How to make sense of the words your Accountant likes to use.

Posted by admin@larkinpartners In Uncategorised 0 comment

With the Australia Federal Budget having been delivered, we thought we’d help out with some of the terminology they used in the news cycles, and we thought how appropriate it might be that we define some common accounting terms that may be useful for you in your everyday business life, as well as when we post specific details about the Budget, so feel free to print this little glossary out and have it handy to refer to.

Everyone knows we love working with small businesses and new entrepreneurs. One thing that we come across often when working with clients, however, is that we spend a lot of time going over basic accounting terms and concepts before getting into the essential work of tax planning, forecasting, bookkeeping coding and so on, so let’s get stuck in with defining some terms for you:

Accounts payable – a record of all unpaid short-term (less than 12 months) invoices, bills and other liabilities. Examples of accounts payable include invoices for goods or services, bills for utilities and tax payments due.
Accounts receivable – a record of all short-term accounts (less than 12 months) from customers you sell to but are yet to pay. These customers are called debtors and are generally invoiced by a business.
Accrual accounting – an accounting system that records transactions at the time they occur, whether the payment occurs now or in the future.
Amortisation/Depreciation – the process of offsetting assets such as goodwill and intellectual property over a period of time.
Assets – things you own. These can be cash or something you can convert into cash such as property, vehicles, equipment and inventory.
Audit – a check by an auditor or tax official on your financial records to check that you account for everything correctly.

Bad debts – money that is unlikely to be paid in the near future.
Balance Sheet – a snapshot of a business on a particular date. It lists all of your assets and liabilities and works out the net assets.
Balloon payment – a final lump sum payment due on a loan agreement. Loans with a larger final ‘balloon payment’ have lower regular repayments over the term of the loan.
Bank reconciliation – a cross-check that ensures the amounts in your cashbook match the relevant bank statements.
Benchmark – a set of conditions against which you can measure a product or business.
Benchmarking – the process of comparing your business to similar businesses in your industry.
Bill of sale – a legal document for the purchase of property or other assets that details the purchase, where it took place, and for how much.
Bootstrapping – where a business funds its growth purely through personal finances and revenue from the business.
Bottom line – also called Net profit.
Break-even point – the exact point when a business’s income equals its expenses.
Budget – a listing of planned revenue and expenditure for a given period.

Capital – wealth in the form of money or property owned by a business.
Capital cost – a one-off substantial purchase of physical items such as plant, equipment, building or land.
Capital gain – the amount gained when an asset sells above its original purchase price.
Capital growth – an increase in the value of an asset.
Cash – includes all money available on demand, including bank notes and coins, petty cash, certain cheques, and money in savings or debit accounts.
Cash accounting – an accounting system that records transactions at the time you actually receive money payment.
Cash book – a daily record of all cash, credit or cheque transactions received or paid out by a business.
Cash flow – the measure of actual cash flowing in and out of a business.
Cash incoming – money that is flowing into the business.
Cash outgoing – money that is flowing out of the business.
Chart of accounts – an index of the accounts a business will use to classify transactions. Each account represents a type of transaction such as asset, liability, owner’s equity, income, and expense.
Chattel mortgage – similar to a hire-purchase agreement although the business owns the asset from the start. Chattel mortgages require regular ongoing payments and typically provide the option of reducing the payments through the use of a final ‘balloon’ payment.
Contingent liability – a liability where payment is made only if a particular event or circumstance occurs.
Cost of goods sold – the total direct costs of producing a good or delivering a service.
Credit – a lending term for when a customer purchases a good or service with an agreement to pay at a later date. This could be an account with a supplier, a store credit card or a bank credit card.
Creditor – a person or business that allows you to purchase a good or service with an agreement to pay at a later date. A creditor is also anyone who you owe money to, such as a lender or supplier.
Current asset – an asset in cash or something you can convert into cash within 12 months.
Current liability – a liability that is due for payment within 12 months.

