Business owners often encounter difficulty in understand the accounting terminology used in the Profit and Loss account and Balance Sheet.

Business owners often encounter difficulty in understand the accounting terminology used in the Profit and Loss account and Balance Sheet.

Occasionally a misunderstanding of the terminology may lead to poor business decisions being taken.  If the business owner is regularly reviewing the financial performance an improved comprehension of ‘what the numbers mean' should be gained, however, at this point the business owner will be reviewing historical data.

It is desirable that the future impact of all business decisions taken have on the business is understood.  Consequently greater knowledge of what is reported in the Profit and Loss Account and Balance Sheet will contribute to informed decisions being taken.  

Some frequently used words and phrases are:

Profit & Loss Account - This is a statement that reports the financial performance of the business to identify the levels of income, expense and profit or loss.

Accounting Period - This identifies the time frame for which the profit or loss of the business is reported.  For internal reporting this typically will be one calendar month, four weeks or one quarter, whilst for published accounts the time frame is usually twelve months.

Turnover - Sales is an alternative name for turnover and indicates the value of invoiced transactions, net of sales discounts and value added tax, for the accounting period.

Cost of Sales - This would include the cost of materials and components sold and the cost of converting the materials into a saleable product which would include direct labour and the manufacturing overhead cost.

Gross Profit - This number is calculated by deducting the cost of sales value from the turnover.

Expenses - This may be analysed by administrative, sales, distribution and marketing activities and give aggregate numbers for monies expended against the appropriate categories.

Operating Profit/(Loss) before tax - Represents the value after deducting the expenses cost from the Gross Profit.

Balance Sheet - Is a statement, at a point in time, of the values of all assets and liabilities of the business.

Assets - Represents the realizable sum should all tangible and intangible possessions of the business be sold or recovered at the date of the Balance Sheet.

Liabilities - Represents the value of all debt of the business at the date of the Balance Sheet.

Fixed Assets - The value of fixed assets in the balance sheet is represented by the original cost of items that will be expected to have a useful life greater than one year, less the write-off to profit and loss of the cumulative depreciation charged.

Debtors - All sums invoiced but not paid by customers would be treated as debtors or receivables at the date of the Balance Sheet.

Bank and Cash - Is the funds on hand or the overdrawn position

Share Capital - The value of the issued shares in the business would be recorded.

Share Premium - If shares have been issued and paid for at a value great than the nominal value, this additional sum (the premium) would be identified separately.

Stock - Or inventory is the value, usually at the lower of cost or net realizable value, of the materials and components purchased with the intention of converting to saleable product, but at the Balance Sheet date remained partially or wholly unconverted and unsold.