Accounting Terminology

ACCOUNTING REPORTS AND TERMINOLOGY
Accounting Terminology

Any period of time utilised to measure accounting performance
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1. Accounting Period

Short term financial obligations
2. Accounts Payable (Sundry Creditors)

Amounts owed to the firm by customers
3. Accounts Receivable (Sundry Debtors)

Acquired by the firm to accomplish its business objectives
4. Assets

The comparison of operating figures from one firm with another
5. Benchmarks

Sales to cover all variable and fixed expenses
6. B.O.S. (Before Owners’ Salary)

Sales to cover all variable and fixed expenses
7. Break – Even Sales

Future maintainable profit expressed at a capitalisation rate
Rate of return required by a prudent investor
Reflects a mark up on prevailing interest rates
Items which affect rate of return:
Risk
Lack of negotiability
Economic conditions
8. Capitalisation Rate

Items which affect rate of return (cont’d):
Restrictions on entry
Size of the share parcel
General business risks
8. Capitalisation Rate cont'd...

Review your performance during each benchmark period
9. Comparative Analysis

Opening Stock
Plus:
Purchases
Freight Inwards
Less:
Closing Stock
Equals – Cost Of Goods Sold
10. Cost Of Goods Sold

Average days to pay creditors divided into 365 days
11. Creditors Turnover

Usually turned into cash within twelve months
12. Current Assets

Normally paid within twelve months
13. Current Liabilities

Indication of Liquidity
Calculated
Current Assets
Current Liabilities
= Current Ratio
14. Current Ratio

Business’ valuation of assets
15. Current Market Value

Shows how a business is paying its creditors
Calculated:
Creditors
Average Daily Credit Purchase
= Days Creditors Outstanding
16. Days Creditors Outstanding

Calculated:
Debtors
Average Daily Credit Sales
= Days Debtors Outstanding
17. Days Debtors Outstanding

Percentage of debtors outstanding compared to credit sales
Debtors Ratio – calculated:
Debtors x 100
Credit Sales 1
18. Debtors’ Ratio

Amounts owed to the firm by customers
19. Debtors

Debtor Ratio to Borrowed Funds
Working Capital Ratio to Borrowed Funds
Debt to Equity Ratio
Other key performance indicators applicable
20. Debt Covenants

Percentage of external debt to equity
Debt to Equity % - calculated:
Total Debt x 100
Equity 1
21. Debt To Equity Percentage

Record department’s:
Sales
Cost of Goods Sold
Gross Profits
To determine GP% for each department
22. Departmental Gross Profit %

Costs incurred in producing net profit
23. Expenses

Measures financial commitments:
Profitability
Exposure to Debt
Interest Rate
Owners’ Reinvestment
Indicators to measure:
Debt as % of Sale
Debt as % of Equity
24. Financing Indicators

Earning before Interest and Tax
25. EBIT

Earnings Before Interest, Depreciation and Tax
26. EBIDT

Earnings Before Interest, Tax, Depreciation & Amortisation.
27. EBITDA

Calculated earnings before interest and tax plus principal’s wages, superannuation etc
28. Adjusted EBIT

Items owned by the business used to generate business revenue
29. Fixed Assets

Fixed Assets as a % of Total Assets – calculated:
Fixed Assets x 100
Total Assets 1
30. Fixed Assets As A Percentage Of Total Assets

Expected profitability after making adjustment for unusual or non recurring items
Includes:
Reasonable Management Salaries
“Notional Rent” on Owned Premises
31. Future Maintainable Profits

Difference between sales and cost of goods sold
32. Gross Profit

Measures gross profit earned on sales
33. Gross Profit % Of Sales

Sales - Cost of Goods Sold = Gross Profit, then
34. Gross Profit Ratio

Borrowings expressed as a percentage of assets:
Assets worth $100,000
Borrowings $ 62,000
Calculated:
Assets Worth x 100
Borrowings 1
Gearing is: = 62%
35. Gearing

Measures increase from previous year.
Factors effecting growth includes:
Competition
Business Presentation
Catchment Area Growth
Customer Buying Habits
Advertising
36. Growth - Sales

Original cost of assets
37. Historical Cost

Industry group according to the Australian & New Zealand Standard Industry Classification Coding System of the Australian Bureau of Statistics.
38. Industry Categories

Number of times interest charges are covered by EBIT
39. Interest Cover

Goods purchased or manufactured for sale to customers
40. Inventory (Stock On Hand)

Detailed review and comparison of a business against a “pool of similar businesses”
41. Inter Firm Comparisons

Amounts owing by the firm
42. Liabilities

Ability to pay financial obligations
43. Liquidity

Current Assets to Current Liabilities
44. Liquid Ratio

Amounts owed not due for repayment within the next twelve months
45. Long Term Liabilities

People who look like current customers.
They are normally the first group of prospects targeted in a marketing campaign.
46. Low-Hanging Fruit

Amount added to invoice cost
47. Mark - Up

Amount remaining after cost of goods sold and operating expenses have been deducted from sales
48. Net Profit

Operating Profit or Loss after income tax.
49. Net Profit After Tax

Measures net profit before tax earned on each dollar of sales
50. Net Profit Percentage Of Sales

Owner’s Funds as a percentage of total assets – calculated:
Owner’s Funds x 100
Total Funds 1
51. Owner’s Funds As A Percentage Of Total Assets

Include all expenditure to be paid from Gross Profit.
52. Overheads

A measure of output generated from resources
53. Productivity

Net profit after tax divided by total revenue and multiplied by 100.
54. Profit Margin

Ratio between current assets minus stock and current liabilities minus bank overdraft
55. Quick Ratio

The goods shall remain the property of the seller until all monies are paid
56. Romalpa Clause

Realistic arms length salaries if external persons were appointed
57. Reasonable Management Salaries

Relationship between net profit and total assets
Return on Assets – calculated:
Net Profit x 100
Assets 1
58. Return On Assets

Relationship between net profit and owner’s equity
Return on Equity – calculated:
Net Profit x 100
Equity 1
59. Return On Equity (Investment)

Net profit after tax as a percentage of shareholder's funds.
60. Return On Funds

Net profit after tax as a percentage of total revenue.
61. Return On Revenue

Factors affecting staffing costs
Including:
Structures
Monitoring
Training
Experience
Turnover
productivity
62. Staffing Profile

Goods purchased or manufactured to sell to customers
63. Stock On Hand

Success of stock management including:
Displays
Mix
Ordering Systems
Stocktaking
Security
64. Stock Indicators

Dissection of sales income into departmental sales and measures income to be contributed from each product group
65. Sales Mix

Describes characteristics of retail store:
Average customers
Average items per customer
Average sale per customer
Trading days
Trading hours
Floor area
Sales per floor area
66. Store Profile

Shrinkage measures a business' ability to control its margins and pricing.
Strong stock management policies will reduce shrinkage.
67. Shrinkage

Number of times the entire stock is sold and replaced
68. Stock Turnover/Stock Turns

Shows ability of a borrower to service the interest cost of a loan out of the business’ profit
Times Interest Covered by Profit – calculated:
Profit Before Tax And Interest
Interest
69. Times Interest Covered By Profit

Based on prior year’s performance:
Competition
Management
Business Planning
Business Reinvestment
Demographic Information
70. Trend Analysis

Excess of current assets over current liabilities
Calculated:
Current Assets less Current Liabilities
= Working Capital
71. Working Capital