Debit – in double-entry bookkeeping, a debit is an entry made on the left-hand side of a journal or ledger representing an asset or expense.
Debt – any amount that you owe including bills, loan repayments and income tax.
Debt consolidation – the process of combining several loans or other debts into one for the purposes of obtaining a lower interest rate or reducing fees.
Debt finance – money provided by an external lender, such as a bank or building society.
Debtor – a person or business that owes you money.
Default – a failure to pay a loan or other debt obligation.
Depreciation – the process of offsetting an asset over a period of time. You can depreciate an asset to spread the cost of the asset over its useful life.
Disbursements – money that a business spends.
Discount – a reduction applied to a full priced good or service.
Double-entry bookkeeping – is a bookkeeping method that records each transaction in 2 accounts, both as a debit and a credit.
Drawings – personal expenses paid for from a business account.

Employee share schemes- where you give your employees the opportunity to buy shares in your company. Other terms include an ’employee share purchase plan’ or an ’employee equity scheme’.
Encumbered – an encumbered asset is one that is currently put forward as security or collateral for a loan.
Equity / Owner’s Equity – the value of ownership interest in the business, calculated by deducting liabilities from assets.
Equity finance – money provided to a business in exchange for part ownership of the business. This can be money invested by the business owners, friends, family, or investors like business angels and venture capitalists.
Excise duty – an indirect tax levied on certain types of goods produced or manufactured in Australia including petrol, alcohol, tobacco and coal.

Facility – an arrangement such as an account offered by a financial institution to a business (such as a bank account, a short-term loan or overdraft).
Finance – money used to fund a business or high value purchase.
Financial year – a 12-month period typically from 1 July to 30 June.
Financial statement – a summary of a business’s financial position for a given period. Financial statements can include a profit and loss, balance sheet and cash flow statement.
Fixed asset – a physical asset used in the running of a business.
Fixed cost – a cost that is not part of producing a good or service.
Fixed interest rate – when the interest rate of a loan remains the same for the term of the loan or an agreed timeframe.
Forecast – a list of future financial transactions. Forecasts help to plan a more accurate budget.
Fringe benefits – non-monetary benefits, such as company cars and mobile phones, included as part of a salary package.
Fully drawn advance – is a long term loan with the option to fix the interest rate for a period. These loans are usually secured and can help fund a new business or equipment.

Goodwill – an intangible asset that represents the value of a business’s reputation.
Gross income – the total money earned by a business before you deduct expenses.
Gross profit (also known as net sales) – the difference between sales and the direct cost of making the sales.
Guarantor – a person who promises to pay a loan in the event the borrower cannot meet the repayments. The guarantor is legally responsible for the debt.

Hire-purchase – a type of contract where you purchase a good through an initial deposit. You then rent it and pay the balance off in instalments plus interest charges. When you make the final payment, ownership of the good transfers to the purchaser.

Insolvent – a business or company is insolvent when they cannot pay their debts as and when they are due.
Intangible assets – non-physical assets with no fixed value, such as goodwill and intellectual property rights.
Interest – the cost of borrowing money on a loan or earned on an interest-bearing account.
Interest rate – a percentage used to calculate the cost of borrowing money or the amount you will earn. Rates vary from product to product and generally the higher the risk of the loan, the higher the interest rate. Rates may be fixed or variable.
Inventory – a list of goods or materials a business is holding for sale.
Investment – the purchase of an asset for the purpose of earning money such as shares or property.
Invoice – a document to a customer to request payment for a good or service received.

Liability – any financial expense or amount owed.
Line of credit – an agreement allowing a borrower to withdraw money from an account up to an approved limit.
Liquidate – to quickly sell all the assets of a company and convert them into cash.
Liquidation – the process of winding up an insolvent company. An appointed administrator will do this by ceasing business operations, selling assets, and paying creditors and shareholders.
Liquidity – how quickly you can convert assets into cash.
Loan – a finance agreement where a business borrows money and pays it back in instalments (plus interest) within a specified period of time.

