Glossary of Accounting Terms

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1 Glossary of Accounting Terms Accruals or Income & Expenditure Accounts This is where accounts are prepared in a way that shows not only what happened in a period, but what should have happened in the period. E.g. If you got a gas bill after yearend, it would be included in the accounts since the gas was actually used before the yearend. If you issued an invoice for work done before year-end and it had not been paid, you would include it in the accounts as if it had been paid. This approach enables you to measure the trading surplus/(deficit), rather than the flow of cash in/out of the organisation over the accounting period. Accruals (another meaning) These are estimates of specific expenses that have been incurred by the company, but have not been billed or paid for during the accounting period. Assets These can be: Fixed valuable items that last more than one year, e.g. vehicle, furniture, equipment, IT, investments. Current cash or things that can be turned into cash within a short period, e.g. stock, money in the bank, petty cash, prepayments and debtors. Audit Any Registered Auditor must follow a set of guidelines issues by the Audit Practice Board. The Auditor does not say that the accounts are correct, but simply expresses an opinion on the accounts. Auditors must be registered in accordance with the 1989 Companies Act. Average Costs Average cost is the cost of doing each thing, e.g. if it costs 200 to produce 100 widgets, including all the initial set up costs, the average cost of those 100 widgets is 200/100 = 2 per widget. If you then produce another widget, making a total of 101 widgets with a total cost of the average cost per widget will be /101 = per widget. On this basis the cost of the 101st widget is compare this to the Marginal Cost example later in the Glossary.

2 Balance Sheet This is a statement within the accounts that explains what the group has and where it came from. The first part adds up the assets of the organisation, i.e. the good things (e.g. money in the bank), and then subtracts the liabilities of the organisation, i.e. the bad things (e.g. bills you haven't paid yet). The second part shows how the organisation is funded. As the totals of each part agree the statement is called a balance sheet. Capital Capital has a number of meanings in accounting, the most common use for charities is to mean monies granted or raised to fund the acquisition of fixed assets, to purchase or convert buildings, vehicles or equipment, as opposed to revenue funds that are usually granted for delivery of services. Cost Driver These are the factors that drive the cost of an activity up or down, e.g. the more people that come to the lunch club, the more the catering will cost. In this example the cost-driver is the number of people attending. Creditors These are people/organisations you owe money to at any particular time the value of the creditors is included in the published accounts. Debtors Money owed to the organisation. Although debtors are considered an asset, if you are owed a vast amount, this might indicate problems collecting monies owed and possible cashflow difficulties. Deferred Grants These will be grants received in one period but actually intended for spending in a future period. Sometimes this may be called Grants in Advance or Advance Receipts. Depreciation Depreciation is a way of spreading the cost of an asset over the expected useful economic life of that asset. Direct Costs Costs that can be attributed clearly to the activity you are considering, e.g. the salary of the youth project worker.

3 Endowment This is a particular type of fund which a charity may receive. The endowment may be in the form of money, or a building, or investments etc and the charity can not spend this asset, but can use the income generated from the endowment. However, some endowment may be spent if they are defined as expendable endowment funds. Fixed Costs Costs that remain the same however much activity you do, e.g. the line rental charge in a phone bill. Independent Examination This is a service, similar to an audit, where a group s accounts are scrutinised by an independent person. There are rules for who can do this, and guidelines on how it should be done. It is of particular relevance to charities. Indirect or Shared Costs Costs that also relate to the activity, but less clearly. They are often costs shared by a number of projects or activities, e.g. premises rental costs Liabilities Money you owe to others. These can be current (payable within one year) or long-term. Liquidity This is the measure of how much cash you have and is it enough for your needs. It can include things that can be turned into cash quite quickly like debtors and other current assets. A liquidity problem is where you don t have enough cash to pay your immediate bills. Marginal Costs Marginal cost is the cost of doing one more thing, e.g. making the 101st widget, when all the set up costs have already been included in the costs of producing the 1st 100 widgets. Producing 100 widgets costs 200, including all the set up costs of 150 (i.e. 2 per widget) and producing the 101st widget will cost in total the same as in the Average Costs example. As the first 100 widgets are already produced and the set up costs have already been covered, the marginal cost of producing the 101st widget will be = 0.50 different from the Average Costs example earlier in the Glossary.

4 Materiality This is a concept often used into accounts. It basically means 'big enough to bother about'. For example a 100 error in the petty cash may be very 'material' to a small organisation but 'immaterial' for a big national organisation. The basic test of materiality is - if the reader of the accounts would form a different opinion if they knew about it, then it is material. Net Current Assets This is a figure that appears in the Balance Sheet. It comprises the current assets less the current liabilities. It can be a very important figure. For example, you may have total net assets of 1,000,001, but if a million of this is an old building which you can not sell and only 1 is in the bank then it s not so good. Opportunity Costs These are costs associated with losing the opportunity to do something else with your time, e.g. instead of coming to a training course, you could have delivered a course of your own and earned 500 for your organisation. This type of cost is rarely recognised in the voluntary sector. Overheads Sometimes called core costs, these are the costs usually incurred at the office, which must be paid for by all the projects and activities of the organization, e.g. audit fees, some salaries, office rent, etc. Prepayments These are services that the company has paid for in advance, but not used during the accounting period, for example an annual insurance premium. Receipts & Payments or Cash Accounts These are accounts prepared to show simply what money has been received & paid out through the bank and petty cash during the accounting period. This approach does not measure the trading surplus/(deficit) during the period and is only suitable for small organisations.. Reserves Each year income is received and expenditure incurred resulting in a surplus or deficit. Year-on-year, this builds up as a reserve, which can be: Restricted money where the donor has specified what it must be spent on; General uncommitted unrestricted reserves, can be spent on anything within the charities objects ; Designated unrestricted money the Trustees have set aside for a particular purpose.

5 Revenue This has a number of meanings in accounting, for charities revenue usually relates to funds granted to support spending on services, rather than purchase of capital items, such as equipment or buildings. SoFA Statement of Financial Activities. Not to be confused with a comfy piece of furniture! This is the name for the main financial statement for larger charities showing incoming resources and how they have been used. SORP This is the Statement of Recommended Practice for Charities and it sets out the regulations for accounting by charities. Statements of Assets and Liabilities This is an accounting statement common in the accounts of smaller charities who prepare receipts and payments accounts. It s basically a list of what you own (fixed assets, etc) and owe (creditors, etc). Variable Costs Costs that vary as you do more activity, e.g. the call charges detailed in a phone bill. To find out how the Community Accountancy Service could support your organisation, call Judith Harrison on Visit: Voluntary Action is a registered charity (No ) a company limited by guarantee (No ) registered for VAT (No ) and a member of the National Association for Voluntary and Community Action (NAVCA)

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