Glossary

Meaning: A cell reference with $ signs, such as $H$1. When you copy the formula to another cell, this reference stays pointing at the same cell.

Example: =E2*$H$1 copied down one row becomes =E3*$H$1. E2 changed to E3, but $H$1 stayed the same.

Meaning: A record that collects every transaction for one item, such as cash, sales or rent. Each account has a debit (left) side and a credit (right) side.

Example: The Rent account lists every rent payment in the year. Adding them up gives the total rent cost.

Meaning: A figure that needs judgement because the true amount isn’t known yet.

Example: Useful lives of assets, allowances for bad debts, warranty provisions.

Meaning: The rules and methods a company uses to prepare its accounts.

Example: Valuing inventory using FIFO, or measuring property using the cost model.

Meaning: A cost that belongs to this year, but has not been paid by the year end. It is added to this year’s costs and shown as a liability (an amount owed).

Example: The December electricity bill arrives in January. It is still a December cost, so it goes in this year’s accounts as an accrual.

Not the same as: Prepayment. A prepayment is the opposite: paid this year, but it belongs to next year.

Meaning: The rule that income and costs go in the year they relate to. The date the cash is paid or received does not decide the year.

Example: Rent for December is paid on 5 January. It is still December’s cost.

Meaning: A long-term asset, such as a machine or a vehicle, that the business bought during the year.

Example: A new delivery van bought in August for £32,500 is an addition in that year.

Meaning: An event after the year end that gives evidence of conditions that existed at the year end. The figures are changed.

Example: A court case open at the year end is settled for more than the provision.

Meaning: Money a customer pays after the year end for a debt they owed at the year end. Auditors use it as evidence that the debt was real.

Example: A customer owed £10,000 on 31 March and paid £10,000 on 18 April. The payment shows the debt existed.

Meaning: A profit figure (or other figure) that a company defines itself. It is not defined by the accounting rules (IFRS). Companies often call it “adjusted” or “underlying” profit.

Example: Statutory profit is £20m. The company adds back £5m of restructuring costs and reports “adjusted profit” of £25m.

Not the same as: Statutory profit. Statutory profit follows IFRS exactly and is the audited figure.

Meaning: Spreading the cost of an intangible asset (one you cannot touch, such as software or a patent) as an expense over the years it is used. It works in the same way as depreciation.

Example: A patent costing £50,000 that lasts 10 years gives amortisation of £5,000 each year.

Not the same as: Depreciation. Depreciation is the same idea, but for physical assets such as machines and vans.

Meaning: A way to measure a loan or bond. Start with the amount borrowed or paid, add interest at the effective interest rate each year, and take off the payments.

Example: Borrow £9,500. Interest at 5.4% is £513. Pay £400. The new balance is £9,500 + £513 − £400 = £9,613.

Meaning: Working out what a figure should roughly be, then comparing it with the actual figure. A big difference needs an explanation.

Example: Wages were £1.26m last year. There are 7% more staff and a 4% pay rise, so wages should be about £1.40m. If they are £1.45m, the auditor asks why.

Meaning: The document a company publishes once a year. It contains a written review of the business, reports on how it is run, and the audited financial statements.

Example: A listed company’s annual report is often more than 200 pages. The audited accounts are near the back.

Meaning: A statement showing how a partnership’s profit is split between the partners: salaries first, then interest on capital, then the rest in the agreed ratio.

Example: Profit £80,000. Salary to one partner £12,000, interest £5,000, and the remaining £63,000 split 3:2.

Meaning: A statement that the accounts are making, which the auditor tests. The main ones are: it exists, it is complete, the amount is right, and it is in the right year.

Example: Showing “Inventory £50,000” makes the assertion that £50,000 of stock really exists and belongs to the business.

Meaning: The final stage of many graduate job applications. It is a half day or full day of tasks, such as a group exercise, a written test, a presentation and an interview.

Example: A graduate scheme might invite 30 people to an assessment centre and offer jobs to 10.

Meaning: Something the business owns or controls that will bring it money or another benefit in future.

Example: Cash in the bank, stock to sell, a delivery van, and money customers owe are all assets.

Not the same as: Expense. An expense is used up now. An asset gives benefit in future.

Meaning: A company in which an investor owns a large share (usually 20% to 50%) and has “significant influence”: a real say in decisions, but not control.

Example: Owning 30% of a company and having one seat on its board usually makes it an associate.

Not the same as: Subsidiary. A subsidiary is controlled, usually through owning more than 50%.

Meaning: The auditor’s written opinion, near the front of the financial statements, on whether the accounts give a true and fair view.

Example: “In our opinion, the financial statements give a true and fair view…” is an unmodified (clean) opinion.

Meaning: The difference between the total of the debit side and the total of the credit side of an account. It shows how much is left.

Example: Cash account: £3,300 in (debit) and £450 out (credit). The balance is £2,850 debit, so the business has £2,850 of cash.

Meaning: “Balance brought down”. The closing balance of an account, written as the first line of the next period. It sits on the opposite side to the balance c/d.

