Business terms in Finance and accounts

The rule that a business's assets always equal its liabilities plus equity, so that total assets minus total liabilities equals equity.

The total depreciation charged on a non-current asset since it was bought, deducted from its original cost in the statement of financial position to give its net book value.

A liquidity ratio that divides current assets minus stock by current liabilities, showing whether a business can pay its short-term debts without selling its stock.

A formal legal process in which an independent administrator manages an insolvent company and tries to rescue it, or to sell all or part of it, so that creditors recover more than in liquidation.

A difference between budgeted and actual figures that reduces profit, because actual revenue is lower than budgeted or actual cost is higher than budgeted.

The spreading of the cost of an intangible asset with a limited life, such as a patent or licence, over that life; the intangible equivalent of depreciation.

Resources owned or controlled by a business that have value and will bring future benefits, such as buildings, machinery, stock, debtors and cash.

An independent examination of a business's final accounts by qualified accountants (auditors), who give an opinion on whether the accounts present a true and fair view.

The cost per unit of output, calculated as total cost divided by the quantity produced.

The average annual profit of an investment, after deducting its initial cost, expressed as a percentage of the initial cost: ((total returns − capital cost) ÷ years of use) ÷ capital cost × 100.

The revenue received per unit sold, calculated as total revenue divided by the quantity sold; equal to the price when every unit sells at the same price.

The mean value of a business’s stock over a period, found by adding opening stock and closing stock and dividing by 2.

The legal status of an individual, or in some countries a business, declared by a court to be unable to pay their debts, after which their assets are sold to repay creditors.

A quantitative financial plan, agreed in advance, that sets out the expected revenues and costs of a business or a part of it for a future period.

The manager who is responsible for a particular budget and accountable for explaining any differences between its budgeted and actual figures.

A wealthy individual who invests their own money in a small, new business with high growth potential, usually in return for a share of the ownership.

The total long-term finance invested in a business, equal to its non-current liabilities plus equity.

Spending on non-current assets, such as buildings, machinery and vehicles, that will be used in the business for more than one year.

The money a business holds in notes and coins and in its bank accounts at a given date; the most liquid current asset.

The movement of money into and out of a business over a given period of time.

A statement of the expected cash inflows and cash outflows of a business, month by month, over a future period, showing the net cash flow and closing balance of each month.

Money received by a business in a period, for example from cash sales, payments by debtors, loans, owners' capital or the sale of assets.

Money paid out by a business in a period, for example for stock, wages, rent, interest, tax, loan repayments or the purchase of non-current assets.

The amount of cash a business holds at the end of a period, found by adding the period's net cash flow to its opening balance.

An asset that a borrower pledges to a lender as security for a loan, which the lender can take and sell if the loan is not repaid.

A legal right that protects the owner of an original creative work, such as writing, music, film, software or art, from having it copied or used without permission for a set period.

A department, section, product, location or activity of a business to which costs can be directly attributed, but which does not earn revenue of its own.

The direct cost of producing or buying the goods a business sold during an accounting period, calculated as opening stock plus purchases minus closing stock.

The use of accounting methods, estimates and judgments that may be legal but are chosen to make a business's financial performance or position look better than it really is.

An efficiency ratio that measures the average number of days a business takes to pay its suppliers: creditors divided by cost of sales, multiplied by 365.

Suppliers and other organisations to which a business owes money for goods or services bought on credit; trade creditors are shown as a current liability.

Raising finance from a large number of people, each contributing a relatively small amount, usually through an online platform, in return for a reward, shares, interest or nothing.

The running total of a project's net cash flows from year 0 onwards, showing at each point how much of the initial cost has been repaid.

Assets a business expects to turn into cash or use up within one year, mainly cash, debtors and stock.

Debts a business must pay within one year, such as bank overdrafts, trade creditors and short-term loans.

A liquidity ratio that divides current assets by current liabilities, showing whether a business has enough short-term assets to cover its short-term debts.

A long-term loan certificate (bond) issued by a company to investors, paying a fixed rate of interest and repaid on a stated date.

An efficiency ratio that measures the average number of days a business takes to collect money from its credit customers: debtors divided by total sales revenue, multiplied by 365.

Customers who have bought goods or services on credit and still owe the business money; shown as a current asset in the statement of financial position.

The fall in the value of a non-current asset over its useful life because of wear and tear, obsolescence or the passage of time, recorded as an expense in the accounts.

A cost that can be clearly identified with and allocated to a particular product, service or department, such as the raw materials or labour used to make it.

The number by which a future cash flow is multiplied to find its present value, which depends on the discount rate and the number of years until the cash flow arrives.

The process of converting future cash flows into their present values, by reducing them to allow for the time value of money.

A ratio that measures how well a business manages its assets and liabilities, such as how quickly it sells stock, collects debts and pays suppliers, and how much it relies on long-term debt.

The owners' stake in a business, made up of the capital they have put in (share capital for a company) and the profits kept in the business (retained earnings); equal to net assets.

The indirect costs of running a business over an accounting period, such as salaries, rent, marketing, insurance and depreciation, deducted from gross profit in the statement of profit or loss.

