Glossary
Financial Glossary
Your Essential Guide to Financial & Tax Terms: A simplified, go-to reference for understanding the key terms, concepts, and compliance language used in accounting, VAT, tax consultancy, and business regulations. This glossary is designed to help entrepreneurs, business owners, and professionals navigate financial conversations with clarity and confidence.
Gross profit margin
Gross profit margin is a measure of a company’s profitability that indicates how much of its total revenue is left after accounting for the cost of producing and selling its products or services. It is calculated by dividing a company’s gross profit by its total revenue, and it is expressed as a percentage.
IFRS
IFRS stands for International Financial Reporting Standards. It is a set of accounting standards developed by the International Accounting Standards Board (IASB) that provide a framework for the preparation of financial statements. IFRS is used by more than 100 countries around the world, including most countries in Europe and many countries in Asia and South America. It is designed to improve the comparability and transparency of financial reporting across different countries and industries. IFRS includes a number of different standards, each of which addresses a specific aspect of financial reporting. These standards cover topics such as revenue recognition, asset classification, and income tax. They provide guidance on how companies should account for different transactions and events in their financial statements. IFRS is an important tool for investors and other stakeholders because it helps them understand and compare the financial performance of different companies. It also promotes consistency and reliability in financial reporting, which helps to build trust in the financial markets.
Indirect costs
Indirect costs, also known as overhead costs or overhead expenses, are expenses that are not directly related to the production of a good or service. They are incurred by a company as a result of its operations, but cannot be easily traced to a specific product or service. Examples of indirect costs include administrative expenses, rent, utilities, and insurance. These costs are necessary for the operation of a business, but are not directly tied to the production of specific products or services. Indirect costs are typically allocated to different products or services based on an allocation method, such as the number of units produced or the direct labor hours required. For example, if a company incurs $100,000 in indirect costs and produces 1,000 units of a product, the indirect cost per unit would be $100 ($100,000 / 1,000 units).Indirect costs are important to consider because they can impact a company’s profitability. By accurately allocating indirect costs to the products or services that they support, a company can better understand its cost structure and make more informed pricing decisions.
Intangible assets
Intangible assets are non-physical assets that have a value to a company but cannot be touched or seen. They are long-term assets that are not easily converted into cash and are typically held by a company for a long period of time. Examples of intangible assets include patents, trademarks, copyrights, and customer relationships. Intangible assets are important for a company because they can provide economic benefits and competitive advantages. For example, a patent can protect a company’s technology from being copied by competitors, while a strong customer relationship can generate repeat business and boost the company’s revenue. Intangible assets are shown on a company’s balance sheet along with the company’s other assets, such as property, plant, and equipment. They are recorded at their historical cost, which is the amount that the company paid to acquire them. Over time, intangible assets may become impaired, which means that their value has decreased due to factors such as obsolescence or market conditions. In this case, the company would need to write down the value of the intangible asset on its balance sheet.
Invoice
An invoice is a document that a seller sends to a buyer to request payment for goods or services that have been provided. It typically includes information such as the date of the sale, the items or services purchased, the price of each item or service, and the total amount due. An invoice serves as a legal document that provides evidence of a transaction and sets out the terms of payment. It is an important tool for a business because it helps the company to track its sales and ensure that it receives payment for the goods or services that it has provided. To create an invoice, a seller typically uses invoicing software or an invoicing template. The invoice is then sent to the buyer, who is responsible for paying the amount due according to the terms set out in the invoice. In summary, an invoice is a document that a seller sends to a buyer to request payment for goods or services that have been provided. It is an important tool for a business because it helps the company to track its sales and ensure that it receives payment for the goods or services that it has provided.
Journal entry
A journal entry is a record of a financial transaction in a company’s accounting records. It is a way of capturing the details of a transaction, such as the date, the amount, and the accounts affected, in a standardized format. To create a journal entry, a company first identifies the accounts that are affected by the transaction. For example, if a company sells a product, the journal entry would typically include accounts for sales, accounts receivable, and cost of goods sold. Next, the company determines the direction of the transaction, which is either a debit or a credit. For each account affected by the transaction, the company records the appropriate debit or credit in the journal entry. The total debits and credits in the journal entry must be equal in order for the entry to be balanced. Journal entries are typically recorded in a journal, which is a chronological record of a company’s financial transactions. The journal entries are then used to prepare a company’s financial statements, such as the income statement and the balance sheet
Key Performance Indicator (KPI)
A key performance indicator (KPI) is a measurable value that is used to assess the performance of an organization, team, or individual against a set of targets or objectives. KPIs are often used to track progress towards specific goals, such as increasing sales, improving customer satisfaction, or reducing costs.