Example: £2,850 is carried down on the credit side at the end of March, then brought down on the debit side as the opening balance for April.

Meaning: “Balance carried down”. The amount written on the smaller side of an account at the end of a period so that both sides add up to the same total.

Example: Debits £3,300 and credits £450. Write £2,850 as “Balance c/d” on the credit side so both sides total £3,300.

Meaning: A missing number worked out from a total that must be correct. You subtract all the known numbers from the total.

Example: Assets are £62,700. Liabilities and share capital are £50,700. Retained earnings must be the balancing figure of £12,000.

Meaning: The process at the end of a period of adding up both sides of an account, writing in the balance c/d, and bringing the balance down to the next period.

Example: At the end of each month, a bookkeeper balances off the cash account to find the closing cash.

Meaning: A statement that explains why the business’s own cash record (the cash book) shows a different balance from the bank statement.

Example: The cash book shows £4,505 and the bank shows £5,030. The reconciliation shows the difference is a £1,625 cheque not yet cleared, less £1,100 paid in but not yet shown.

Meaning: The amount a company would realistically have to pay to settle an obligation today. It is used to measure a provision.

Example: Lawyers think a claim will cost between £80,000 and £120,000, most likely £100,000. The best estimate is £100,000.

Meaning: Free extra shares given to existing shareholders. No cash comes in, so it is treated as if it happened at the start of the year.

Example: A 1 for 4 bonus issue turns 4 million shares into 5 million.

Meaning: Interest and other costs of borrowing money.

Example: Interest on a bank loan taken out to build a factory.

Meaning: A plan, written before the period starts, of the income and costs the business expects.

Example: The October budget said membership income would be £84,000.

Meaning: The tax rules’ version of depreciation. They decide how much of an asset’s cost can be taken off taxable profit, and when.

Example: A company buys a £55,000 machine. The annual investment allowance lets it deduct all £55,000 from taxable profit in the year of purchase.

Meaning: Money spent to buy a long-term asset, or to improve one so it does more or lasts longer. It goes on the balance sheet, not straight into expenses.

Example: Adding a new packing module that increases output by 40% is capital expenditure.

Not the same as: Revenue expenditure. Revenue expenditure is day-to-day spending, including repairs, which is an expense.

Meaning: A grant related to buying or building a long-term asset.

Example: A grant for 20% of the cost of new equipment.

Meaning: The weighted average interest rate on general borrowings, used when no specific loan funds the asset.

Example: Loans at 6% and 9% averaging 7.2%.

Meaning: Add a cost to an asset in the statement of financial position, instead of treating it as an expense.

Example: Interest during construction is added to the building’s cost.

Meaning: Investments that can be turned into a known amount of cash very quickly (usually within 3 months) with very little risk. They are counted together with cash.

Example: Money in a 3-month bank deposit is a cash equivalent.

Meaning: A prediction, month by month, of the cash the business expects to receive and pay, and its bank balance at the end of each month.

Example: The forecast shows the bank balance reaching £190,000 overdrawn in January.

Meaning: The smallest group of assets that produces cash on its own. Assets are tested for impairment as a group when they cannot be tested one by one.

Example: One shop, with its fittings, equipment and share of goodwill, can be a cash-generating unit.

Meaning: The address of one cell in a spreadsheet: the column letter followed by the row number.

Example: D2 means column D, row 2.

Meaning: The exchange rate at the year end.

Example: £1 = $1.30 on 31 December.

Meaning: Knowing what is happening in business and the economy, and being able to explain how it affects companies and their advisers.

Example: Explaining that higher interest rates increase clients’ loan costs, so auditors will look more closely at going concern.

Meaning: An interview question that asks for a real example from your past. It usually starts with “Tell me about a time when…”.

Example: “Tell me about a time you found a mistake.” Answer with a real example using STAR.

Meaning: Depreciating the main parts of one asset separately when they last for different lengths of time.

Example: An aircraft’s engines last 8 years and its body lasts 25 years, so each part is depreciated over its own life.

Meaning: Combining the accounts of a parent company and the companies it controls (subsidiaries) into one set of accounts, as if they were one business.

Example: The group accounts add 100% of each subsidiary’s assets to the parent’s, then remove any trading between them.

Meaning: A duty to pay that comes from how the company has behaved, not from the law or a contract. Other people reasonably expect the company to pay.

Example: A shop has always refunded unhappy customers and says so in its adverts. It has a constructive obligation to keep doing it.

Meaning: A possible obligation that depends on a future event, or one that is not probable. It is described in the notes to the accounts, but not included in the figures.

Example: A customer is suing the company, and lawyers say the company will probably win. The claim is disclosed as a contingent liability.

Not the same as: Provision. A provision is probable and is included in the figures.

Meaning: Money a customer has paid before the business has done the work or delivered the goods. It is a liability until the work is done.

Example: A member pays £600 in January for a year. After one month, £550 is still a contract liability.

Meaning: One account that shows the total of many individual accounts, such as all customers’ balances. It is used to check the individual accounts are right.

Example: The sales ledger control account shows £412,600. The individual customer balances should add up to the same £412,600.

