Financial Accounting

Dictionary

FAD

Financial Accounting Dictionary

Accountancy: This is an accounting profession governed by conventions and ethics.

 

Accountant:   This is an individual trained and knowledgeable in the profession of accountancy. It is also a practitioner of accountancy.

 

Accounting:   It is the process of recording, classifying, summarizing and interpreting financial information to the user of the information to make informed economic judgments and decisions based on it. Accounting underlining terms definition:

 

Accounting Assumption: An assumption is a statement that is presumed to be true without concrete evidence to support it. In the business world, assumptions are used in a wide variety of situations to enable companies to plan and make decisions in the face of uncertainty.

 

Accounting Bases: These are the method used in expressing or applying these concepts to financial transaction and item. Accrual basis: The practice of bookkeeping when income is recorded when earned and expenses are recorded when they are incurred. Or this recognizes revenue and matches it with the expenses that generated that revenue. Cash basis: This recognizes revenue and expenses in the order in which they are received or spent

 

Accounting Concepts: There are basic assumptions which underline the preparation of financial statements of business enterprise. List of accounting concepts: Going concern concept: accounting assumes that the business will continue to operate for a long period of time. In other words, it means continuity in business or Continuity Assumption. Entity concept: This accounting concept separates the business from its owner. Meaning the business is a legal entity. It can sue and be sued. It also means the owners of a business are limited to how much he has invested not his personal resources. So for example, if the owner brings in additional capital into the business, we will treat this as a liability on the balance sheet of the business. Matching Concept: This concept states that the revenue and the expenses of a transaction should be included in the same accounting period. So to determine the income of a period all the revenues and expenses (whether paid or not) must be included. The matching accounting concept follows the realization concept. First, the revenue is recognized and then we match the costs associated with the revenue. So costs are matched with revenue, the reverse would be an incorrect system. Dual concepts: this says that there are two aspects of accounting. It is represented by the assets of the business and liabilities (i.e. claims against it). Assets =liabilities + capital. So for example. Say the business buys an asset worth N10, 000. So now the Fixed Assets of the company will increase by N10, 000. But at the same time, the bank or cash balance will reduce by N10, 000 and so the transaction will have a dual effect in accounting. And also the Balance Sheet will stay balanced etc.

 

Accounting Convention: This is a common practice used as a guideline when recording a business transaction. It is used when there is not a definitive guideline in the accounting standards that govern a specific situation. Thus, accounting conventions serve to fill in the gaps not yet addressed by accounting standards. List of Accounting conventions: Consistency: It refers to the use of the same methods for the same items (ie consistency of treatment) either from period to period within a reporting entity or in a single period across entities. Or the principle of accounting that says that the same accounting policies and procedures should be followed in every accounting period. Constantly changing the methods of reporting profit would lead to a distortion of the profits calculated from the accounting records. Conservatism/Prudence: This means that the accountant will take a figure which will understate rather than overstate the profit. Record losses in the books but don’t anticipate profit prematurely. An alternative term, which means the same, is prudence.Materiality: Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity.

 

Accounts: These are records that are kept for the individual asset, liability, equity, revenue, expense, and dividend components. Classifications of account are: Personal Account: This consist of account receivable (debtors) and account payable (creditors) account. Impersonal Account: This consist of real and nominal account

 

Accounts Analysis: Accounts analysis is a method of cost behavior analysis by classifying records under two heads: fixed or variable.

 

Accounts Payable:     Accounts of money you owe.  It is also a liability that is usually created when you’ve made a purchase on credit. Or amounts due from your business to your creditors e.g. Services, unpaid taxes, unpaid dividend and other accrued expenses. Generally these are short term liabilities (30-120 days). It is changed from creditor by IFRS.

 

Accounts Receivable: Accounts of money owed to you for the sale of goods or services. Or amounts due to your business from your customers. Generally these amounts are short term receivables (30-120 days. It is changed from Debtor by IFRS.

 

Accounting Cycle:     An accounting cycle is the series of steps to be followed while preparing financial statements. The steps in the accounting cycle are budgeting, journal entries, adjusting entries, ledger posting, preparing financial reports and closing of accounts.

 

Accounting Equation: The accounting equation is Total Assets = Total Liabilities + Owner’s Equity.

 

Accounting Information System: An accounting information system consists of the people, records, and methods used to gather financial information about business events, record it, process it into a useful form, and communicate the information to end users and decision makers. In other words, an accounting system is everything and everyone involved in collecting, recording, and organizing financial transactions for the company.

 

Accounting Method: This is the medium through which the foregoing fundamental accounting concepts are applied to financial transaction and to the preparation of financial statement. Accounting method refers to the rules a company follows in reporting revenues and expenses. eg depreciation method, inventory method etc. Two primary methods are accrual accounting and cash accounting. Cash accounting reports revenue and expenses as they are received and paid; Accrual accounting reports them as they are earned and incurred.

 

Accounting Periods: This refers to the time span, usually one year, covered by financial statements. It is the period for which books are balanced and the financial statements are prepared. Generally, the accounting period consists of 12 months.

 

Accounting Policies: Accounting policies refer to the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Once selected, accounting policies must be applied consistently for similar transactions, other events, and conditions unless a Standard or Interpretation specifically requires otherwise or permits. Accounting policies consist of: Investment: basis of valuation method will be disclosed; Depreciation: the method and rate of depreciation will be stated; Basis of accounting: this could be historical cost; Stock and work in progress: the basis of valuation and method of determining cost must be disclosed; Turnover and gross income: This indicates how turnover had been arrived at. It usually represents gross amount invoiced etc.

 

Accounting Policies and Explanatory Notes. Accounting Policies and Explanatory Notes to the Accounts should include information that must be provided in a systematic manner and properly cross referenced from the face of the financial statements to the notes. There must be full disclosures of all accounting policies including bases for measurements, estimates and judgements made in applying policies that have significant effects on the amounts recognised in the financial statements.

 

Accounting Principles: Principles are accounting rules used to prepare, present, and report financial statements. Example of accounting principles are: Cost Principle: From an accountant’s point of view, the term “cost” refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts. Assets are recorded at historical cost, not fair market value. For example, if a company purchases a building for $500,000 it should be recorded as such, and should remain on the books for that amount until disposed of. If the building appreciates to $700,000 in the next few years, no adjustment should be made; Full Disclosure Principle: If certain information is important to an investor or lender using the financial statements, that information should be disclosed within the statement or in the notes to the statement. It is because of this basic accounting principle that numerous pages of “footnotes” are often attached to financial statements. In other words, all information pertaining to the operations and financial position of the entity must be reported within the period of time in question. Circumstances and events that make a difference to financial statement users should be disclosed etc

 

Accounting Profit: This is the income earned by the business over the accounting year on an accrual basis before deducting tax expense.

 

Accounting Ratio: Accounting ratios are mathematical tools which help in performing the comparative financial analysis for two financial variables. Or comparing of one variable of financial statement in relation to the other.

 

Accounting Record: This is a key source of information and evidence used to prepare, verify and/or audit the financial statements. They also include documentation to prove asset ownership for creation of liabilities and proof of monetary and non-monetary transactions. Accounting records: Purchase day book: It captured all credit supplies from creditors; Store ledger: It records inventory received, issued and balance;  Sales day book: It captured all credit sales to customers etc

 

Accounting Software: This describes a type of application software that records and processes accounting transactions within functional modules such as accounts payable, accounts receivable, journal, general ledger, payroll, and trial balance.

 

Accounting Standard: This is generally accepted principles used in the preparation and presentation of financial statement. An accounting standard is a common set of principles, standards and procedures that define the basis of financial accounting policies and practices. Accounting standards improve the transparency of financial reporting in all countries.

