The gross equity method is a way of accounting for associated undertakings whereby the investor displays its proportionate share of the investee's aggregate gross assets and liabilities on the balance sheet. Additionally, the related share of turnover is noted in the profit and loss account.
Horizontal Analysis is a time series analysis of financial statements that covers more than one accounting period to examine the percentage change in an account over time.
The presentation of a financial statement in which the debits are given on one side of the statement and the credits on the other. In the case of a balance sheet, the fixed assets and current assets would be shown on the left-hand side of the statement, and the capital and liabilities on the right-hand side.
Impairment is an accounting principle that outlines the process of reducing the book value of an asset when its fair market value drops below the asset's carrying amount on the balance sheet. It is a critical concept in financial reporting that ensures that the value of assets is not overstated in an organization's balance sheet.
An impersonal account is a type of ledger account that does not bear the name of an individual and includes nominal accounts and real accounts.
In accounting, income accounts refer to revenue and expense accounts that reflect transactions affecting profit or loss during the accounting period. Unlike balance sheet accounts, income accounts provide insight into the organization's operational performance.
An account primarily used by non-profit organizations to record and summarize their income and expenditures, leading to a calculation of surplus or deficit without applying the accruals concept.
The manipulation by companies of certain items in their financial statements to eliminate large movements in profit and report a smooth trend over a number of years. This practice stems from the belief that investors prefer companies showing steady profit increases year by year.
The income statement, also known as a profit and loss account, is a financial document that provides a summary of a company's revenues, expenses, and profits/losses over a specific period. Under both International Accounting Standards (IAS) and the Financial Reporting Standard Applicable in the UK and Republic of Ireland (FRS 102), the income statement plays a pivotal role in financial reporting.
Incomplete records in accounting refer to situations where some details are missing, such as unrecorded or partially recorded transactions. Completing these records usually involves examining the cash book and deducing missing items.
Information intermediaries are individuals and groups tasked with obtaining, analyzing, and interpreting information to inform others, often helping clients make significant financial decisions.
An interim audit is the examination of the financial records and operations of a company during the course of the financial year, ensuring accuracy and compliance prior to the final year-end audit.
A comprehensive guide to the International Accounting Standards (IAS) issued by the International Accounting Standards Committee (IASC) and maintained by the International Accounting Standards Board (IASB).
The London-based privately funded organization responsible for developing a single set of high-quality, understandable International Financial Reporting Standards (IFRS) for general-purpose financial statements.
The International Accounting Standards Committee (IASC) was established in 1973 to set global accounting standards and was later superseded by the International Accounting Standards Board (IASB) in 2001.
International Financial Reporting Standards (IFRS) are a set of international accounting standards issued by the International Accounting Standards Board (IASB) since 2001, aimed at creating consistent financial statements that are comparable across international boundaries.
International Financial Reporting Standards (IFRS) are a set of accounting standards developed and maintained by the International Accounting Standards Board (IASB). They aim to provide a common global language for business affairs so that company accounts are understandable and comparable across international boundaries.
Last In, First Out (LIFO) is a method used in inventory management and accounting that prioritizes the most recently added inventory for distribution or recording first.
A financial arrangement where the owner of an asset sells it but retains the right to use it through a lease agreement, effectively raising funds while maintaining the use of the asset.
The Lehman Brothers scandal emerged after the collapse of Lehman Brothers in late 2008. It involved using a loophole in US accounting standards known as 'Repo 105' to hide substantial losses on the subprime mortgage market.
A formal written record of representations made by the management of an organization to the auditors, aimed at confirming matters of material significance impacting the audit and financial statements.
Limitation of scope refers to restrictions or constraints that may prevent auditors from obtaining sufficient and appropriate evidence to form an audit opinion. This can significantly impact the reliability and comprehensiveness of the audit report.
Liquid assets are assets that can be easily converted into cash without significantly affecting their value. They are essential for maintaining the liquidity of individuals and corporations.
A loan package is a comprehensive set of documents and information submitted to a lender to apply for a loan. These documents usually include a loan application, financial statements, and other pertinent information.
