Accounting glossary: A to C

A terms (part 1)

An accounting glossary is a reference list of the terms accountants, auditors and finance teams use, each defined in plain language. This page covers 88 terms from A to C, most common first under each letter, with the IFRS, IAS or ISA reference where one applies. Each definition stands alone, so it can be read, quoted or shared without the rest of the page.

The glossary runs across four pages: A to C, D to I, J to P and Q to Z. No term is defined twice, so a related term may sit on another page, and synonyms are given inside the main entry, for example cost of sales under cost of goods sold.

• Accounting: the process of recording, classifying, summarising and reporting an organisation's financial transactions so that owners, lenders, managers and tax authorities can judge its performance, financial position and cash flows and make decisions.
• Accounting equation: the identity Assets = Liabilities + Equity, which holds after every correctly recorded transaction. Double-entry bookkeeping keeps it in balance, and the balance sheet is the equation presented at a single point in time.
• Accounts payable: amounts a business owes to suppliers for goods and services bought on credit, also called trade payables or trade creditors. Accounts payable is a current liability and is settled under the agreed payment terms.
• Accounts receivable: amounts customers owe a business for goods or services delivered on credit, also called trade receivables or trade debtors. Accounts receivable is a current asset, measured under IFRS 9 net of a loss allowance for expected credit losses.
• Accrual basis accounting: the method of recording revenue when it is earned and expenses when they are incurred, regardless of when cash moves. IFRS financial statements, apart from the cash flow statement, must be prepared on the accrual basis.
• Accrued expenses: costs a business has incurred but has not yet been invoiced for or paid at the reporting date, such as utilities used or interest owed. They are recorded as a liability, often called accruals, with a matching expense in the period.
• Accrued revenue: revenue earned for work performed or goods delivered that has not yet been invoiced at the reporting date. It is recorded as an asset; under IFRS 15 it is a contract asset if payment still depends on something other than the passage of time.
• Asset: a present economic resource controlled by an entity as a result of past events, where an economic resource is a right that has the potential to produce economic benefits (Conceptual Framework, 2018). Examples include cash, inventory, receivables and equipment.

A terms (part 2)

Depreciation, audit and credit-risk vocabulary that appears in almost every set of accounts.

• Amortisation: the systematic allocation of the depreciable amount of an intangible asset with a finite useful life over that life (IAS 38). The word is also used for the gradual repayment of a loan's principal through scheduled instalments.
• Accumulated depreciation: the total depreciation charged on an asset since it was brought into use. It is held in a contra-asset account and deducted from cost to give the asset's carrying amount on the balance sheet.
• Adjusting entry: a journal entry made at the end of a period, before the financial statements are prepared, to record accruals, prepayments, depreciation, allowances and similar items so that income and expenses fall in the correct period.
• Allowance for doubtful debts: a contra-asset that reduces trade receivables to the amount expected to be collected. Under IFRS 9 it is called the loss allowance and is measured using expected credit losses, not only debts already known to be bad.
• Audit evidence: the information an auditor uses to reach the conclusions on which the audit opinion is based, including accounting records, documents, confirmations, observation and recalculation. ISA 500 requires evidence that is sufficient in quantity and appropriate in quality.
• Audit trail: the chain of records that lets any figure in the accounts be traced back to its source document, and any source document forward to the accounts, including who recorded, changed or approved each entry and when.
• Audit opinion: the auditor's written conclusion on whether financial statements are prepared, in all material respects, in accordance with the applicable framework. ISA 700 covers the unmodified opinion and ISA 705 the qualified opinion, adverse opinion and disclaimer of opinion.
• Aged receivables report: a list of amounts owed by customers grouped by how long they have been outstanding, typically current, 1-30, 31-60, 61-90 and over 90 days. It is used for credit control and to estimate the loss allowance.

A terms (part 3)

Terms from IAS 8, IFRS 9, IAS 28 and IFRS 5 that describe how figures are measured and presented.

