Between the Sheets
Glossary of Terms
This is a glossary of all the terms that appear in the downloadable spreadsheets in this section. The downloadable spreadsheets and all the notes in this section have been written by Duncan Williamson. Follow the links below to get to the terms associated with each spreadsheet:
- Tasker - an introduction to the balance sheet and income statement
- Cost analysis - fixed and variable costs
- Elasticity - price, cross and income elasticities
- Profit measures - mark up and margin
- Gearing - different types of company finance and their significance
- Depreciation - measures of depreciation
- Cost volume profit analysis
- Profit Maximisation - revenues, costs and profit
- The Master Budget - an exercise in drawing up a cash budget, income statement and balance sheet
Objectivity:
the objectivity concept means that an accountant has to prepare any accounts only on the basis of objective and factual information. Thus, this concept attempts to ensure that if, for example, 100 accountants were to draw up a set of accounts for one business, there would be 100 identical accounting statements prepared.
Duality:
is the very foundation of double entry book keeping system and it comes from the fact that every transaction has a double (or dual) effect on the position of a business as recorded in the accounts. For example, when an asset is bought, another asset cash (or bank) is also and simultaneously decreased OR a liability such as creditors is also and simultaneously increased.
Entity:
otherwise known as the 'accounting entity' concept. The idea here is that the financial transactions of one individual or a group of individuals must be kept separate from any unrelated financial transactions of those same individuals or group. The best example here concerns that of the sole trader or one man business: in this situation you may have the sole trader taking money by way of 'drawings' - money for his own personal use. Despite it being his business and apparently his money, there are still two aspects to the transaction - the business is 'giving' money and the individual is 'receiving' money.
Cost:
this concept is based on the notion that only the costs paid to acquire an asset are relevant and thus should be the only costs to be shown in the accounts.
Monetary Measurement:
one of the simpler concepts. It simply and clearly states that only those transactions which may be expressed in money values (whatever the currency) are of interest to the accountant.
Materiality:
accountants should concern themselves only with matters which are significant because of their size and should not consider trivial matters.
Realisation:
Realisation occurs when a sale is made to a customer. The basic rule is that revenue is created at the moment a sale is made, and not when the price is later paid in cash.
Accruals:
The purpose of this concept is to make sure that all revenues and costs are recorded in the appropriate statement at the appropriate time. So, when a profit statement is compiled, the cost of goods sold relevant to those sales should be recorded accurately and in full in that statement. Costs concerning a future period must be carried forward as a prepayment for that period and not charged in the current profit statement.
Going concern:
this concept is the underlying assumption which any accountant makes when he prepares a set of accounts. That the business under consideration will remain in existence for the foreseeable future.
Consistency:
because the methods employed in treating certain items within the accounting records may be varied from time to time, the concept of consistency has come to be applied more and more rigidly.
Conservatism:
The concept says that whenever there are alternative procedures or values, the accountant will choose the one that results in a lower profit, a lower asset value and a higher liability value.
Stable money:
normal or historic cost accounting assumes that transactions occurring over a period of time can be measured in terms of a single, stable measuring unit eg Pounds, Dollars ... This means that, in the UK, all accounts are drawn up in Pounds; and this year's balance sheet can be compared with last year's balance sheet. All of this gives rise to consistency but there is a problem with reality - inflation means that very few currencies are truly stable.
Compound transaction:
in the Tasker case, we have combined two or more transactions in one question. For example, this is a compound transaction:
the company buys land for £7,000: £2,000 is paid in cash immediately and £5,000 is paid for by means of taking out a mortgage secured on the property
Here we have a cash transaction and a mortgage transaction.
From Cost Analysis: Fixed and variable costs
Total cost:
the total value of all costs incurred by a product or department or organisation. Total costs can be expressed in algebraic form as Y = a + bX
Fixed cost:
those costs that tend to remain unchanged even when the volume of sales or output changes. Fixed costs can be expressed in algebraic form as Y = a
Variable cost:
costs that tend to change in relation to changes in output. Variable costs can be expressed in algebraic form as Y = bX
Linear:
this term is used when costs and relationships we are describing are straight lines when they are put onto a graph. The formula for a straight line is Y = a + bX (see total cost). Non linear is the term used when costs, revenues and other relationships are curved lines when put onto a graph.
High low method:
a method cost behaviour estimation that uses only two sets of values to determine the values of 'a' and 'b' in the function Y = a + bX
Regression line:
the line of best fit. The line, or curve, that splits a series of data exactly in two.
Regression analysis:
ordinary least squares. The method that is used to estimate statistically the regression line and the value of Y = a + bX.
Left click the mouse:
the instruction to computer users to click on the button on the left hand side of the mouse. Most actions relating to mouse clicks use the left click.
