 FORMULAE

1. Assets = Capital + Liabilities

2. Net Current Assets (Working Capital) = Current Assets – Current Liabilities

3. Current (Working Capital) Ratio = Current Assets

Current Liabilities

4. Return on Capital Employed = Profit before Interest x 100

(ROCE) Capital Employed

5. Net Profit Percentage = Net Profit __ x 100

Sales (Revenue)

6. Gross Profit Percentage = Gross Profit x 100

Sales (Revenue)

7. Stock/Inventory Turnover = Cost of Sales (Cost of Goods Sold)

Average Inventory

8. Acid Test Ratio = Current Assets – Inventory

Current Liabilities

9. Current (working capital) Ratio = Current Assets

Current Liabilities

10. Trade Receivables to Sales = Accounts Receivables x 365

Credit Sales for the year

11. Trade Payables to Purchases = Trade Payables x 365

Credit Purchases for the year

12. Average Inventory = Opening Inventory + Closing Inventory

2

13. Rate of Inventory Turnover (Inventory Turnover) =

Cost of Goods Sold (Cost of Sales)

Average Inventory

14. Straight line method of calculating depreciation =

Cost – Disposal Value

Number of years

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 GLOSSARY OF ACCOUNTING TERMS

WORD/TERM DEFINITION/MEANING

Accounting The process of recording, summarising, analysing and

interpreting of financial data to make informed judgments and
decisions.

Accounting Adjustments A business transaction which has not yet been included in the
accounting records of a business on a specific date.

Accounting Cycle A series of steps for the recording and the use of information for
decision-making.

Accounts Payable A person to whom money is owed for goods or services. (Formerly
known as creditors).

Accounts Receivables A person who owes money to the business for goods or services
supplied. (Formerly known as debtors).

Accrual and Matching When calculating profit or loss for a period, all revenues and
Concept expenses must be taken into account whether or not cash was
actually paid or received.

Accrued Expenses An expense for which the benefit has been received but which has
not been paid for by the end of the period.

Accrued Revenues Revenues from a source other than the main source of business
revenue that were due to be received by the end of the period but
which have not been received by that date.

Accumulated Depreciation The account where depreciation is accumulated for the balance
sheet purposes.

Acid Test Ratio Financial ratio that measures the ability of the firm’s liquid
current assets to pay short-term debts.

Adjusting Entries Journal entries recorded at the end of an accounting period to

alter the ending balances in various general ledger accounts.

Advanced Revenues Revenues that have not yet been earned, but represent products
or services that are owed to a customer.

Average Stock The average value of stock during a financial year, calculated by
adding together the values of the stock at the beginning of the
year and end of the year and dividing by two.

Bad Debts A debt that a business will not be able to collect.

Balance Sheet A statement showing assets, liabilities and capital of a business.

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Bank Charge Charges and fees made by a bank to their customers.

Bank Reconciliation A calculation showing that the cash book bank column balance
Statement agrees with the bank statement balance.

Budget An estimate of income and expenditure for a set period of time.

Business Plan Setting out a business’s future objectives and strategies for
achieving them.

Business Technology Refers to applications of science, data, engineering, and

information for business purposes, such as the achievement of
economic and organisational goals. The main element of
technology is the idea of change, and how it can affect business
and society.

Capital The total resources invested and left in a business by its owner.

Capital Expenditure When a business spends money to buy or add value to a fixed
asset.

Capital Ratio The extent to which a financial institution finances its operations
by issuing shares and retaining profits expressed as a percentage
of its assets.

Carriage Cost of transportation of goods. Cost of transportation of goods

purchased by a business is known as carriage inwards while the
cost of transportation of goods to the customers is known as
carriage outwards.

Cash Book Book of original entry for cash and bank receipts and payments.

Cash Discounts An allowance given for quick payment of an account owing.

Cash Flow Total money being transferred into and out of a business,
especially as affecting liquidity.

