Accounting glossary: D to I

D terms (part 1)

This accounting glossary page defines 88 terms from D to I, from debit and depreciation to IFRS and impairment. Terms are listed most common first under each letter, every definition is written to stand alone, and the IFRS, IAS or ISA reference is given where one applies. Use it to check a word in a report, an exam question or an audit request.

The glossary runs across four pages: A to C, D to I, J to P and Q to Z. Each term is defined once, and synonyms appear inside the main entry, such as reducing balance under declining balance depreciation.

• Debit: an entry on the left-hand side of an account. A debit increases assets and expenses and decreases liabilities, equity and revenue. Under double-entry bookkeeping, every transaction has total debits equal to total credits.
• Depreciation: the systematic allocation of the depreciable amount of a tangible asset over its useful life (IAS 16). An asset costing EUR 50,000 with a residual value of EUR 5,000 and a five-year life has straight-line depreciation of EUR 9,000 a year.
• Double-entry bookkeeping: the system in which every transaction is recorded in at least two accounts, with equal debits and credits, so that the accounting equation always balances. It allows many errors to be detected through the trial balance and gives a complete record of each transaction.
• Deferred revenue: money received or invoiced in advance for goods or services not yet delivered, also called unearned revenue. It is a liability, a contract liability under IFRS 15, released to revenue as the business performs, for example monthly over a subscription.
• Dividend: a distribution of profits to shareholders, usually in cash, declared by the directors or approved by shareholders. A dividend is a deduction from retained earnings, not an expense, and a dividend declared after the reporting date is not a liability at that date (IAS 10).
• Days sales outstanding: the average number of days it takes to collect payment from credit customers, calculated as trade receivables divided by credit sales, multiplied by 365. Receivables of EUR 150,000 on annual credit sales of EUR 1,095,000 give 50 days.
• Debt-to-equity ratio: total borrowings, or sometimes total liabilities, divided by total equity, a measure of financial leverage. Borrowings of EUR 400,000 and equity of EUR 800,000 give a ratio of 0.5; the definition used should be stated when comparing companies.
• Deferred tax: income tax payable or recoverable in future periods because of temporary differences between the carrying amounts of assets and liabilities and their tax bases, and because of unused tax losses and credits (IAS 12). It is presented as a deferred tax asset or liability.

D terms (part 2)

Working-capital, costing, derecognition and presentation terms beginning with D.

• Direct costs: costs that can be traced specifically and economically to a product, service, job or other cost object, such as raw materials and production wages. Costs that cannot be traced in this way are indirect costs, or overheads.
• Days payable outstanding: the average number of days a business takes to pay its suppliers, calculated as trade payables divided by credit purchases or cost of sales, multiplied by 365. A higher figure preserves cash but can strain supplier relationships.
• Days inventory outstanding: the average number of days inventory is held before being sold, calculated as inventory divided by cost of goods sold, multiplied by 365. Inventory of EUR 90,000 and annual cost of goods sold of EUR 730,000 give 45 days.
• Declining balance depreciation: a method that charges a fixed percentage of the asset's opening carrying amount each year, so the charge falls over time; also called reducing balance depreciation. Double declining balance uses twice the straight-line rate, for example 40 per cent for a five-year life.
• Derecognition: the removal of a previously recognised asset or liability from the statement of financial position. Examples include selling or scrapping equipment, transferring receivables that meet the IFRS 9 conditions, and extinguishing a loan when it is repaid.
• Discontinued operation: a component of an entity that has been disposed of or is classified as held for sale and represents a separate major line of business or geographical area of operations (IFRS 5). Its post-tax result is presented separately from continuing operations.
• Diluted earnings per share: earnings per share adjusted for the effect of all dilutive potential ordinary shares, such as share options, warrants and convertible debt, as if they had been converted (IAS 33). Potential shares that would increase earnings per share are excluded as anti-dilutive.
• Debit note: a document that increases the amount a party owes, for example issued by a seller to correct an undercharge, or by a buyer to a supplier when returning goods and claiming a reduction. Its accounting effect depends on who issues it and why.