For example, a company may set a KPI to increase its sales by 10% over the next year. To track progress towards this goal, the company may track the total number of sales made each month and compare it to the same period in the previous year. If the company is on track to achieve its goal, the KPI will show an increase in sales of at least 10% over the course of the year.
KPIs are an important tool for organizations, as they provide a clear and quantifiable way to measure progress towards specific goals. By regularly tracking and analyzing KPIs, organizations can identify areas of success and areas for improvement, and make informed decisions about how to achieve their goals.
Last Twelve Months (LTM)
Last Twelve Months (LTM) is a term used to refer to the most recent twelve months for which financial data is available. This term is often used in finance to compare a company’s performance over the last twelve months to its performance in prior periods, or to compare a company’s performance to that of its competitors. LTM is typically used to calculate financial ratios and other metrics that provide insight into a company’s financial health and performance.
Ledger
A ledger is a book or database that is used to record financial transactions. It is an important tool for a business because it allows the company to track its income, expenses, and other financial activities. A ledger typically includes several different accounts, each of which is used to track a specific type of financial transaction. For example, a ledger may include accounts for revenue, expenses, assets, and liabilities. Each account is divided into two columns, one for debits and one for credits. When a financial transaction occurs, it is recorded in the appropriate account and the debits and credits are entered in the corresponding columns. The ledger is used to prepare a company’s financial statements, such as the income statement, balance sheet, and cash flow statement. These financial statements provide information about the company’s financial performance and help stakeholders, such as investors and creditors, make informed decisions about the company. In summary, a ledger is a tool that is used to record and track a company’s financial transactions. It is an important part of a company’s accounting system and is used to prepare financial statements.
Liabilities
Liabilities are obligations that a company owes to others. They represent the debt that a company has incurred and are typically classified as either current liabilities or non-current liabilities. Current liabilities are obligations that are due for payment within the current accounting period. Examples of current liabilities include accounts payable, short-term loans, and taxes owed. Non-current liabilities, also known as long-term liabilities, are obligations that are not due for payment within the current accounting period. They are usually due for payment in more than one year’s time. Examples of non-current liabilities include long-term loans, bonds payable, and deferred tax liabilities. Liabilities are important for a company because they represent obligations that must be paid in the future and can affect the company’s financial health. They are shown on a company’s balance sheet along with the company’s assets. The difference between a company’s assets and its liabilities is known as its equity or net worth.
Limited Liability Company (LLC)
A limited liability company (LLC) is a type of business entity that provides its owners with limited liability protection. This means that the owners, known as members, are not personally responsible for the company’s debts and liabilities. Instead, the company is responsible for its own debts and liabilities, and the members’ personal assets are generally protected from creditors.
For example, let’s say a company is an LLC and it takes out a loan to expand its business. If the company is unable to repay the loan, the creditors cannot go after the members’ personal assets, such as their houses or cars, to collect the debt. Instead, the creditors can only go after the company’s assets, such as its property or equipment.
LLCs are a popular business structure for small businesses, as they provide owners with the benefits of both a corporation and a partnership. Like a corporation, LLCs provide limited liability protection to their members. Like a partnership, LLCs offer flexibility in terms of management and profit distribution. Additionally, LLCs are typically easier and less expensive to set up and maintain than corporations.
Liquidity
Liquidity refers to a company’s ability to meet its short-term obligations. It is a measure of how easily a company can convert its assets into cash to pay its bills and other liabilities. High liquidity indicates that a company has a lot of liquid assets, such as cash, marketable securities, and accounts receivable, that can be easily converted into cash. This means that the company is well-positioned to pay its bills and other obligations as they come due. Low liquidity, on the other hand, indicates that a company has few liquid assets and may have difficulty paying its bills and other obligations on time. This can be a sign of financial distress and can put the company at risk of bankruptcy or other financial difficulties. Liquidity is an important concept in finance because it is a key determinant of a company’s financial health and stability. It is typically measured using liquidity ratios, such as the current ratio and the quick ratio, which compare a company’s liquid assets to its liabilities. A company with a high level of liquidity is generally considered to be in a stronger financial position than a company with low liquidity.
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