Accounting glossary: J to P

J and K terms

This accounting glossary page defines 88 terms from J to P, from journal entry and lease to provision and prudence. Terms are listed most common first within each letter, every definition stands alone, and IFRS, IAS or ISA references are included where they apply. Use it alongside the other three pages, which cover A to C, D to I and Q to Z.

No term is defined twice across the four pages; a synonym is given inside its main entry, such as gearing under leverage and prepayments under prepaid expenses.

• Journal entry: the record of a transaction in the books, listing the date, the accounts debited and credited, the amounts and a description. Total debits must equal total credits; for example, buying stationery for cash is Dr Office supplies 200 / Cr Bank 200.
• Journal: a book of prime entry in which transactions are first recorded in date order before being posted to ledger accounts. The general journal is used for entries that do not belong in a specialised day book, such as adjustments and corrections.
• Job costing: a costing method that accumulates the materials, labour and overheads of each individual job, contract or customer order separately. It is used where work is made to order, such as construction, printing, repairs and professional services.
• Joint arrangement: an arrangement of which two or more parties have joint control, meaning that decisions about the relevant activities require the unanimous consent of the parties sharing control (IFRS 11). It is classified as either a joint operation or a joint venture.
• Joint venture: a joint arrangement in which the parties with joint control have rights to the net assets of the arrangement (IFRS 11), usually held through a separate company. Each venturer accounts for its interest using the equity method under IAS 28.
• Key audit matters: the matters that, in the auditor's professional judgement, were of most significance in the audit of the current period's financial statements (ISA 701). They must be described in the auditor's report on the financial statements of listed entities.
• Key performance indicator: a measurable value chosen to track progress towards a business objective, such as gross margin, days sales outstanding, customer retention or on-time delivery. A useful KPI has a clear definition, a target, an owner and a reporting frequency.
• Key management personnel: the people with authority and responsibility for planning, directing and controlling the activities of an entity, directly or indirectly, including any director (IAS 24). Their compensation must be disclosed, and they are related parties of the entity.

L terms (part 1)

Liabilities, leases, liquidity and inventory valuation terms beginning with L.

• Liability: a present obligation of an entity to transfer an economic resource as a result of past events (Conceptual Framework, 2018). Trade payables, loans, lease liabilities, tax payable, accruals and provisions are all liabilities.
• Lease: a contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration (IFRS 16). A contract contains a lease if it identifies an asset and the customer controls the use of that asset.
• Lease liability: a lessee's obligation to make lease payments, measured at the present value of the payments not yet made, discounted at the interest rate implicit in the lease or, if that is not readily determinable, the lessee's incremental borrowing rate (IFRS 16).
• LIFO: last in, first out, an inventory cost formula that assumes the most recently acquired items are sold first. IAS 2 does not permit LIFO, so it cannot be used under IFRS, although US GAAP allows it.
• Liquidity: the ability of a business to meet its short-term obligations as they fall due, using cash or assets that can quickly be turned into cash. It is measured with ratios such as the current ratio and quick ratio, and with cash forecasts.
• Lower of cost and net realisable value: the IAS 2 rule that inventory is carried at the lower of its cost and its estimated selling price less costs to complete and sell. Items costing EUR 80 that now sell for a net EUR 65 are written down by EUR 15.
• Loan amortisation schedule: a table showing, for each instalment of a loan, the payment, the interest portion, the principal repaid and the remaining balance. With equal instalments, the interest portion falls and the principal portion rises over the term.
• Letter of credit: a bank's undertaking, issued on behalf of a buyer, to pay a seller a stated amount once the seller presents specified documents, such as a bill of lading and a commercial invoice. It is widely used in international trade to reduce payment risk.

L terms (part 2)

Further L terms from finance, company law, fraud, audit, IFRS 16 and IFRS 13.