D terms (part 3)

Further D terms from ownership, finance, audit and credit control.

• Drawings: cash or goods taken out of an unincorporated business, such as a sole trade or partnership, by its owner for personal use. Drawings reduce the owner's capital; they are not a business expense and are not deductible for tax.
• Direct method: a way of presenting operating cash flows in the cash flow statement by showing major classes of gross cash receipts and payments, such as cash received from customers and cash paid to suppliers and employees. IAS 7 encourages it; the indirect method is also permitted.
• Derivative: a financial instrument whose value changes in response to an underlying variable such as an interest rate, exchange rate or commodity price, needs little or no initial net investment and is settled at a future date (IFRS 9), such as a forward, option or swap.
• Due diligence: an investigation of a business carried out before a transaction such as an acquisition, investment or loan, covering its financial statements, quality of earnings, tax, legal, commercial and operational risks, so the buyer or lender can price and structure the deal.
• Day book: a book of prime entry in which transactions of one type are listed in date order before being posted to the ledger, such as the sales day book, purchase day book and cash book. Its totals are posted to the control accounts.
• Discount rate: the rate used to convert future cash flows into their present value. It reflects the time value of money and the risk of the cash flows, and is used in net present value analysis, in impairment tests under IAS 36 and in lease accounting.
• Debt covenant: a condition in a loan agreement that the borrower must meet, such as a maximum ratio of debt to EBITDA or a minimum interest cover. A breach can make the loan repayable on demand, which may require it to be classified as a current liability.
• Dunning: the structured process of reminding customers about overdue invoices through a sequence of increasingly firm letters, emails or calls, often escalating to account holds, late-payment interest or debt collection. It is a core part of credit control.

E terms (part 1)

Earnings, equity and IFRS measurement terms beginning with E.

• EBITDA: earnings before interest, tax, depreciation and amortisation, a measure of operating performance before financing costs, tax and the non-cash charges for long-term assets. EBITDA is not defined by IFRS, and under IFRS 18 it may be disclosed as a management-defined performance measure.
• Equity: the residual interest in the assets of an entity after deducting all its liabilities (Conceptual Framework). For a company it comprises share capital, share premium, retained earnings and other reserves; for a sole trader or partnership it is often called owner's capital.
• Expense: a decrease in assets, or increase in liabilities, that results in a decrease in equity, other than distributions to holders of equity claims (Conceptual Framework). Cost of goods sold, wages, rent, depreciation and interest are all expenses.
• Earnings per share: profit attributable to the ordinary shareholders of the parent divided by the weighted average number of ordinary shares outstanding during the period (IAS 33). Profit of EUR 1,200,000 and 4,000,000 shares give basic earnings per share of EUR 0.30.
• EBIT: earnings before interest and tax: profit before finance costs and income tax expense. EBIT is often used as a proxy for operating profit, although the two can differ because of items such as investment income and the share of associates' results.
• Expected credit loss: the probability-weighted estimate of credit losses, meaning the present value of all cash shortfalls, over the life of a financial instrument (IFRS 9). A loss allowance for trade receivables is usually measured at lifetime expected credit losses using a provision matrix.
• Events after the reporting period: events, favourable or unfavourable, that occur between the reporting date and the date the financial statements are authorised for issue (IAS 10). Adjusting events change the figures; material non-adjusting events are disclosed in the notes.
• Equity method: a method of accounting for associates and joint ventures in which the investment is first recorded at cost and then adjusted for the investor's share of the investee's profit or loss and other comprehensive income, less dividends received (IAS 28).

E terms (part 2)

Further E terms for finance, foreign currency, tax, systems and audit reporting.

