Accounting

Account	The named place in the ledger system where one side of the double entry involved in recording a financial transaction of an organisation will be made, e.g. an expense of wages paid by cash will be entered in the wages account and the cash account.
Accrual	An amount owed by the business to a supplier of a service at the balance sheet date. When preparing the income statement, revenue and profits are matched with the associated costs and expenses incurred in earning them. This is often also referred to as the ‘matching’ concept.
Audit	External audit is the independent, expert scrutiny of an entity’s financial statements and supporting information, usually to assess whether or not those statements give a true and fair view, and reporting to the funders. Internal audit is a tool of management intended to assess the effectiveness of control systems within an organisation, and reporting to that management.
Balance sheet	This is a summary of the assets and liabilities of the organisation at a specific time.
Cash flow statement	A statement showing the cash inflows and outflows. A summary of cash received and paid during a period, usually of one year.
Corporate entity	The notion of corporate entity means that several people can band together as owners of a business, by investing capital in the business, and the business will be a legal entity separate from the owners. It also means that the owners – the investors of capital – can be changed without the need also to change the legal entity of the company.
Credit transactions	Financial transactions of an organisation that do not involve the immediate payment of cash, e.g. a sale made by an organisation where payment will be received in two weeks’ time.
Dividend	The cash payment made to shareholders as their return on their investment. The dividend is appropriated out of the profits made and available for distribution by the company. The dividend paid is shown as a change in equity.
Double entry	The method by which financial transactions of an organisation are entered into the ledger accounts; for every debit entry there will be an equal and opposite credit entry.
External Audit	External audit is the independent, expert scrutiny of an entity’s financial statements and supporting information, usually to assess whether or not those statements give a true and fair view, and reporting to the funders.
Internal Audit	Internal audit is a tool of management intended to assess the effectiveness of control systems within an organisation, and reporting to that management.
Funds flow	The flow of funds in and out of the organisation, such as share capital, working capital, etc. Funds are not necessarily flows of cash.
Gearing ratio	The fixed-term capital in a company compared to the shareholders’ capital.
Income statement	List of expenses incurred by an organisation set against its revenues. The result is a profit or a loss. It covers a specific period which is generally one year.
Liabilities	A liability is the obligation to transfer benefits to someone else as a result of past transactions or events. ‘Obligation’ is interpreted very strictly, so that it means being unable to avoid the transfer out, not just that the payment is commercially sensible.
Memorandum of Association	Defines the relationship between the company and any external parties and states the objectives of the company, i.e. what sort of trade it will undertake. It also identifies the maximum capital to be invested in the company by the owners, known as the share capital.
Presentation	Publishing economic information about the business entity in a form which complies with any applicable rules, such as those given by law and accounting standards.
Price/earnings ratio (P/E)	A ratio comparing earnings per share to the price of a share on the inventory market.
Processing	Turning the raw data that we have recorded into useful information that can be presented to those interested in knowing about the organisation.
Replacement cost	Valuing an asset at what it would cost to replace today.
Reserves	Accumulated profits and capital gains available to shareholders. These reserves can be termed realised and unrealised.
Revenue recognition	Revenue is the inflow of economic benefits arising from ordinary activities. Its recognition should be made only when it both arises from ordinary activities and is reasonably certain to be realised.
Realisation	Only recognising, i.e. making an accounting entry for, those transactions where the money has changed hands, or is almost certain to do so in the near future.
Shares	The capital of a company is divided into shares which are issued to the shareholders as collateral for their investment. The shares can have various nominal values and be of several types, e.g. ordinary, preference.
Sources and applications of funds	Sources are where the money has come from, for example previous profits, share issues and amounts borrowed. Applications are where the money has gone, either spent on expenses or on assets. Given this definition, total sources must always equal total applications.