• Leverage: the use of borrowed money to finance assets, which magnifies returns to shareholders both up and down; called gearing in the UK. It is commonly measured by debt to equity, debt to capital employed or net debt to EBITDA.
• Limited liability company: a company whose owners' liability for its debts is limited to the amount they invested or agreed to contribute. It is a separate legal person that must keep accounts and, in many countries, file or publish them under company law.
• Lapping: a fraud in which an employee steals a customer's payment and hides the theft by applying a later customer's payment to the first account, repeating the process. Rotating duties, separating cash handling from recording and confirming balances with customers help detect it.
• Lead schedule: an audit working paper that summarises the balances making up one financial statement line item, such as trade receivables, for the current and prior year, cross-referenced to the trial balance and to the detailed supporting schedules.
• Lessee and lessor: the lessee obtains the right to use an asset under a lease, and the lessor provides it. Under IFRS 16 the lessee recognises a right-of-use asset and lease liability, while the lessor classifies each lease as finance or operating.
• Low-value asset exemption: an IFRS 16 option allowing a lessee to expense lease payments straight-line, instead of recognising them on the balance sheet, for assets of low value when new, such as tablets, small personal computers and small items of office furniture.
• Level 1, 2 and 3 inputs: the IFRS 13 fair value hierarchy. Level 1 inputs are quoted prices in active markets for identical items, Level 2 inputs are other observable inputs, and Level 3 inputs are unobservable, such as an entity's own forecasts, and need the most disclosure.
• Landed cost: the total cost of getting purchased goods to the buyer's premises, including the purchase price, freight, insurance, import duties, non-recoverable taxes and handling. IAS 2 includes these costs of purchase in the cost of inventory.

M terms (part 1)

Materiality, matching and management accounting: the core M vocabulary.

• Materiality: information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that primary users make on the basis of the financial statements (IFRS definition). Auditors set a quantitative materiality level for the audit under ISA 320.
• Matching principle: the idea that expenses are recognised in the same period as the revenue they help to generate, such as recording the cost of goods sold when the sale is made. Under IFRS it is an outcome of accrual accounting rather than a separate rule.
• Management accounting: the preparation and analysis of financial and non-financial information for managers inside the organisation, such as budgets, forecasts, costings, variance analysis and performance measures, to support planning, control and decisions. It is not bound by IFRS.
• Markup: profit expressed as a percentage of cost. Goods costing EUR 80 and sold for EUR 100 carry a markup of 25 per cent, while the margin on the same sale is 20 per cent, because margin is measured on the selling price.
• Monetary items: units of currency held, and assets and liabilities to be received or paid in a fixed or determinable number of units of currency (IAS 21), such as cash, receivables, payables and loans. Foreign-currency monetary items are retranslated at the closing rate.
• Month-end close: the set of tasks a finance team completes after each month to finalise the books, including recording accruals and depreciation, reconciling bank and control accounts, reviewing the trial balance and producing management reports.
• Modified audit opinion: an auditor's opinion that is a qualified opinion, an adverse opinion or a disclaimer of opinion (ISA 705). It is issued when the financial statements are materially misstated or the auditor cannot obtain sufficient appropriate audit evidence.
• Management letter: a letter from the auditor to management and those charged with governance that reports internal control deficiencies found during the audit, with recommendations. ISA 265 requires significant deficiencies in internal control to be communicated in writing.

M terms (part 2)

Further M terms from audit, budgeting, costing, valuation and IFRS 18.