• Accounting period: the span of time covered by a set of financial statements or a management report, such as a month, quarter or financial year. Revenue and expenses are allocated to accounting periods so that results can be compared.
• Accounting policies: the specific principles, bases, conventions, rules and practices an entity applies in preparing and presenting financial statements (IAS 8). A change in accounting policy is normally applied retrospectively, restating the comparative figures.
• Accounting estimate: a monetary amount in the financial statements that is subject to measurement uncertainty, such as a loss allowance, a useful life or a provision (IAS 8). A change in an accounting estimate is applied prospectively, in the current and future periods.
• Amortised cost: an IFRS 9 measurement basis used for most financial liabilities and for financial assets held to collect contractual cash flows of principal and interest. It is the initial amount less repayments, adjusted by effective-interest amortisation and, for assets, the loss allowance.
• Associate: an entity over which an investor has significant influence but not control or joint control. Under IAS 28 an associate is accounted for using the equity method; 20 per cent or more of the voting power is presumed to give significant influence.
• Assets held for sale: non-current assets whose carrying amount will be recovered mainly through a sale that is highly probable, usually within twelve months. IFRS 5 measures them at the lower of carrying amount and fair value less costs to sell, and depreciation stops.
• Annual report: the document a company publishes each year containing its audited financial statements, the auditor's report and narrative reports such as the directors' or management report, strategy, risks and governance. Its content is set by company law and listing rules.
• Absorption costing: a costing method that includes both variable and fixed production overheads in the cost of each unit produced. IAS 2 requires inventory to include fixed production overheads allocated on the basis of the normal capacity of the production facilities.

A terms (part 4)

Audit, costing and analysis terms used by auditors, controllers and analysts.

• Acquisition method: the method IFRS 3 requires for every business combination. The acquirer is identified, the identifiable assets acquired and liabilities assumed are measured at fair value at the acquisition date, and goodwill is the excess of the consideration transferred, plus any non-controlling interest, over those net assets.
• Activity-based costing: a costing method that assigns overheads to products or services through the activities that drive cost, such as machine set-ups, purchase orders or inspections, using a cost-driver rate for each activity instead of one blanket overhead rate.
• Analytical procedures: evaluations of financial information made by studying plausible relationships among financial and non-financial data, such as margins, trends and ratios (ISA 520). Auditors use them in planning, as substantive tests and in the overall review near completion.
• Assertions: the representations management makes, explicitly or implicitly, about the recognition, measurement, presentation and disclosure of items in the financial statements, such as occurrence, completeness, accuracy, cut-off, existence, rights and obligations, and valuation (ISA 315).
• Audit risk: the risk that an auditor expresses an inappropriate opinion when the financial statements are materially misstated (ISA 200). It is a function of the risk of material misstatement, made up of inherent risk and control risk, and detection risk.
• Audit committee: a committee of the board, usually made up of independent non-executive directors, that oversees financial reporting, internal control, internal audit and the relationship with the external auditor. Public-interest entities in the EU and listed companies in the UK and Canada generally must have one.
• Arm's length transaction: a transaction between independent parties, each acting in its own interest, on terms that would apply between unrelated parties. The arm's length principle underlies transfer pricing rules, and IAS 24 allows related-party terms to be described as arm's length only if this can be substantiated.
• Asset turnover ratio: revenue divided by average total assets, showing how much revenue each unit of assets generates. For example, revenue of EUR 2,000,000 on average total assets of EUR 800,000 gives an asset turnover of 2.5 times.

B terms (part 1)

The core B vocabulary: the balance sheet, bookkeeping, budgets and the bank.

