Community accounting, management and research services
Glossary of financial & legal terms
Accountable body: Where funding is agreed for a partnership of two or more organisations, the accountable body is the lead charity which is accountable to the funder for ensuring the use of the funding as agreed or accountable for the provision of the service. Accounting period: The time during which the organisations’ financial information is being tracked, usually done on a monthly or quarterly basis in management accounts or annually for statutory accounts. Accounts payable: (‘AP’ for short) Money owed by the business to another business that has provided goods or services, e.g. vendors, contractors, and consultants – this is filed under accounts payable. Accounts receivable: (‘AR’ for short) Money owed to your business by a customer for products and services, typically provided on credit – this is filed under accounts receivable. Accounting Standards: An accounting standard is a document which sets out principles to be used in the preparation of financial accounts to assist in ensuring that they give a true and fair view and to introduce consistency between organisations. Accrual: An expense due but not yet recorded in books, e.g. wages being paid in arrears. Accrual Accounting: Charity accounts prepared on the accruals basis show all income earned during the accounting period and all expenses incurred during the accounting period. This is contrasted with receipts and payments accounting which only accounts for money received and paid out. For large organisations accrual accounting is considered essential to give a true and fair view. Aggregate: The total sum of everything added together or compiled into a single place. Annual Accounts: The year end published accounts of the charity. In most cases these must be sent to the charity regulator. Appreciation: When an asset’s value increases over time. Arrears: Money that is overdue and unpaid. Assets: All items owned by the organisation, e.g. money, equipment, land, buildings, vehicles, etc. Audit: an examination to ensure appropriate accountability of an organisation, especially finances. Bad debts: Overdue payments that are unlikely to be received, even after an effort is made to retrieve the funds. It is written off as a loss in accounts. Balance sheet: This is a report that summarises the business’ financial situation; it details the assets, liabilities, and capital of the business. It also shows the balance of income and expenditure as of the date specified. Balance sheets help highlight what the organisation owns and owes. Bank reconciliation: This refers to comparing the organisations’ bank balance with a bank statement to ensure the records are complete. Beneficiaries: those who benefit and/or receive services from the organisation. Billing: Sending invoices to customers who have purchased goods or services from your business. Budget: The financial plan that estimates what the organisation will receive in income and spend to keep running. For a charity the balance on this will often be zero (i.e. the budget will be set to balance income and expenditure). Budget variance: The difference between the actual and the budgeted figure in an account. It can be expressed as an amount in pounds or as a percentage. Business Plan: A document prepared to describe and guide the organisation. It generally projects future opportunities, maps the financial operations, marketing and organisational strategies that will enable the organisation to achieve its goals. Sometimes referred to as an Operational or Forward Plan. Capital: Money belonging to the business owner. Cash book: The book in which all cash flow is recorded, including the following information: date, amount, description of transaction, bookkeeping account, and reference. Cash flow: The total amount of money going in and out of the business. Cash flow forecast: This refers to planning the organisations’ future cash requirements. It involves predicting how much money will come in and out of the business at any given point. Chart of accounts: A list of all the accounts used in the general ledger of an organisation; it’s used to categorise financial transactions. The categories are: Assets, Liabilities, Equity, Income, Cost of Goods Sold, and Expenses. Closing balance: The positive or negative amount that remains in an account at the end of the accounting period, e.g. a month or year. Conflict of interest: When a personal or professional interest may get in the way of making a decision in the best interest of the organisation. Connected person: as defined within the Charity and Trustee Investment (Scotland) Act 2005, a connected person includes; immediate family members of the Trustee including domestic partners and their immediate families; companies, businesses and other organisations controlled by the Trustee or by an immediate family member or in which the Trustee and / or family member has a substantial interest; a Scottish partnership in which the Trustee or a connected person is a partner. Contra: When an entry into or withdrawal from a bookkeeping account is made to cancel out an earlier one, e.g. paying £200 into an account in error then withdrawing £200 to cancel it. Conversion balances: This refers to transferring bookkeeping records between accounting software programs. It involves taking closing balances from the previous software and entering it into the new software as opening balances. Credit check: Examining a person’s credit history: their track record of paying back debts. Creditors: These are the persons or businesses to whom your business owes money. Credit notes: Issued to reimburse the buyer either partially or fully if a mistake has been made on an invoice, or if goods need to be returned. Credit policy: The terms and conditions for providing goods on credit, qualification criteria, the collection procedures, and steps to be taken if customers do not repay the amount owed. Debtors: The persons or businesses who owe money to your business. Deductible: Purchases that are claimed as business expenses are described as deductible; they reduce business profits but reduce the amount of income tax owed. Deficit: A deficit arises when the expenditure is more than the income in a given year, either over the whole organisations or within a particular fund. Deposit slip: A slip of paper that accompanies cash or cheque payment. It details the amount of the deposit, the bank account the funds should be paid into, and the date of deposit. Depreciation: The reduction in value of an asset overtime. Depreciation accounting: The process of recording how much an asset will depreciate in terms of monetary value over its estimated lifetime before it’s essentially written off. Ethos: the distinguishing values, beliefs and character of an organisation. Equity: The amount the business owner has contributed to the business from their personal funds (capital) and how much has been withdrawn for personal use (drawings). Expenses: Costs that are incurred for the purpose of keeping the business running, excluding fixed assets. Fixed asset: An asset that is expected to be in the company for at least two years, such as a vehicle or building. FRS102: Financial Reporting Standard number 102 FRSSE: Financial Reporting Standard for Smaller Entities Governance: the systems and processes concerned with ensuring the overall direction, supervision and accountability of an organisation. Governing body: Also known as Management Committee, Executive Committee, Board or Council of Management. Governing document: a formal, written document that sets out the organisation’s purpose and how it will be run. The document may take many forms, those most commonly used include: Trust Deed, Rules, Constitution, Memorandum and Articles. HMRC: Her majesty's Revenue and Customs. Also known as the tax office. Interim reports: Financial statements produced before the financial year has ended. They may be used to give banks or loan companies an indication of how well a business is doing before they approve a loan. Ledger: Books that contain all the details of financial accounts. There are three types of ledgers: the general ledger, the accounts receivable ledger, and the accounts payable ledger. The general ledger includes all the financial details from every business transaction, for each account listed in the charts of accounts. The other two include details relating to accounts receivable and accounts payable. Liability: This means the debts owed by the business to other businesses, including accounts payable, loans, and credit card balances Mission: why an organisation exists and the broad effect it wants to have. A summary of the overall difference it wants to make. Often produced as a result of organisation-wide discussions. Monitoring: collecting and recording information in a routine and systematic way to check progress against plans and enable evaluation. Net profit: The result of deducting business expenses from the gross profit. Objects: the statement of an organisation’s purpose set out in its governing document. Also known as objectives, aims or purposes. OSCR: Office of the Scottish Charity Regulator Opening balance: The amount of funds in the company’s account on the first day of the financial period (usually the same as the closing balance the day before). Overheads: This refers to ongoing business expenses that help the company operate on a day to day basis, e.g. rent, wages, phone bills, etc. Payroll: Lists the employees who receive a wage or salary. Managing payroll involves reporting the taxes to be paid on behalf of employees (PAYE), national insurance contributions and pension contributions. This is also where sick pay, maternity pay and paternity pay is recorded. PAYE: This stands for pay as you earn. It refers to when tax is deducted from each employee’s pay by their employer. Petty cash: A small amount of cash withdrawn from the bank used to buy miscellaneous items, e.g. stationary, stamps, milk, etc. Petty cash reconciliation: The act of reviewing cash records to see if there are any undocumented transactions, and to ensure petty cash funds are being used appropriately. Probity: behaviour in accord with accepted norms, the quality of having strong moral principles of honesty and decency. Policies: statements which describe the desired conduct of the organisation, its volunteers and staff, and how to remedy any breaches. Quorum: this is the minimum number of committee members that need to be present at a meeting for it to qualify as a properly constituted meeting. Reconciliation: The process of comparing two sets of records to make sure they correspond with one another, e.g. comparing the bank account with the cash book to make sure there are no inconsistencies. Regulator: a person or body empowered by law/statute that supervises a particular industry or business activity to ensure that public benefit is maintained. Remittance advice: A document sent to a supplier or received from a customer which states that their invoice has been paid, and includes information such as a text note, invoice number, invoice amount, etc. Resource: everything an organisation draws on to carry out its activities. These will include people, equipment, money and services. They may also include the less tangible: time, morale and knowledge. Settlement discount: Discounts offered to buyers on the condition that the funds be paid within a specified period of time. SOFA: Statement of Financial Activities SORP: Statement of Recommended Practice (unless otherwise stated this will always be the Charities SORP) Stakeholder: anyone with a significant interest in the good management of an organisation. This could include funders, trustees, volunteers, staff, suppliers, users, etc. Surplus: A surplus arises when the income is greater than the expenditure over the year, either for the organisation as a whole or for a particular fund. Trade discount: Discounts given to regular customers, which are not usually recorded in books. Trial balance: A report made at the end of an accounting period. It lists the balance in each of the accounts in the general ledger, which helps determine if any errors in recording transactions exist. Trustee: person who has legal authority to take control of and manage another’s finance and property for the advantage of the beneficiary. A Trustee may also be known as Board Member, Committee Member, Governor or Director. Undeposited funds: Payments that have been received by cash, cheque, or credit card that have yet to be paid into the bank. Unpresented: Cheques that have not yet been deposited to the bank. Year-end: The end of the financial year. During this period, the accountant prepares the statutory accounts (also known as year end accounts or financial statements), and calculates how much tax a business owes to the government. Bookkeepers need to ensure that reconciliations are completed, transaction entries are correctly coded, supporting paperwork is readily available, and that VAT and PAYE taxes have been processed.