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Financial year

This refers to the period for which financial statements or accounts are prepared in the UK terms. In the US this is known as a fiscal year. Profit and loss accounts are produced to reflect activity within the financial year.  Balance sheets are produced to reflect the business’s assets and liability on the last day… Read more

Derivative

This refers to a financial instrument whose value changes according to changes in another entity. Common examples of derivatives include futures, swaps, and options. These are used by organisations to protect themselves against price movements (for example sudden increases in the value of raw materials). They can also be used by investors to speculate on… Read more

Monetary asset

This refers to an asset whose stated cash value is fixed. This includes cash, cash in the bank and customer’s outstanding accounts receivables. Monetary asset is a term normally found in financial reporting.

Historical cost

This refers to an accounting convention where assets are recorded on the statement of financial position at their purchase value, not at their depreciated value or current market price. Historical cost has the advantage of being simple, of not assuming a value until it is realised (that is, when the asset is sold) and is… Read more

Operating expenses

This refers to expenses incurred whilst an organisation is carrying out its day-to-day activities. These are consumable items such as employee payroll and other staff costs, supplies, utility bills, property costs, research and development. They do not include non-consumables such as property or equipment purchases, which are a capital expense.Controlling operating expenses is a key… Read more

Capital expenditure

This refers to spending on non current term assets. These are non-consumable items such as property, equipment or vehicles. They do not include consumables such as employee payroll and other staff costs, supplies, utility bills; which are operating expenses. The cost of capital items is typically depreciated across their expected life in order to reflect… Read more

Depreciation

This is a non-cash expense which spreads the cost of an asset over its useful life. Typically assets (for example vehicles, IT equipment, fixtures and fittings) decrease in value over time; depreciation reflects this by reducing the asset’s value on the balance sheet in accordance with the business’s depreciation policy. The depreciation policy will reflect… Read more

Accounting

This refers to identifying, recording, measuring, summarising, interpreting and reporting financial information. Accounting is used to describe both the practices and knowledge which support these activities as well those processes.  Accounting supports business and investment decision making. Accounting is a term normally found in financial accounting, financial reporting and management accounting.

Share capital

This refers to the amount of equity the company has obtained by selling stock (equity) to shareholders. Share (equity) capital typically refers to the value, quantity and type of shares issued by a company. In accounting it refers to the nominal value of the issued shares plus any share premiums received for sales of shares… Read more

Net profit

This refers to the excess of revenues over all expenses, but before financing costs and tax charges, commonly referred to as EBIT (earnings before interest and tax). Net profit is typically lower than gross profit as it takes account of all indirect and overhead costs.  In financial reporting, net profit can be calculated before or… Read more