Cash Flow Projection A projection showing how cash will be generated and disposed of
by an organisation.

Cash Resources Money available to a business for spending in the form of cash,
liquid securities and credit lines.

Closing Inventory The amount of inventory a company has in stock at the end of its
financial year.

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Columnar Accounts Accounts making use of multiple columns in order to better

display their information. Where there are several accounts of
similar format such as partnership current accounts, they may be
in columnar form.

Consistency Concept Keeping the same method of recording and processing

transactions.

Control Accounts An account which checks the arithmetical accuracy of the

subsidiary ledgers.

Control Systems Ensuring compliance with accounting policies and procedures,

protecting the organisation’s assets, and preparing reliable and
timely financial reports.

Co-operatives A business entity formed to further the economic welfare of its

members by providing them with goods and services.

Corporations See limited liability company.

Ltd Liability Companies
Credit Notes A document sent to a customer showing allowance given by a
supplier in respect to unsatisfactory goods.

Current Ratio A ratio comparing current assets with current liabilities.

Debenture Loan to a company.

Debit Notes A document sent to a supplier showing allowance to be given for

unsatisfactory goods.

Depreciation The part of the cost of a fixed asset consumed during its period of
use by the firm.

Discounts Allowed A reduction from the amount due given to customers who pay
their accounts within the time allowed.

Discounts Received A deduction from the amount due given to a business by a

supplier when their account is paid before the time allowed has
elapsed.

Dishonoured Cheque A cheque which the writer’s bank has refused to make payment
upon.

Dividends The amount given to shareholders as their share of the profits of

a company.

Doubtful Debts Debts which a business is unlikely to be able to collect.

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Drawings Money or goods taken out of the business by the owner for their
private use.

Earnings Money obtained in return for goods or services provided.

E-Business The concept is broader than e-commerce, and includes the

transaction based e-commerce businesses and those who run
traditionally but cater to online activities as well. An e-business
can run any portion of its internal processes online, including
inventory management, risk management, finance, human
resources. For a business to be e-commerce and e-business, it
must both sell products online and handle other company
activities or additional sales offline.

E-Commerce Any transaction completed over a computer-mediated network

that involves the transfer of ownership or rights to use goods and
services. Transactions are not required to have a price and
include both sales and items like free downloads. E-commerce
includes transactions made on the internet, Intranet, Extranet,
World Wide Web, by email and even by fax.

Employee Earnings Record A record that details an employee’s payroll history.

Equity Another name for capital.

Error A non-fraudulent discrepancy in financial documentation.

Estimated Useful Life Lifespan of a depreciable non-current asset, during which it can
be expected to contribute to business operations.

Final Accounts Statements produced at the end of an accounting period.

Financial Institution An establishment that conducts financial transactions such as

investments, loans and deposits. Everything from depositing
money to taking out loans and exchanging currencies must be
done through financial institutions (www.investopedia.com).

Financial Statement Statement produced at the end of an accounting period.

Fixed Assets Assets which have a long life and which were bought with the
intention to use them in the business.

Fixed Capital Assets The portion of the total capital that is invested in fixed assets, that
stay in the business almost permanently.

Fixed Percentage The same amount of depreciation is recognised each year.

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Fluctuating Capital Assets When the capitals of partners are fluctuating, all adjustments
with regards to the interest on capitals, interest on drawings,
partners’ salaries and the like, are passed through the capital
accounts of the partners.

General Journal A book of original entry for all items not included in the other
books of original entry.

General Ledgers A ledger for all accounts other than those for customers and
suppliers.

Gross Loss Where the cost of goods sold exceeds the sales revenue.

Gross Pay The amount of wages or salary before deductions are made.

Gross Profit Where the sales revenue exceeds the cost of goods sold.

Gross Profit Percent Calculation that shows the proportion of sales comprised of those
costs directly related to either goods sold or services rendered in
order to generate sales.