 

Accounting System: An accounting system is the system used to manage the income, expenses, and other financial activities of a business. An accounting system is a holistic approach to accounting. It may be manual as well as computerized. An accounting system helps identify economic events, record them and generate reports at the end of the accounting period or even during the period. Types of accounting system are: Single-entry systems; Double-entry systems; Manual accounting systems and Computerized accounting systems

 

Accrued Expenses: These are expenses owned by the business at the end of financial year. This is also an accounting expense recognized in the books before it is paid for. It is also called arrears or outstanding. It is a liability. Examples of accrued expenses are salaries payable and interest payable. Salaries payable are wages earned by employees in one accounting period but not paid until the next, Interest payable is interest expense that has been incurred but not yet paid.etc

 

Accrued Revenue: This is revenue that has been earned and recorded but not yet received. Example is two most common forms of accrued revenues are interest revenue and accounts receivable. Interest revenue is income that’s earned from investments made. Accounts receivable is money owed to a company for goods or services that have not been paid for yet.

 

Accumulated Depreciation: This is the running balance of the depreciation taken on an asset.

 

Accumulated Amortization: Accumulated amortization is the accumulated charges against the intangible assets owned by the business.

 

Administrative Cost: Administrative expenses are the expenses that an organization incurs not directly tied to a specific function such as manufacturing, production or sales. Salaries of senior executives and costs of general services such as accounting are examples of administrative expenses.

 

Advance Income: This is an income collected but not yet earned. This is liability. If an income that belongs to a future accounting period is received in the current accounting period it is considered as Income Received in Advance, also known as Unearned Income. This type of income is received before the related benefits are provided.

 

Advance Payment: Advance is an amount of money paid before the business earns it. Or payment for services not actually rendered. It is also called prepayment or prepaid expenses.

 

Ageing Schedule: A schedule showing the length of time an invoice has been outstanding or held.

 

Allowance for Bad/Doubtful Debts: Allowance for bad debts is an amount of money set aside by the business as a cover for possible defaults on payments.

 

Annual Report: An annual report is a detailed report of all the financial statements of a business at the end of its calendar or fiscal year. It is a mandatory requirement for public companies.

 

Appreciation: Appreciation is the increase in the value of the asset due to economic conditions or improvements to the asset.

 

Appropriation: Appropriation is the allocation of amounts that are part of the total net profit, under various heads such as general reserve fund etc.

 

Arm’s-length Transaction: Business dealings between independent and rational parties who are looking out for their own interests.

 

Asset:  According to The International Accounting Standards Board (IASB) framework, asset is a resources controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.

 

Assessment: Assessment is the total amount of tax or levy payable.

 

Assurance Service: This is professional services that are designed to improve the quality of information, both financial and non-financial, used by decision-makers. This adds value such as credibility, reliability, Relevance and Timeliness to information reported. It is more general than auditing that is more detailed. Example of Assurance engagement: Statutory audit;  Corporate governance; Management performance; System control; etc

 

Audit: Audit is a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organization to ascertain how far the financial statements as well as non-financial disclosures present a true and fair view of the concern. Audit is the process of checking and validating the business records. Types of audit are: Compliance Audit: Compliance audit is a watchdog procedure to ensure that the business is complying with the set of rules and procedures that are set for it. It can be compared to the accounts audit which ensures that the true accounting details are disclosed. Statutory audit: This is conducted to ensure that all the financial details of the company are perfect without any scam. Reports regarding this audit will be submitted to the shareholders; Joint Audit: This audit where two or more auditor joint together to carry out audit; Interim Audit: This is conducted by the management itself to ensure that they are following the specified rules and regulations.

 

Audit Committee: This is a special committee appointed in an organization to carry out the audit oversight responsibility of the board of directors.

 

Audit Opinion: The official result of an audit. A Certified Public Accountants (CPA’s) stated types of audit opinion: Unqualified opinion: it means that the financial statements he/she has audited present fairly the financial position and operating results of the company in conformity with Generally Accepted Accounting Principles (GAAP). A qualified opinion: it occurs under a number of circumstances, for instance, if the financial statements do not follow GAAP and the client refuses to make the needed changes. An adverse opinion: it happens when the financial statements are misleading and do not fairly represent a company’s financial position. (Just because you passed an audit, it does not mean that your company is in good financial shape. It just means that your books are a fair representation of what you did.); and Disclaimer Opinion.

 

Audit Planning: This is a specific guideline to be followed when conducting an audit.

 

Audit Test: An audit test is a sample taken from a larger population, with the intent of testing the sample for certain characteristics, which are then extrapolated to the entire population. Examples of audit test are: Compliance test: Auditor will carry out compliance test to determine if the internal control system is adequate and effective to express it opinion. Once auditor found the system to be adequate, he will carry out compliance. Substantive test: These are those tests which involves vouching transaction and account balances contain in the financial statement to determine their validity and be free from errors, omission or misstatement etc. if the system is weak, then substantive test is necessary.

 

Audit Report: Audit report is an official, signed document that provides the details regarding the purpose, scope and findings of the audit.

 

Audit Risk: This is the risk that the amount will draw an invalid opinion from his audit work. Audit risk elements: Inherent risk: This is the risk that client’s transaction may contain materials errors irrespective of the clients control system Control risk. Risks that are present before management action are described as inherent risks. eg cash on hand is by nature more susceptible to theft than a large inventory of coal; Detection risk: This is the risk that the auditor test procedure may not detect some material errors; Control risk: This is a risk that a client system may not detect some material errors

 

Audit Trail: This is the information within the accounting system that reveals the effects of a transaction.

 

Automated Teller Machine (ATM): This is a machine that dispenses cash or performs other banking services when an account holder inserts a bank card. Benefit of Automated Teller Machine (ATM): It service is available 24hours a day; It is safe and convenient; It saves time and effort of going to the bank etc..

 

Auditing: This is the examination of vouchers, internal control system and financial statements

 

Auditor: An auditor is an official whose job it is to carefully check the accuracy of business records. Types of auditor: Internal Auditor: They are employees of the business reporting directly to the audit committee or vice president. External Auditor: They are entirely independent of the business. They are hired by an entity as outsiders to audit the entity as a whole. Government Auditors: Auditors in public service; and Forensic Auditors: They are trained in detecting, investigating, and deterring fraud and white –collar crime.

 

Audit Working Paper: This consists of information and records that auditors compiles so as to have a reasonable basis for their opinion on a firm financial statement. Types of working paper: Permanent audit file: this contain information of continuing audit relevance e.g. Memorandum and articles of association; Details of Director contracts; List of Directors etc; Current audit file: This contains information relevance to account under review e.g. management letter; audit programme; major terms in Statement of Profit or loss account and statement of financial statement.

 

Authority Matrix: This is a list or table that sets out who can approve a change, subject to cost limits, or areas of responsibility. An authority matrix is a critical supplement, if not a replacement, for the traditional job description and organizational chart. One advantage is that it focuses on decision-making rather than static activities. Another advantage is that it presents in graphical format the relationships between people and functions. Instead of describing people’s job in isolation from one another, it focuses on how they interact. Because of this, the authority matrix supports the movement away from individual, isolated work to a more coordinated, team-based environment. For example, the manager or company representative for a particular work site may be able to approve changes up to a certain limit, that only have an effect on the work at that site, but would not be able to approve changes above that limit, or that might affect multiple sites.

Bad debt: An uncollectible Account Receivable or amount owed to us but which cannot be recovered. It is a loss. It needs to be written off as business prudence.

 

Bad Habits of Communication: Telling lies; Not returning telephone calls or email; Not listening; Negative altitude etc

 

Balance: This is the difference between the credit and the debit sides of an account.

 

Bank Overdraft: This represents negative balance in the bank account of the company or this allows a bank customer to withdraw more money from his/her current account than has been deposited.

 

Bank Reconciliation: This is the verification of all the entries in the bank statement with the bank book of the business.

 

Bank Statement: A bank statement is the financial statement showing the details of all the transactions that the business had made through the bank account.

