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.

Accounting period

An accounting period is a specific period of time used for performing, combining, and analyzing accounting tasks.

It can be a week, month, quarter, calendar year, or fiscal year. The purpose of an accounting period is to help potential shareholders evaluate a company’s performance by examining its financial statements, which are prepared based on a fixed accounting period.

For instance, a company may have an accounting period that covers the calendar year, in which case its accounting period would run from January 1 to December 31 of each year. Another company might have an accounting period that covers the fiscal year, which could run from April 1 to March 31 of the following year.

The specific accounting period used by a company is usually determined by the company itself, but it may also be determined by regulatory requirements or other factors.

Accounts payable

Accounts Payable (AP) refers to the amount of money a company owes to its suppliers or creditors for goods or services that have been received but not yet paid for. This appears on the company’s balance sheet as a short-term debt. Accounts payable are managed by the department responsible for making payments owed by the company to its suppliers.

Main Points:

AP can refer to both the outstanding debts and the department responsible for managing the payments.
Payables can be created from purchases on credit or subscription/ instalment payments.
AP is compared with accounts receivable, which is the amount of money owed to the company by its customers.
Accounts payable are considered as a current liability because they represent funds owed to others.

For Example, Suppose that a company called ABC Inc. purchases $10,000 worth of office supplies from a supplier called XYZ Inc. ABC Inc. agrees to pay the amount within 30 days, so the supplier extends credit to ABC Inc. for the purchase.

In this case, ABC Inc. would record the purchase on its balance sheet as an accounts payable liability of $10,000, with XYZ Inc. as the creditor.

Once the 30-day period has passed and ABC Inc. has paid the $10,000 to XYZ Inc., the accounts payable liability would be removed from the balance sheet and replaced with a cash payment.

The transaction would also be recorded in the company’s general ledger as a debit to the accounts payable account and a credit to the cash account.

Accounts receivable

Accounts receivable, also known as AR, are the unpaid invoices or money that a company is waiting to receive from its customers.

It represents the amount owed to the company for goods or services that have been provided but not yet paid for. Businesses consider accounts receivable as an asset because they have a legal right to receive payment from their customers.

These receivables can be used as collateral to obtain short-term loans and are included in a company’s working capital.

Main Points:

Accounts receivable are an important part of analyzing a business’s financial health.
Accounts receivable help assess a company’s liquidity or its ability to pay its short-term obligations without needing more cash.
It provides insights into the company’s ability to manage its cash flow and meet its financial obligations.
If a company determines that a customer will not be able to pay their accounts receivable, it needs to be written off as a bad debt expense or one-time charge.

Suppose a customer walks into a store and buys a widget for 100 AED. The store doesn’t require the customer to pay for the widget upfront, so the customer takes the widget and promises to pay the store at a later date.

In this case, the store would record the 100 AED owed by the customer in the accounts receivable account. The store would continue to show the 100 AED in accounts receivable until the customer pays for the widget.

Once the customer makes payment, the store would reduce the accounts receivable amount by 100 AED and record the payment from the debtor.

Accredited investor

An accredited investor is a person or organisation that is authorised to purchase and sell specific investments that are not subject to regulation by financial institutions. Due to their income, wealth, size of the organisation, position in the governance, or level of experience, they are granted this particular privilege.

Wealthy individuals, banks, insurance firms, brokers, and trusts are examples of accredited investors.

To become accredited in the UAE, an individual or business entity must meet certain criteria, which may include:

Individuals who have a high net worth, typically exceeding a certain threshold, such as AED 5 million or more.
Individuals who have a high income level, often exceeding a specific amount, such as AED 1 million or more per year.
Companies, institutions, or legal entities with substantial assets or capital, often exceeding a certain threshold, such as AED 10 million or more.
Professional investors, including licensed financial institutions, banks, insurance companies, or government-related entities.
Individuals or entities with extensive knowledge, expertise, or experience in financial markets, investments, or relevant industries.

Accrual accounting

A method of accounting that recognizes revenue when it is earned and realizable, regardless of when the cash is received, and recognizes expenses when the related revenue is recognized, rather than when the cash is paid.

Main Points:

Accrual accounting follows the matching principle, which means that revenue and expenses are reported in the same period to determine profits and losses.
It is different from cash accounting, which only records transactions when cash is exchanged.
Accrual accounting considers both current and expected cash flows, providing a more accurate understanding of a company’s financial status.
It captures all business transactions, not just those involving cash.
It is particularly useful for complex transactions involving credit, prepayments, and future payments, as it ensures proper recognition of revenues and expenses, which can significantly impact a company’s perceived financial performance.

For example, suppose that a company called ABC Inc. provides consulting services to a client in March, and the client agrees to pay for the services in April.

Under the accrual method of accounting, ABC Inc. would recognize the revenue from the consulting services in March, when the services were provided, even though the money has not yet been received.

The transaction would be recorded in the company’s general ledger as a credit to the consulting services revenue account and a debit to the accounts receivable account.

Once April arrives and the client pays the invoice, the accounts receivable account would be reduced by the amount of the payment, and the cash account would be increased by the same amount.

Amortization

Amortization is a way of gradually reducing the value of a loan or intangible asset over a specific time period. It is used to spread out loan payments or expenses related to intangible assets, like patents or trademarks, so that businesses and investors can better understand and plan for their costs.

With loans, it helps determine how much of each payment goes towards interest and principal, and with intangible assets, it reflects how much value has been used up over time.

Main Points:

It helps businesses and investors forecast costs and understand the proportion of interest and principal in loan payments.
Amortizing intangible assets reduces taxable income and provides a more accurate representation of a company’s true earnings.
Intangible assets, like trademarks and patents, have a limited useful life and may lose value over time.
Amortization is different from depreciation, which applies to tangible assets subject to wear and tear, such as equipment or buildings.