Meaning: Showing an asset in the accounts at what it cost, minus the depreciation charged so far.

Example: A machine cost £20,000 and has £8,000 of depreciation, so it is shown at £12,000.

Not the same as: Revaluation model. The revaluation model shows the asset at its current market value.

Meaning: The cost of the goods that were actually sold during the period. It is calculated as opening stock + purchases − closing stock.

Example: Opening stock £1,500 + purchases £9,000 − closing stock £2,000 = cost of sales £8,500.

Meaning: The auditor’s written record of what happened at the client’s stock count: how it was run, the test counts done, and any problems found.

Example: “The count was well organised, but the supervisor counted aisle 4 alone.”

Meaning: The client’s form listing each stock item and the quantity counted at the stock count.

Example: The count sheet says 260 bags of Ethiopian beans.

Meaning: A condition in a loan agreement that the borrower must keep to. If it is broken, the lender may be able to demand the money back.

Example: “Operating profit must be at least 3 times the interest cost.” A result of 2.63 times breaks the covenant.

Meaning: The right-hand side of an account. A credit increases a liability, income or capital account, and decreases an asset or expense account.

Example: When a business receives £1,000 of sales in cash, Sales is credited with £1,000.

Not the same as: Credit on a bank statement. A bank statement uses the bank’s point of view, so money paid in is called a credit there.

Meaning: In a spreadsheet formula, the condition a row must meet to be included.

Example: In =SUMIFS(D:D,E:E,"Unpaid"), the criteria is "Unpaid".

Meaning: Expected to be turned into cash, used up or paid within 12 months of the year end.

Example: Stock and money owed by customers are current assets. A supplier bill due next month is a current liability.

Not the same as: Non-current. Non-current means longer than 12 months.

Meaning: In a partnership, each partner’s account for their salary, interest, share of profit, and the money they take out (drawings).

Example: A partner is credited with a £40,800 profit share and debited with £30,000 of drawings.

Meaning: The tax a company must pay on this year’s taxable profit.

Example: Taxable profit £401,900 × 25% = £100,475 of current tax.

Not the same as: Deferred tax. Deferred tax is tax that will be paid or saved in future years.

Meaning: Making sure each transaction is recorded in the correct year, especially transactions close to the year end.

Example: Goods sent to a customer on 31 March belong in the year ending 31 March, even if the invoice is dated 2 April.

Meaning: The date the directors approve the accounts for issue. Events after this are ignored.

Example: The board signs the accounts on 15 March.

Meaning: The left-hand side of an account. A debit increases an asset or expense account, and decreases a liability, income or capital account.

Example: When a business pays £300 of rent, Rent is debited with £300.

Not the same as: Debit on a bank statement. A bank statement uses the bank’s point of view, so money taken out is called a debit there.

Meaning: Money received now for goods or services the business will provide in a later period. It is a liability until it is earned.

Example: £600 of rent received in December for January to March is deferred income at 31 December.

Meaning: Tax that will be paid (or saved) in future years because the accounts and the tax rules count some items in different years.

Example: Tax relief on a machine was given all in year 1, but the accounts spread the cost over 5 years. More tax will be paid later, so a deferred tax liability is recorded.

Meaning: Spreading the cost of a physical long-term asset, such as a van or machine, as an expense over the years it is used.

Example: A £10,000 van used for 5 years and then worth nothing: straight-line depreciation is £2,000 each year.

Not the same as: Amortisation. Amortisation is the same idea, but for intangible assets.

Meaning: Using research results to design or build a specific new product or process. Its cost can be recorded as an asset once strict conditions are met.

Example: Building and testing a new app after proving the idea works.

Not the same as: Research. Research is looking for new knowledge, and its cost is always an expense.

Meaning: EPS recalculated as if convertible loans, options and similar items had turned into shares.

Example: Options that would create 500,000 more shares lower EPS.

Meaning: A payment of profit from a company to its shareholders. It reduces retained earnings. It is not an expense.

Example: A company with £480,000 of profit pays dividends of £150,000 and keeps £330,000.

Meaning: Money or goods the owner of a business takes out for their own personal use. Drawings reduce the owner’s capital. They are not a business expense.

Example: A sole trader takes £200 from the till to buy personal shopping. That is £200 of drawings.

Meaning: Profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares.

Example: £1,200,000 ÷ 4,250,000 shares = 28.2p.

Meaning: A profit figure calculated before taking off interest, tax, depreciation and amortisation. Lenders and analysts use it as a rough measure of cash-like profit.

Example: Operating profit £300,000 + depreciation £50,000 = EBITDA £350,000.

Meaning: The single interest rate that spreads the total cost of a loan evenly over its life, including any fees or discount, not just the stated interest.

Example: A bond pays 4% interest, but the company only received £9,500 for £10,000 of bonds. The effective rate works out as 5.4%.

Meaning: National Insurance that the employer pays to HMRC on top of employees’ wages. It is an extra cost to the business.

Example: An employee earns £3,000 a month. The employer pays its own National Insurance on top, which is not taken from the employee’s pay.