Margin / Profit Margin – the difference between the selling price of a good or service and the profit. Margin is generally shown as a gross margin percentage which shows the proportion of profit for each sales dollar.
Mark down – a discount applied to a product during a promotion or sale for the purposes of attracting sales or for shifting surplus or discontinued products.
Mark up – the amount added to the cost price of goods, to help determine a selling price. Essentially it is the difference between the cost of the good/service and the selling price. It does not take into account what proportion of the amount is profit.
Maturity date – when a loan’s term ends and all outstanding principal and interest payments are due.

Net assets (also known as net worth, owner’s equity or shareholder’s equity) – the total assets minus total liabilities.
Net income – the total money earned by a business after tax and other deductions.
Net profit (also known as your bottom line) – the total gross profit minus all business expenses.
Net worth – see Net assets.

Overdraft facility – a finance arrangement where a lender allows a business to withdraw more than the balance of an account.
Overdrawn account – a credit account that has exceeded its credit limit or a bank account that has had more than the remaining balance withdrawn.
Overheads / Fixed Costs – the fixed costs associated with operating a business such as rent, marketing, utilities and administrative costs.

Personal property – covers any property someone can own, except for land, buildings and fixtures. Examples include goods, plant and equipment, cars, boats, planes, livestock and more.
Personal Property Security Register (PPSR) – registers of security interests. It provides a single national noticeboard of security interests in personal property.
Petty cash – cash for small miscellaneous purchases such as postage.
Plant and equipment – a group of fixed assets used in the operation of a business such as furniture, machinery, fit-out, vehicles, computers and tools.
Principal – the original loan amount borrowed or the remainder of the original borrowed amount that is still owing (excluding the interest portion).
Profit – the total revenue a business earns minus the total expenses.
Profit and loss statement (also known as an income statement) – a financial statement listing sales and expenses. Use it to work out the gross and net profit of a business.

R&D – stands for ‘research and development’. Businesses conduct research and development to innovate, create new products and find better ways of doing things.
Receipts – a document given to a customer to confirm payment and to confirm the sale of a good or service.
Record keeping – the process of keeping or recording information that explains certain business transactions. Record keeping is a requirement under tax law.
Refinance – when a new loan helps to pay off an existing one. Reasons to refinance include: extending the original loan over a longer period of time, reduce fees or interest rates, switch banks, or move from a fixed to variable loan.
Rent to buy / Hire Purchase – a finance arrangement where you purchase something through an initial deposit and then ‘lease’ it while pay it off. After the final payment, the purchaser has the option (but no obligation) to buy the good or continue leasing. S
Retention of title – a clause in contracts where a buyer may receive property, but doesn’t take legal ownership until the full price is paid.
Return on investment (ROI) – a calculation that works out how efficient a business is at generating profit from the original equity from the owners/shareholders. It’s a way of thinking about the benefit (return) of the money you invest into the business. To calculate ROI, divide the gain (net profit) of the investment by the cost of the investment. The ROI then becomes a percentage or a ratio.
Return on investment (ROI) formula example – Annie buys $1000 worth of stocks and sells the stocks a year later for $1500. The net profit is $500. ROI = (500/1000) = 0.5 x 100 = 50%. Annie’s ROI on the stocks is 50%.
Revenue (also known as Turnover) – the amount earned before expenses, tax and other deductions.

Security (also known as collateral) – property or assets that a lender can take ownership of when repayment of a loan does not occur.
SMSF – self-managed superannuation fund . An SMSF is a way of saving for your retirement. Unlike other super funds, an SMSF is self-managed, which means you’re responsible for making sure the super fund complies with super and tax laws.
Stock – the actual goods or materials a business currently has on hand.
Stocktaking – a regular process involving a physical count of merchandise and supplies actually held by a business, to verify stock records and accounts.
Superannuation – money set aside for retirement that must go into a complying superannuation fund for employees, some contractors and business owners.

Tax invoice – an invoice required for the supply of goods or services over a certain price. You need a valid tax invoice when claiming GST credits.

Variable interest rate – when the interest rate of a loan changes with market conditions for the duration of the loan.
Variable cost – a cost that changes depending on the number of goods produced or the demand for the products or service.

Working capital – the cash available to a business for day-to-day expenses.