• Effective interest method: the method of calculating the amortised cost of a financial asset or liability and allocating interest income or expense over its life, using the rate that exactly discounts estimated future cash flows to the instrument's gross carrying amount or amortised cost (IFRS 9).
• Exchange difference: the difference resulting from translating a given number of units of one currency into another currency at different exchange rates (IAS 21). Differences on settling or retranslating monetary items are generally recognised in profit or loss.
• Emphasis of matter paragraph: a paragraph in an auditor's report that draws attention to a matter properly presented or disclosed in the financial statements that is fundamental to users' understanding, such as a major catastrophe or an uncertain lawsuit (ISA 706). It does not modify the opinion.
• External audit: an examination of an entity's financial statements by an independent auditor from outside the organisation, to express an opinion on whether they give a true and fair view, or are presented fairly, in accordance with the applicable financial reporting framework.
• Enterprise resource planning: software that runs a business's core processes, including finance, sales, purchasing, inventory, payroll and production, on one shared database, so that operational transactions flow directly into the general ledger and reports. It is commonly abbreviated to ERP.
• Excise duty: a tax on the production, import or sale of specific goods such as alcohol, tobacco, energy products or sugary drinks, charged per unit or by value. Excise paid on purchased goods that cannot be recovered forms part of their cost under IAS 2.
• Entity concept: the principle that a business is treated as separate from its owners for accounting purposes, even when it has no separate legal personality, as with a sole trade. Only the business's own transactions are recorded in its accounts.
• Equity instrument: any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities (IAS 32), such as an ordinary share. Broadly, it is equity only if the issuer has no contractual obligation to deliver cash or another financial asset.

F terms (part 1)

Financial statements, fixed assets and fair value: the core F vocabulary.

• Financial statements: the structured report of an entity's financial position, performance and cash flows. A complete IFRS set comprises a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity, a statement of cash flows, and notes.
• Fixed assets: an everyday term for the long-term assets a business uses to operate rather than to sell, mainly property, plant and equipment and sometimes intangible assets. They are recorded in a fixed asset register and depreciated or amortised over their useful lives.
• FIFO: first in, first out, an inventory cost formula that assumes the items bought or produced first are sold first, so closing inventory reflects the most recent costs. IAS 2 permits FIFO and weighted average cost but does not permit LIFO.
• Fiscal year: a twelve-month period used for financial reporting and often for tax, also called the financial year. A fiscal year need not match the calendar year; for example, it might run from 1 April to 31 March.
• Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (IFRS 13). Fair value is an exit price, not an entity-specific value.
• Financial accounting: the branch of accounting that records transactions and prepares general-purpose financial statements for external users, such as investors, lenders and tax authorities, in accordance with a framework such as IFRS or local GAAP.
• Forensic accounting: the application of accounting, auditing and investigative skills to legal matters, such as fraud investigations, commercial disputes, insurance claims and valuations, producing evidence and expert reports that can be used in court or arbitration.
• Free cash flow: operating cash flow minus capital expenditure: the cash a business generates that is available for debt repayment, dividends or new investment. Operating cash flow of EUR 900,000 and capital expenditure of EUR 350,000 give free cash flow of EUR 550,000.

F terms (part 2)

Currency, leasing, instruments and cost-behaviour terms beginning with F.

• Functional currency: the currency of the primary economic environment in which an entity operates (IAS 21), normally the one in which it mainly generates and spends cash. Transactions in any other currency are foreign-currency transactions and are translated into it.
• Finance lease: a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset (IFRS 16). The classification applies to lessors, who recognise a net investment in the lease as a receivable; lessees apply a single model to almost all leases.
• Financial instrument: any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity (IAS 32). Trade receivables, loans, bonds, shares and derivatives are all financial instruments.
• Fixed costs: costs that stay the same in total within a relevant range of activity, whatever the level of output, such as rent, insurance and salaried staff. Fixed cost per unit falls as volume rises.
• Factoring: selling trade receivables to a finance company, the factor, at a discount in exchange for immediate cash. Under IFRS 9 the receivables are derecognised if substantially all risks and rewards pass to the factor; if they are retained, as with full recourse, the cash received is a borrowing.
• Fraud: an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving deception to obtain an unjust or illegal advantage (ISA 240). Auditors consider both fraudulent financial reporting and misappropriation of assets.
• Finished goods: completed products that are ready for sale and held in inventory. Under IAS 2 they are measured at the lower of cost, including materials, labour and allocated production overheads, and net realisable value.
• Forecast: an estimate of future financial results, such as sales, profit or cash, based on actual results to date and current expectations. Unlike a budget, which is usually set once as a target, a forecast is updated as conditions change.