• Balance sheet: a financial statement showing an entity's assets, liabilities and equity at a specific date, also called the statement of financial position. Total assets always equal total liabilities plus equity, which is the accounting equation.
• Bad debt: an amount owed by a customer that is not expected to be collected, for example because the customer is insolvent. It is written off against the loss allowance or expensed, and output VAT already declared on it can often be recovered through bad-debt relief.
• Bank reconciliation: a comparison of the cash book balance with the bank statement balance at the same date that explains each difference, such as unpresented cheques, deposits in transit, bank charges and errors, and corrects the cash book where needed.
• Bookkeeping: the day-to-day recording of financial transactions in journals and ledgers, from sales and purchases to payments and receipts. Bookkeeping produces the records; accounting then adjusts, analyses and reports them.
• Budget: a financial plan expressed in figures for a future period, usually a year split into months, setting expected revenue, costs, capital spending and cash. Actual results are compared with the budget to identify variances and take action.
• Break-even point: the level of sales at which total revenue equals total costs, so profit is zero. It equals fixed costs divided by contribution per unit: fixed costs of EUR 60,000 and a contribution of EUR 20 per unit give 3,000 units.
• Book value: the value of a company according to its accounts, meaning total equity, or total assets less total liabilities. Book value per share divides it by the number of shares in issue, and it usually differs from the company's market value.
• Bill: a supplier's request for payment for goods or services supplied, recorded by the buyer as a purchase invoice and an account payable. In everyday use, the buyer receives a bill while the seller issues an invoice for the same transaction.

B terms (part 2)

Group accounting, financing and analytics terms beginning with B.

• Business combination: a transaction or other event in which an acquirer obtains control of one or more businesses (IFRS 3). It is accounted for using the acquisition method, which can give rise to goodwill or to a bargain purchase gain.
• Bank statement: the record a bank issues of all deposits, withdrawals, charges and interest on an account over a period, with opening and closing balances. It is the external evidence used to prepare the bank reconciliation.
• Benford's law: the observation that in many naturally occurring sets of numbers the first digit is 1 about 30 per cent of the time and 9 less than 5 per cent of the time. Auditors compare journal and invoice amounts with it to spot unusual patterns.
• Bonus issue: an issue of new shares to existing shareholders free of charge, in proportion to their holdings, funded by capitalising reserves such as retained earnings or share premium. Total equity is unchanged, and earnings per share is restated for all periods presented (IAS 33).
• Bond: a debt security under which the issuer borrows a fixed sum from investors and promises periodic interest, called the coupon, and repayment at maturity. The issuer usually measures bonds payable at amortised cost using the effective interest method.
• Borrowing costs: interest and other costs an entity incurs in connection with borrowing funds. IAS 23 requires borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised; other borrowing costs are expensed.
• Budget variance: the difference between a budgeted figure and the actual result. A budget variance is favourable when it increases profit, such as higher revenue or lower cost, and adverse when it reduces profit.
• Burn rate: the speed at which a loss-making or early-stage business uses up its cash, usually expressed per month. Cash of EUR 600,000 and a net burn of EUR 50,000 a month give a cash runway of twelve months.

B terms (part 3)

Less common B terms that still come up in exams, audits and board packs.

• Bargain purchase: a business combination in which the fair value of the identifiable net assets acquired exceeds the consideration transferred. After reassessing all its measurements, the acquirer recognises the excess as a gain in profit or loss at the acquisition date (IFRS 3).
• Bill of materials: a structured list of the raw materials, components, sub-assemblies and quantities needed to make one unit of a product. Costing and manufacturing systems use it to calculate standard material cost and to issue materials to production.
• Bill of exchange: a written, unconditional order from one party to another to pay a stated sum on demand or at a fixed future date. Bills of exchange are used in international trade and can be discounted with a bank before they mature.
• Bearer plant: a living plant used to produce or supply agricultural produce over more than one period, such as a grape vine or oil palm, that is not expected to be sold as produce. Bearer plants are accounted for as property, plant and equipment under IAS 16.
• Batch costing: a form of job costing in which costs are collected for a batch of identical units, such as 500 loaves or 1,000 printed labels, and the total batch cost is divided by the number of units to give a unit cost.
• Balanced scorecard: a performance management framework that combines financial measures with customer, internal business process, and learning and growth perspectives, so that managers track the drivers of future financial results as well as past outcomes.
• Bank guarantee: a bank's promise to pay a beneficiary a stated amount if its customer fails to meet an obligation, such as performing a contract or honouring a tender. For the customer, a guarantee is usually disclosed as a commitment or contingent liability rather than recognised.
• Big bath accounting: the practice of deliberately taking large write-downs, provisions or impairments in a period that is already poor, so that future periods look better. Auditors treat unexplained one-off charges followed by later reversals as a warning sign of earnings management.