Meaning: The owner’s share of the business: the money the owner put in, plus profits kept in the business, minus drawings. It equals assets minus liabilities.

Example: Assets £50,000 − liabilities £18,000 = equity £32,000.

Meaning: A transaction that was left out of the books completely. The trial balance still agrees, because neither side was recorded.

Example: A £200 rent payment that nobody recorded.

Meaning: In an audit, an item where the evidence does not match the client’s records. Each exception needs to be investigated.

Example: An employee who left in January is still being paid. That is an exception.

Meaning: For VAT: a type of sale that is outside VAT. No VAT is charged, and VAT on related costs usually cannot be reclaimed.

Example: Insurance is exempt from VAT.

Not the same as: Zero-rated. Zero-rated items are taxable at 0%, so VAT on related costs can be reclaimed.

Meaning: The audit check that an asset or balance in the accounts is real.

Example: The auditor finds stock listed on the count sheet on the warehouse shelf. That tests existence.

Meaning: The amount a business expects to lose because some customers or borrowers will not pay. It is set aside as an allowance before they fail to pay.

Example: £100,000 of receivables with an expected 2% loss rate gives an allowance of £2,000.

Meaning: An independent check of a company’s financial statements by a qualified auditor from outside the company, who then gives an opinion on them.

Example: An audit firm checks a company’s accounts every year and signs the auditor’s report.

Meaning: The price an asset would sell for (or a liability would cost to transfer) in a normal sale between willing parties on the measurement date.

Example: A building bought for £500,000 would sell for £800,000 today. Its fair value is £800,000.

Meaning: Three levels ranking the inputs used to measure fair value, from quoted prices (Level 1) to unobservable estimates (Level 3).

Example: Quoted shares are Level 1; a model using the company’s own forecasts is Level 3.

Meaning: Investment property is remeasured to fair value each year, with gains and losses in profit or loss and no depreciation.

Example: A £30,000 rise in value is shown as a gain in profit.

Meaning: Words used to describe a variance. Favourable means the result is better than budget. Adverse means it is worse than budget.

Example: Income £14,600 against a budget of £12,000 is £2,600 favourable. Costs £43,900 against a budget of £41,000 is £2,900 adverse.

Meaning: A contract that gives a right to receive cash (or another financial asset), such as money owed by customers, a loan given, or shares held.

Example: A £5,000 invoice a customer has not yet paid is a financial asset.

Meaning: The 12-month period the accounts cover. It does not have to match the calendar year.

Example: A financial year from 1 April 2025 to 31 March 2026.

Meaning: In the statement of cash flows: cash received from or paid to the business’s owners and lenders.

Example: Issuing new shares for £10,000 and repaying £8,000 of a loan are financing activities.

Meaning: The currency of the main economic environment the company operates in.

Example: Pounds sterling for a UK retailer.

Meaning: How much of a business’s long-term funding comes from borrowing, as a percentage.

Example: Loans £40,000 and equity £60,000: gearing = 40,000 ÷ 100,000 = 40%.

Meaning: A person being paid through the payroll who does not really work for the business, such as a former employee still being paid, or a fake name. It can be an error or fraud.

Example: An employee left in January, but salary payments kept going to a bank account in February and March.

Meaning: The assumption that a business will keep operating for at least the next 12 months and will not have to close or sell off its assets. Accounts are normally prepared on this basis.

Example: If a company’s bank is about to withdraw its overdraft and it has no other money, it may not be a going concern.

Meaning: A document created when goods arrive, recording what was delivered and when.

Example: GRN-889 records 200 bags of beans delivered at 5:30pm on 31 March.

Meaning: The amount paid for a business that is more than the fair value of its identifiable net assets. It represents things like reputation, customers and staff.

Example: A company pays £500,000 for a business whose net assets are worth £390,000. Goodwill is £110,000.

Meaning: Help from government in the form of money or assets, given in return for meeting conditions.

Example: £20,000 towards buying a new machine.

Meaning: Sales minus the cost of the goods sold, before any other expenses are taken off.

Example: Sales £20,000 − cost of sales £8,500 = gross profit £11,500.

Not the same as: Net profit. Net profit is after all the other expenses, such as rent and wages.

Meaning: The amount by which an asset’s recoverable amount is higher than its value in the accounts. Small headroom means a small change could cause an impairment.

Example: Goodwill of £84m and recoverable amount of £90.2m gives headroom of £6.2m (about 7%).

Meaning: In a lease, the specific asset the contract is for, such as a named machine or a particular building.

Example: A contract for “machines serial numbers 101 to 110” has identified assets. A contract for “a cleaning service” does not.

Meaning: International Financial Reporting Standards: the rules that set how companies measure and present their figures. Older standards are called IAS. Both are still in use.

Example: IAS 2 is the standard for inventory. IFRS 16 is the standard for leases.

Meaning: A write-down of an asset because it is worth less than the value shown in the accounts. The write-down is an expense.

Example: Shop fittings are in the accounts at £200,000, but they are only worth £120,000. The impairment is £80,000.