G terms

Ledger, profit, group and payroll terms beginning with G.

• General ledger: the principal set of accounts that holds every account in the chart of accounts, with the balances that feed the trial balance and financial statements. Transactions reach it directly from journals or as totals from subsidiary ledgers.
• Gross profit: revenue minus cost of goods sold. Revenue of EUR 500,000 and cost of goods sold of EUR 300,000 give gross profit of EUR 200,000, before operating expenses such as rent, salaries and marketing are deducted.
• Goodwill: an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised (IFRS 3). Goodwill is not amortised under IFRS but is tested for impairment at least annually (IAS 36).
• Going concern: the assumption that an entity will continue operating for the foreseeable future, with neither the intention nor the need to liquidate or cease trading. Management must assess it, and the auditor evaluates that assessment under ISA 570.
• GAAP: generally accepted accounting principles, the accounting rules used in a particular jurisdiction, such as US GAAP, UK GAAP under FRS 102, or Canadian accounting standards for private enterprises. Many countries require or permit IFRS instead of, or alongside, local GAAP.
• Gross margin: gross profit expressed as a percentage of revenue. Gross profit of EUR 200,000 on revenue of EUR 500,000 gives a gross margin of 40 per cent, showing how much of each sale remains to cover operating costs.
• Government grants: assistance by government in the form of transfers of resources to an entity in return for compliance with conditions (IAS 20). They are recognised only when receipt is reasonably assured, and taken to profit or loss as the related costs are incurred.
• Gross pay: an employee's total earnings for a period before any deductions, including salary or wages, overtime, bonuses and taxable allowances. Income tax, social security contributions and other deductions are subtracted from gross pay to give net pay.

H terms

Measurement, group, analysis and closing terms beginning with H.

• Historical cost: a measurement basis that records an asset at the amount paid, or the fair value of the consideration given, at acquisition, adjusted over time for depreciation and impairment. Most property, plant and equipment is carried on this basis.
• Holding company: a company that owns enough shares in other companies to control them, making it their parent. A holding company may trade itself or exist only to hold investments, and under IFRS 10 it prepares consolidated financial statements, subject to limited exemptions.
• Hedge accounting: an optional IFRS 9 treatment that aligns the timing of gains and losses on a hedging instrument, such as a forward contract, with those on the hedged item, reducing volatility in profit or loss. It requires formal designation and documentation at inception.
• Horizontal analysis: comparing financial statement line items across two or more periods to show changes in amount and percentage, such as revenue rising from EUR 800,000 to EUR 920,000, an increase of 15 per cent.
• Hyperinflationary economy: an economy with very high inflation, indicated by factors such as cumulative inflation over three years approaching or exceeding 100 per cent (IAS 29). Entities with a hyperinflationary functional currency restate their financial statements in current purchasing-power terms.
• Hurdle rate: the minimum rate of return a project or investment must be expected to earn before it is accepted, often based on the weighted average cost of capital plus a premium for the project's risk.
• Hire purchase: a financing arrangement in which a buyer pays for an asset in instalments and obtains legal title after the final payment. Under IFRS the buyer normally records the asset as property, plant and equipment and the unpaid balance as a liability.
• Hard close: a period-end close in which all transactions are fully recorded, reconciled and reviewed, and the period is then locked so that no further entries can be posted. It contrasts with a soft close, which relies more on estimates.

I terms (part 1)

The core I vocabulary: the income statement, invoices, inventory, impairment and IFRS.