C terms (part 1)

The most common C terms: cash, credit and the chart of accounts.

• Cash basis accounting: a method that records revenue when cash is received and expenses when cash is paid, ignoring receivables, payables and accruals. It is simple but not permitted under IFRS; some small businesses use it for tax where local rules allow.
• Cash flow statement: the financial statement showing cash receipts and payments over a period, classified into operating, investing and financing activities (IAS 7). It explains the movement from opening to closing cash and cash equivalents, with operating cash flows shown by the direct or indirect method.
• Chart of accounts: the structured list of every account in the general ledger, each with a code, name and type, usually grouped as assets, liabilities, equity, revenue and expenses. It determines how transactions are classified and how reports are built.
• Cost of goods sold: the cost of the inventory sold in a period, including purchase cost, conversion costs and other costs of bringing it to its present location and condition (IAS 2). Also called cost of sales, it is deducted from revenue to give gross profit.
• Credit: an entry on the right-hand side of an account. A credit increases liabilities, equity and revenue and decreases assets and expenses. In everyday business use, credit also means allowing a customer to pay later.
• Current assets: assets expected to be realised, sold or consumed within the normal operating cycle or within twelve months after the reporting date, assets held for trading, and cash and cash equivalents. Examples include inventory, trade receivables and prepayments.
• Current liabilities: obligations expected to be settled within the normal operating cycle or due within twelve months after the reporting date, or for which the entity has no right to defer settlement beyond twelve months. Examples include trade payables, accruals and short-term loans.
• Capital expenditure: spending to acquire, build or improve long-term assets such as property, plant, equipment or software that will benefit more than one period. Often called capex, it is capitalised on the balance sheet and depreciated or amortised rather than expensed immediately.

C terms (part 2)

IFRS terms for measuring assets and for recognising contracts and obligations.

• Carrying amount: the amount at which an asset or liability is recognised in the statement of financial position. For an item of property, plant and equipment under IAS 16 it is cost or revalued amount less accumulated depreciation and accumulated impairment losses.
• Contingent liability: a possible obligation whose existence will be confirmed only by uncertain future events, or a present obligation not recognised because an outflow is not probable or cannot be measured reliably. IAS 37 requires disclosure unless the outflow is remote.
• Contingent asset: a possible asset arising from past events whose existence will be confirmed only by uncertain future events outside the entity's control, such as a claim in a lawsuit. IAS 37 permits disclosure when an inflow is probable; the asset is recognised only when virtually certain.
• Contract asset: an entity's right to consideration in exchange for goods or services it has transferred to a customer, when that right is conditional on something other than the passage of time, such as further performance (IFRS 15). It becomes a receivable once the right is unconditional.
• Contract liability: an entity's obligation to transfer goods or services to a customer for which it has received consideration, or for which an amount of consideration is due, from the customer (IFRS 15). It is released to revenue as the performance obligations are satisfied.
• Control account: a general ledger account that holds the total of a subsidiary ledger, such as trade receivables for all customer accounts or trade payables for all supplier accounts. Its balance must agree with the sum of the individual balances in that ledger.
• Credit note: a document issued by a seller that reduces the amount a customer owes, for returns, price corrections or cancelled services. The seller debits revenue and, where applicable, output VAT, and credits the customer's receivable.
• Current ratio: current assets divided by current liabilities, a measure of short-term liquidity. Current assets of EUR 300,000 and current liabilities of EUR 200,000 give a current ratio of 1.5; what counts as healthy depends on the industry.

C terms (part 3)

Closing, consolidation, cash and reporting-framework terms.

