Chapter 1 Glossary of Terms

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Chapter 1: Glossary of Terms

Accounting:

The record-keeping and reporting of an enterprise's performance and position in monetaryterms. Accounting provides the reports that summarise the economic results of management's

decisions for internal use and for transmission to external interested parties (such as investors,

creditors and regulatory agencies). See inancial accounting, !anagement accounting.

Accounting Entity:

The enterprise for "hich the accounting is #eing done. The entity may #e a single legal

company or other organisation, an economic unit "ithout legal standing (such as a

proprietorship) or a group of companies "ith connected o"nership for "hich consolidated

financial statements are prepared.

Accounting Equation:

The dou#le-entry arithmetic #y "hich Assets $ %ia#ilities & Shareholders' euity.

Accounting Principles:

See enerally accepted accounting principles (AA).

Accounting Standards:

The mandating of particular accounting methods or policies #y an authoritative #ody. *n

Australia, this is done #y the Australian Accounting Standards +oard, and in the nited States

#y the inancial Accounting Standards +oard. See Accounting policies, enerally accepted

accounting principles (AA).

Accounts Payable: %ia#ilities representing amounts o"ed to short-term trade creditors. ften called 'trade

creditors'.

Accounts Receiable:

Amounts o"ing #y de#tors (customers), usually arising from sales of goods or services.

ften called 'trade de#tors'.

Accrual Accounting:



The method of making an economically meaningful and comprehensive measurement of

performance and position #y recognising economic events regardless of "hen cash

transactions happen, as opposed to the simpler cash #asis of accounting. nder this method,

revenues and expenses (and related assets and lia#ilities) are reflected in the accounts in the

period to "hich they relate.

Accrual Profit:

The result of su#tracting expenses from revenue(s), "hen #oth kinds of accounts are

calculated #y accrual accounting. See Accrual accounting, et profit.

Audit:

A service "here the auditor's o#/ective is to provide a reasona#le level of assurance #y

issuing a positive expression of opinion that enhances the credi#ility of an assertion a#out an

accounta#ility matter. See Auditor, Auditor's report.

Auditor!s Report:

The document accompanying the financial statements that expresses the auditor's opinion on

the fairness of the financial statements.

"alance Sheet:

The list of assets, lia#ilities and o"ners' euity that constitutes the formal statement of a

company's financial position at a specified date, summarising, #y category, the assets,

lia#ilities and shareholders' euity.

"oard of #irectors:

The senior level of management, representing and directly responsi#le to the o"ners

(shareholders). ormally elected annually #y the shareholders.

Capital:

The o"ners contri#ution to or interest in a #usiness (the euity). ften used specifically to

refer to the euity of unincorporated #usinesses (proprietorships and partnerships). See

0uity.

Cash $lo%:

The inflo"s of cash (cash receipts) and outflo"s of cash (cash dis#ursements) over a period.

*nformation a#out cash flo" is presented in the statement of cash flo"s.

Cash Profit:



1ash receipts minus cash dis#ursements. 2oughly euivalent to the cash from operations

figure.

Cash Receipts:

1ash inflo"s, #y currency, other people's cheues or direct #ank deposits. See 1ash receipts

/ournal, 1ash transaction.

C&GS: See 1ost of goods sold.

Comparability:

*nformation that ena#les users to identify similarities in and differences #et"een t"o sets of

economic phenomena, such as t"o different years of a company's financial statements.

Cost of Goods Sold 'C&GS(:

An expense account that reflects the cost of goods that generated the revenue (also called cost

of sales). See 1ost flo" assumption, ross profit, *nventory costing.

Creditor:

ne "ho extends credit3 that is, gives someone the right to #uy or #orro" no" in

consideration of a promise to pay at a later date.

#epreciation: Allocation of the cost of a noncurrent asset to expense over several accounting periods to

recognise the consumption of the asset's economic value as it helps to earn revenue over

those periods. The term 'depreciation' is used "ith respect to tangi#le assets, "hile

'amortisation' is used "ith respect to intangi#le assets. See Accumulated depreciation,

Amortisation, +ook value, Straight-line depreciation.

#isclosure:

rinciple of providing sufficient disclosure in accounting reports to ena#le users to make

necessary decisions.

#iidends:

4istri#utions of a portion of net profit to shareholders in the company.

Equity:



The net assets or residual interest of an o"ner or shareholder (Assets - %ia#ilities $ 0uity).