A detailed analysis provided by an auditor, examining a client's financial statements in depth to ensure accuracy, compliance, and to provide insights into the financial health of the organization.
Long-term debtors refer to individuals or entities that owe money to an organization but are not expected to make payment within the near future, typically beyond a 12-month period.
The matching concept in accounting requires that expenses be matched with the revenues they generate within the same accounting period, ensuring accurate financial reporting.
Materiality is an important accounting principle determining the significance of financial information and its impact on decision-making. This concept is essential for accurate financial reporting and is influenced by the size, nature, and circumstances of an item.
A medium-sized company must meet specific criteria to qualify for certain filing exemptions, making the preparation of financial statements crucial. Companies that are public, banking, or insurance firms, or fall under certain categories cannot claim these exemptions.
Monetary assets and liabilities represent specific sums of money that are either receivable or payable, captured in a company's financial statements, including cash, bank balances, loans, debtors, and creditors.
The monetary measurement convention in accounting demands that transactions be recognized in financial statements only if they can be measured in monetary terms. This convention assumes money as a stable unit of measurement and discourages the inclusion of non-monetary assets.
Net income, also known as net earnings or net profit, is the sum remaining after all expenses have been fulfilled. It serves as a crucial metric that indicates a company's profitability.
Net loss occurs when a company's total expenses exceed its total income for a specific period, such as a fiscal quarter or year.
Net Realizable Value (NRV) represents the estimated selling price of an asset in the ordinary course of business, minus any predictable costs associated with the completion and sale of the asset. It is a critical metric in inventory valuation and accounting practices, ensuring realistic asset values are reflected in financial statements.
Net Realizable Value (NRV) is the net amount that an entity expects to realize from the sale of an asset after deducting any costs involved in its sale or disposal.
The net-investment method, often used in international accounting, is a technique applied to translate a foreign subsidiary's financial statements into the parent company's currency. This method helps in adjusting for fluctuating exchange rates and provides a consistent basis for valuation of the subsidiary’s net assets.
The nominal ledger, also known as the general ledger, contains the nominal accounts and real accounts necessary to prepare the financial statements of an organization. It differs from personal ledgers, such as debtors' and creditors' ledgers, which contain the accounts of customers and suppliers respectively.
Non-adjusting events are occurrences that take place between the balance-sheet date and the approval of financial statements by the board of directors. These events do not relate to conditions that existed at the balance-sheet date but necessitate disclosure if they are material to the financial statements.
Non-statutory accounts are financial statements issued by a company that do not form part of the statutory annual accounts required by law. These accounts are often reported in the media and are accompanied by a statement clarifying their non-statutory nature.
A nonmonetary item is an asset, liability, or other financial statement line item that is stated in historical dollars and requires adjustment for inflation or deflation. Such items are not categorized as monetary items and thus do not maintain a fixed monetary value over time.
Nonoperating expenses (or revenues) refer to the financial transactions that are incidental to a business's core operations. They typically arise from activities that are secondary to the main business functions.
Notes to the accounts, also known as notes to financial statements, provide detailed information and explanations that support and complement a company's financial statements. These notes help users understand and interpret the financial data and the company's overall performance and financial health.
Understanding the primary goals that financial statements aim to achieve is crucial for determining the scope of information they should provide and the manner in which they should be presented.
Objectivity in accounting aims to minimize subjective actions by preparers of accounts to ensure comparisons of financial statements across different companies are based on consistent principles.
An observation test involves physical and visual verification by inspection of financial statement items or activities. The external auditor observes and evaluates how company employees conduct various accounting-related tasks such as documenting the existence and valuation of assets, safeguarding assets, approving expense accounts, and counting inventory.
Off the balance sheet (OBS) refers to financial transactions where the property involved does not appear on the company’s balance sheet. This technique is often used to keep debt-to-equity ratios lower and manage financial reporting more favorably.
Off-balance-sheet (OBS) refers to assets or liabilities that do not appear on a company's balance sheet but potentially have a significant impact on the company's financial health.