 

Bankruptcy: This is a situation where a business/individual does not have enough assets to pay off his liabilities. A person who is bankrupt is called an insolvent.

 

Basic of Assessment: This is the period of the accounting year (ie basic period) of a company that its profit is subject to tax in a year of assessment.

 

Benefit-In-Kind: Benefit-In-Kind (B.I.K) may be defined as those benefits or perquisites that accrue to a person by reason of the office and/or position he/she occupies. Benefits in kind include such benefits as official car, official accommodation, cooks, gardeners, security etc. The amount treated as B-I-K in the hand of the officer that enjoys the benefit is added to his income in arriving at his/her gross/consolidated income that is assessed to tax.

Billings: A billing is a request sent to the account receivables asking for payment for a debt.

 

Bills Payable: Bills payable is a promise made by the receiver of a benefit to the giver of a benefit, to pay an amount of money in the future.

 

Bills Receivable: Bills receivable is a record of all the bills that are receivable by a firm.

 

Bonus: A bonus is the remuneration given to an employee in excess of the stipulated salary.

 

Bonus Issue/ Scrip/ Capitalization Issue: Is issue to existing shareholders but free of charge. It could also mean capitalization of reserve

 

Book Keeping: This is the process of recording all the financial transactions of a business.

 

Book Value of an Asset: This is cost of the asset (the amount that was paid for it) minus accumulated depreciation. It is also called net book value (NBV).

 

Branch Accounting: Branch Accounting is keeping the books of accounts for geographically separated departments or units of the same business. Branches of accounting: Financial Accounting: This is concerned with external requirements, creditors, shareholders, prospective investor etc; Management Accounting: This is concerned with data gathering from external and internal sources for use within the organization for decision making; Taxation Accounting: This is concern for tax remitted to government; Cost Accounting: This is to ascertain and provide costs information for internal use.

 

Break Even Analysis: This is also known as cost volume profit.

 

Breakeven Point: This is the point at which no profit or loss is made. The business simply covers its total costs. BEP (unit)       =Fixed Cost/Contribution per unit; BEF(N)  =Fixed Cost/Contribution per unit X selling price per unit

 

Budget: This is a financial or qualitative plan of operations for a forthcoming accounting period.

 

Budgetary Control: This is a process where the actual amount incurred and the budgeted amount for each expense head is compared.

 

Budgetary Deficit: This is an excess of expenditure over revenue in a budget. Budgetary surplus is an opposite.

 

Budgeting: This is estimating the expenditure needs of the department or each expense head based on historical data and trend analysis.

 

Budget Performance Report: This represents the comparison between the actual expenditure and the budgeted expenditure.

Detail

Actual

Budget

Variance

 

 

 

 

 

Business Valuation: Business valuation is the amount that would be realized if the business was sold to a hypothetical buyer. Method so business valuation are; Asset-Based Approaches: These business valuation methods total up all the investments in the business minus its total liabilities to determine what it would cost to re-create the business. Asset-based business valuations can be done on a going concern or on a liquidation basis; Earning Value Approaches: These business valuation methods are predicated on the idea that a business’s true value lies in its ability to produce wealth in the future. Also is based on the present value of future cash flows of one’s business; Market Value Approaches: A market approach is a method of determining the appraisal value of an asset, based on the selling price of similar items etc.

 

Business Reconstruction: Business Reconstruction means to build or create again the business entity and the capital structure of the organization. When a company is suffering loss for several past years and suffering from financial difficulties, it may go for reconstruction. In other words, when a company’s balance sheet shows huge accumulated losses, heavy fictitious and intangible assets or is in financial difficulties or is to over capitalized, and then the process of reconstruction is restored. External reconstruction: This reconstruction refers to the sale of the business of existing company to another company formed for the purposed. In external reconstruction, one company is liquidated, and another new company is formed. The liquidated company is called “Vendor Company” and the new company is called “Purchasing Company”. Internal Reconstruction:  This reconstruction refers to the internal re-organization of the financial structure of a company. This permits the existing company to be continued. Generally, share capital is reduced to write off the past accumulated losses of the company. The accounting procedure of internal reconstruction is distinct from that of amalgamation, absorption and external reconstruction.

 

Business Re-organization: Business Reorganization means the rearrange the business by adding other lines of businesses into the existing one by diversification. Type of business reorganization: Merger: A merger occurs when two separate entities combine forces to create a new, joint organization. Acquisition: An acquisition refers to the takeover of one entity by another etc.

 

 

Capital: This is the owner’s or owners’ rights to assets of a business. Or cash or goods used in a business to generate revenue. Classification of capital are: Authorized capital: stated in memorandum of association; Issued capital: portion of authorized capital advertised; Called up capital: This is the capital that is call up; Paid up capital: Refer to Contributed Capital; Capital invested: This is the actual amount of money or money worth brought into the business by the proprietor; Capital employed: This is net asset or net worth. Formula, Asset – liabilities =capital employed; Capital owned: capital contributed by owners; Working capital: This excess of current asset over current liabilities; Additional paid-in capital: This is the amount paid by the shareholders over and above the par value of the asset.

 

Capital Allowance: This is a tax relief that is granted to a business on capital expenditure purchased and used in the production of the income instead of depreciation of fixed asset charged in the financial statement. Tax authority allows capital allowance instead of depreciation for tax purposes.

 

Capital Rationing: This is to describe the situation in which finance available for new investment is limited to an amount that prevents acceptance of all projects with positive NPV. Single period capital rationing means when there is shortage of fund in one period only while multiple period capitals rationing means there is shortage of fund in more than one period. The tool used in capital rationing is profitability index. It is also called cost benefit analysis (CBA). The formula for PI is 1 + NPV/Outlay. PI is a financial tool which tells us whether an investment should be accepted or rejected. PI helps in ranking a project. If PI is greater than 1 indicates that present value of future cash flows from the investment is more than the initial investment, there by indicating that it will earn profits, and then accept the project. If PI is less than 1 indicate loss from the investment, then reject the project. If PI is equal to 1 means that there are no projects, then indifferent may accept or reject decision. In Capital rationing, a project is said to be divisible if when that project can be handle in phases or in part. A project is said to be indivisible, when the project can be accepted or rejected wholly.  Project is said to be mutually dependent projects when occurrence of one project depends upon the outcome of one or other projects.

 

Carried Down (C/D): This is the year’s closing balance for an account that is carried to the next accounting period. Carried forward (cf) is the opposite.

 

Carriage Inwards/Carriage Outwards: Carriage Inwards means cost of transporting goods into a firm. Add it to the purchases. Carriage Outwards means cost of carrying goods out of a firm to its customers. It is treated as expenses before arriving at the net profit

 

Carrying Amount: This is the net value at which the asset is included in the statement of financial position (i.e. after deducting accumulated depreciation and any impairment losses).

 

Cash: Cash refers to the liquid money available with the business in the form of notes and coins for the purpose of payment. Or money which the firm can disburse immediately without any restriction.  Cash is the most liquid asset

 

Cash Cycle: This is the number of days that passes before we collect the cash from sales measured from when we pay for the inventory.

 

Cash Deficit: This mean the excess of cash payment obligations over the total cash available. Cash surplus is opposite of cash deficit.

 

Cash Earnings: These are defined as the excess of cash revenue over cash expenses in an accounting period.

 

Cash Management: Cash management is the corporate process of collecting and managing cash, as well as using it for short-term investing. Cash management refers to a broad area of finance involving the collection, handling, and usage of cash and solvency. This is a financial management technique that aims to maximize the availability of cash in the business without changing the levels of fixed assets. It aims to secure faster debtor payments to improve the liquidity position of the business. It is a key component of a company’s financial stability.

 

Cash Profit:   Cash profit is cash flow profit. It is calculated as Cash Profit = Profit after tax + Depreciation.

