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1. Assets

Assets are everything that a company owns. This might include cars, money, buildings and machines. It also includes money which other companies owe to the company. A good way to think about assets is that an asset must have a positive value.

Example:
The firm had assets worth approximately £750,000.

2. Liabilities

A liability is money which a company owes to another company or person. Examples of this are loans from a bank or money which a company owes to its suppliers (suppliers are the companies which sell goods or provide services to other companies).

3. Balance Sheet (also known as A Statement of Financial Position)

A Balance Sheet is a Financial Statement which lists all the assets and all the liabilities of a company on one particular day, which is very often 31^st December. It’s like a photograph because it’s at one moment in time.

Most companies will have total assets which are bigger than total liabilities. In this case, the company is solvent. But if the liabilities are bigger than the assets (which obviously is a bad situation!), then the company is insolvent.

Example:

The company had assets of £250,000 and liabilities of £150,000 so therefore it was solvent and the balance sheet had a net worth of £100,000.

4. Income Statement (also known as a Profit and Loss Account)

An Income Statement is a Financial Statement which shows all the company’s sales and all of its costs, for a period of time, which is normally a year and is often the year to 31^st December.

If the sales are bigger than the costs, then the company is making a profit (it is profitable). But if the costs are bigger than the sales, then the company is making a loss (it is loss making or unprofitable).

There are some extra synonyms here. Another word for profit is surplus and another word for loss is deficit. Another word for a cost is an expense.

Example:
The Income Statement for the company for the year showed sales of £500,000 and costs of £200,000 and so the company recorded a healthy profit of £300,000.

5. Financial Statements (also known as Annual Accounts)

We have seen two Financial Statements so far; The Balance Sheet and the Income Statement. There are several others. Many companies have to produce an Annual Report and a Statement of Cashflows.

Example:
The firm published its Financial Statements yesterday and the amount of profit made headlines in the newspapers.

6. Double Entry

Double Entry is the accounting system used all over the world. It was invented several centuries ago and records every transaction twice (as a Debit and a Credit, which we will look at next). In this way, all the records of the business remain accurate. The verb that gets used for this accuracy is to balance. When something is recorded in the records, it is known as an entry.

In the double entry system, every transaction must be one of the following; an asset, a liability, a sale, or an expense (a cost).

Example:

There are records still in existence which show that Double Entry was used by traders in the 11^th Century in Italy.

7. Debit and Credit

These are often shown in a shorter form as Dr. and Cr. They are the two sides used in Double Entry. A Debit appears on the left and shows assets and expenses. A Credit appears on the right and shows liabilities and sales.

Example:

The debits didn’t add up to the same as the credits and therefore the financial records did not balance (see 41. below). They had to check every entry to find where the mistake was!

8. Bookkeeping

Bookkeeping is the job of recording all the entries of a business in its records. The person doing this is known as the bookkeeper and he/she records every transaction on a daily basis. The bookkeeper will usually have a boss, and this is normally the accountant (see 32. below).

You don’t need to have a formal qualification or degree to be a bookkeeper, but many bookkeepers study to become accountants.

Example:

The company had several bookkeepers, each one looking after a different department. They all reported to the Accountant and his boss was the Finance Director.

9. Fixed Assets (also known as Non-Current Assets)

Fixed Assets are assets which a company owns that have a long-term value. They are things that a company will own for a long period of time and which it uses to run the business. Examples of Fixed Assets are buildings, motor vehicles, and machines.

Example:

The company had made a big investment in its fixed assets by buying many new machines in the year.

10. Capital Expenditure

Capital Expenditure is the phrase used when a company buys Fixed Assets.

Example:
The business was planning to invest a lot of money in new Fixed Assets. This was a huge Capital Expenditure programme.

11. Freehold Premises

Freehold Premises means a building (or a number of buildings) that are owned by a company. It’s a strange term but basically ‘Freehold’ means that the company owns the property forever. If it only had a right to be there for a number of years, then this would be called Leasehold.

Premises means the buildings and land used by a business.

Example:
The Freehold Premises used by the company was made up of 3 buildings and a large plot of land. It also had several Leasehold Premises which it was allowed to occupy for another 15 years.

12. Plant and Equipment

Plant and Equipment basically means machines (or machinery) owned by a company. Plant has many meanings in English (see below), but here it means big and heavy machines. Equipment, on the other hand, can be quite small and light.

Example:

In the factory was a lot of heavy Plant and Equipment which was used to make steel and some other metals.

13. Fixtures and Fittings

Fixtures and Fittings is a term used to show assets owned by a firm which are attached to a building. Fixtures are fixed and very difficult to remove. Fittings are easy to remove and take away. For instance, a built-in oven would be a fixture as you can’t really take it away easily. But a washing machine is not attached to a building so this would be a fitting. Quite a lot of furniture could be seen as fittings.

Example:
When the building was sold, it was agreed that the price would not include any fixtures and fittings. So, the owner was able to remove all the pictures, mirrors, washing machine and dishwasher.

14. Current Assets

Current Assets are assets owned by the company that have value, but will only stay in existence for a short period of time. A good example is Cash at Bank but there are several others which we’ll look at after this.