Off-balance-sheet financing refers to financial arrangements that do not appear on a company's balance sheet, thus not affecting its borrowing capacity as measured by financial ratios. It is commonly seen in operating leases rather than capital leases. GAAP requires disclosure of such financing in financial statements regarding credit, market, and liquidity risk.
An operating budget is a comprehensive financial statement displaying projected revenues and expenses in a business. This budget helps in day-to-day decision-making and ensuring the effective allocation of resources.
Operating expenses are the costs and operating revenues are the income incurred and generated by an organization in the normal course of business, excluding any extraordinary items.
Opinion shopping refers to the practice of a company seeking out an auditor who is willing to approve its financial statements without qualifications, even when they do not meet generally accepted accounting principles.
Other Income refers to the revenue generated from activities that are not part of the primary operations of a business. It is a crucial component of a profit and loss statement, offering insights into ancillary revenue streams.
The Profit and Loss (P & L) account is a financial statement summarizing the revenues, costs, and expenses incurred during a specific period, typically a fiscal quarter or year.
A payee statement is a required tax information statement that indicates the amount paid to a payee, including various types of income and withholding details.
An essential financial term representing the profits of a company that are subject to corporation tax, adjusted for allowable deductions.
The accounting concept that ensures the financial statements of a company are produced at regular intervals, providing consistency, comparability, and regular communication to stakeholders.
The time span over which financial activities and statements are assessed, often corresponding to an accounting period.
An accounting process used to determine the cost of inventory sold or put into production. Data on beginning inventory, purchases, and ending inventory are used to find the amount and cost of withdrawals from inventory.
A detailed document that provides an individual's financial health using often the accrual basis of accounting.
Physical capital maintenance is an accounting concept that focuses on preparing financial statements to ensure an enterprise's capacity to operate at its physical capital level is maintained over time.
Pooling of interests was an accounting method, previously utilized in mergers and acquisitions, allowing the combining of companies' balance sheets by line item additions of their assets and liabilities.
The pooling-of-interests method was an accounting approach previously used in business combinations in the USA, reflecting the continuation of the acquired company's accounts at book value.
Positive cash flow refers to the amount of cash that a business generates from its operations, which exceeds the cash outflows. It is a critical indicator of financial health, showing that a company is capable of meeting its obligations, reinvesting in its operations, and paying dividends.
Post-balance-sheet events, also known as subsequent events, are events or transactions that occur after the balance sheet date but before the financial statements are issued or available to be issued. These events sometimes impact the financial reporting and disclosures of the entity.
A Post-Closing Trial Balance is prepared after closing entries are recorded and posted, ensuring that beginning balances for the next accounting period are accurate and free of temporary accounts.
Benefits provided by an employer to former employees, typically those who have retired. The accounting treatment for these benefits, including health care and pensions, varies based on whether they are part of a defined-contribution or defined-benefit pension scheme.
The Preclosing Trial Balance is an internal financial statement used to ensure that total debits equal total credits before the financial books are closed for the accounting period.
A term used in the auditor's report to signify sufficient disclosure, reasonable detail, and absence of bias, ensuring the integrity and accuracy of financial statements.
The currency in which the financial statements of an entity are presented, which can differ from the functional currency, especially in multinational groups with subsidiaries in different countries. It often requires a common presentation currency for consolidated financial statements.
A prior period adjustment is an accounting term used to describe a correction to an error in previously issued financial statements. These adjustments are necessary to accurately reflect the financial status of a company or organization.
Adjustments applicable to prior accounting periods due to changes in accounting policies or correction of material errors. These are not normal recurring adjustments or corrections of accounting estimates.
Pro Forma refers to the presentation of financial data that adheres to a specific format and often includes hypothetical or projected numbers to provide a basis for analysis and planning.
A profit and loss account reserve is a reserve that contains the balance of retained earnings to carry forward. It is fully distributable and shown as part of shareholders' reserves on the balance sheet.
