Accounting Glossary

Account A record that collects all the entries relating to one item, such as cash, receivables or rent expense. Accounting cycle The repeating sequence of steps from analysing documents to closing the books and preparing statements. Accounting errors Mistakes in recording; some, like posting to the wrong account, are not revealed by a trial balance. Accrual basis Recording income and expenses in the period they occur, regardless of cash timing. Accrued and prepaid expenses Accrued expenses are incurred but unpaid; prepaid expenses are paid for a future period. Adjusting entry An entry made at period end to bring balances into line with the accrual basis before statements are prepared. Assets Resources a business owns that are expected to bring future economic benefits. Capital The money or assets the owners have contributed to start or expand the business. Cash basis Recording income when cash is received and expenses when cash is paid. Chart of accounts The structured list of every account a business uses, each with a code, a name and a type. Closing entry An entry at period end that closes revenue and expense accounts and moves the result to equity. Compound entry A journal entry involving more than two accounts, with total debits equal to total credits. Consistency principle Using the same accounting policies from period to period unless there is good reason to change. Debit and credit The two sides of an account: debits increase assets and expenses, credits increase liabilities, equity and revenue. Deferred revenue Cash received in advance for goods or services not yet delivered, held as a liability. Double-entry bookkeeping Recording every transaction in at least two accounts so total debits equal total credits. Drawings Money or goods an owner takes from a sole proprietorship for personal use. Equity What remains for the owners after liabilities are deducted from assets. Expenses Costs used up in earning revenue during the period. Fiscal year The twelve-month period a business uses for its financial statements; it need not match the calendar year. General ledger The book that gathers the movements of each account and gives its balance. Going concern The assumption that a business will continue operating for the foreseeable future. Journal The book where transactions are first recorded in date order. Liabilities Obligations of the business to others, expected to be settled with economic resources. Opening balances The balances of accounts at the start of a period, equal to the previous period closing balances. Posting Transferring journal entries to their individual accounts in the ledger. Prudence Exercising caution so assets and income are not overstated and liabilities and expenses are not understated. Reserve A part of profits set aside for a specific purpose or by law and not distributed. Retained earnings Accumulated profits that have not been distributed to owners and remain in the business. Revenue Amounts a business earns from its ordinary activities. Stocktaking / physical count Counting assets, inventory and cash physically and comparing the result with the books. Subsidiary ledger A detailed ledger for sub-accounts, such as each customer, controlled by one general ledger account. Trial balance A list of all account balances at a date to check that debits equal credits.

Accumulated depreciation The total depreciation charged against an asset since it was acquired. Amortisation Depreciation of intangible assets: spreading their cost over their useful life. Capital and revenue expenditure Capital spending creates or improves an asset for years; revenue spending is consumed in the period and expensed. Capital work in progress The accumulated cost of a fixed asset still under construction, not depreciated until ready for use. Carrying amount Cost of an asset less accumulated depreciation and impairment. Declining balance method A depreciation method charging more in early years and less later. Depreciation Spreading the cost of a fixed asset, less residual value, over its useful life. Derecognition of assets Removing an asset from the books when it is sold or scrapped, recording any gain or loss. Fixed assets Tangible assets held for use, not for sale, and used for more than one year. Goodwill The excess of the price paid for a business over the fair value of its identifiable net assets. Impairment When an asset recoverable amount falls below its carrying amount, the loss is recognised. Intangible assets Non-monetary assets without physical form, such as trademarks and software. Investment property Property held to earn rentals or capital appreciation rather than for own use or ordinary sale. Lease liability The present value of future lease payments, recognised as a liability by the lessee. Residual value The estimated amount obtainable from disposing of an asset at the end of its life. Revaluation Carrying an asset at its current fair value instead of historical cost, with the difference treated per the standard. Right-of-use asset The asset a lessee recognises for its right to use a leased item over the lease term (IFRS 16). Straight-line method A depreciation method charging the same amount each year.