 

Cash Ratio:    Cash ratio is calculated by Cash Ratio = (Cash + Marketable Securities) / Current Liabilities.

 

Certified Financial Statements: This is a financial statement that have been audited and certified by an audit firm.

 

Chart of Accounts: A chart of accounts is a serial listing of all the ledger accounts of a business. Example of chart of account are Asset, Liability, Revenue, Expenses, Equity etc

 

Chartered Accountant (CA): This is somebody who has multi-disciplinary knowledge in auditing, management consultancy, taxation, liquidation etc

 

Cheque: This is a document that orders a bank to pay a specific amount of money from a person’s account to the person in whose name the cheque has been issued.

 

Cheque Truncation: A process that involves stopping the physical movement of the cheque and replacing the physical instrument with the image of the instrument and the corresponding data contained in Magnetic Ink Character Recognition line. MICR refers to the formulation of toner used to print the specialized font at the bottom of checks and other negotiable documents.

                            

Committed Costs: These are a long-term fixed cost that the business has an obligation to pay.

 

Comparative Statement: This is a financial statement that compares the results of two or more previous years with the current results.

 

Compound Interest: This is the interest calculated on the principle over which the interest continues to accrue over time.

 

Consolidated Financial Statement: This is a comprehensive statement that gives details regarding all the assets, liabilities and operating accounts of the parent company and subsidiary companies under it, if any.

 

Contingency Budget: This is the money set aside for a contingency plan. Whereas contingency plan is implemented if some unfortunate event takes place. It is a ‘plan B’.

 

Contingent Liability: This is a potential liability that will become an actual liability only if a potential event does occur. It is reported at the foot note to the financial statement because they are not real debt

 

Contra: This means where an item does not need entering in another book as double entry has already taken place within the cash book.  E.g. cash paid into the bank and cash withdraw from the bank.

 

Contributed Margin (CM): This is the excess of proceeds from sales over the variable costs. It gives the total revenue available for servicing the fixed costs.

 

Contribution Margin Ratio: This is CM divided by selling price. It could also be change in profit over change in sales unit.

 

Control: This is power to govern the financial and operating policies of the enterprise to obtain benefit from its activities eg. Subsidiary etc. Control could be in form of the following: Power to cast majority of votes at meeting of Directors; Power to appoint or remove the majority member of the board of Directors; Power to govern the financial and operating policies of the company etc

 

Controllable Expense: These are those that can be controlled, restrained or avoided completely by the business. e.g. advert, insurance etc.

 

Convertible:   The word ‘Convertible’ is generally used to refer to one type of security that can be converted into another type of security.

 

Correlation. Correlation is a statistical technique that can show whether and how strongly pairs of variables are related. Types of correlation: Positive correlation: This is when values of one variable increase with the increase in another variable. Negative correlation: This is where the values of one variable decrease with the decrease in another variable. Neutral correlation: There might be the case when there is no change in a variable with any change in another variable.

 

Corporate Governance: This is defined as a system by which the affairs of company are directed and controlled by those charged with the responsibility. Corporate governance was established for the following essences: It helps to maximizing corporate value; It enforces compliance with audit regulation; It ensures the investor and other stakeholders in the companies have adequate rewards.

 

Cost Benefit Analysis: This is the analysis of the costs and benefits associated with any business decision by first estimating the costs and then the expected return. Cost benefit ratio (CBR) is the present value of future cash returns divided by initial investment as a basis for capital rationing. CBR=PV/Initial Investment.

 

Cost Ceiling: This is the maximum budget that will be allotted for a project. It is calculated as Cost Ceiling = Target Cost + Contingency Cost.

 

Cost Centre: This is a location, person for which costs may be ascertained.

 

Cost Control: This is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process. Method of cost control are: Budgeting; and Standard cost.

 

Cost Unit: This is a unit of product, service for which cost may be ascertained.

 

Cost Cutting Measures in Economic Recession: Cost cutting strategies are the same with cost reduction. Cost reduction can be achieved through reduction, elimination, modification, substitution or innovation. All cost drivers are taken into account and with thorough analysis the best and least cost path is adopted for each activity. The reasons why companies need cost reduction; Profits; waste reduction; increase productivity; competition; resource conservation and image enhancement etc Areas where cost reduction are necessary: Raw material procurement: Purchase directly or order directly. Logistics – inbound and outbound etc

 

Closing Stock: Closing stock is the amount of inventory that a business still has on hand at the end of a reporting period. This includes raw materials, work-in-process, and finished goods inventory.

 

Cost of Sales: The total cost attributed to units of inventory actually sold during a period

 

Credit Note: This is sometimes it is necessary to return goods bought on credit because they are faulty, damaged or not as ordered. A Credit Note is sent by the Supplier to the Customer who returns the goods and the value is deducted from the Customer’s monthly statement. It is used by the Customer to complete the Purchases Returns Account (also known as the Returns Outwards Account).

 

Credit Limit: This is the maximum amount of credit that a financial institution or other lender will extend to a debtor for a particular line of credit (sometimes called a credit line, line of credit, or a trade line). This limit is based on a variety of factors ranging from an individual’s ability to make interest payments, an organization’s cash flow or ability to repay the credit card debt and is an obligation of the consumer to pay just like all other parts of the balance. A line of credit that has reached or exceeded its limit is said to be maxed out. While the line of credit is maxed out, it cannot be used for any further activity unless the consumer pays off at least some of the debt to enable it to fall below the limit, the creditor agrees to extend the limit, or the creditor allows one or more additional purchases with the charging of an over-the-limit fee.

 

Credit Terms: The terms which indicate when payment is due for sales made on account (or credit). Credit terms or terms of credit is the agreement between a seller and buyer that lists the timing and amount of payments the buyer will make in the future. In other words, this is the contract that describes the specific details of the seller’s payment requirements that the buyer must meet into order to purchase goods on account. For example, the credit terms might be 2/10, net 30. This means the amount is due in 30 days; however, if the amount is paid in 10 days a discount of 2% will be permitted. This is cash discount period. Other terms might be net 10 days, due upon receipt, net 60 days, or net 45 day.

 

Currency Decimalization: This is process of converting from traditional denomination to a decimal system eg Nigerian adopted decimal system in Jan 1, 1973 changing from Pound, shilling and pence to Naira and Kobo.

 

Currency Redenomination: This is the process where a new unit of money replaces the old unit with a certain ratio. It is achieved by removing zero from a currency or moving some decimal points to the left with the aim of correcting perceived misalignment in the currency and enhancing credibility of the local currency.

 

Currency Revaluation: This entails an official adjustment of the exchange value of a country’s currency (usually an upward change in value) relative to other currencies by fiat under a fixed exchange rate regime. It appreciates or depreciates.

 

Current Liabilities: Obligations that will be liquidated within one year or the operating cycle, whichever is longer. It still remains the same by IFRS. Examples are bank overdraft, account payable, Accrual, Unpaid tax, Unpaid Dividend.

 

Current Asset: An asset held in a company’s statement of financial statement that the company expects to turn into cash within 12 months. This includes inventories and trade receivable that are sold, consumed and realized as part of the normal operating cycle. Etc

 

Cut-off Procedure: Cut-off: This step involves making sure all transactions have been reported in the proper financial period. Therefore cut-off procedure is to ensure that transactions are recorded completely within an accounting period in which they are incurred. Cut off procedures are used to separate the transactions from one accounting period to another accounting period. It applied to the accounting records at the end of an accounting period to ensure that all transactions not relevant to the period are excluded. In accounting, cut-off procedure are the procedures in which organisation in business have their data either sales or inventory ready for a certain agreed date for the accounting team to report it. If correct cut-off procedure are not established it can be a big problem for the accountants.  Set a time to count all inventory, perhaps at noon of the say every 31st of the month with all counted inventory. Store operations and finishing areas must have same deadlines to process all location inventory and all fulfilled orders by end of business on the 31st.This process gives accounting a defined period to determine actual inventory on hand and compare numbers from period to period. Examples of cut-off procedure are: Goods in transit at the date of inventory could be included in inventory sheet; and Goods already sold but not dispatched should be excluded from the inventory sheet.