• Management representation letter: a written statement signed by management confirming certain matters to the auditor, such as that it has provided all relevant information and that all transactions have been recorded (ISA 580). It is dated as near as practicable to the auditor's report.
• Master budget: the combined budget for a whole organisation for a period, bringing together the sales, production, purchasing, labour, overhead, capital expenditure and cash budgets with a budgeted income statement and balance sheet.
• Marginal costing: a costing method that treats only variable costs as product costs and charges all fixed costs to the period in which they arise. It highlights contribution for decision-making but cannot be used for inventory in IFRS financial statements, because IAS 2 requires absorption.
• Mark-to-market: measuring an asset or liability at its current market price at each reporting date, with the change recognised in profit or loss or in other comprehensive income. Traded securities and derivatives are commonly measured in this way under IFRS 9.
• Monetary unit sampling: an audit sampling method in which each individual unit of currency in a population, rather than each item, has an equal chance of selection, so larger balances are more likely to be tested. It is used mainly to test for overstatement.
• Mixed cost: a cost with both a fixed and a variable element, also called a semi-variable cost, such as a phone contract with a monthly fee plus call charges. The high-low method or regression analysis can be used to separate the two parts.
• Management-defined performance measure: under IFRS 18, a subtotal of income and expenses that an entity uses in public communications outside the financial statements to show management's view of its performance, and that IFRS does not specify. It must be reconciled and explained in a single note.
• Mortgage: a loan secured on property, which the lender can take and sell if the borrower defaults. For a business, the outstanding mortgage is split between current and non-current liabilities, and the interest is expensed or, for a qualifying asset, capitalised under IAS 23.

N terms

Profit, valuation, group and presentation terms beginning with N.

• Net income: total revenue and gains minus all expenses and losses for a period, including tax, also called net profit or profit for the year. Revenue of EUR 1,000,000, expenses of EUR 850,000 and tax of EUR 30,000 give net income of EUR 120,000.
• Net realisable value: the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale (IAS 2). Inventory is written down when its net realisable value falls below cost.
• Non-controlling interest: the equity in a subsidiary not attributable, directly or indirectly, to the parent (IFRS 10), such as the 20 per cent held by outside shareholders in an 80 per cent owned subsidiary. It is presented within equity, separately from the parent's owners.
• Non-current assets: assets that do not meet the definition of current assets, generally those expected to be used or held for more than twelve months, such as property, plant and equipment, intangible assets, investment property and long-term investments.
• Non-current liabilities: obligations the entity has the right, at the reporting date, to defer settling for at least twelve months and does not expect to settle within its operating cycle, such as long-term loans, bonds, the non-current part of lease liabilities and deferred tax liabilities.
• Notes to the financial statements: the explanatory information that accompanies the primary statements, including material accounting policy information, judgements and estimates, breakdowns of line items and disclosures required by standards. The notes are an integral part of the financial statements.
• Normal balance: the side, debit or credit, on which an account's balance is normally found. Assets and expenses have a debit normal balance; liabilities, equity and revenue have a credit normal balance. A balance on the opposite side often signals an error.
• Net present value: the sum of the present values of a project's future cash inflows and outflows, discounted at a required rate of return, minus the initial investment. A positive net present value means the project is expected to earn more than the required return.

O terms (part 1)

Operating, overhead, share and comprehensive-income terms beginning with O.

• Operating expenses: the costs of running a business that are not part of cost of goods sold or financing, such as salaries, rent, utilities, marketing, administration and depreciation of office assets. Often called opex, they are deducted from gross profit to reach operating profit.
• Operating profit: profit from a business's main activities. Under IFRS 18, effective for annual periods beginning on or after 1 January 2027, it is a required subtotal equal to all income and expenses classified in the operating category, before investing, financing and income tax.
• Other comprehensive income: items of income and expense that IFRS requires or permits to be recognised outside profit or loss, in equity reserves, such as revaluation surpluses, exchange differences on translating foreign operations and some fair value changes on financial instruments.
• Overhead: an indirect cost that cannot be traced directly to a specific product or service, such as factory rent, supervision, utilities and administration. Production overheads are absorbed into inventory cost; other overheads are expensed in the period.
• Opening balance: the balance of an account at the start of an accounting period, which equals its closing balance at the end of the previous period. On moving to a new system, opening balances are entered as a balanced set that agrees to the closing trial balance.
• Ordinary shares: shares that carry the residual interest in a company, usually with voting rights and a right to dividends after any preference shareholders. They are presented as share capital, with any amount paid above nominal value shown as share premium.
• Operating cycle: the time between acquiring assets for processing and their realisation in cash, from buying inventory through to collecting cash from customers. Items realised or settled within the normal operating cycle are classified as current even if that is beyond twelve months.
• Onerous contract: a contract in which the unavoidable costs of meeting the obligations exceed the economic benefits expected to be received under it (IAS 37). Unavoidable costs are the lower of the cost of fulfilling it and any penalties for not fulfilling it, and a provision is recognised.