• Income statement: the financial statement showing revenue, expenses and profit or loss for a period, also called the profit and loss account or statement of profit or loss. For annual periods beginning on or after 1 January 2027, IFRS 18 requires operating, investing and financing categories and specified subtotals.
• Invoice: a document a seller issues to a buyer requesting payment for goods or services supplied, stating the parties, date, description, quantities, prices, taxes and payment terms. It is the source document for recording a credit sale and, for the buyer, a purchase.
• Inventory: assets held for sale in the ordinary course of business, in the process of production for such sale, or as materials or supplies consumed in production or services (IAS 2). Inventory is measured at the lower of cost and net realisable value.
• Intangible asset: an identifiable non-monetary asset without physical substance (IAS 38), such as software, patents, licences, and acquired customer lists and brands. Internally generated brands and customer lists cannot be recognised; development costs can once specific criteria are met.
• Impairment: a fall in the recoverable amount of an asset below its carrying amount (IAS 36). The asset is written down to its recoverable amount and the impairment loss is recognised in profit or loss, or against a revaluation surplus where one exists.
• IFRS: International Financial Reporting Standards, the accounting standards issued by the International Accounting Standards Board, including the earlier IAS standards and their interpretations. IFRS is required for the consolidated accounts of EU listed companies and is used in more than 140 jurisdictions.
• Internal control: the processes, policies and procedures designed and operated by management to provide reasonable assurance about reliable financial reporting, effective and efficient operations, and compliance with laws. Approvals, segregation of duties and reconciliations are examples.
• Input VAT: value added tax a business pays on its purchases and imports. A VAT-registered business can normally deduct input VAT from the output VAT it charges, paying or reclaiming the difference on its VAT return; input VAT linked to exempt supplies is not recoverable.

I terms (part 2)

Further I terms from reporting, groups, ratio analysis, closing and leases.

• Internal audit: an independent, objective assurance and consulting activity within an organisation that evaluates risk management, control and governance processes. Internal auditors report to the audit committee or board, and external auditors may use their work under ISA 610.
• Interim financial reporting: financial statements for a period shorter than a full financial year, such as a half-year or quarter. IAS 34 sets the minimum content, which may be condensed, and the recognition and measurement principles for interim reports.
• Investment property: land or a building held to earn rentals, for capital appreciation or both, rather than for use in production, administration or sale in the ordinary course of business (IAS 40). It is measured using either the cost model or the fair value model.
• Intercompany transaction: a transaction between two entities in the same group, such as a sale, loan, management recharge or dividend. Each entity records it in its own books, and it is eliminated on consolidation so that the group reports only transactions with outside parties.
• Inventory turnover: cost of goods sold divided by average inventory, showing how many times inventory is sold and replaced in a period. Cost of goods sold of EUR 730,000 and average inventory of EUR 146,000 give an inventory turnover of 5 times.
• Interest coverage ratio: earnings before interest and tax divided by interest expense, showing how comfortably a business can pay interest from its profits; also called times interest earned. EBIT of EUR 600,000 and interest of EUR 150,000 give cover of 4 times.
• Income summary account: a temporary account used at year end to collect the closing balances of all revenue and expense accounts. Its net balance, which is the profit or loss for the year, is then transferred to retained earnings.
• Incremental borrowing rate: the rate of interest a lessee would have to pay to borrow, over a similar term and with similar security, the funds needed to obtain an asset of similar value in a similar economic environment (IFRS 16). It is used to discount lease payments.

D to I terms in Skyline Nexus ERP

Skyline Nexus ERP applies several D to I terms directly. Double entry is enforced on every manual journal: a journal needs at least two lines and is refused unless total debits equal total credits. Depreciation runs monthly in Asset Management, where the Depreciation screen offers Straight Line, Declining Balance, Sum of Years Digits and Units of Production, and it posts to the ledger when Auto-post Depreciation Entries is switched on.

Fiscal years are created under Fiscal Authority, Fiscal Periods, with monthly or quarterly periods generated automatically, and every posting must fall within a period. The General Ledger and Day Book reports sit under Ledger Reports, the EBIT & EBITDA Report under Tax & Compliance Reports, and the Income Statement can be compared with the previous period or previous year. Inventory can be costed on FIFO, the IFRS-compatible choice, and the Income Summary Account set in Skyline Nexus settings is used when the fiscal year is closed.