Data Mining: This refers to the summary of a large data to obtain a clear picture on pattern and behaviour.

 

Debit and Credit:      Debit: An entry on the left side of an account – increases assets or decreases liabilities. Credit is opposite. Credit: An entry on the right side of an account – decreases assets or increases liabilities. Or this means that payment is made at a later date.

 

Depreciation: According to International Accounting Standards (IAS), depreciation is the systematic procedure for allocating the cost of fixed assets over their useful lives. Or reduction in value through physical wears and tears. It is not allowed for tax deduction because of lack of uniformity. Methods of depreciation are: Straight line method: This is a method that allows an equal amount to be charged as depreciation. Depreciation=cost-scrap/number of years of expected use. Reducing balance method: This is where a fixed percentage is applied to the balance of costs not yet allocated as an expense at the end of the previous accounting period.

 

Discount: Means allowances made to a customer over the market value of a commodity, usually to induce him either to pay up earlier than it could have been or to enable him to buy larger quantities. Trade discount: Means allowances granted to wholesale buyers. They are usually subtracted from the invoice value and they do not pass through the cash book or any other book of accounts. Quantity discount: Are allowances granted to customers to encourage them to buy in large quantities? It is a right and treated in profit and loss account. E.g. Discount Allowed or received. Cash Discount: Are allowances given for speedy payment either in cash or cheque. It is a privilege and is treated in cash account.

 

Discounting: This is the opposite of compounding and it involves the conversion of future sums to their equivalents present values as at the present time period (i.e. year 0). P= A/ (1+r) n. Where P=Principal, A=Amount, R=rate and n=years.

 

Distribution Cost: This is (also known as “Distribution Expenses”) are usually defined as the costs incurred to deliver the product from the production unit to the end user. It is a broad terminology and it includes several costs.

 

Diversification: This is the spread of investment in different portfolio i.e. minimize risk. Types of diversification are: Horizontal diversification: add new and unrelated product and services to existing one but for the product customer. Conglomerate diversification: add new and unrelated products or services to the existing ones and not principally intended for the existing customers.Concentric diversification: This occurs when a business organization adds new but related products or services to the existing ones.

 

Dividend: Amounts paid from profits of a corporation to shareholders as a return on their investment in the stock of the entity. Dividends decrease both the assets and retained earnings of the corporation. The number of time dividend can be paid are: Interim dividend: This is the money paid to the Shareholders during the year. It is part of their dividend payment. An Interim Dividend is often paid out half way through the financial year. Final dividend: This is the last Dividend payment due to Shareholders for a particular financial year. It is often paid after the Accounts have been prepared and is entered as a Current Liability in the Balance Sheet if it is still due to be paid at the end of the financial year.

 

Double Entry: This means that every transaction will involve at least two accounts. For example, if your company borrows money from the bank, the company’s asset Cash is increased, and the company’s liability Notes Payable is increased.

 

Due Diligence: This is a process through which a potential buyer evaluates a target company or its assets for acquisition. It involves examine financial records, management decisions, competitive challenges, assets, liabilities and any other considerations that would make the acquisition a good or bad decision.

E-commerce (electronic commerce or EC) is the buying and selling of goods and services, or the transmitting of funds or data, over an electronic network, primarily the Internet. E-Commerce includes: Buying or selling on websites and/or online marketplaces; The gathering and use of demographic data through web contacts and social media; Electronic data interchange, the business-to-business exchange of data; E-mail and fax and their use as media for reaching prospective and established customers (for example, with newsletters); and Business-to-business buying and selling

 

Efficient and Effective:  Efficient is producing with minimum waste or effort while Effective means having a definite or desired result.

 

Epayment system is a way of making transactions or paying for goods and services through an electronic medium without the use of check or cash. Example of E-payment institutions: Inters witch; Value card; Swift card technology; NIBSS etc

 

Error: This is an unintentional misstate in the financial information eg misapplication of accounting policies.

 

Exchange Rate: This is the rate at which currency of a country is exchange for the currency of another country. Exchange rates used are: Spot rate: This is the exchange rate prevailing in a day. Closing Rate: This is rate ruling at balance sheet day; Official exchange rate: This is the rate that is established by the appropriate government agency for eligible transaction; and Forward Rate: This is the rate quoted or agreed upon now for future delivery of currency between the parties involves.

 

External Reserves:  Are veritable means of paying imports or meeting debt obligations and to determine domestic exchange rate. E.g. monetary gold, bank balances, Treasury bill, convertible currencies etc.

Factoring: Selling of accounts receivable at a discount before they are due.

 

Fair Market Value: This is the amount for which an asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm’s length transaction. Or an unbiased estimate of how much a good, service or other asset is worth.

 

Feasibility Study: This is to assess the economic viability of the proposed business. You carry out feasibility before business plan.

 

Final Accounts: The final accounts are Prepared at the end of the trading period. They include the all financial statements.

 

Finance Cost: The Financing Cost (FC), also known as the Cost of Finances (COF), is the cost and interest and other charges involved in the borrowing of money to build or purchase assets. The total expenses associated with securing finance for a project or business arrangement.

 

Financial Intermediation: This is a process by which financial intermediaries provide a linkage between surplus units and deficit units in the economy.

 

Financial Management: This means to plan and control the finance of an organization. Objective of financial management are: Create wealth for the business; Generate cash; and provide an adequate return on investment bearing in mind the risks that the business is taking and the resources invested

 

Financial Plan: This is a comprehensive evaluation of an investor’s current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans.

 

Financial Statement: This is the accounting report prepared periodically and usually at the end of every financial year.

 

Financing Strategy: This is integral to an organization’s strategic plan. It sets out how the organization plans to finance its overall operations to meet its objectives now and in the future. A financing strategy summarizes targets, and the actions to be taken over a three to five-year period to achieve the targets.

 

Financial System: A financial system (within the scope of finance) is system that allows the exchange of funds between lenders, investors, and borrowers. Example of financial system are: Financial intermediaries, Financial market, Financial instruments, rules, conventions and norms that facilitate and regulate the flow of fund through a macro economy.

 

Fiscal Year:   This is a 12-month accounting period. Not necessarily a calendar year.

 

Fixed Assets Accounting System: This is designed to keep track of each of the fixed assets for the company from time of entry to the time of disposal. Before any fixed asset is acquired, it must be budgeted for and approve.

 

Fraud: This is an intentional misrepresentation of financial statement by one or more individual among management, employee or other third parties.

 

Fraud Risk: This is the vulnerability that an organization faces from individuals capable of combining all three elements of the fraud triangle such as pressure, opportunity and rationalization. Fraud risk have both internal and external sources to the organization and any risks present before management action are described as inherent risks (eg cash on hand is by nature more susceptible to theft than a large inventory of coal) and risks that remain after management action are described as residual risks (eg risk avoidance, risk reduction, risk transfer and risk acceptance). In other word, residual risk is a risk that remains after one has treated the risk. It is difficult to completely eliminate risk, so there is residual risk that remains after each risk has be managed. Four examples of residual risk are Risk Avoidance: Eliminate asset or activity if controls are too expensive. A company may decide to avoid the risk of developing a new technology because the project has many risks. The residual risk is that a competitor will develop the technology instead and the company will become less competitive; Risk Reduction: Implement countermeasures, such as prevention and detection controls. An airline reduces the risk of accident by improving the maintenance procedures. Residual risk remains in the process including a chance of human error such as skipping steps in the procedure; Risk Transfer: Purchase fidelity insurance policy. a homeowner transfers the risk of flooding damages to their home by getting flood insurance, residual risk include the insurance deductible amount and the chance that the insurance company will go bankrupt as a result of a large scale flood and fail to pay; Risk Acceptance: If probability of occurrence and impact of loss are low. When a risk is accepted, the entire risk becomes a residual risk. For example, an investor may accept the risk that a stock will go down because they predict that the potential rewards of the investment overweigh the risks.