Accounting data backup Regular copies of accounting books and files stored elsewhere for recovery after loss or damage. Accounting spreadsheet A spreadsheet file used to record accounts or analyse, suited to small businesses and training. E-invoicing An invoice issued and sent in a structured digital format through a tax-authority approved system. ERP system An integrated software system linking accounting, inventory, sales, purchasing and HR in one database.

Capital budgeting The process of evaluating long-term investment projects and choosing which to undertake. Cash budget An estimate of monthly cash receipts and payments to spot surpluses or shortfalls early. Cash conversion cycle The time between paying suppliers and collecting from customers. Cost of capital The return that funders (lenders and owners) require from the business for their money. Discounted cash flow (DCF) A valuation method that estimates value as the sum of expected cash flows discounted to today. Dividends A portion of company profit distributed to shareholders in cash or shares. Internal rate of return (IRR) The discount rate at which a project net present value equals zero. Short-term financing Funding repaid within a year, such as overdrafts, supplier credit and short-term loans. Treasury shares Shares a company has bought back but not cancelled, shown as a deduction from equity.

Exchange rate The price of one currency in terms of another. Fiscal policy Government decisions on public spending and taxes to influence economic activity. Foreign exchange differences Gains or losses arising from movement in exchange rates between transaction and settlement or closing dates. Gross domestic product (GDP) The market value of all final goods and services produced within a country in a period. Inflation A general and sustained rise in prices that reduces the purchasing power of money. Marginal cost The increase in total cost from producing one extra unit. Monetary policy Central bank actions on money supply and interest rates to achieve stability. Price elasticity of demand A measure of how much quantity demanded changes when price changes. Supply and demand The two forces that set price: what sellers offer and what buyers ask for at each price. Trade balance The difference between the value of a country exports and imports of goods.

Amortisation schedule A table splitting each loan instalment into interest and principal, with the remaining balance. Bank transfer Moving money from one account to another through the bank, shown on the statement at execution date. Bill of exchange A commercial paper by which a drawer orders the drawee to pay a sum to the payee at a set date. Compound interest Interest added to principal so that later interest is earned on it too. Letter of credit A bank undertaking to pay the seller when documents complying with the credit terms are presented. Letter of guarantee A bank commitment to pay a set amount to the beneficiary if the customer defaults. Murabaha A sale at cost plus an agreed, disclosed profit margin, common in Islamic finance. Simple and compound interest Simple interest is on principal only; compound interest is on principal plus earlier interest.

Current ratio Current assets divided by current liabilities; a liquidity measure. Debt-to-equity ratio Total debt divided by equity, showing reliance on borrowed funds. Discount rate The rate used to convert future cash flows to today value, reflecting the cost of money and risk. DuPont analysis Breaking return on equity into profit margin, asset turnover and financial leverage. Earnings per share (EPS) The net profit attributable to each ordinary share for the period. Financial leverage Using debt to finance assets to raise owners returns, at higher risk. Financial ratios Relationships between statement figures that summarise liquidity, profitability, leverage and efficiency. Free cash flow Cash from operations after capital expenditure needed to maintain and grow the business. Future value The value of a sum today after it has grown at a given interest rate for a number of years. Horizontal analysis Comparing statement items across years to see the trend and percentage change. Interest coverage ratio Operating profit divided by interest expense, showing the ability to service debt. Inventory turnover How many times inventory is sold and replaced during the period. Liquidity A business ability to raise cash to pay short-term obligations when they fall due. Net present value (NPV) The present value of a project expected cash flows minus its initial investment. Net profit margin Net profit as a percentage of sales. Operating margin Operating profit as a percentage of sales. Payback period The time needed to recover the amount invested from the project cash flows. Present value The value today of an amount receivable in the future, discounted at a given rate. Price-to-earnings ratio (P/E) Share price divided by earnings per share, i.e. how much investors pay per unit of profit. Quick ratio Like the current ratio but excluding inventory. Receivables turnover A measure of how quickly receivables are collected. Return on assets (ROA) Net profit divided by total assets: how efficiently assets earn profit. Return on equity (ROE) Net profit divided by equity: the return earned on the owners funds. Return on invested capital (ROIC) After-tax operating profit divided by invested capital (equity plus debt). Solvency The ability to meet all obligations in the long term, meaning assets exceed liabilities. Vertical analysis Expressing each statement item as a percentage of a base, such as sales or total assets. Working capital Current assets minus current liabilities.