Provision for depreciation refers to the allocation of the cost of a tangible fixed asset over its useful life, ensuring accurate representation of asset value in financial statements and compliance with accounting and tax regulations.
Published accounts refer to the financial statements of organizations made available to the public in accordance with legal requirements. In the UK, these often relate to limited companies and include documents provided to shareholders and filed with the Registrar of Companies at Companies House, Cardiff.
A Purchase Journal is a specialized accounting book where all purchases made on account are initially recorded. It typically includes details about the date of purchase, supplier name, purchase amount, and other relevant information to maintain accurate financial records.
A purchases journal, also known as a purchase day book, is a specialized accounting record used to track all credit purchases of merchandise for a business.
Push Down Accounting refers to the practice in the USA of incorporating the fair value adjustments on acquisition, including goodwill, made by the acquiring company into the financial statements of the acquired subsidiary.
An auditors' report that includes qualifications due to scope limitations or disagreements regarding the treatment/disclosure of matters in financial statements based on the degree of materiality.
A qualified opinion is a statement issued by an auditor that indicates exceptions or limitations to the comprehensive nature of the audit conducted on financial statements.
The degree to which the net profit of an organization reflects accurately its operating performance; it is particularly important to ensure that creative accounting has not taken place and that no events have occurred to distort the profit figure.
In the USA, a quarterly report is a financial report issued by a company every three months, containing essential financial statements and a narrative overview of business operations.
The inventory of raw materials held at a specified time, which appears on the balance sheet under the heading of current assets.
Real Terms Accounting refers to an accounting method that adjusts financial statements for inflation to reflect the real value of money over time, providing a more accurate representation of an entity's financial position.
The general basis used in financial statements prepared under historical-cost accounting in which increases or decreases in the market values of assets and liabilities are not recognized as gains or losses until the assets are sold or the liabilities are paid.
An accounting method that records transactions based on the actual receipt or payment of cash rather than when the transaction occurs.
Receivables represent the amount of money owed to a business by its customers for goods or services delivered or used but not yet paid for. These are current assets recorded on the balance sheet, reflecting the business's right to receive payment.
Recognition is the procedure used to incorporate an accounting item into the financial statements of an organization. This process is not only essential for capturing revenue and expenditure items but has also become increasingly crucial for the proper treatment of off-balance-sheet finance.
Red ink is a slang term often used to describe financial losses, especially highlighted in financial statements where losses are marked in red for quick identification.
Relevant revenue refers to the income generated from operations that are directly related to the core activities of a business. This figure is crucial for management to assess profitability and make informed financial decisions.
Report and accounts refer to the set of financial statements and accompanying notes that publicly traded companies are required to release annually, summarizing their financial activities and condition over the fiscal year.
The currency used by an organization to present its financial statements. It serves as the basis for the organization's financial reporting and helps standardize financial data across different entities and regions.
The reporting date is the specific point in time at which an organization closes its books for an accounting period, summarizing financial activities over that period for reporting purposes.
The reporting partner in an audit firm is responsible for forming an audit opinion on the financial statements of a client company. This role includes signing and dating the auditors' report after the board of directors formally approves the financial statements.
A reporting period is the specific span of time covered by a financial statement. This time frame is crucial as it provides stakeholders with the necessary context to evaluate a company’s financial performance and position.
Correction of a previously issued financial statement due to an accounting irregularity or misrepresentation. While restatement can result from honest error, the practice gained notoriety during the wave of corporate scandals in the early 2000s.
Retained earnings represent the portion of net income that a company retains, rather than distributing it to shareholders as dividends, to reinvest in its core business or to pay off debt.
Retained earnings refer to the portion of a company's profit that is held back and not distributed to shareholders as dividends. These earnings are reinvested in the business for growth, debt reduction, or other corporate purposes.
A statement that provides a reconciliation of the beginning and ending balances in the retained earnings account on a company's balance sheet.
Retroactive adjustment refers to the process of restating prior years' financial statements to present financial data on a comparable basis as necessitated by accounting error corrections, changes in accounting principles, or other significant financial recalibrations.