Current (or currently) means ‘at the present time’, and so this shows that these assets are only in the company for a short period.

Example:

The bookkeeper had to decide whether this particular asset was a Fixed Asset or a Current Asset.

Accounts Receivable are monies owed TO a business BY its customers. Clearly, these are a type of Current Asset. When a customer buys something from a company, but does not pay for a while, then the company has an asset, being the debt from the customer which it will collect on an agreed date (see 43. below).

The bookkeeper will keep a list of all the Accounts Receivable in a book (usually in reality this is on a computer) called an Accounts Receivable Ledger (or Sales Ledger). So, a ledger is an accounting term for a book which records accounting entries (see 38. below).

The list of Accounts Receivable will probably show the age of each debt. This is called an Aged Report.

Example:
The company was worried about its Aged Receivables Report as many of the debts were very old and would possibly not be paid.

16. Inventory (also known as Stock)

Inventory is all the things purchased by a company which it is going to sell (or use to make things to sell), which it has not yet used. These are assets because they still have value and are part of the Current Assets.

Companies need to keep control of their Inventory so that they know exactly what they have ‘in stock’ at any time. So, they have a regular ‘stocktake’ when they count everything.

Example:
All staff need to attend the company stocktake on Saturday morning when all inventory will be counted and valued. It will start at 9am, sharp! Do not be late.

17. Prepayments

A prepayment is when a company pays for something, but doesn’t use it for a while. Because it doesn’t use it, it keeps its value and so it is a Current Asset. This is similar to when you buy a prepaid mobile phone sim card. A good example for a company is: renting of property. Rent is always paid 3 months in advance (to cover the next 3 months into the future). So, when a company pays its rent, it has a prepayment of the amount it has paid.

Example:
The bookkeeper listed all of the prepayments; these included Rent, Telephone and Insurance costs, all of which had been paid in advance.

18. Current Liabilities

Current Liabilities are amounts owed by a company which need to be paid within the next year. An example would be the next year’s payments on a Bank Loan. There are several other examples which we’ll look at below.

We’ve already looked at the meaning of ‘current’ (see 14. above).

Example:
The bookkeeper added up all of the Current Liabilities and it was good that they totalled less than the total of Current Assets. Therefore, the company had Net Current Assets, so the position was healthy.

19. Accounts Payable (also known as Payables, Creditors or Trade Creditors)

Accounts Payable are monies owed BY a business TO its suppliers (the companies it buys things from). If the company does not pay for these goods at the time, then it owes money to its suppliers and these liabilities are called Accounts Payable. The company will pay this debt at an agreed time in the future.

The bookkeeper will keep a record of all these Payables in the Accounts Payable Ledger (or Trade Creditors ledger) (see 38. below) and, just like the Receivables, there will be an aged report.

Example:

The company’s Aged Payables report showed that the company took a long time to pay its Trade Creditors.

20. Bank Overdraft

An overdraft with the bank is where a company has a negative amount of money in its bank account. Usually, this is agreed with the bank in advance and there is a limit to the amount that the company can go overdrawn. This overdraft is a Current Liability. The limit is known as the Overdraft Facility.

Example:

We have just had a meeting with our bank manager and he has given us a bigger overdraft facility.

21. Accruals

When a business is using a service such as telephone or electricity, but the telephone or electricity company has not yet sent a bill, then the business needs to estimate (or guess) what the bill is going to be, when it arrives. This is known as an accrual and is a Current Liability.

It comes from the verb ‘to accrue’, which basically means to build up an amount over a period of time.

Example:

We are not sure what our electricity bill is going to be for December, so we have made an accrual of £4,750 which we think will be quite accurate, based on experience.

22. Sales (also known as turnover or revenue)

All Income Statements start with sales at the top. As you can see from the heading, there are 3 equally used words for sales, which of course is: money paid by customers to a business in return for goods or services provided (or ‘services rendered’).

Example:

Our turnover for the month of May is 10% higher than it was for May of last year. It’s great that sales are going so well.

23. Cost of Sales (also known as Cost of Goods Sold)

Cost of Sales represents the cost to the business of all the things it has sold (or services that it has provided). If a business is manufacturing (making) products in a factory, then the main item in Cost of Sales is often called Raw Materials.

Example:
Our Cost of Sales is going up because the wood we buy (our raw materials) is going up in price.

24. Purchases

If a business is buying things, which it just sells (and not making or manufacturing anything), then the main item in Cost of Sales is usually known as Purchases. Sometimes these are known as Goods Purchased. A Good (or goods) is simply something which is purchased (bought).

Example:
In our Income Statement, the two main items in our Cost of Sales are Purchases and Wages of our factory staff.

25. Gross Profit

Gross Profit is shown in the Income Statement as the calculation of Sales minus (less or deducting) Cost of Sales. Clearly, every business needs its Sales to be greater than its Cost of Sales, in order to make a profit.

Example:

Our Revenue for this year has been $250,000 and our Cost of Goods Sold was $175,000. Therefore, our Gross Profit was $75,000.