| Term | InThinking Definition | Key Ideas |
|---|---|---|
| Accumulated depreciation | This refers to the accrued value of non-current assets, most of which fall in value over time due to depreciation. | |
| Assets | The possessions owned by a business, which have a monetary value, e.g., buildings, land, machinery, equipment, inventories, and cash. | |
| Balance sheet | Also known as the statement of financial position, this set of final accounts shows the value of a firm’s assets, liabilities, and the owners’ investment (or equity) in the business, at a particular point in time. | |
| Cash | This refers to the money an organisation has either “in hand” (at its premises) and/or “at bank” (i.e., in its bank account). It is the most liquid type of current assets. | |
| Copyrights | These intangible assets give the registered owner the legal rights to creative pieces of work, such as the works of authors, musicians, conductors, playwrights (scriptwriters) and directors. | |
| Costs of sales (COS) | These are the direct costs of production, such as the cost of raw materials, component parts, and direct labour. | |
| Creditors | Also known as trade creditors, this refers to the suppliers that allow a business to purchase goods and/or services on trade credit. | |
| Current assets | Short-term assets belonging to an organisation which will last in the business for up to 12 months, e.g., cash, debtors, and stock (inventory). | |
| Current liabilities | These are the short-term debts of a business, which need to be repaid within twelve months of the balance sheet date. Examples include bank overdrafts, trade creditors, and other short-term loans. | |
| Debtors | A type of current asset, referring to individual or business customers that owe money to the organisation as they have bought goods or services on trade credit, i.e., they need to pay within 30 and 60 days. | |
| Depreciation | The fall in the value of a fixed asset over time, mainly due to wear and tear (usage) and obsolescence. | |
| Dividends | These are the payments from a company’s profit (after interest and tax) paid to the shareholders (owners) of the company. The amount of dividends paid to an individual shareholder depends on the number of shares held by the individual. | |
| Equity | Refers to the value of the owners' stake in the business, i.e., what the business is worth at the time of reporting the balance sheet. | |
| Expenses | These are a firm’s indirect costs of production, e.g., rent, management salaries, marketing campaigns, accountancy fees, bank interest charges, travel expenses, utilities, repairs and maintenance, and general insurance. | |
| Final accounts | These are the published accounts of an organisation, made available to and used by different stakeholders, e.g., managers, employees, shareholders, sponsors, financiers, and investors. | |
| Finished goods | These are the final products of a business, ready to be sold to customers. | |
| Fixed assets | The long-term assets (possessions) of an organisation that have a monetary value and are used repeatedly but are not intended for resale within the next twelve months, e.g. property and equipment. | |
| Goodwill | The reputation and established networks (know-how) of an organisation, which adds to a firm’s monetary value. | |
| Gross profit | This refers to the profit from a firm’s everyday trading activities. It is calculated by the formula: Sales revenue – Cost of sales. | |
| Illiquid assets | These items of value, owned by the business, cannot be sold quickly, are difficult to sell, and/or cannot be sold easily without incurring a significant loss in value. | |
| Intangible assets | Non-physical fixed assets that are valuable to a firm’s survival and success, such as brand value, goodwill, copyrights, trademarks, and patents. | |
| Intellectual property rights | Abbreviated as IPRs, these are a firm's fixed, intangible assets with a monetary value, comprised of goodwill, patents, copyrights and trademarks. | |
| Liabilities | The debts of a business, i.e., the money owed to others, e.g., money owed to financiers, trade creditors, and the government (for tax). | |
| Net assets | Refers to the overall value of an organization’s assets after all its liabilities are | |
| deducted. It is calculated by the formula: total assets minus current liabilities minus | ||
| non-current liabilities. | ||
| Non-current assets | Also known as fixed assets, this refers to the long-term assets or possessions of | |
| an organization with a monetary value but are not intended for resale within the | ||
| next twelve months of the balance sheet date. | ||
| Non-current liabilities | Also known as long-term liability, this refers to debt owed by a business which | |
| will take longer than a year (from the balance sheet date) to repay. | ||
| Overdrafts | This financial service allows customers to temporarily take out more money than is available in their bank account. | |
| Patents | The official rights given to a business to exploit an invention or process for commercial purposes. | |
| Profit and loss account | Also known as the income statement, this shows a firm’s profit (or loss) after all | |
| production costs have been subtracted from the organization’s revenues, each | ||
| year. It is also known as the statement of profit or loss or income statement. | ||
| Profit after interest and tax | Also referred to as profit for period, this section of the P&L account shows the | |
| actual value of profit earned by the business after all costs have been accounted | ||
| for. | ||
| Profit before interest and tax | This section of the P&L account shows the value of a firm’s profit (or loss) before deducting interest payments on loans and taxes on corporate profits. | |