See the components of euity under 2etained profits, Shareholders' euity.

E)pense:

The cost of assets used and5or o#ligations created in generating revenue. !ore formally,

consumptions or losses of future economic #enefits in the form of reductions in assets or

increases in lia#ilities of the entity, other than those relating to distri#utions to o"ners, that

result in a decrease in euity during the reporting period. See Accrual accounting, *ncome

statement, 0xpense recognition, !atching, 2evenue.

E)ternal Audit:

The audit conducted #y an 0xternal auditor.

$inancial Accounting:

The reporting in financial statements of the financial position and performance of an

enterprise to users external to the enterprise on a regular, periodic #asis.

$inancial Performance:

The enterprise's a#ility to generate ne" resources from day-to-day operations over a period of

time, via dealing "ith customers, employees and suppliers. !easured #y the net profit figurein the income statement.

$inancial Position:

The enterprise's set of assets, lia#ilities and o"ners' euity at a point in time. !easured #y the

#alance sheet.

$inancial Statements:

The reports for people "ho are external to the enterprise (although they are also of interest tomanagement) referred to in the definition of accounting, "hich generally comprise a #alance

sheet, an income statement, a statement of cash flo"s and the notes to these statements.

$inancing Actiities:

art of the statement of cash flo"s for those activities that relate to the changing si6e and

composition of the financial structure of the entity.

GAAP:



See enerally accepted accounting principles.

Generally Accepted Accounting Principles 'GAAP(:

rinciples and methods of accounting that have the general support of standard-setting

#odies, general practice, texts and other sources. See Accounting standards.

Going Concern:

A fundamental assumption in financial accounting that a firm "ill continue to #e financially

via#le. *f a firm is not a going concern, normal accounting principles do not apply. See

%iuidation value.

Goods and Serices Ta):

The Australian federal sales tax on goods and services ("ith some exceptions, such as fresh

food) that a #usiness collects as a percentage of its o"n revenue, and remits to the

government after deducting any ST the #usiness paid on its o"n purchases.

Gross Profit: Sales revenue minus cost of goods sold. Also called gross margin.

GST 'Goods and Serices Ta)(: See oods and services tax.

*istorical Cost: The dollar value of a transaction on the date it happens, normally maintained in the

accounting records from then on #ecause of accounting's reliance on transactions as the #asis

for recording events. The cost, or historical cost, of an asset is therefore the dollar amount

paid for it or promised to #e paid as of the date the asset "as acuired.

+ncome Statement: A financial statement that summarises the revenues and expenses of a #usiness for a stated

period of time and computes the net profit (revenues minus expenses). Sometimes referred to

as a profit and loss statement. See components of the statement such as 0xpense, rofit,

2evenue3 see also inancial performance.

+ncome Ta):



Tax assessed on the profit of a #usiness enterprise or the salary or "age of an individual,

according to income tax la"s.

+nentory'ies(:

oods that are purchased or manufactured #y a company for sale, resale or further use in

operations, including finished goods, goods in process, ra" materials and supplies. See

1urrent assets, *nventory costing.

+nestments:

Assets, such as shares or #onds, that are held for their financial return (e.g. interest or

dividends) rather than for their use in the enterprise's operations.

+nestors:

eople "ho o"n investments and "ho, #ecause of their interest in the value of those shares or

#onds, are interested in information a#out the enterprises issuing such shares and #onds.

,iability:

A present o#ligation of the entity arising from past events, the settlement of "hich is expected

to result in an outflo" from the entity of resources em#odying economic #enefits.

,isted 'Shares(:

A listed company (corporation) is one "hose shares are availa#le for trading on a Stock

exchange. See u#lic company.

,ong Serice ,eae:

*n Australia, leave granted to an employee "ho stays "ith the same employer for a minimum

num#er of years (often 78 years).

,oss- ,osses:

sually refers to the case of a negative return (proceeds #eing less than #ook value) o#tained

from the disposition of assets (or lia#ilities) not normally disposed of in the daily course of

#usiness, such as from selling land, #uildings or other noncurrent assets, or from refinancing

de#t.

.anagement Accounting:



Accounting information that is designed to aid management in its operation and control of the

firm and in its general decision-making. 4ifferent from inancial accounting, "hich is aimed

primarily at users "ho are external to the firm.