Right click the mouse:
the instruction to computer users to click on the button on the right hand side of the mouse
Dialogue box:
a box or menu or display that informs the computer user that something has happened, or that they should do something, or that they are at the beginning or in the middle of a series of steps that they need to follow and complete to achieve a certain objective
Menu:
in computer jargon, a list
Chart wizard:
a function that helps spreadsheet users, for example, to build a chart or graph from data entered onto a worksheet
Icon:
a picture or graphic that represents a software package or a one click operation that starts a software package
F11 key:
in the case of Microsoft Excel, the Function Key that we press once we have selected one or more series of data and that will automatically build a graph for us.
| Price elasticity of demand = | % change in quantity demanded |
| % change in price |
| Income elasticity of demand = | % change in quantity demanded |
| % change in real incomes |
| Cross-elasticity of demand = | % change in quantity demanded of one product |
| % change in price of another good |
| Advertising elasticity of demand = | % change in quantity demanded |
| % change in advertising expenditure |
| Price elasticity of supply = | % change in quantity supplied |
| % change in price |
Total revenue = Total number of units sold x selling price per unit
Demand schedule:
the table, graph or data series that links the selling price of a good or service with the level of demand for it. In general, the higher the price the lower the demand and vice versa.
From Profit measures: mark up and margin
Mark up
is the amount of profit added on to the cost of a product or service to give selling price. A mark up is usually expressed as a percentage. Note: you might see a definition that says that mark up refers to Gross Profit and Cost of Sales. No problem, it's really the same as we have said.
Margin
is short for profit margin. The margin compares the profit made with the selling price that we sold our things for. The margin may be shown as either a percentage or as a value; and here we'll show it as a percentage figure.
From Gearing: different types of company finance and their significance
Permanent capital
is made up of ordinary shareholders' funds (share capital and reserves)
Long term capital
is made up of preference shares and loans such as mortgages, bank loans and debentures
Short term capital
is made up of creditors and similar sources normally provided in exchange for goods and services
Mortgage:
a debt, secured on real property or land buildings
Public limited company:
a company that has a share capital for that members of the public can buy
Private limited company:
a company that has a share capital but that members of the public cannot readily buy
Equity capital:
the ordinary shares of a public or private limited company
Nominal value:
the value of a share that is written on the share certificate of the company. Note: the nominal value and the market value of a share can be the same or more or less than each other!
Risk capital:
a synonym for the equity capital
Par value:
a synonym for nominal value
Share capital:
the permanent capital of a company divided into shares or smaller amounts
Trade creditor:
a person who has supplied goods in exchange for a promise to pay in the future
Ordinary shares:
a synonym for equity shares
Bank overdraft:
a short term loan taken out by a company or individual that is normally repayable on demand
Preference shares:
shares in a company that often have a fixed dividend due to them and that have preference over ordinary shares if the company has a problem and has to be closed down and/or sold
Expense creditor:
a person who has supplied services in exchange for a promise to pay in the future
Voting capital:
share capital in a company the holding of which entitles the owner to attend general meetings of the company and vote on the items on the agenda
Dividends:
amounts of money paid out of the profit of a company to the holders of ordinary and preference shares
Redeemable:
shares or loans that can be sold back to the company that issued them
Dividends payable:
dividends that have been promised but not yet paid
Loans:
amounts borrowed from banks, finance houses, other business or individuals
Interest:
the amount payable on a loan by way of reward to the lender
Debenture:
a loan secured on an asset. That is, we might borrow some money to buy a large machine and the lender of the money will prepare a debenture that says that if we have a problem paying back the interest on the loan and the money it self, the lender can take the machine and sell it or do whatever he needs to get his money back.
Capital employed:
the difference between total assets and current liabilities
Depreciable amount
is the cost of the asset less the scrap or resale value that is expected to be received when the asset is finished with.
Depreciation
arises because fixed assets lose value as they get older and wear out. Depreciation is the allocation of the depreciable amount of an asset over its working life.
Depreciable assets
are assets which are expected to have a limited working life that is greater than one year and that are used in the production or supply of goods or services or for administration purposes.
Working life
is the length of time that the organisation expects the asset to remain useful; or the number of units of production that can be expected to be made by the asset. The working life is also known as the Useful Life.
Straight Line Method:
This is the simplest method. Here we divide the total cost of an asset by an estimate of its working life; we also have to take into account any selling or scrap value that we might get back when we sell the asset at the end of that working life. The amount charged for depreciation will be the same for every year using this method and is calculated as follows:
| Cost of the asset - Selling Value |
| Working life of the asset |
Reducing balance method:
This method charges a lot of depreciation in the early years and less later. The method works on the basis that in the early years of the life of an asset its repair and maintenance costs will be small; but they will increase as the asset gets older. This suggests that depreciation + repairs and maintenance will be the same each year.