Imprest System A system where a refund is made of the total paid out in a period
in order to restore the float to it agreed level.

Income Statement Financial report that shows an entity’s financial results over a
specific period of time.

Information ICT covers any product that will store, retrieve, manipulate,
Communication transmit or receive information electronically in a digital form.
Technology (ICT) For example, personal computers, digital television, email,
robots. In business, ICT is often categorised into two broad types
of product:

1. Traditional computer-based technologies (things you can

typically do on a personal computer or using computers
at home or at work).

2. Digital communication technologies (which allow people

and organisations to communicate and share
information digitally).

Inventory Goods in which the business normally deals that are held with the
intention of resale. (Formerly known as stock).

Inventory Control The process employed to maximise a company’s use of inventory.

Inventory Valuation Provide monetary value for items that make up inventory.

Late Lodgment A receipt recorded in the cash book but which was paid late to the
bank after the bank statement was prepared.

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Ledger (Sales/Debtor, Collection of an entire group of similar accounts in completing the

purchases, general) double entry in accounting.

Limited Liability Company An organisation owned by its shareholders, whose liability if

limited to their share capital.

Liquidity The ability of a business to pay its debts as they fall due and to
meet unexpected expenses within a reasonable settlement
period.

Manufacturing Accounts An account in which production cost is calculated.

Mutual Agency A legal relationship between partners in a partnership where

each partner has authorisation powers and the ability enter the
partnership into business contracts.

Net Book Value (Nbv) The cost of a fixed asset with depreciation deducted.

Net Current Assets Current assets minus current liabilities. Same as working capital.

Net Loss Where the cost of goods sold plus expenses are greater than the
revenue.

Net Pay The amount of wage or salary after deductions are made.

Net Profit Where sales revenue plus other income exceeds the sum of cost
of goods sold plus other expenses.

Net Profit Per cent Per cent of revenue left after all expenses have been deducted
from sales.

Nominal Accounts Accounts in which expenses, revenues and capital are recorded.

Non-Cash Resources Resources correlating to expenses that are essentially just

accounting entries rather than actual movements of cash.

Non-Current Assets Assets bought which have along life and are to be used in the
business.

Non-Current Liabilities Liabilities that will be settled in the longer term, which is usually
more than one year.

Non-Profit Organisations A form of business owned by a group of people called members.

The common interest or aim of the members is to fulfill the needs
of members rather than making a profit.

Non-Statutory Deductions Deductions made from pay at an employee’s request.

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Ordinary Shares Shares entitled to dividends after the preference shareholders

have been paid their dividends.

Overheads Refers to indirect manufacturing costs.

Overtime Hours worked in excess of eight consecutive hours.

Partnerships A firm in which two or more people are working together as

owners with a view to making profits.

Payroll A list of employees employed by a business to whom a wage or

salary is paid.

Permanence Arrangement of assets in order of how everlasting they are, with

the items likely to be used by the business for the longest period,
listed first.

Personal Accounts Accounts for accounts receivables and payables.

Petty Cash Book A cash book for small payments.

Petty Cash Vouchers A form used by someone requesting payment for a small item of
expenditure incurred on behalf of the business.

Preference Shares Shares that are entitled to an agreed rate of dividends before the
ordinary shareholders receive anything.

Pre-Payments An expense or revenue that has been paid or earned in advance.

Prime Cost Direct materials plus direct labour plus direct expenses.

Principles of Accounts Refers to the basic or fundamental principles in Accounting.

Private Organisations A limited company that must issue its shares privately.

Production Budget Calculates the number of units of products that must be

manufactured and is derived from a combination of sales forecast
and the planned amount of finished goods inventory to have on
hand.

Profitability Measures the firm’s potential to obtain and maintain revenues

that exceed expenses.

Prudence Ensuring that profit is not shown as being too high, or that assets
are shown as too high a value and that the financial statements
are neutral.

Public Organisations A company that can issue its shares publicly, and for which there
is no maximum number of shareholders.