O terms (part 2)

Tax, leasing, segment, banking and costing terms beginning with O.

• Output VAT: value added tax a business charges its customers on taxable sales. It is collected on behalf of the tax authority and recorded as a liability, then declared on the VAT return, where input VAT on purchases is deducted from it.
• Off-balance-sheet financing: arrangements that give a business the use of assets or funding without recording the full liability on its balance sheet, such as certain factoring or special-purpose structures. IFRS 16 largely closed the lessee operating-lease route by bringing leases on to the balance sheet.
• Operating lease: a lease that does not transfer substantially all the risks and rewards incidental to ownership. Under IFRS 16 the classification applies to lessors, who keep the asset on their balance sheet and usually recognise lease income on a straight-line basis.
• Operating segment: a component of an entity that earns revenues and incurs expenses, whose operating results are regularly reviewed by the chief operating decision maker, and for which discrete financial information is available (IFRS 8). Listed entities disclose information by segment.
• Outstanding cheque: a cheque that has been written and recorded in the cash book but not yet presented to or cleared by the bank, also called an unpresented cheque. It is deducted from the bank statement balance in a bank reconciliation.
• Opportunity cost: the benefit given up by choosing one alternative over the next best one. If a machine used for product A could instead earn EUR 5,000 of contribution making product B, that EUR 5,000 is a relevant cost of choosing product A.
• Overdraft: a facility allowing a business to withdraw more than the balance in its bank account, up to an agreed limit, with interest charged on the amount overdrawn. Under IAS 7 an overdraft repayable on demand may be included in cash and cash equivalents.
• Overhead absorption rate: the rate used to charge production overheads to units of output, calculated as budgeted overheads divided by a budgeted level of activity. Overheads of EUR 240,000 over 12,000 machine hours give a rate of EUR 20 per machine hour.

P terms (part 1)

The most common P terms: petty cash, prepayments, provisions, payroll and posting.

• Petty cash: a small cash float kept on the premises to pay minor expenses such as postage, taxi fares or refreshments. Under the imprest system the float is topped up to a fixed amount at regular intervals, by the total of the vouchers spent.
• Prepaid expenses: payments made in advance for goods or services to be received in a future period, such as annual insurance or rent paid ahead. They are recorded as a current asset, also called prepayments, and expensed as the period of benefit passes.
• Provision: a liability of uncertain timing or amount (IAS 37). A provision is recognised when there is a present obligation from a past event, an outflow of resources is probable and a reliable estimate can be made; warranties, legal claims and restoration costs are examples.
• Purchase order: a document a buyer issues to a supplier authorising the purchase of stated goods or services at agreed quantities, prices and delivery terms. It creates a commitment but no accounting entry until the goods or services are received.
• Payroll: the process of calculating and paying employees' wages and salaries, withholding income tax and social security deductions, paying those amounts to the authorities, and recording the related expenses and liabilities in the accounts.
• Posting: transferring entries from a journal or day book into the individual accounts in the ledger, so that each account shows its movements and balance. In computerised systems, posting usually happens automatically when a document or journal is saved or approved.
• Property, plant and equipment: tangible items held for use in the production or supply of goods or services, for rental to others or for administrative purposes, and expected to be used during more than one period (IAS 16), such as buildings, machinery and vehicles.
• Peppol: an international network and set of specifications for exchanging electronic business documents, such as invoices and orders, between registered access points. It is governed by OpenPeppol and is used by several European public-sector and business e-invoicing requirements.

P terms (part 2)

Profitability, revenue recognition, error correction and reporting terms beginning with P.