                     

 

Functions of Finance Manager: Investment Decision; Financing Decision; Dividend Decision; Tax management; Risk management; Asset management etc

 

Function of Finance Controller: Cost analysis; Preparation of payroll; Management information; Tax administration; Preparation of financial statement; Reporting and interpreting etc

 

Function of Internal Auditor: Installation of company’s financial system and procedure; Ensuring compliance with such system procedure; Special investigation; Examination of financial or operating information for management and Review the efficiency and effectiveness of operation.

 

Function of Management Accountant: Planning: To plan a profitable future for the business; Control: To install and maintain an accounting system to monitor the performance of the business; To identify potential problem etc.

 

Function of Risk Manager: To help identify risk; Evaluation of its potential impact on the organization; To help to eliminate the risk entirely or mitigate or reduce risk; To ensure you don’t incur losses from your business etc.

 

Function of Treasurer: Raising of fund; Credit collection; Risk management; Banking and custody etc

Goal congruence: Means overall objective of an organization

 

Goodwill: This is intangible noncurrent assets which does not have physical form. Or is the excess of the price paid over and above what you have got for your investment. This is created by good relationship between a business and its customers. By building up a reputation for high quality products of high standards of service; By responding promptly and helpfully to queries and complaints from customer; Through the personality of staff and their attitudes to customers.

 

Going Concern: The going concern principle is that you assume a business will continue in the future, unless there is evidence to the contrary. Going concern symptoms or problem in a company: Undercapitalization; High gearing; Adverse current ratio; Excess inventory and account receivable; etc

 

Gross Profit: This is the excess of revenue over the cost of goods sold in the period.

Honorarium: This is a small fee paid to a committee member for the work he/she has undertaken for the club or organization on a voluntary basis.

Income Smoothing: This is the shifting of revenue and expenses among different reporting periods in order to present the false impression that a business has steady earnings. Management typically engages in income smoothing to increase earnings in periods that would otherwise have unusually low earnings

 

Impairment: This is fall in the value of asset so that its recoverable amount is less than carrying amount in the statement of financial position.

 

Income and Expenditure Account: his account is prepared after a receipts and payments account of a club is drawn up.

 

Incremental Fixed Cost: This is the additional cost incurred as a result ofundertaking a new project. It is relevant cost

 

Inflation: A general increase in prices and fall in the purchasing value of money. Types of Inflation: Creeping Inflation: this occur when the general price rise is gradual or less than 5% annually. Hyper or Galloping Inflation: this is when the general price rises steeply or above 5% annually.

 

Insolvent Person: This is one who cannot meet his debts as and when due.

 

Intangibles Noncurrent Asset: Assets that have no physical form but that have value. Or they are defined by IAS 38 as non-monetary assets without physical substance. Examples are copyrights and patents, goodwill, development cost, trade mark, computer software, motion picture firm, customer lists. Characteristic of intangible asset: Flow of economic benefit in future; Controllability under the enterprise; It must be identifiable etc.

 

Internal Control: It is means by which an organization’s resources are directed, mentioned and measured. Or this is organizational plan and all the related measures adopted to safeguard assets, promote operational efficiency, encourage adherence to company policies, and ensure accurate and reliable accounting records. Types of Internal Control: Organization control: e.g. delegation of authority, organization chart etc. Segregation of duties: e.g. authorization, approval, execution, custody and recording. Physical control: e.g. authorized person to have access to asset and document and Management control:

 

Interest: The cost of the use of money. Interest rate: The cost of money expressed as an annual percentage.

 

Inventory: This is an accounting term that refers to goods that are in various stages of being made ready for sale, including: Finished goods (that are available to be sold) Work-in-progress (meaning in the process of being made) Raw materials (to be used to produce more finished goods).

 

Inventory Management: It involves placing an order at the right time, through the right sources, to acquire the right quality, at the right price and quality.

 

Invoice: This is a bill sent by the Supplier to the Customer who is buying goods (stock) on credit. The invoice will show the date, description of the goods, quantity purchased unit price, total price, any trade discount, Valued Added Tax (VAT) and terms for cash discount. Invoices are used by the customer to prepare the purchases account. PURCHASES are goods/stock bought for resale.

 

Invoice Price: This is a list price less any trade discounts

 

Irregularities: This is intentional distortion of financial statement for whatever purpose and if it persists, its end point will be fraud.

Journal: It is also called Book of Prime Entry or Subsidiary Book or books of original entry. Journal is a book where entries are made before posting to ledger.

Kiting: This first came into existence in 1920s. This is also called check kiting or cheque kiting. This is a check fraud. This is a fraudulent act that uses checks to embezzle money from individual and business. In other words, kiting is the fraudulent use of a financial instrument such as a check to obtain additional credit that is not authorized. Kiting is usually committed by a bookkeeper or someone else with access to company checks and the ability to forge checks, but it can also be used by the company itself. Drawing a cheque on insufficient funds to take advantage of the lag time (time interval) required for collection. Certainly not ethical, and under some circumstances very illegal! Check kiting is illegal in many countries. However, a majority of countries do not have a float system and checks are not paid until they are cleared, so check kiting is impossible.

Leasing: This is an agreement between two parties the lessor and the lessee. Lessor: is someone who owns a capital asset but grants the lessee use of it. Lessee: is someone who does not own the asset but use it and in return makes payment under the lease to the lessor for a specified period of time installmemtally subject to the agreement between the parties. Types of Leasing: Operating leases: This is a lease agreement between the lessor and lessee whereby the lessor is responsible for the upkeep, maintenance, servicing and insurance of the leased asset. Capital or finance leases: These are lease agreement between the use of the leased asset ( ie the lessee) and the provider of finance (ie the lessor). The lessee is responsible for the upkeep, maintenance, servicing and insurance of the lessed asset.

 

Ledger: Ledger is an account. Is part of double entry. This is a book containing accounts to which debits and credits are posted from books of original entry. Types of Ledgers are:Sales ledger or receivables Account: this is customer personal account to whom the firm sells good on credit. Sales invoice to sales day book to sales ledger.Purchase/bought ledger/payables account: this is supplier personal account, Cash book: This book is concerned receiving and paying of money both by cash and cheque. It may also be expanded to include the bank transactions if the business does not wish to keep a separate bank book. General/ nominal ledger: The master record of all the balance sheet and income statement account balances. This consist of capital account, sales, purchases, motor van, rent, discount received, return inwards etc.

 

Liability: A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits ( IASB). Or Liability is amount owed to others in the course of the business.

 

Liquidation: Liquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they come due. As company operations end, the remaining assets are used to pay creditors and shareholders, based on the priority of their claims.

Management by Exception (MBE): It entails concentrating on areas that deviate from the plan and ignoring areas that are presumed to be running smoothly.

 

Management by Objective (MBO): This is where the entire employee including the manager is carry along in making decision.

 

Management Report: This is a report that keeps company executive and other business managers up to date on the status and progress of the company: e.g. Sales Report, production report, budget etc.

 

Mark –Up: Mark up is the ratio between the cost of a good or service and its selling price. It is expressed as a percentage over the cost. A mark-up is added onto the total cost incurred by the producer of a good or service in order to cover the costs of doing business and create a profit. Mark –up means percentage of cost price. Mark-up =GP/CP or 1/2

 

Margin: Profit margin is the amount by which revenue from sales exceeds costs in a business, usually expressed as a percentage. It can also be calculated as net income divided by revenue, or net profit divided by sales. Margin means percentage of selling price. Margin=GP/SP or 1/2+1

 

Margin of Safety (MOS): This is the difference between the total sales and sales at breakeven point. It is the amounts by which sales revenues may drop before loss begin. MOS= budgeted sales-breakeven/budgeted sales.