• Cash equivalents: short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value (IAS 7). An investment normally qualifies only if it has a maturity of three months or less from acquisition.
• Closing entries: journal entries made at the end of a financial year that transfer the balances of revenue, expense and drawings or dividend accounts to retained earnings, often through an income summary account, so those temporary accounts start the new year at zero.
• Comprehensive income: the change in equity during a period from transactions and other events, other than changes from transactions with owners. Total comprehensive income is profit or loss plus other comprehensive income, such as revaluation surpluses and some foreign exchange differences.
• Conceptual Framework: the IASB's Conceptual Framework for Financial Reporting, revised in 2018, which sets out the objective of financial reporting, the qualitative characteristics of useful information and the definitions of assets, liabilities, equity, income and expenses. It is not itself a standard.
• Consolidated financial statements: the financial statements of a group, presenting the parent and its subsidiaries as a single economic entity (IFRS 10). Intragroup balances, transactions and unrealised profits are eliminated, and non-controlling interests are shown separately within equity.
• Cost centre: a part of an organisation, such as a department, branch or production line, to which costs are charged for control and analysis. The manager of a cost centre is accountable for its costs but not for revenue or profit.
• Cut-off: the principle, and audit assertion, that transactions are recorded in the correct accounting period. Cut-off testing checks that deliveries, services received and invoices around the period end fall on the correct side of the reporting date.
• Cash conversion cycle: the number of days between paying suppliers and collecting cash from customers, calculated as days inventory outstanding plus days sales outstanding minus days payable outstanding. With 45, 40 and 30 days respectively, the cycle is 55 days.

C terms (part 4)

Further C terms from impairment, costing, tax and asset accounting.

• Cash-generating unit: the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets (IAS 36). Goodwill and assets without independent cash flows are tested for impairment at this level.
• Contra account: an account whose balance is the opposite of the account it is paired with, used to reduce that account's value while keeping the original figure visible. Accumulated depreciation, the loss allowance and sales returns are common examples.
• Contribution margin: revenue minus variable costs, the amount available to cover fixed costs and then provide profit. A product sold for EUR 50 with variable costs of EUR 30 has a contribution of EUR 20 per unit and a contribution margin ratio of 40 per cent.
• Capitalisation: recording a cost as an asset on the balance sheet rather than as an expense, because it will bring economic benefits in future periods. Examples include buying equipment and, under IAS 38, development costs once strict criteria are met.
• Compound journal entry: a journal entry with more than one debit line or more than one credit line, such as a sale split between revenue and VAT: Dr Trade receivables 1,200 / Cr Revenue 1,000 / Cr VAT payable 200. Total debits must still equal total credits.
• Corporation tax: tax charged on a company's taxable profits, as distinct from taxes on individuals or on sales. It is calculated on accounting profit adjusted by tax rules, and is accounted for as current tax and deferred tax under IAS 12.
• Consignment inventory: goods held by one party, the consignee, but still owned by another, the consignor, until sold to an end customer. Because control has not passed, the consignor keeps the goods in its inventory and recognises revenue only when they are sold on (IFRS 15).
• Construction in progress: the accumulated cost of property, plant or equipment that is being built or installed and is not yet ready for use, also called capital work in progress. It is not depreciated until the asset is available for use.

A to C terms in Skyline Nexus ERP

Many of the terms above are screens and fields in Skyline Nexus ERP. The chart of accounts sits under Fiscal Authority, Chart of Accounts: each account has a GL Code and an account type that belongs to one of five classifications (asset, liability, equity, revenue, expense) with a normal balance, plus control settings such as Is Control Account, Requires Cost Center and Requires Party. Customer and supplier balances are analysed in the AR Aging Report and AP Aging Report, with buckets for current, 1-30, 31-60, 61-90 and over 90 days.

The audit trail is a report in its own right: the Skyline Nexus Audit Trail records who created, updated, approved, posted or reversed an entry, with old and new values, IP address and browser. Bank reconciliation runs in the Treasury module, where the statement ending balance is entered, items are matched or marked outstanding, and bank statements can be imported as CSV, TXT, XLSX or XLS files. Cost centres are dimensions on each journal line, and closing entries are posted automatically when a fiscal year is closed, through the Income Summary account to Retained Earnings.