Meaning: Accounting records that do not use full double entry, often kept by small businesses. The accountant has to work out the missing figures.

Example: A market trader keeps only bank statements and a box of receipts.

Meaning: The interest rate a company would pay to borrow a similar amount, for a similar time, with similar security. It is used to discount lease payments when the lease’s own rate is not known.

Example: Northwell would pay 7% to borrow for 5 years, so 7% is used for its 5-year lease.

Meaning: When there is no foreseeable end to the time an intangible asset will bring benefits. The asset is not amortised, but it is tested for impairment every year.

Example: A broadcasting licence that can be renewed forever at little cost may have an indefinite useful life.

Meaning: A way to work out operating cash flow. Start with profit, then add back items that did not use cash (such as depreciation) and adjust for changes in stock, receivables and payables.

Example: Profit £50,000 + depreciation £12,000 − increase in stock £4,000 = £58,000 so far.

Meaning: VAT a business pays on its purchases. A VAT-registered business can usually claim it back from HMRC.

Example: Buying £1,000 of materials plus £200 VAT: the £200 is input VAT.

Not the same as: Output VAT. Output VAT is charged on sales.

Meaning: A long-term asset with no physical form that can be separated or comes from a legal right, such as software, patents or licences.

Example: A patent bought for £50,000.

Meaning: In a partnership, an amount given to each partner based on the capital they invested. It is a way of sharing profit, not an expense.

Example: 5% interest on £60,000 of capital gives the partner £3,000.

Meaning: Between companies in the same group, such as a parent selling goods to its subsidiary.

Example: The parent sells £40,000 of goods to its subsidiary. That is an intra-group sale.

Meaning: Goods the business holds to sell, and materials it will use to make goods. Also called stock.

Example: A coffee roaster’s unsold bags of coffee beans.

Meaning: In the statement of cash flows: cash paid for, or received from selling, long-term assets and investments.

Example: Buying equipment for £30,000 and selling an old van for £5,000 are investing activities.

Meaning: Land or buildings held to earn rent, for capital growth, or both.

Example: An office block leased to other businesses.

Meaning: The record where each transaction is first written down, showing which account is debited and which is credited, with a short explanation.

Example: Dr Rent £850, Cr Cash £850 (Rent paid by bank transfer).

Meaning: An area the auditor judged most important in the audit, described in the auditor’s report with what they did about it.

Example: “Carrying value of goodwill in the Homeware division” as a key audit matter.

Meaning: A payment or benefit that the owner of an asset gives to the business renting it, to encourage it to sign the lease.

Example: The lessor pays Northwell £3,000 in cash for signing the equipment lease.

Meaning: The amount a lessee owes for a lease, measured as the present value (today’s value) of the lease payments still to be made.

Example: 5 payments of £24,000 discounted at 7% gives a lease liability of £98,405.

Meaning: The complete set of a business’s accounts, such as cash, sales, rent and receivables.

Example: The general ledger contains every account used to prepare the trial balance.

Meaning: The business that rents an asset under a lease and pays for using it.

Example: Northwell Fitness rents gym machines, so it is the lessee.

Meaning: An amount the business owes to someone else, which it will have to pay in future.

Example: A bank loan, an unpaid supplier invoice and tax owed to HMRC are liabilities.

Meaning: Whether a business has enough cash, or items that will soon become cash, to pay its bills when they are due.

Example: Current assets £25,000 and current liabilities £12,500 give a current ratio of 2 : 1, which shows good liquidity.

Meaning: A cheap asset, such as a laptop or tablet. A lessee can choose to expense its lease payments instead of putting the lease on the balance sheet.

Example: Leasing 4 tablets for reception.

Meaning: Internal reports, usually monthly, that show managers and directors how the business is performing against its budget. They are not published.

Example: The October management accounts show profit of £27,650 against a budget of £32,500.

Meaning: A letter from the auditor to the client’s management that lists weaknesses in the client’s controls and recommends improvements.

Example: “Leavers are not always removed from the payroll promptly. We recommend a monthly check against HR records.”

Meaning: Profit as a percentage of the selling price.

Example: Selling for £125 something that cost £100: profit £25 ÷ price £125 = 20% margin.

Not the same as: Mark-up. Mark-up divides by the cost, not the selling price.

Meaning: Profit as a percentage of the cost.

Example: Selling for £125 something that cost £100: profit £25 ÷ cost £100 = 25% mark-up.

Not the same as: Margin. Margin divides by the selling price, not the cost.

Meaning: An error (or group of errors) in the accounts that is big enough to change the decisions of someone reading them.

Example: If materiality is £120,000, an error of £200,000 in revenue is a material misstatement.

Meaning: A serious doubt about whether a business can continue operating for the next 12 months. It must be explained in the accounts, and the auditor highlights it.

Example: The bank has not confirmed it will renew the overdraft the company needs, so there is a material uncertainty.

Meaning: To decide the amount at which an item is shown in the accounts.

Example: Inventory is measured at the lower of cost and net realisable value.

Meaning: Money held, or amounts to be received or paid in a fixed number of currency units.