Money raised from people or organisations outside the business, such as shareholders, banks, suppliers, investors and other lenders.

A method of improving cash flow in which a business sells its debtors (unpaid customer invoices) to a specialist finance company for immediate cash, in return for a fee.

A difference between budgeted and actual figures that increases profit, because actual revenue is higher than budgeted or actual cost is lower than budgeted.

The financial statements a business prepares at the end of an accounting period, mainly the statement of profit or loss and the statement of financial position, to show its performance and financial position.

The money a business obtains and manages to pay for its activities; also the business function responsible for raising, planning, recording and controlling that money.

A cost that does not change with the level of output in the short run, such as rent, insurance and salaries; it must be paid even if output is zero.

A budget that is adjusted to the actual level of output or sales, so that costs which vary with output are compared with what they should have been at that level.

The percentage of a business’s capital employed that is financed by non-current liabilities, showing how far it relies on long-term borrowing rather than equity.

An intangible asset that arises when one business buys another for more than the fair value of its net assets; the excess paid for reputation, customers, staff and brands.

A sum of money given by a government or public body to a business for a specific purpose, which does not have to be repaid if its conditions are met.

The profit a business makes from trading before its expenses are deducted, calculated as sales revenue minus cost of sales.

Gross profit expressed as a percentage of sales revenue, showing how much of each $1 of sales is left after paying the cost of sales.

A method of setting budgets in which last period's budget or actual results are used as the starting point and adjusted by a percentage or amount for expected changes.

A cost that cannot be linked to a single product or service because it is shared by the whole business or several products, such as head office rent, administration and insurance.

The financial situation in which a person or business cannot pay its debts as they fall due, or in which its liabilities are greater than its assets.

Non-current assets that have no physical form but bring a business value, such as patents, copyrights, trademarks, licences, brands and goodwill.

The price paid for borrowing money, expressed as a percentage of the amount borrowed per year; for a lender or saver, the reward for lending.

Money raised from within the business or from its owner, such as personal funds, retained profit and the sale of assets.

Spending on capital assets, such as machinery, buildings or technology, now in the expectation of earning returns over several years in the future.

The use of quantitative techniques to assess whether an investment project is financially worthwhile, by comparing its expected returns with its cost, and to compare competing projects.

A contract that allows a business to use an asset owned by another firm (the lessor) in return for regular payments, without buying the asset.

The debts a business owes to people and organisations outside it, such as suppliers, banks and other lenders, which must be paid in the future.

The legal process of closing a company, in which a liquidator sells its assets and pays its creditors in a set order of priority; also called winding up.

The ability of a business to meet its short-term debts when they fall due by turning its current assets into cash quickly enough.

The extent to which a business is able to meet its short-term debts as they fall due, judged by comparing its liquid assets with its current liabilities.

A ratio that compares current assets, or the most liquid current assets, with current liabilities to show whether a business can pay its short-term debts.

Money borrowed from a bank or other lender for a set period, which must be repaid, usually in instalments, together with interest.

Loans a business must repay after more than one year, such as long-term bank loans, mortgages and debentures, shown under non-current liabilities.

Finance available to a business for more than five years or permanently, such as share capital, mortgages, debentures and retained profit, used mainly for non-current assets and expansion.

Financial services, mainly small loans, provided to people on low incomes who cannot obtain credit from traditional banks, usually to start or expand a small business.

A long-term loan to buy land or buildings, secured on the property, which the lender can take if repayments are not made.

The value of a business's total assets minus its total liabilities; it always equals total equity.

The value of a non-current asset in the accounts at a given date, calculated as its original cost minus the accumulated depreciation charged so far.

The difference between the total cash inflows and the total cash outflows of a business in a period; negative when outflows are larger than inflows.

The sum of the present values of an investment's future net cash flows minus its initial cost; a positive value means the project earns more than the discount rate.

Assets a business expects to keep and use for more than one year, such as land, buildings, machinery, vehicles and intangible assets.

Debts a business does not have to repay within the next year, such as long-term bank loans, mortgages and debentures.

The loss of value of an asset because it has become out of date, for example when newer technology replaces it, even though it may still work.

The amount of cash a business holds at the start of a period, equal to the closing balance of the previous period.

The value of the next best alternative given up when a choice is made.

A flexible short-term facility that allows a business to withdraw more money from its bank account than it holds, up to an agreed limit, paying interest only on the amount overdrawn.

The situation in which a business expands its sales and operations too quickly for its working capital and finance to support, so that it runs short of cash despite strong demand.

A legal right granted by a government that gives the owner of an invention the exclusive right to make, use and sell it for a limited period, usually up to 20 years.

The length of time it takes for the net cash flows from an investment to repay its initial cost.

The owner's own savings or personal money invested in the business; the main source of start-up capital for sole traders.

The value today of a sum of money to be received in the future, found by discounting it at a chosen interest rate.

The amount by which total revenue exceeds total cost in a period; if total cost is greater than total revenue, the result is a loss.

The profit a business makes from its operations, calculated as gross profit minus expenses, before interest on borrowing and tax are deducted.

