Introduction to business accounting (glossary)

Accounting

The process of organizing, analyzing, and communicating financial information to support decision-making

Accrual Accounting

An accounting method that records revenues and expenses when they are earned or incurred, not when cash changes hands.

Accounting equation

The formula Assets = Liabilities + Equity, which underpins the balance sheet.

Assets

Resources owned by a business that have value and can generate future benefit.

Assurance

Independent verification that financial information or internal controls are reliable and comply with relevant standards.

Auditor

A professional who examines financial records and controls to assess accuracy and compliance.

Balance sheet

A snapshot of a company’s financial position at a given time, showing assets, liabilities, and equity.

Break-Even Point

The level of sales at which total revenue equals total costs, resulting in neither profit nor loss.

Budget Creep

The gradual increase in a budget over time due to repeated small increases that go unchallenged

Budget Variance

The difference between what was budgeted and what actually occurred in financial performance.

Budgeting

The process of planning and managing income and expenses over a specific period to meet financial goals.

Continuing Professional Education

Educational activities that professionals engage in to maintain, improve, and expand their skills and knowledge within their field.

Contribution Margin

The amount remaining from sales revenue after variable costs are deducted; used to cover fixed costs and contribute to profit.

Conversion costs

The sum of direct labor and manufacturing overhead; costs involved in converting materials to finished goods.

Cost center

A department or function that incurs costs but does not directly generate revenue.

Cost efficiency

The ability to achieve desired outcomes with minimal expense, often a goal of zero-based budgeting.

Cost Object

Anything for which costs are measured separately, such as a product, department, or customer order.

Deficiency

A lack or weakness in meeting a required standard, guideline, or expectation.

Departmental Reporting

Tracking and evaluating financial performance by department or business unit.

Direct Materials

Raw materials directly used in the production of goods.

Direct Labour

Wages paid to employees directly involved in production.

Discrepancy

A difference or inconsistency between two or more items that should be in agreement.

Entity Perspective

The concept that a business is a separate economic unit, distinct from its owners, with its own financial records and activities.

Exception Reporting

Highlighting significant differences between budgeted and actual figures to support financial decision-making.

Expenses

The costs incurred in operating a business, such as wages, rent, and materials.

External Auditor

An independent reviewer of financial statements and internal controls for accuracy and transparency.

Favorable Variance

When actual income is higher, or expenses are lower than the budgeted amount.

Fraud

Intentional deception or dishonest conduct aimed at gaining an unfair advantage or causing harm to others.

Financial Accounting

Produces standardized reports for external stakeholders like investors and regulators.

Fixed costs

Costs that remain the same regardless of the level of business activity.

Forecasting

Predicting future income or expenses based on past data and expected trends.

Fraud triangle

A model identifying three conditions that lead to fraud: pressure, opportunity, and rationalization.

GAAP

Generally Accepted Accounting Principles. The standard framework for financial reporting in the U.S.

Gains

Income from non-operating activities, such as selling assets for more than their book value.

Income Statement

A financial report that summarizes a business’s revenues, expenses, gains, and losses over a period to determine profit or loss.

Incremental Budgeting

A budgeting method that adjusts last year’s budget by small percentages or amounts, maintaining consistency.

Industry Benchmarks

Standardized measures or performance metrics used to compare a company's performance against others in the same industry.

Internal Controls

Procedures and systems used to safeguard assets, ensure accurate reporting, and reduce the risk of fraud.

Liabilities

Financial obligations a company owes to others, such as loans and unpaid bills.

Liquidity

The ability of a business to meet its short-term financial obligations using its available cash or easily convertible assets.

Losses

Costs from non-operating events, such as selling assets at a loss or legal expenses.

Managerial Accounting

Provides internal data to support planning, budgeting, and decision-making within an organization

Manufacturing Overhead

Indirect costs associated with production, such as utilities or equipment depreciation.

Mixed Costs

Costs that have both fixed and variable elements, such as utility bills with a base fee and usage charge.

Net Income (or Net Loss)

The amount of profit or loss remaining after all revenues, expenses, gains, and losses have been accounted for.

Notes to the financial statements

Additional information provided in financial reports to explain or provide context for the figures presented.

Operating Activities

Day-to-day business activities that generate cash, such as receiving customer payments and paying wages.

Overextension

A situation where a business takes on more financial commitments than it can support, leading to cash flow strain or risk of default.

Owner’s Equity

The residual value in the business after subtracting liabilities from assets represents the owner's financial interest.

Period Costs

Non-manufacturing costs, such as admin or marketing, recorded as expenses in the period they occur.

Prime Costs

The total of direct materials and direct labor in production.

Product Costs

Costs directly related to manufacturing, including direct materials, direct labor, and manufacturing overhead.

Profit Center

A business segment responsible for generating both revenue and expenses, evaluated based on profitability.

Related-Party Transaction

A business arrangement between parties with a pre-existing relationship, which may influence the terms of the transaction.

Responsibility Accounting

A system where financial accountability is assigned to specific managers or departments.

Revenue

The total income earned from normal business operations before any costs are deducted.

Sarbanes-Oxley Act (SOX)

A U.S. law introduced in 2002 to prevent corporate fraud by strengthening internal controls and audit practices.

Segregation of duties

An internal control practice that divides responsibilities among different individuals to minimize risks of error or fraud.

Separation of Duties

A control method that divides responsibilities among individuals to prevent errors or fraud.

Shell corporation

A business entity that exists only on paper without significant assets or operations, often used for financial or legal purposes.

Siphoned

When funds are secretly or improperly removed from a business, often for personal use or hidden purposes.

Statement of Cash Flows

A financial statement that tracks actual cash inflows and outflows across operating, investing, and financing activities.

Statement of Owner’s Equity

A financial statement that shows changes in equity over a period due to investments, earnings, and withdrawals.

Unfavorable Variance

When actual income is lower, or expenses are higher than the budgeted amount.

Variable Costs

Costs that change in direct proportion to business activity levels.

Variance

The difference between planned or expected results and actual outcomes, often used in budgeting and financial analysis.

Zero-Based Budgeting (ZBB)

A budgeting approach that starts from scratch each cycle, requiring full justification for every expense.