Example: Cash, trade receivables and payables, loans.

Meaning: The process a finance team follows at the end of each month to make the accounts complete and correct: posting accruals and prepayments, reconciling the bank, and reviewing the results.

Example: On the first working days of November, the team closes October’s accounts.

Meaning: The market giving the best net amount after transaction and transport costs. Used only if there is no principal market.

Example: The market where selling nets £22, not £21.

Meaning: A short written explanation under a journal entry that says what the entry is for.

Example: “(Rent paid by bank transfer)” under Dr Rent, Cr Cash.

Meaning: Total assets minus total liabilities. It equals the owner’s equity.

Example: Assets £12,500 − liabilities £900 = net assets £11,600.

Meaning: An asset’s cost minus all the depreciation charged on it so far. It is the value shown in the accounts.

Example: A van cost £12,000 and has £3,000 of depreciation, so its net book value is £9,000.

Meaning: What is left from sales after taking off the cost of sales and all the other expenses, such as rent and wages.

Example: Gross profit £11,500 − expenses £6,900 = net profit £4,600.

Not the same as: Gross profit. Gross profit is before the other expenses are taken off.

Meaning: An event after the year end about conditions that arose after it. Disclosed in the notes if material, not adjusted.

Example: A warehouse is destroyed by fire in February.

Meaning: The part of a subsidiary that is owned by shareholders outside the group.

Example: A parent owns 80% of a subsidiary. The other 20% is the non-controlling interest.

Meaning: Expected to be kept, used or owed for more than 12 months after the year end.

Example: A delivery van is a non-current asset. A bank loan repayable in 5 years is a non-current liability.

Not the same as: Current. Current means within 12 months.

Meaning: An asset the business keeps and uses for more than a year, such as buildings, machinery or vehicles.

Example: A delivery van used for 5 years.

Meaning: Items not settled in a fixed amount of money.

Example: Machinery, inventory, prepayments.

Meaning: The side (debit or credit) that an account’s balance is usually on. Assets and expenses are normally debit. Liabilities, income and capital are normally credit.

Example: The Cash account normally has a debit balance. Trade payables normally has a credit balance.

Meaning: Net realisable value: what an item of stock is expected to sell for, minus the costs of finishing and selling it. Stock is valued at the lower of cost and NRV.

Example: Gift tins sell for £4.50 and cost £0.50 each to sell, so NRV is £4.00. They cost £6.00, so they are valued at £4.00.

Meaning: Bought or sold now, with payment made later. It creates an amount owed.

Example: Selling £1,200 of goods on credit means the customer will pay later. Until then they owe £1,200 (a trade receivable).

Not the same as: A credit entry. “On credit” describes the timing of payment, not the credit side of an account.

Meaning: A contract where the costs the business cannot avoid are more than the benefits it will get. The expected loss is provided for now.

Example: A company is locked into renting an empty office for £50,000 more than it can earn from subletting it.

Meaning: In the statement of cash flows: cash from the business’s normal day-to-day trading, such as cash from customers and payments to staff and suppliers.

Example: Cash received from customers of £400,000 is an operating cash flow.

Meaning: Gains and losses that are recorded in the accounts but are not included in profit for the year, such as a gain from revaluing a building. They are shown in a separate section under profit.

Example: A company’s building is revalued up by £150,000. The £150,000 is other comprehensive income, not profit.

Meaning: VAT a business charges its customers on its sales. It is paid to HMRC.

Example: A sale of £1,000 plus £200 VAT: the £200 is output VAT.

Not the same as: Input VAT. Input VAT is paid on purchases.

Meaning: Property the company uses itself. It is covered by IAS 16, not IAS 40.

Example: The company’s own head office.

Meaning: A company that controls one or more other companies (its subsidiaries).

Example: P owns 80% of S and controls it, so P is the parent.

Meaning: The written agreement between partners that sets out how profits are shared, including salaries, interest on capital and the profit-sharing ratio.

Example: The agreement says profits are shared 3:2 after a £12,000 salary to one partner.

Meaning: Pay As You Earn: income tax that an employer takes from employees’ pay and pays to HMRC for them.

Example: £21,400 of PAYE is taken from March wages and paid to HMRC by 22 April.

Meaning: A promise in a contract to give the customer a separate good or service. Revenue is recognised as each promise is completed.

Example: A contract for a phone and 12 months of airtime has two performance obligations.

Meaning: An item that is treated differently in the accounts and for tax, and the difference never reverses. No deferred tax arises.

Example: A parking fine is an expense in the accounts but is never allowed for tax.

Meaning: A spreadsheet tool that groups a list of data by category and shows totals, without writing formulas.

Example: Turning 5,000 invoices into a small table of total sales by region and by status.

Meaning: Copying each entry from the journal into the correct ledger accounts.

Example: Dr Rent £850 is posted to the debit side of the Rent account.

Meaning: A cost paid this year that belongs to next year. It is taken out of this year’s costs and shown as an asset.

Example: £1,200 of insurance paid on 1 October for 12 months: 9 months (£900) belong to next year, so £900 is a prepayment.

