historic Cost The original cost of an asset or liability at the time it was purchased or incurred.
• Fair Value The amount at which an asset could be sold or a liability settled in the open market.
• Dual Aspect The recognition that each accounting transaction has a double effect on the amounts stated in financial statements
• Double Entry : An accounting methodology which recognizes that every transaction has two effects on the figures in financial statements
• Income Defined by the IASB as “increase in economic benefits during the accounting period”.
• Revenue: Sales of goods and services made by an entity in the ordinary (everyday) course of business.
• Expenses Defined by the IASB as “decreases in economic benefits during the accounting period”.
• Cost of Sales The direct costs attributable to the sale of particular goods or services.
• Sales: = Revenue
• Turnover The term used in financial statements in the UK to represent sales or revenue
• Gross Profit Sales less the direct cost of making those sales
• Operating Profit The profit that remains after all the costs of trading, direct (cost of sales) and indirect (distribution and selling costs and administration costs), have been deducted from sales revenue.
• Profit before Tax Sales – cost of sales – distribution and selling costs – administration expenses + finance income – finance expense
• Profit for the year profit after tax.
• Profit after Tax The profit that remains once all the expenses and charges have been deducted from sales revenue and any other income for the accounting period added on.
• Net Profit The surplus that remains once all the expenses have been deducted from sales revenue.
• Accruals Basis of Accounting All income and expenditure are recognized in the accounting period in which they occurred rather than in the accounting period in which cash is received or paid.

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