Allowances Additional amounts on top of basic pay, such as housing, transport or nature-of-work allowances. Annual leave Paid leave an employee is entitled to each year under law and contract. Basic salary The fixed pay of an employee excluding allowances, bonuses and overtime. End-of-service benefit A benefit an employee is entitled to at the end of employment, based on service and pay. Gross and net salary Gross is pay before deductions; net is what the employee receives after them. Lateness deduction The amount deducted from pay for late arrival, early departure or absence. Overtime Hours worked beyond normal hours, paid at a higher rate. Payroll A monthly schedule listing each employee earnings, deductions and net pay. Probation period An initial period during which both sides assess suitability, ending in confirmation or termination. Salary advance An amount paid to an employee ahead of salary and deducted in instalments. Social insurance A compulsory scheme funded by employee and employer contributions for pensions and benefits.

Deferred tax Tax arising from temporary differences between the accounting and tax values of assets and liabilities. Income tax A tax on company profits or personal income under the law. Payroll income tax Income tax on employment earnings, using progressive brackets and deducted from salary. Tax avoidance and evasion Avoidance legally arranges affairs to reduce tax; evasion is illegal concealment or falsification. Tax identification number A number issued by the tax authority to a taxpayer and shown on invoices and returns. Tax invoice An invoice meeting the tax law requirements, needed to reclaim input tax. Tax return A form filed with the tax authority stating income, profit and tax due. Value added tax (VAT) An indirect tax on the value added at each stage of supply, borne by the final consumer. Withholding tax Tax deducted by the payer from a payment and remitted to the tax authority on behalf of the recipient. Zakat An obligatory Islamic levy on wealth above the nisab held for a lunar year, 2.5% on cash and trade goods. Zakat base The total of zakatable assets after permitted deductions. Zakat threshold (nisab) The minimum wealth that, once reached and held for a lunar year, makes zakat due.

Balance sheet A statement of assets, liabilities and equity at a specific date (balance sheet). Cash flow statement A statement of cash inflows and outflows from operating, investing and financing activities. Consolidated financial statements Statements presenting a parent and its subsidiaries as if they were a single entity. Contingent liabilities Possible obligations depending on uncertain future events, or present obligations that cannot be measured reliably. Current assets Assets expected to be turned into cash or used within a year or one operating cycle. Current liabilities Obligations due within a year or one operating cycle. EBITDA A measure of operating performance before interest, taxes, depreciation and amortisation. Events after the reporting period Events between the reporting date and the date the statements are authorised, which may require adjustment or disclosure. Fair value The price that would be received to sell an asset or paid to transfer a liability in an orderly market transaction. Gross profit Sales minus cost of goods sold, before operating expenses. Historical cost Measuring an asset at what was paid to acquire it at the time of purchase. Income statement A statement showing revenue and expenses for a period and the resulting profit or loss. Net profit What remains of revenue after all expenses, interest and taxes. Non-controlling interest The share of a subsidiary net assets and profit that belongs to shareholders other than the parent. Notes to the financial statements Notes explaining the figures in the financial statements and the policies used. Operating profit (EBIT) Profit from the main business activity before interest and taxes. Other comprehensive income Gains and losses that affect equity without passing through profit or loss, such as translation differences and revaluation. Statement of changes in equity A statement showing the movement in each component of equity during the period.