Not the same as: Accrual. An accrual is the opposite: it belongs to this year, but has not been paid yet.

Meaning: The market with the greatest volume and level of activity for the asset.

Example: The main exchange where a commodity is traded.

Meaning: A mistake in earlier accounts, such as a miscount, a misapplied policy or fraud.

Example: Last year’s closing inventory was counted twice.

Meaning: Income minus expenses for a period.

Example: Income £96,000 − expenses £63,500 = profit £32,500.

Meaning: The part of the group’s profit for the year that belongs to the outside shareholders of the subsidiaries.

Example: A subsidiary makes £38,000 profit and outsiders own 20%, so £7,600 is attributable to the non-controlling interest.

Meaning: The proportions in which partners split the profit left after salaries and interest.

Example: A ratio of 3:2 means one partner gets 3/5 and the other gets 2/5.

Meaning: A correction the auditor asks the client to make to its accounts, usually as a journal entry.

Example: Dr Sales £20,000, Cr Trade receivables £20,000 to move a sale into the correct year.

Meaning: Applied only from now on. Past figures are left alone.

Example: A change in useful life affects this year’s and future depreciation only.

Meaning: A liability where the amount or the timing is not certain, such as expected warranty repairs or a legal claim the company will probably lose.

Example: A warranty provision of £22,500 for expected repairs on products already sold.

Not the same as: Contingent liability. A contingent liability is only possible, not probable, and is disclosed, not recorded.

Meaning: An asset that takes a substantial period of time to get ready for use or sale.

Example: A factory, a power station, or whisky that matures for years.

Meaning: A block of cells in a spreadsheet, written as the first cell and the last cell with a colon between them.

Example: D2:D50 means every cell in column D from row 2 to row 50.

Meaning: The level of confidence an audit gives: high, but not complete. Auditors test samples, so they cannot guarantee there are no errors.

Example: An unmodified audit opinion gives reasonable assurance that the accounts contain no material errors.

Meaning: VAT paid on a purchase that a VAT-registered business can claim back from HMRC. It is not part of the asset’s cost.

Example: A van costs £32,500 plus £6,500 VAT. The £6,500 is reclaimable, so the van’s cost is £32,500.

Meaning: To include an item as a figure in the financial statements (not just describe it in the notes).

Example: A probable legal claim is recognised as a provision. A possible one is only disclosed.

Meaning: The higher of: (a) what an asset could be sold for, minus selling costs, and (b) the value of the cash it will bring in if the business keeps using it.

Example: A machine could be sold for £90,000 or used to generate cash worth £87,829. The recoverable amount is £90,000.

Meaning: The date the accounts are drawn up to, such as 31 December.

Example: A company with a 31 December year end.

Meaning: Original work to find new knowledge. Its cost is always an expense.

Example: Testing new coffee packaging materials in a laboratory.

Not the same as: Development. Development applies research to a specific product and can be capitalised.

Meaning: The amount an asset is expected to be worth at the end of its useful life.

Example: Machinery costs £20,000 and is expected to sell for £2,000 after 5 years. The residual value is £2,000.

Meaning: The total profits a company has made over its life and kept in the business, instead of paying them out as dividends.

Example: Retained earnings of £12,000 in the statement of financial position.

Meaning: Applied as if the new treatment had always been used: last year’s figures and opening retained earnings are restated.

Example: A policy change from FIFO to weighted average is shown in the comparatives too.

Meaning: Showing an asset in the accounts at its current market value (fair value), minus any depreciation charged since that valuation.

Example: A building is revalued from £400,000 to £600,000 and shown at £600,000.

Not the same as: Cost model. The cost model shows the asset at its original cost less depreciation.

Meaning: The part of equity that holds the gains from revaluing assets upwards. The gains are not counted as profit.

Example: A building revalued from £400,000 to £600,000 creates a £200,000 revaluation surplus.

Meaning: The money a business earns from selling goods or services in its normal trading. Also called sales or turnover.

Example: A café that sells £20,000 of coffee in a year has revenue of £20,000.

Meaning: Day-to-day spending, including repairs and maintenance. It is an expense in the period it is incurred.

Example: Repairing storm damage to a roof so it is back to its original condition.

Not the same as: Capital expenditure. Capital expenditure buys or improves an asset.

Meaning: A grant related to income or running costs.

Example: A grant towards the wages of trainees.

Meaning: In a lease, when the customer decides how an asset is used and gets almost all of the benefit from using it.

Example: Northwell decides when and how its leased gym machines are used, so it has the right to control them.

Meaning: The asset a lessee records for its right to use a leased item. It is depreciated over the lease.

Example: A right-of-use asset of £97,405 for leased gym equipment.

Meaning: Return on capital employed: operating profit as a percentage of the long-term money invested in the business (equity plus long-term loans).

Example: Operating profit £18,000 ÷ capital employed £120,000 = 15% ROCE.

Meaning: The money shareholders paid the company for its shares, measured at the shares’ nominal (face) value.

Example: 1,000,000 shares of £1 each gives share capital of £1,000,000.