Angel investor

Angel investors are wealthy individuals who invest their personal funds in small business ventures in exchange for equity. They differ from venture capital firms as they use their own net worth for investments.

Angel investors are generally more patient and flexible with entrepreneurs, providing smaller amounts of funding over a longer period of time.

However, they expect an exit strategy, such as a public offering or acquisition, to realize their profits.

Main Points:

Having an angel investor means the business doesn’t have to repay the funds as they receive ownership shares in exchange.
Angel investing is typically for established businesses beyond the startup phase.
Angel investors have a personal stake in the investment and are motivated to help the business succeed.
They can provide guidance, mentoring, or direct management assistance to support the business
Angel investors typically seek a substantial ownership stake in the company, typically ranging from 10% to 50%, and giving away excessive equity can result in business owners losing control.
It is important to carefully consider the amount of equity given to angel investors to avoid losing ownership of the company.

Annual Contract Value (ACV)

Annual contract value (ACV) is a term used to describe the average annual revenue generated by a customer contract. It is typically calculated by dividing the total contract value by the length of the contract in years.

For example, if a customer signs a three-year contract worth $30,000, the ACV would be $10,000 ($30,000 / 3 years).

ACV is often used by businesses as a way to measure the value of customer contracts and to compare the relative value of different contracts. It is also used in sales and marketing to help forecast future revenue and to set targets for sales teams.

Annual Recurring Revenue (ARR)

Annual Recurring Revenue (ARR) is a financial metric that measures the portion of a company’s revenue that is expected to recur on an annual basis. This metric is typically used by companies that offer subscription-based products or services, as it provides a way to measure the long-term value of a customer.

For example, a company that sells software as a service (SaaS) might have a customer who pays $100 per month for a subscription to the software.

In this case, the customer’s annual recurring revenue would be $100 x 12 = $1,200.

This means that the company can expect to receive $1,200 in revenue from this customer on an annual basis, assuming that the customer continues to renew their subscription.

Annual report

An annual report is a document that provides detailed information about a company’s financial performance and activities over the course of a fiscal year. Annual reports are typically prepared by publicly traded companies and are intended to provide investors, shareholders, and other stakeholders with information about the company’s financial health and future prospects.

An annual report typically includes several key sections, including:

1. A letter from the company’s CEO or other top executive, providing an overview of the company’s performance and key achievements during the year

2. Financial statements, including the balance sheet, income statement, and statement of cash flows, providing detailed information about the company’s revenues, expenses, assets, liabilities, and cash flows

3. A description of the company’s business operations, including its products and services, markets, and competitive environment

4. An overview of the company’s financial performance, including its revenues, earnings, and other key metrics

5. A discussion of the company’s strategic goals and plans for the future

6. Audited financial statements, providing an independent review of the company’s financial information.

Here is an example of how an annual report might look:

ABC Inc. Annual Report 2020

Dear Shareholders,

I am pleased to present ABC Inc.’s 2020 annual report, which provides an overview of our financial performance and key achievements over the past year.

During 2020, ABC Inc. continued to grow and expand its operations, achieving record revenues of $500 million and net income of $100 million. This represents a significant increase from the previous year, and it reflects the success of our ongoing efforts to diversify our product line and expand into new markets.

In addition to our strong financial performance, ABC Inc. also made significant progress on several key strategic initiatives. We launched several new products, including the XYZ line of consumer electronics, which has already gained significant market share. We also expanded our operations into several new international markets, including China and India, which has helped to drive our growth.

Looking ahead, we are confident that ABC Inc. is well positioned for continued success. We have a strong balance sheet, a diversified product line, and a highly skilled and dedicated team of employees. We are committed to delivering value to our shareholders, and we are confident that we will continue to grow and prosper in the years ahead.

Sincerely,

John Smith

CEO, ABC Inc.

Financial statements and other information can be found in the following pages.

Assets

Assets are items of value that are owned by an individual or a business. Assets can be tangible, such as buildings, equipment, or cash, or they can be intangible, such as patents, trademarks, or copyrights. The value of an asset is typically determined by its ability to generate income or provide some other economic benefit.

Here is an example of how assets might work in practice: Suppose that a company called ABC Inc. owns several buildings that it uses for its operations. These buildings are considered assets because they provide a physical space for the company to conduct its business, and they have value because they can generate rental income or be sold for a profit. ABC Inc. would record the buildings on its balance sheet as assets, along with their estimated value.

In addition to its buildings, ABC Inc. also owns several pieces of equipment, such as computers, printers, and other office equipment. These are also considered assets because they are used to conduct the company’s business and they have value. ABC Inc. would record the equipment on its balance sheet as assets, along with their estimated value.

Finally, ABC Inc. also has cash on hand, which is considered an asset because it has value and can be used to pay for expenses or invest in other opportunities. ABC Inc. would record the cash on its balance sheet as an asset, along with its current value.

In this way, assets are items of value that are owned by a company and can be used to generate income or provide other economic benefits.

Average Revenue Per User (ARPU)

Average Revenue Per User (ARPU) is a financial metric that measures the average amount of revenue that a company generates from each of its users or customers. This metric is commonly used by companies that offer subscription-based products or services, as it provides a way to measure the value of each customer over time.

For example, a company that sells software as a service (SaaS) might have 100 customers who pay $100 per month for a subscription to the software.

In this case, the company’s average revenue per user would be ($100 x 100) / 100 = $100.

This means that, on average, the company generates $100 in revenue from each of its customers each month.

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