Activity-based costing (ABC) A method that assigns overhead to products according to the activities they actually consume. Break-even point The sales level at which total revenue equals total costs. Budget A quantitative financial plan for a coming period, against which results are compared. Contribution margin Selling price less variable cost; it contributes to fixed costs and profit. Cost of goods sold The cost of the goods sold during the period, deducted from sales. Direct labour Wages of workers who directly make the product and can be traced to units. Direct materials Materials that become part of the product and whose cost can be traced directly to units. Economic order quantity (EOQ) The order size that minimises the total of ordering and holding costs. FIFO An inventory costing method assuming the first goods bought are the first sold (FIFO). Fixed and variable costs Fixed costs stay the same with activity; variable costs change in proportion to it. Flexible budget A budget restated at the actual activity level to compare actual results with what should have been spent. Inventory Goods or materials held for sale or for use in production. Joint costs Costs of a single process that yields several products, later allocated among them. Manufacturing overhead Factory costs that cannot be traced directly to a unit, such as factory rent, power and supervision. Margin of safety The gap between actual or expected sales and break-even sales. Net realisable value The estimated selling price less the costs of completion and sale; inventory is written down to it if lower than cost. Operating leverage The sensitivity of operating profit to changes in sales, arising from fixed costs. Opportunity cost The value of the best alternative given up when a decision is made. Periodic and perpetual inventory Periodic determines inventory by a physical count at period end; perpetual updates it with every movement. Production cost The sum of direct materials, direct labour and manufacturing overhead for a period of production. Reorder point The stock level at which a new purchase order is placed so it arrives before stock runs out. Standard cost A predetermined unit cost under normal operating conditions, against which actual cost is compared. Sunk costs Costs already incurred that cannot be recovered and should not affect future decisions. Variance analysis Comparing actual with planned figures and explaining the difference. Weighted average cost An inventory costing method using the average cost of units available, weighted by quantity.

Accounts payable Amounts the business owes to suppliers for credit purchases. Accounts receivable Amounts owed to the business by customers for credit sales. Audit evidence The information an auditor relies on: documents, observation, confirmations and recalculation. Audit risk The risk that the auditor gives an inappropriate opinion when the statements contain material misstatement. Auditor's opinion The auditor conclusion: unmodified, qualified, adverse, or a disclaimer of opinion. Balance confirmation A written request to a customer, supplier or bank to confirm a balance at a date. Bank reconciliation Comparing the bank balance in the books with the bank statement and explaining differences. External audit An independent examination of financial statements by an outside auditor to give an opinion on fair presentation. Fraud An intentional act to deceive others to gain an advantage, such as misappropriating assets or misstating statements. Internal audit An independent activity inside the organisation that evaluates controls and risk management. Internal control Policies and procedures set by management to safeguard assets, ensure accurate records and comply with rules. Management letter A letter from the auditor to management describing control weaknesses noticed and recommendations. Materiality The size of an error or omission that could influence users decisions. Notes and cheques receivable / payable Post-dated cheques and bills: notes receivable are owed to us, notes payable are owed by us. Petty cash A small cash float given to an employee for minor daily expenses. Provisions Liabilities of uncertain timing or amount, recognised when probable and measurable. Segregation of duties Not giving one person all stages of a process (authorising, executing, recording and custody).

AAOIFI An organisation issuing accounting, auditing, governance and Shari a standards for Islamic financial institutions. Corporate governance The system of authority, responsibility and oversight among the board, management and shareholders. Disclosure Providing the information in statements and notes users need to understand the entity position and results. Egyptian Accounting Standards The standards applied by Egyptian entities, close to IFRS with local adjustments. GAAP The set of accounting rules and principles accepted in a country for preparing financial statements. IASB The independent body that sets IFRS, based in London. IFRS The set of standards issued by the IASB to harmonise financial reporting worldwide. Professional ethics The principles of accountant conduct: integrity, objectivity, competence, confidentiality and professional behaviour.

Agricultural accounting Treatment of biological assets (livestock, trees) and produce, measured at fair value less costs to sell. Construction accounting Accounting for long-term contracts, with revenue recognised by percentage of completion or transfer of control. Government accounting Accounting for public bodies, aimed at budget and public money control rather than profit. Islamic accounting Accounting that follows Shari a rules in contracts and structures, such as prohibiting interest and excessive uncertainty. Non-profit accounting Accounting for charities and associations, focusing on donations, restricted funds and spending efficiency.