.ateriality- .aterial:

The magnitude of an omission or misstatement of accounting information that, in the light of

surrounding circumstances, makes it pro#a#le that a reasona#le person relying on the

information "ould have had their /udgement changed or influenced #y the omission or

misstatement. A decision not to disclose certain information may #e made #ecause the

amounts involved are too small to make a difference (it is not material).

.easurement- .easuring:

The attachment of dollar figures to assets, lia#ilities, revenues and expenses in order to

produce the figures (values) on the #alance sheet and to ena#le the computation of profit(revenues minus expenses) and euity (assets minus lia#ilities). See Asset valuation, +alance

sheet valuation, rofit, 2ecognition.

/et Profit:

The net profit of a #usiness is the residual after deduction of expenses from revenues.

&ff "alance Sheet $inancing:

!ethods of o#taining financing that avoid having to record the sources as lia#ilities or euity.

Preparers: !anagers and accountants "ho produce financial statements.

Profit:

The excess of revenues over expenses. The (net) profit of a #usiness is the residual after

deduction of expenses from revenues. Also referred to as income or earnings. See 1ash profit,

ross profit, rofit #efore (income) tax.

Profit "efore '+ncome( Ta):

An amount eual to revenue minus all other ordinary expenses except income tax. Some non-

taxed or special items, such as extraordinary items, are placed after income tax has #een

deducted, and are therefore not part of profit #efore income tax.

Property- Plant and Equipment:



on-current assets that are tangi#le, and are used in the operating activity of an entity.

Proision $or Employee Entitlements: A lia#ility for future economic #enefits to #e paid to employees that employees accumulate as

a result of the rendering of their services to an employer up to the reporting date. Theyinclude, #ut are not limited to, "ages and salaries (including fringe #enefits and nonmonetary

#enefits), annual leave, sick leave, long service leave, superannuation and other post-

employment #enefits.

Releance: The capacity of information to make a difference in a decision #y helping users to form

predictions a#out the outcomes of past, present and future events or to confirm or correct

prior expectations. See 4ecision relevance, !ateriality, #/ectivity, 2elia#ility, Timeliness.

Reliability:

A characteristic of information that is represented faithfully (or faithfully portrays the

underlying transactions), and is free from #ias and verifia#le. See !ateriality, #/ectivity,

2elevance, Timeliness.

Retained Profits 'Retained Earnings(: rofits not yet distri#uted to o"ners3 the sum of net profits earned over the life of a company,

less distri#utions (dividends declared) to o"ners.

Reenue:

A class of income relating, typically, to the ordinary activities of an entity.

Ris0:

The pro#a#le varia#ility in possi#le future outcomes a#ove and #elo" the expected level of

outcomes (e.g. returns), #ut especially #elo". 2isk and return go hand in hand, #ecause a high

risk should mean a higher potential return, and vice versa.

Share 'Stoc0( .ar0et: A capital market in "hich euity shares are traded. ften used as a generic term for capital

markets.

Share Capital:



The portion of a company's euity o#tained #y issuing shares in return for cash or other

considerations.

Shareholders:

The holders of a company's share capital3 therefore, the o"ners of the company.

Shareholders! Equity:

The sum of shareholders' direct investment (share capital) and indirect investment (retained

profits and reserves).

Shares 'Stoc0(:

nits of share capital, evidenced #y certificates and, for pu#lic companies, traded on capitalmarkets "ith other securities.

Statement of Cash $lo%s 'Cash $lo% Statement(:

A statement that explains the changes in cash euivalent #alances during a fiscal period.

Timeliness: Timely information is usa#le #ecause it relates to current decision needs. *nformation that is

received too late may not #e usa#le #ecause the time for making the decision has already passed #y. See 2elevance, 2elia#ility, !ateriality, #/ectivity.

nderstandability:

ne of the concepts underlying the preparation of financial statements is that they should #e

a#le to #e understood #y users "ho are "illing to exercise diligence in examining the reports

and "ho possess the skills and a#ility to comprehend accounting practices.

seful ,ife:

The period over "hich an asset is expected to #e availa#le for use #y an entity, or the num#er

of production units, or similar units, expected to #e o#tained from the asset #y an entity.

sers:

eople "ho use financial statements to help them decide "hether to invest in an enterprise,

lend it money or take other action involving financial information.

2aluation:



The determination of the amounts at "hich assets, lia#ilities and euity should #e sho"n in

the #alance sheet.

3ages Payable:

Amounts o"ing to employees in the form of "ages at the end of the pay period.

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Chapter 1 Glossary of Terms