key words

• Income


  Money coming into a business
• Capital income


  Money invested by owners or other investors, used to set up the business or to buy equipment (one off)
• Revenue income


  Money coming into a business from day-to-day activity (sales, rent received, commission received, interest received, discount received), used to pay costs and expenses (ongoing)
• Expenditure


  Money spent by a business
• Capital expenditure


  Money spent on assets which will stay in the business for five years or more (one off)
• Revenue expenditure


  Money spent on day-to-day expenses, such as HL&M, insurance, salaries, wages, bank charges, interest, depreciation and discount allowed (ongoing)
• Liquidity


  A measure of a business's ability to meet short-term cash payments
• Cash flow forecast


  A tool used by a business to understand future cash requirements
• Cash inflows


  Also known as receipts, money coming into the business as cash, e.g. cash sales, credit sales, loans, capital, sale of assets, interest received
• Cash outflows


  Also known as payments, money going out of a business as cash, e.g. cash purchases, credit purchases, rent, rates, salaries, wages, HL&M, purchase of assets, VAT, interest paid
• Opening balance


  The amount of cash available in a business at the start of the month. Normally carried forward from the closing balance of the previous month
• Closing balance


  The amount of cash available in a business at the end of the month. Opening balance + net cash flow
• Break-even analysis


  A tool used by a business to calculate how much revenue is needed to become profitable
• Break-even point


  The moment a business stops making a loss and before it starts making a profit. Total revenue = total costs
• Fixed costs


  Costs which do not vary with output, e.g. rent
• Variable costs


  Costs which vary depending on output, e.g. purchases of stock or raw materials
• Semi-variable costs


  Part of the costs vary and part stays the same with increase in output, e.g. staff pay (a business pays staff a fixed salary, but they pay variable overtime and bonuses)
• Total costs


  Total costs = fixed costs + variable costs
• Total sales


  The amount of sales a business makes in a given period, expressed as value or quantity
• Sales revenue


  Money coming into a business from sales. Total revenue = quantity × price
• Statement of comprehensive income (SOCI)

  Also known as the profit and loss account, a financial document showing income, costs and expenditure, used by a company to calculate gross profit and net profit
• Depreciation


  An accounting tool used to spread the cost of the asset over its useful life. Shown as an expense
• Straight-line


  Depreciation where the asset loses a set amount of value, or a percentage of its original cost, each year
• Reducing-balance


  Depreciation where the asset loses a percentage of its net current value each year
• Prepayment


  An expense which has been paid for but has not been used. Taken away from expenses
• Accrual


  An expense which has been used but has not been paid for. Added to expenses
• Statement of financial position (SOFP)


  Also known as the balance sheet, a financial document showing a snapshot of the value of a business, normally at the end of the financial year. It shows everything a business owns (assets) and owes (liabilities)
• Non-current assets


  Items owned by the business and held for more than one year (long term), e.g. property, vehicles, equipment, machinery
• Depreciation


  An accounting tool used to spread the cost of the asset over its useful life. Historic cost, accumulated depreciation and net book (current) value are shown.
• Current assets


  Items owned by the business for less than one year (short term), e.g. inventory, trade receivables, prepayments, cash in the bank, cash in hand
• Current liabilities


  Debts owed by the business which need to be paid within one year (short term), e.g. overdraft, trade payables, accruals
• Non-current liabilities


  Debts owed by the business which will take longer than one year to pay (long term), e.g. mortgages, debentures and loans
• Prepayment


  An expense which has been paid for but has not been used. Shown as a current asset
• Accrual


  An expense which has been used but has not been paid for. Shown as a current liability
• Gross profit margin


  A ratio comparing gross profit to sales. Expressed as a percentage
• Profit margin


  A ratio comparing net profit to sales. Expressed as a percentage
• Mark up


  A ratio comparing gross profit to cost of sales, used to show how much money is made on each sale. Expressed as a percentage
• Return on capital employed

  A ratio showing how much is returned to investors compared to their capital investment. Expressed as a percentage
• Current ratio


  A ratio comparing current assets with current liabilities. Expressed as n:1
• Liquid capital ratio


  A ratio comparing current assets with current liabilities, but with inventory taken away from current assets as this is the most difficult form of asset to convert to cash. Expressed as n:1