 

Money: This is anything that makes exchange possible. The characteristics or qualities of money: Generally Acceptable; Durable; Divisible; Portable; Scare; Stability and Homogenous.

Net Assets or Net Worth: This is the difference between the assets and the liabilities are known as of the company.

 

Net Income:   This is the excess of revenues over expenses for a designated period of time. Net income is the opposite of net loss.

 

Net Realizable Value: This is the estimated proceeds from sales less all additional costs incurred to the point of completion; marketing, selling and distribution of an item of stock.

 

Noncurrent Assets: Permanent assets of a company required for the regular conduct of business which will not be converted into cash during the next year. Examples are land, building, furniture and fixtures. It is formerly fixed asset.

 

Non-Controlling Interest:(NCI) is the portion of equity ownership in a subsidiary not attributable to the parent company, who has a controlling interest (greater than 50% but less than 100%) and consolidates the subsidiary’s financial results with its own.

 

Non-Current Liabilities: These are liabilities in your business that are due in more than one year. For example mortgage payable

Opening Stock: The opening stock for the next accounting period is the same as the closing stock from the immediately preceding period

 

Operating Cycle: The period of time it takes to convert cash back into cash (i.e., purchase inventory, sell the inventory on account, and collect the receivable)

 

Operating Expenses: This is an expense that is incurred from the daily operation of the business.

 

Overtrading: This is over capitalization: This occurs when a company commits excessive capital into the company’s trading activities, so that there are excessive inventory, account receivable, and cash as well as large account payable. Overtrading shows the following symptoms: Gross profit margin might fall because of higher purchased cost; Rapid increase in sales turnover; current and acid test ratio will fall; Ratio of account receivable to account payable will decline etc

 

Owners’ Equity: According to IASB, this is residual interest in the assets of the entity after deducting all its liabilities. This is the owner’s “interest” or “right” in the business. It is sometimes called net assets, because it is equivalent to assets minus liabilities for a particular business. 

Par Value: This is the price at which both market and face (i.e. book) value are at a par with one another.

 

Payroll: this is also called employee compensation which includes Wages; Salary; Commission; bonus. Payroll accounting: This handles the expenses and liabilities arising from compensating employee. Books in payroll are: Payroll register; Payroll bank account; Payroll checks; Earning records of employee

 

Payroll Gross Pay: This is the total of salary, wages, commission or any other employee compensation before taxes and other deductions. Payroll net pay: This is equal to take home pay i.e. gross pay less taxes

 

Payroll Optional Deductions: Charitable contribution; Corporative contribution; Insurance premium

 

Payroll Statutory Deduction:

  1. Contribution pension (employer 10% and employee 8% of Basic salary, transport and housing allowance)
  2. National Health Insurance Scheme (NHIS)(Government 10% and employee 5% of basic salary) but employer 5% has not be implemented yet.
  3. National Housing Fund (Employee 2.5% of basic salary).
  4. Union Due (Employee 2% of basic salary).
  5. Pay as you earn (.i.e. employee 200,000 or 1% gross salary whichever is higher plus 20% gross salary). Then apply tax table

 

 

Posted Price: This is the price ruling at Organization of Petroleum Exporting Countries (OPEC) or world market or the price free on board (FOB) at the Nigeria Port of export for crude oil.

 

Proceeding Year Basic: This is the profit for the year immediately preceding the assessment year. A basis for assessing profits in which the assessment in any given fiscal year is based on the accounts that ended during the previous tax year.

 

Professional Ethics: This means the way and manner each member is to relate to other members on the one hand and to the society on the side. Ethics: This involves making the right decisions and professional choices.

 

Purchases: Purchases mean the purchase of those goods which the firm buys with the prime intention of selling

 

Purchase Order: This is a written instruction to a vendor to supply the listed items. It is used to control the purchasing of products and services from external suppliers. Purchasing policy are stated below: Just in Time (JIT):(This is a system where items are produced or received just in time to be used or sold); Contract buying; Speculative buying; Economic buying

Ratio Analysis: This is obtained by dividing one number by another. Ratio is therefore the process of calculating ratios and noting how they change over time or when compared with the measures calculated for other organizations.

 

Recoverable Amount: This is that part of the net book value of an item of property, plant and equipment that the enterprise can recover in the future through depreciation of the item including its net realizable value of disposal.

 

Relevance Range: This is the space within the current optimal plan level.

 

Reporting Currency: This is the currency in which financial transactions are recorded and financial statement presented.

 

Retained Earnings: Capital earned operations of the corporation.

 

Returns Inwards (RI)/Return Outwards (RO): RI means goods returned to the firm or us by their customers. Deduct it from sales (now changed to revenue by IFRS). RO means when a firm returns goods to their supplier. Deduct it from purchases.

 

Reserves: This is amount set aside out of profit of a company in order to strengthen the financial position of the business. Types of Reserves: Capital reserve: A capital reserve is one of the reserves that a business creates, out of the yearly profits, for any specific purpose. It is not available for distribution as dividend among shareholders. Revenue reserves: This is where amount has been voluntary transferred from the appropriation account by debiting it, thus reducing the amount of profit left available for cash dividend purpose and crediting the name of revenue reserve. General reserves: It means undistributed profit accumulated over a period of time and transferred from the profit and loss account. It may be needed because of the effect of inflation. Specific reserves: means reserves that are presently not available for distribution but are set aside for special purpose. Secret reserves: These are reserves which are not shown in the financial books. Eg undervaluation of assets, excessive depreciation, appreciation of assets,

 

Revenue: This arises from a company’s ordinary activities. Or Amounts earned by delivering goods or services to customers. Formerly called turnover or sales. It is also known as income. The amount left when returns, discounts, and allowances are deducted from sales revenue is called Net revenue.

 

Risk: This is the probability of an adverse even occurring. When an entity makes an investment decision, it exposes itself to a number of financial risks. The quantum of such risks depends on the type of financial instrument. These financial risks might be in the form of high inflation, volatility in capital markets, recession, bankruptcy, etc.Types of financial risk: Credit risk: Credit risk is also referred to as default risk; Liquidity risk; Asset backed risk: The risks under asset-backed risk include prepayment risk and interest rate risk; Foreign investment risk; Equity risk and Currency risk etc

 

Risk Management: Risk management is the identification, evaluation, and prioritization of risks. In the world of finance, risk management refers to the practice of identifying potential risks in advance, analyzing them and taking precautionary steps to reduce/curb the risk. Risk management comprises of: Risk analysis, Risk measurement and Risk control.

 

Round Tripping: These are arbitrage transactions where retail banks buy foreign currencies from the CBN and resale at the parallel (black) market far above the stipulated 2% premium allowed by the apex bank.

Significance Influence: This is the power to participate in the financial and operating policies, decision of the investee but not to control these policies. Eg Associate.

 

Source Documents: These are the first source of information from which the accounting books are prepared, eg Purchased order; Invoice; Debit note; Credit note; Cheque; Receipt; Cash register. etc

 

Source of Finance: Sources of finance mean the ways for mobilizing various terms of finance to the industrial concern. Sources of finance state that, how the companies are mobilizing finance for their requirements.

 

Statement for Financial Position: It is formerly called Balance Sheet. It is the list of balances remaining after the statement of profit or loss account and other comprehensive income have been prepared. It is not part of double entry or not account. On assets, this must contain, at a minimum, information on property, plant and equipment; investment property; intangible assets; financial assets; investments accounted for using equity method; biological assets; deferred tax assets; inventories; trade and other receivables; current tax assets; cash and cash equivalents; assets held for sale; and assets included in disposal groups held for sale. On liabilities, it must contain, at a minimum, information on trade and other payables; provisions; financial liabilities; current tax liabilities; deferred tax liabilities; reserves; minority interest; parent shareholders’ equity; and liabilities included in disposal groups held for sale. Under equity, it should reflect non-controlling interests; issued capital and reserves attributable to owners of the parent.