The profit left after interest on a business's borrowing has been deducted from profit before interest and tax, and before tax on profits is paid.

A department, product, branch or other part of a business to which both costs and revenues can be attributed, so that its profit or loss can be calculated.

The profit left for the owners after interest and tax have been deducted, calculated as profit before tax minus tax; it is either paid out as dividends or kept as retained profit.

Profit before interest and tax expressed as a percentage of sales revenue, showing how much of each $1 of sales is left after cost of sales and expenses.

The ability of a business to make a profit in relation to its sales revenue or the capital invested in it.

A ratio that measures profit as a percentage of sales revenue or capital employed, such as the gross profit margin, profit margin and ROCE.

The tangible non-current assets a business uses in its operations, such as land, buildings, machinery, vehicles and computers, shown at cost in the statement of financial position.

A quantitative management tool that uses figures from the final accounts to calculate ratios, which are compared over time and with other businesses to judge financial performance.

The amount a business expects to receive for a non-current asset when it sells or scraps it at the end of its useful life.

The total of all the profits a business has kept since it started, after tax and dividends, shown as part of equity in the statement of financial position.

The profit left after tax and dividends have been paid, which is kept in the business and can be reinvested.

Profit before interest and tax expressed as a percentage of capital employed, measuring the profit generated from the long-term finance invested in a business.

Spending on the day-to-day running costs of a business, such as wages, rent, utilities and raw materials, whose benefit is used up within the year.

A distinct source from which a business earns revenue, such as product sales, subscriptions, advertising, licensing, commission or renting out assets.

The sale of an asset, usually property, to another party, which then leases it back to the seller, so that the business receives cash but continues to use the asset.

Raising finance by selling items the business owns and no longer needs, such as unused buildings, land, machinery or vehicles, or a part of the business.

The value of the goods and services a business sells during an accounting period, calculated as the price of each item multiplied by the quantity sold; the first line of the statement of profit or loss.

A cost with both a fixed element, paid regardless of output, and a variable element that changes with output, such as a utility bill with a standing charge.

The money a company raises by selling shares to investors, who become part-owners (shareholders) of the company; it is not repaid and carries no interest.

Loans and other borrowing a business must repay within one year, shown as other short-term loans under current liabilities in the statement of financial position.

Finance that must be repaid within one year, such as an overdraft or trade credit, used mainly to pay for working capital.

The ways in which a business obtains the money it needs, either from within the business (internal sources) or from outside it (external sources).

The finance needed to set up a new business and pay for its first assets and costs before it generates enough revenue to cover them.

A financial statement that shows what a business owns (assets), what it owes (liabilities) and the owners' equity at one particular date, usually the last day of the accounting period.

A financial statement that shows a business's sales revenue, costs and profit or loss over an accounting period, usually one year, and how the profit is divided between tax, dividends and retained profit.

The raw materials, work in progress and finished goods a business holds for production or sale; shown as a current asset and also called inventory.

An efficiency ratio that measures how quickly a business sells its stock, as cost of sales divided by average stock (times a year) or as the average number of days stock is held.

A method of depreciation that charges the same amount each year, calculated as the cost of the asset minus its residual value, divided by its useful life in years.

A payment from the government to a business that reduces its costs of production or the price of its product, usually paid on a continuing basis.

Assets that have a physical form, such as land, buildings, machinery, vehicles and stock, as opposed to intangible assets.

A compulsory payment to the government; in the statement of profit or loss, the tax a company pays on its profits, deducted from profit before tax.

The principle that a sum of money is worth more now than the same sum in the future, because money available now can earn interest or a return in the meantime.

The value of everything a business owns at a given date, calculated as non-current assets plus current assets.

The sum of all the fixed and variable costs of producing a given level of output: total fixed cost plus total variable cost.

The total income a business receives from selling its output in a period, calculated as price multiplied by the quantity sold.

An agreement with a supplier to receive goods or services now and pay for them later, typically within 30 to 90 days.

A registered sign, such as a name, logo, symbol or slogan, that distinguishes one business's goods or services from those of others and cannot legally be used by competitors.

A method of depreciation that charges each year according to how much the asset is used, calculated from cost minus residual value divided by the total expected units, times the units in the year.

The period over which a business expects to use a non-current asset, measured in years or in units of output, before it is sold or scrapped.

A cost that changes in direct proportion to the level of output, such as raw materials, packaging and piece-rate wages; it is zero when output is zero.

The difference between a budgeted figure and the actual figure for a revenue or a cost, calculated as budgeted figure minus actual figure and labelled favourable or adverse.

The process of calculating the differences between budgeted and actual figures, investigating their causes and taking action to correct problems or to update future budgets.

Finance provided by specialist investment firms to new or fast-growing businesses with high potential but high risk, in return for a share of the ownership.

A form of creative accounting in which a business makes its final accounts look more attractive just before the reporting date, for example by delaying payments or temporarily selling assets.

The money available for the day-to-day running of a business, measured as current assets minus current liabilities.

The period of time between a business paying cash for stock, materials and labour and receiving cash from the sale of the finished goods or services.

A method of setting budgets in which every budget starts at zero and each item of planned spending must be justified before it is approved.