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Those new to finance can take a while to get used to the terminology used by accountants. Here are some of the common terms used. You can also refer to the ‘jargon buster’ at the back of the book at any time.

Financial statements and accounting principles

 Financial statements. The collection of formal financial records of a business’s activity (namely the balance sheet, income statement, statement of recognized income and expense, and statement of cash flows).

 Matching (or accruals) concept. Costs are accounted for when incurred, and income when earned.

 Going concern. An assumption that the business will continue in operation for the foreseeable future, which provides the basis for the valuation of business assets.

 Prudence. Revenues and profits should only be recognized once their realization is reasonably certain. Conversely, liabilities are accounted for when they are foreseen.

 Materiality. Amount above which an item’s omission or mis-statement would affect the view taken by a reasonable user of financial statements.

“People want to learn about finance because they want to know what accountants are talking about” Anonymous

Revenue, capital and assets

 Asset. An item of value owned or controlled by a business that will generate a future benefit. Examples include buildings and inventory.

 Capital expenditure. Payments to purchase or improve long-term assets such as property and equipment.

 Revenue expenditure. Expenses incurred in running a business, which do not specifically increase the value of long-term assets.

 Receivables (debtors). Amounts owed by customers paying on credit.

 Prepayment. A payment for goods or services before they have been received. Examples include advance payment of insurance and rent.

Liabilities

 Liability. Money owed by a business. A commitment to transfer economic benefit in the future. Examples include payables and loans.

 Payables (or creditors). Amounts owed to suppliers who have offered credit.

 Accrual. Goods or services received but not yet invoiced by the supplier. Examples include certain goods for resale and utility bills.

 Provision. An amount set aside for a known liability whose extent and timing cannot be precisely determined, e.g. restructuring costs.

 Contingent liability. A liability where the amount and/or likelihood of payment are uncertain. As such, no specific provision is made.

Be aware of common financial terms.