| Raw materials | These are the natural resources used in the production process to create goods and provide services to customers. | |
| Residual value | Also known as the scrap value, this is the value of a fixed asset at the end of its useful life before it is replaced. | |
| Retained profit | Also referred to as retained earnings, this refers to the value of a firm’s earnings | |
| after all costs are paid (including interest and tax) and shareholders have been | ||
| compensated (dividends). | ||
| Sales revenue | Shown on the profit and loss account, this refers to the money an organisation earns from selling goods and services. | |
| Share capital | The value of equity in a business that is funded by its shareholders, either through an initial public offering (IPO) or via a share issue. | |
| Short-term loans | These are advances (loans) from a financial lender, such as a commercial bank, that needs to be repaid within 12 months of the balance sheet date. | |
| Stocks | Also known as inventories, these are the goods that a business has available for | |
| sale, per time period. | ||
| Straight-line depreciation | A method of depreciation that spreads the depreciation of a fixed asset evenly over its useful life, i.e., the value of the asset falls by the same amount each year. |
| Term | InThinking Definition | Key Ideas |
|---|---|---|
| Accounting rate of | ||
| return (ARR) |
| Also referred to as the average rate of return, this method of investment appraisal calculates the average annual profit of an investment project expressed as a percentage of the amount of invested. | | | Cumulative net cash flow | The sum of an investment project’s net cash flows for a particular year plus the net cash flows of all previous years. | | | Discount rate | Also known as a discount factor, this is the figure used to reduce the future value of money. It is used to establish the present value of cash that is yet to be received by the business. | | | Discounted cash flow | This method of investment appraisal uses a discount rate (the inverse of compound interest) to reduce the value of money received in future years because money loses its value over time. | | | Investment | Capital expenditure with the intention of a financial return on this spending at some point in the future. | | | Investment appraisal | The formal process of quantifying the financial risks of an investment decision, in order to establish whether the expenditure can be justified from a financial perspective. | | | Net present value (NPV) | A method of investment appraisal that calculates the real value (rather than the absolute value) of an investment project by discounting (adjusting) the actual value of money received in the future. | | | Payback period (PBP) | The investment appraisal method that considers the time it takes for the amount of money invested in a project to be repaid using the proceeds generated from the investment. | | | Principal | The principal refers to the capital outlay or the original amount spent on an investment project. | | | Qualitative investment appraisal
| Method of investment appraisal used to determine whether a project is worth investing in by using non-numerical techniques, e.g., whether the project aligns with the organisation’s mission. | | | Quantitative investment appraisal
| Method of investment appraisal used to determine whether an investment project is worthwhile based on financial analysis, namely, PBP, ARR, and NPV. | |
| Adverse variance | This discrepancy in the budget occurs when profit is lower than expected, due to costs being higher than expected and/or revenues being lower than predicted. | |
|---|---|---|
| Budget | A detailed financial plan for the future, usually involving the expected costs and revenues or a cash flow forecast, for a pre-determined period of time. | |
| Budgetary control | The financial methods used to attempt to balance actual outcomes with budgeted outcomes. This is achieved by systematic observations and corrective measures to minimize variances. | |
| Cost centre | A section or division of a business that has responsibility for its own operational costs. It is held accountable for its departmental expenditure. | |
| Favourable variance | This discrepancy in the budget occurs when profits are higher than expected, due to lower than expected costs and/or higher than predicted revenues. | |
| Organization by function | Arranging the different cost centres of a business based on different functional departments of the organization. | |
| Organization by geography | Arranging the different cost centres of a business based on the location of its operations domestically and/or overseas. | |
| Organization by product | Arranging the different cost centres of a business based on what it produces, i.e. its range of different goods and/or services. | |
| Profit | Refers to the positive difference between a firm’s total revenues and its total costs for any given period of time. | |
| Profit centre | A section or division of a business that has responsibility for both costs and revenues generated within the department. It is held accountable for the amount of profit generated. | |
| Variance | Refers to a discrepancy between the planned (budgeted) item of expenditure or revenue and the actual amount. | |
| Variance analysis | This is the management process of comparing planned and actual costs and revenues, in order to measure and compare the degree of budgetary success. | |
| Zero budgeting | A method of budgeting that requires all budget holders to justify each dollar of spending subject to management approved before the funds are released. |