Where n is the working life of the asset
S is the selling value of the asset and
C is the cost of the asset
Units of production method:
With this method, depreciation is calculated by sharing the cost of the asset over its working life in terms of the number of units it will make. The calculation is simple and is
| Cost of the asset - Selling Value |
| Number of units of output to be produced during the working life of the asset |
Sum of the years' digits method:
This method calculated depreciation by taking the total working life of the asset and using this to apply a fraction based on that working life. The calculation here gives us a different value year by year and is based on the following formula:
Where SYD = sum of the year's digits
n = working life of the asset in years
Depletion method:
This method of depreciation applies to natural resources such as coal, oil, gold: assets that naturally are not replaced as they are exploited. This method is similar to the production unit method and is based on the following formula:
| Cost of the asset - Selling Value |
| Total estimated reserves |
From Cost Volume Profit Analysis
Fixed costs:
costs that tend to remain unchanged even if output changes significantly. Here Y= a
Variable costs:
costs that vary directly with output. A change in output will automatically lead to a change in a variable cost. Here Y = bX
Semi variable cost:
a cost that is partly fixed and partly variable at the same time. Here Y = a + bX. Total costs are an example of a semi variable cost
Contribution:
the contribution that sales make towards fixed costs and profit. Also defined algebraically as:
Contribution = Sales - Variable Costs = Fixed Costs + Profit
Contribution per unit:
total contribution divided by the number of units made or sold
Contribution/Sales ratio:
keep as a decimal: contribution divided by sales, expressed as a decimal or as a percentage. Also known as the C/S ratio, it shows us the rate at which profits are made.
Break even point in units:
the number of units it is required to make to ensure that total costs = total revenue or sales. Calculated by dividing the total fixed costs by the contribution per unit
Break even point in values:
the total value of sales at which total costs = total revenues. Calculated by dividing the total fixed costs by the C/S ratio
Units to sell to achieve a given profit:
the break even calculation modified so that profit can equal any value other than, or including, zero. Calculated by dividing the total fixed + profit costs by the contribution per unit
Value of sales to achieve a given profit:
the break even calculation modified so that profit can equal any value other than, or including, zero. Calculated by dividing the total fixed + profit costs by the C/S ratio
Margin of safety:
also known as the MOS, this calculation shows us how much leeway we have in terms of where we are now and how close we are to our break even point. We need to know this if, for example, we are close to our break even point and we think that our sales are going to fall … hence driving us to make a loss. The formula for calculating the MOS value is MOS = (total sales - sales at BEP)/sales at BEP
Break even chart:
a graph based on linear functions that sets total costs against total revenue to illustrate when the organisation is operating at a profit, at a loss and at its break even point
Profit volume chart:
a graph that gives us the same break even results but it contains only the profit line, showing the amount of profit expected to be made over a range of levels of output
From Profit Maximisation: revenues, costs and profit
Total costs of production:
the total of all materials, labour and overhead costs associated with production
Break even point:
the level of output at which total costs = total revenues, therefore profit = zero
Accountant's break even chart:
a graph based on linear functions that sets total costs against total revenue to illustrate when the organisation is operating at a profit, at a loss and at its break even point
Economists break even chart:
the same as the accountant's break even chart except that cost and revenue functions are likely to be non linear and the profit curve is also drawn on the graph
Marginal cost:
the increase in total cost when output is increased by one unit
Marginal revenue:
the increase in total revenue when sales are increased by one unit MC = MR: profit maximising output
Master budget:
variously defined as the cash budget only; or the income statement and the balance sheet combined; or the income statement and the balance sheet and the cash budget combined. In this series, we use the latter definition.
Functional budget:
a budget relating to a function within an organisation. That is, relating to an area of an organisation that does something such as making, selling, administrating ...
Cash budget:
the budget that illustrates total cash to be received and spent and the balance left at the end of each period
Budgeted income statement:
a budget that illustrates the net sales set against cost of sales to give gross profit and then sets other revenues and expenses against that to give net profit
Budgeted trading account:
a budget that illustrates the net sales set against cost of sales to give gross profit
Budgeted profit and loss account:
a budget that illustrates the difference between gross profit and net profit and that also illustrates any revenues over and above net sales
Budgeted balance sheet:
a budget that shows the planned for levels of assets and liabilities at a particular time
Inter relationships of budgets:
the relationships between budgets that illustrates how budgets depend on each other. For example, the sales budget can have an impact on the cash budget, the production budget, the stock budget … and likewise for any other budget.
Duncan Williamson
November 2000