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Purchase Book Book of original entry for credit purchases.

Purchase Invoice A source document received by a purchaser showing details of

goods bought and their prices.

Purchase Ledger Control This ledger segregates into one location a record of the amounts
Account a company spends with its suppliers.

Purchases Returns Goods returned to supplier. Also known as returns outwards.

Ratios Measures the relative efficiency of a firm based on its use of its
assets leverage or other such balance sheet items and are
important in determining whether a company’s management is
doing a good enough job of generating revenues and cash from
its resources.

Raw Material Basic materials from which goods and products are made.

Real Accounts Accounts in which property of all kinds are recorded.

Receipts A form acknowledging receipt of money for goods or services

rendered.

Reducing Balance Method A method of calculating depreciation based on principle that

annual depreciation is calculated as a percentage of the net-of-
depreciation-to-date balance brought forward at the start of the
period on the fixed asset.

Reserves The transfer of apportioned profits to accounts for use in future

years.

Returns Goods returned by a business to its suppliers or by a customer to

a business.

Returns Inwards Goods returned by customers. Also known as sales returns.

Returns Outwards Goods returned to suppliers. Also known as purchases returns.

Revenue Expenditure Expenses needed for the day-to-day running of the business.

Salary A fixed sum of money paid out on a monthly basis for an

employee.

Sales Book Book of original entry for credit sales.

Sales Budget An itemisation of a company’s sales expectations for the budget

period, in both units and dollars.

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Sales Invoice Source document showing details of goods sold and the prices of
those goods.

Sales Ledger Control Part of the balance sheet that shows at any given time how much
Account your customers owe you/your business.

Sales Returns Goods returned by customers. Also known as returns inwards.

Scrap Value The expected or estimated value of the asset at the end of its
useful life.

Separate Entity Basic accounting concept that we should always separately

record the transactions of a business and its owners.

Share Capital Money invested in a company by the shareholders.

Shareholder (Equity) Owners of shares in a limited liability company.

Sole Traders Where one person or a single family operates a firm.

Solvency The possession of assets in excess of liabilities; ability to pay one’s

debt.

Source Documents Written evidence of a business transaction.

Spreadsheet A worksheet that is arranged in rows and columns of a grid and

can be manipulated and used in calculations.

Standing Order A medium used to enable payments to be made automatically at

given dates into a bank account for an amount agreed by the
payer.

Statutory Deductions Compulsory deductions required by law to be taken out by the

employer from each employee pay.

Stock Turnover The number of times stock is sold in an accounting period.

Straight Line Method A method of calculating depreciation that involved deducting the
same amount every accounting period from the original cost of
the fixed asset.

Subsidiary Ledgers Contains accounts that do not appear in the general ledger.

Suspense Accounts An account in which you can enter the amount equal to the
difference in the trial balance while you try to find the cause of
the error(s) that resulted in the failure of the trial balance to
balance.

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Trade Discounts A deduction in price given to a trade customer when calculating

the price to be charged to that customer for some goods.

Transactions An event that is recorded in the accounting system.

(Cash/Non-Cash)
Trial Balance A list of account titles and their balances in the ledgers on a
specific date, shown in debit and credit columns.

Unlimited Liability Should a business fail, the owner stands to lose not only what
he/she invested but also their personal assets.

Unrepresented Cheque A cheque which has been given to a creditor but which has not
yet been received and processed by the writer’s bank.

Vertical Style A style in formatting where the columns are one above the other.
It shows the flow of fund in a given period.

Voluntary Association Group of individuals joined together on the basis of mutual

interest or common objectives, especially a business group that is
not organised or constituted as a legal entity.

Voluntary Deductions Deductions that are made at an employee’s request.

Wages Payment made to a worker in return for services rendered and

usually paid weekly.

Work In Progress Items not completed at the end of a period.

Working Capital Current assets minus current liabilities.

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