• Profit margin: net profit as a percentage of revenue, also called net profit margin. Net profit of EUR 120,000 on revenue of EUR 1,000,000 gives a profit margin of 12 per cent: the share of each sale kept after all expenses and tax.
• Performance obligation: a promise in a contract with a customer to transfer a distinct good or service, or a series of distinct goods or services that are substantially the same (IFRS 15). Revenue is recognised as each performance obligation is satisfied.
• Prior period error: an omission from, or misstatement in, an entity's financial statements for one or more prior periods arising from failure to use, or misuse of, reliable information that was available (IAS 8). Material prior period errors are corrected retrospectively by restating comparatives.
• Pro forma invoice: a preliminary invoice sent before goods are delivered or services performed, showing what the final invoice will contain, often for customs, prepayment or internal approval. It is not a tax invoice and is not recorded as a sale or a receivable.
• Principal versus agent: the IFRS 15 assessment of whether an entity controls a good or service before it is transferred to the customer. A principal recognises revenue gross, while an agent that arranges for another party to supply recognises only its fee or commission.
• Presentation currency: the currency in which financial statements are presented (IAS 21). When it differs from the functional currency, assets and liabilities are translated at the closing rate and income and expenses at transaction-date or average rates.
• Payback period: the time a project takes to recover its initial investment from its net cash inflows. An investment of EUR 100,000 returning EUR 25,000 a year pays back in four years; the method ignores the time value of money and later cash flows.
• Purchase ledger: the subsidiary ledger holding an individual account for each supplier, showing invoices, credit notes and payments, also called the accounts payable ledger. Its total must agree with the trade payables control account in the general ledger.

P terms (part 3)

Closing, inventory, business-structure and audit terms beginning with P.

• Post-closing trial balance: a trial balance prepared after the closing entries are posted, listing only balance sheet accounts because revenue, expense and drawings accounts have been reset to zero. It confirms the ledger is in balance before the new year begins.
• Prudence: the exercise of caution when making judgements under conditions of uncertainty, so that assets and income are not overstated and liabilities and expenses are not understated (Conceptual Framework, 2018). It does not permit deliberate understatement or hidden reserves.
• Partnership: an unincorporated business owned by two or more people who share its profits and, in a general partnership, are jointly liable for its debts. Each partner usually has a capital account and a current account, and profits are shared under the partnership agreement.
• Perpetual inventory system: a system in which inventory records are updated for every purchase, sale and adjustment as it happens, so the quantity and cost on hand and the cost of goods sold are always current. Physical counts are used to check the records.
• Periodic inventory system: a system in which inventory is counted only at the end of each period and cost of goods sold is calculated as opening inventory plus purchases minus closing inventory. It is simpler but gives no running balance of stock.
• Payment terms: the conditions under which a buyer must pay a seller, such as net 30 days, payment on delivery, or a 2 per cent discount if paid within 10 days. Payment terms drive receivables and payables ageing and cash forecasts.
• Purchase price allocation: the process, after a business combination, of measuring the acquired identifiable assets, including intangibles such as customer relationships and brands, and the liabilities assumed at fair value, with the remainder of the consideration recognised as goodwill (IFRS 3).
• Prepared by client list: a list the external auditor sends to the entity, often called a PBC list, of the schedules, reconciliations, documents and explanations it needs, with owners and due dates. Delivering it complete and on time shortens the audit.

J to P terms in Skyline Nexus ERP

In Skyline Nexus ERP a journal entry is made under Fiscal Authority, Journal Entries, New Journal Entry, with a Journal Date, an optional Reference No., a Description, and journal lines carrying the Account, Cost Center, Debit and Credit. Save as Draft keeps the entry editable; Save & Submit sends it for approval when approval is required and the amount is at or above the Approval Threshold. Only draft journals can be deleted, and a posted journal is corrected by a reversal, which keeps the history intact.

Opening balances have their own screen in Skyline Nexus and are saved only when total debits equal total credits, and customer and supplier openings are entered per contact rather than on the receivables and payables control accounts. Accounts are either Posting accounts, which take entries, or Heading accounts, which group them. Petty cash is managed in the Treasury module, processed payroll posts to the ledger when Auto-post Payroll Transactions is switched on, and each fiscal period is Open, Soft Close or Locked.