 

Statement of Profit or Loss and Other Comprehensive Income: It also means Income statement: This is a statement that summarizes revenues and expenses. Information about the performance of the entity should be provided in a single Statement of Comprehensive Income or in two statements: a separate income statement followed immediately by a statement displaying components of other comprehensive income. In all, it must contain, at a minimum, information on revenue; finance costs; share of profits or losses of associates or joint ventures; tax expense; discontinued operations; profit or loss; each component of other comprehensive income; total comprehensive income; profit or loss attributable to non-controlling interests; profit or loss attributable to owners of the parent; and comprehensive income attributable to non-controlling interests as well as to owners of the parent.

 

Statement of Cash Flows: Statement of cash flows At a minimum, this must provide information on cash and cash equivalents and a reconciliation with the equivalent items in the statements of financial position; details about non-cash investing and financing transactions; amount of cash and equivalents that are not available for use by the group; amount of undrawn borrowing facilities available for future operating activities and to settle capital commitments; aggregate amount of cash flows from each of the three activities (operating, investing and financing) related to interest in joint ventures; amount of cash flows arising from each of the three activities regarding each reported business and geographical segment; and distinction between cash flows that represent an increase in operating capacity and those that represent the maintenance of it.

 

Statement of Change in Equity: Minimum information here includes profit or loss for the period; each item of income or expense recognised directly in equity; total of above two items showing separately the amounts attributable to minority shareholders and parent shareholders; effects of changes in accounting policies; effects of correction of errors; capital transactions with owners and distribution to owners; reconciliation of the balance of accumulated profit or loss at the beginning and end of the year; reconciliation of the carrying amount of each class of equity capital, share premium, and each

 

Substance over Form: means reality over legality. Substance over form is an accounting principle which recognizes that business transactions should be accounted in accordance with their (economic) substance instead of their (legal) form. Economic substance refers to the underlying economic or commercial purpose of a business transaction apart from its legal or tax considerations. Legal form refers to interpretation of a business transaction in accordance with the applicable business laws. The key point of the concept is that a transaction should not be recorded in such a manner as to hide the true intent of the transaction, which would mislead the readers of a company’s financial statements. Substance over form is a particular concern under Generally Accepted Accounting Principles (GAAP), since GAAP is largely rules-based, and so creates specific hurdles that must be achieved in order to record a transaction in a certain way. Thus, someone intent on hiding the true intent of a transaction could structure it to just barely meet GAAP rules, which would allow that person to record the transaction in a manner that hides its true intent. Conversely, International Financial Reporting Standards (IFRS) are more principles-based, so it is more difficult for someone to justifiably hide the intent of a transaction if they are using the IFRS framework.

 

Sunk Cost: Amount that has already been incurred prior to the investment under consideration and cannot b recovered. e.g. Rent, fixed cost.

 

Super Profit: This is excess of profit over expectation based on some indices.

 

Suspense Account: A temporary account in which entries of credits or charges are made until their proper disposition can be determined.

 

SWOT Analysis: This is a study undertaken by an organization to identify its internal strengths and weaknesses, as well as its external opportunities and threats. SWOT stands for Strength, Weakness, Opportunity and Threat.

Tangible Noncurrent Asset: They are assets that have physical substance and they could be noncurrent asset or current asset. e.g. Property, plant and equipment IAS 16

 

Tax: This is compulsory levies imposed by government. Sources of tax in Nigerian: Constitution of federal republic of Nigeria; Court judgment on tax matters; Opinions of tax expert etc.

 

Tax Audit is an examination carried out by tax authorities to verify the accuracy of an individual or corporation’s tax return.

 

Tax Avoidance: This is the legal utilization of the tax regime to one’s own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Examples of tax avoidance are but not limited to the following: taking legitimate tax deductions to minimize business expenses and thus lower your business tax bill, setting up a tax deferral plan  and taking tax credits

 

Tax Buoyancy: This refers to increase in tax revenue with respect to increase in tax paid without an extension of tax coverage or an upward review of tax rates. It is measured as change in tax revenue divided by change in tax base.

 

Tax Elasticity: This is the increase in tax revenue due to an extension of its rate or upward review of its rate. It is measured as Change in Tax Revenue divided by change in tax base or tax coverage.

 

Tax Evasion: This is illegal act. It is an act whereby the tax payer minimize the tax its pay through illegal means e.g. deliberate omission of income sources from records; overstatement of expenses; making false claim for allowance and reliefs etc. Examples of tax evasion are but not limited to these listed below: under-reporting income (claiming less income than you actually received from a specific source, Not reporting an income source, Providing false information to the tax authority about business income or expenses.

 

Tax Investigation is an in-depth examination carried out by the RTA in order to recover tax undercharged in previous years of assessment. It is usually conducted when a taxpayer is suspected of tax evasion.

 

Tax Planning: This involves taking note of the applicable taxation legislation to ensure that the tax laws are properly complied with by taxpayers such that all taxes due are paid as at when dues. The following are ways one can plan their tax. In CGT, consider rollover relief; Pat-As-You-Earn (PAYE) properly deducted; Consider current tax incentives such as pioneer companies, export free zone exempt profit; Timing of fixed asset acquisition; Making specific provision instead of general provision for bad debt; Timing of capital allowance, claim and amount to claim; Invest more in inventory and share rather than in building.

 

Time Value of Money: The time value of money is a theory that suggests a greater benefit of receiving money now rather than later. This means what future value of money will be now (ie present). Future value = Present value (1+r)n

 

Toxic Assets: This is a non-technical term used to describe certain financial assets when their value fallen significantly and when there is no longer a functioning market for these assets so that they cannot be reasonably sold at a price satisfactory to the holder. Because assets are offset against liabilities and frequently leveraged, this decline in price may be quite dangerous to the holder. The term became common during the financial crisis of 2007-2008, in which they played a major role.

 

Trading Mispricing. This is also called transfer pricing manipulation or fraudulent transfer pricing.  This is where a company artificially sets the prices for goods or services sold between its subsidiaries to avoid taxation.  This is one of the ways multinational companies avoiding paying their fair share of taxes.

 

Trial Balance: This is a list of balances only arranged as to whether they are debt balances or credit balances.

 

True and Fair View: True and fair view in auditing means that the financial statements are free from material misstatements and faithfully represent the financial performance and position of the entity. In summary true means the once you saw while fair for those you sample during auditing. True suggest that the financial statements are factually correct and have been prepared according to applicable reporting framework such as IFRS and they do not contain any material misstatements that may mislead the users. Misstatements may result from material errors or omissions of transactions and balances in the financial statements. When used VOUCHING to collect evidence. In summary true means the once you saw through evidence. Fair implies that the financial statements present the information faithfully without any elements of bias and they reflect the economic substance of transaction rather than just their legal form. When used audit SAMPLE to collect evidence.

VAT means value added tax. VAT is a tax on consumption of goods and services. The submission of evidence of VAT registration by a contractor is now a requirement prior to being allowed to bid for a contract with Ministries, Departments and Agencies of government at all levels.

 

Voucher: This is a document showing evidence of receipt or payment of money. Types of voucher are receipt voucher, payment voucher and adjustment voucher.

Withholding Tax (WHT): This is deduction at sources or an advance payment of income tax. Withholding tax is not a separate type of tax but a payment on account of income tax and it is available as set-off against future income tax assessments.

 

Working Capital: This refers to the items that are required for the day to day production of goods to be sold by a company. Or excess of current assets over current liabilities. It also called net current assets. Methods of financing working capital: Overdraft; Factoring; Retained earnings; Equity; Franchising etc.

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