Meaning: The exchange rate on the date of a transaction.

Example: £1 = $1.25 on the day goods are bought.

Meaning: The price at which a business would sell a good or service on its own, to a separate customer.

Example: A phone sold on its own for £400 has a standalone selling price of £400.

Meaning: A way to structure an answer to an interview question: Situation (the background), Task (what you had to do), Action (what you did), Result (what happened).

Example: Situation: month-end was late. Task: find the cause. Action: I built a checklist. Result: it was finished on day one.

Meaning: An interview question about what you enjoy and what you are naturally good at, to see whether the job suits you.

Example: “What kind of task gives you the most energy?”

Meaning: A company controlled by another company (the parent), usually because the parent owns more than 50% of its voting shares.

Example: P owns 80% of S, so S is P’s subsidiary.

Not the same as: Associate. An associate is influenced, usually 20% to 50% owned, but not controlled.

Meaning: A temporary account used to hold the difference when a trial balance does not agree. It is cleared to zero once the errors are found and corrected.

Example: Debits are £500 more than credits, so £500 is put in a suspense account until the error is found.

Meaning: The value of an asset or liability according to the tax rules, which can be different from its value in the accounts.

Example: A machine is £80,000 in the accounts, but all its cost has already been claimed for tax, so its tax base is £0.

Meaning: A company’s accounting profit after the tax adjustments (adding back disallowed costs and deducting capital allowances). Corporation tax is charged on this figure.

Example: Accounting profit £412,000 + additions £44,900 − capital allowances £55,000 = taxable total profits £401,900.

Meaning: The difference between an item’s value in the accounts and its value for tax (its tax base). The difference will reverse in future years.

Example: Accounts value £80,000 − tax base £0 = temporary difference of £80,000.

Meaning: A count of stock done by the auditor to check that the client’s count is accurate.

Example: The auditor counts 236 bags on the shelf, while the count sheet says 260.

Meaning: To include only the part of a yearly amount that relates to a certain number of months.

Example: A subsidiary bought on 1 April: include 9/12 of its annual revenue in the group accounts.

Meaning: Profit for the year plus other comprehensive income. It is the total change in equity from the company’s performance in the year, before dividends and share issues.

Example: Profit £480,000 + revaluation gain £150,000 = total comprehensive income £630,000.

Meaning: Money the business owes to its suppliers for goods or services bought on credit. Also called creditors.

Example: £3,200 owed to a coffee bean supplier for a delivery not yet paid for.

Meaning: Money customers owe the business for goods or services sold on credit. Also called debtors.

Example: A café customer owes £2,000 for coffee delivered last week.

Meaning: Any business event involving money, such as a sale, a purchase or a payment. Each transaction is recorded in the accounts.

Example: Paying £850 of rent is one transaction.

Meaning: The total amount a business expects to receive under a contract with a customer.

Example: A contract for a machine, installation and service for £90,000 has a transaction price of £90,000.

Meaning: A list of the balances on every account at a date, in a debit column and a credit column. Both columns should add up to the same total.

Example: Debits total £5,850 and credits total £5,850, so the trial balance agrees.

Meaning: Profit made on a sale between two group companies, where the goods are still held inside the group at the year end. It is removed in the group accounts because nobody outside the group has bought the goods yet.

Example: The parent sells goods to its subsidiary at a £8,000 profit, and a quarter are still in stock. £2,000 is unrealised profit.

Meaning: The value today of the cash an asset will bring in if the business keeps using it. It is worked out by discounting the future cash flows.

Example: Cash flows of £40,000, £35,000 and £30,000 discounted at 10% give a value in use of £87,829.

Meaning: Any part of a contract price that depends on something happening in future, such as a bonus, a penalty or a discount.

Example: A £20,000 bonus paid only if the project finishes early.

Meaning: The difference between an actual result and the budget.

Example: Actual staff costs £43,900 − budget £41,000 = a variance of £2,900 (adverse).

Meaning: A form a VAT-registered business sends to HMRC, usually every quarter, showing the VAT it charged, the VAT it can reclaim, and the difference to pay or be repaid.

Example: Box 1 VAT on sales £37,280 − Box 4 VAT reclaimed £14,900 = Box 5 £22,380 to pay.

Meaning: An audit test that starts with a figure in the accounts and checks it back to the original document, such as an invoice. It tests that the item is real.

Example: The auditor picks a £148,000 addition and finds the supplier’s invoice for it.

Meaning: The number of shares in issue, adjusted for how long each was in issue during the year.

Example: 1 million shares issued on 1 October count as 250,000 for the year.

Meaning: The auditor’s records of the work done, the evidence found and the conclusions reached. A reviewer must be able to follow them.

Example: A working paper for receivables lists the balances tested, the evidence seen and the result.

Meaning: For VAT: a type of sale that is taxable, but at a rate of 0%. No VAT is charged, but the business can still reclaim VAT on its costs.

Example: Goods exported outside the UK are zero-rated.

Not the same as: Exempt. Exempt items are outside VAT, so related VAT usually cannot be reclaimed.