Good to know: more accountancy terms explained

July 10, 2024 by Natalie Brewer
Good to know: more accountancy terms explained

Thanks to the feedback on our earlier blog – Useful Accountancy Terms for SMEs – we’ve created a second glossary, this time covering some of the lesser used accountancy terms that your accountant or financial advisor may use.

You may be a SME or a larger business, but if after reading our glossary of accounting terms, you’re still confused – or if you simply want to outsource whilst you use the extra time to concentrate on running your business, then give us a call! 


Abnormal spoilage – Scrap or waste that should have been avoided and that is over and above the normal amount that is expected. 

Absorption costing – A system when your fixed manufacturing overheads are allocated to the products being manufactured. This system treats your fixed manufacturing costs as a product cost and is required for external financial statements.

Accelerated depreciation – The amount of depreciation in the earlier years of an asset’s life is greater than the straight-line amount. This means that the depreciation in later years will be lower but the total amount of depreciation over the life of the asset will be the same as straight-line depreciation. 

Accounting equation – The equation is Assets = Liabilities + Owner’s Equity (or for corporations, Stockholders Equity). The accounting equation is expressed in the financial statement known as the balance sheet.

Ageing – accounts receivable that are categories and/or sorted based on age. This is often used as a way to detect accounts that are overdue

Aging Schedule – Showing the length of time an invoice has been outstanding – a schedule may be for Accounts Payable or Accounts Receivable. Aging schedules can also be created for inventory

Circulating assets – these are assets which have gone from cash to physical goods and then turned back into cash

Compensating error – a mistake that has been mitigated, or cancelled out, by the making of another mistake

Compound interest – this in interest on the principal loan plus any interest already accrued  

Compounding period – The period of time over which the interest is calculated

Consolidated financial statements: The combined financial statements of a parent company and its subsidiaries.


Debenture – a type of share used by a limited company. This is the safest type of share but it’s usually tied to an asset. If a company should buckle, then the shareholder will then own that asset

Dilutive – when a company takes over another business that has a greater price/earning ratio then they do, the deal is called dilutive to earnings.

EBIT – Earnings before interest and tax

EBITA – Earnings before interest, tax and amortisation. Investors use EBITA as an indicator to measure the profitability and efficiency of a company and compare it with similar companies.

EBITDA – Earnings before interest, tax, depreciation and amortisation. a metric used to evaluate a company’s operating performance. It can be seen as a loose proxy for cash flow from the entire company’s operations. It can give an analyst a quick estimate of the value of the company

Encumbrance – a sum of money that’s reserved for any business purpose

Fair market value – a price that a willing buyer will pay to a seller when both parties are aware of all details about the supplied service or product

GAAP – generally accepted accounting principles

Gearing – money that’s borrowed with a fixed interest with the sole purpose of leveraging the cash for additional financial gain. Gearing is sometimes known as ‘leveraging’

Inventory obsolescence – stock that can longer be sold, such as clothing that has gone out of fashion or food that has expired

Inventory shrinkage – a reduction in stock that has occurred not because of sales. Examples are theft or damage

Management accounting – reports tailored to the directors’/managers’ requirements. Management accounting helps management to make better, more informed decisions

Operating activities – All the activities that ensure a company remains fully-operational – it does not include financial activities.

Operating and financial review – A review of all the documents that show how a business is performing

Operating cycle – the length of time it takes to receive/produce, and then sell a product/service and its delivery to the customer

Operating gearing – ratio of fixed operating costs against the variable operating costs

Operating risk – when the fixed operating costs is so high that is could cause a fluctuation in overall profits

Profitability ratio: The ability of a company to make profits against sales, operating costs, assets and shareholder’s equity.

Preference shares – shares issued by a limited company that pays the holder dividends before an ordinary shareholder


Segmental reporting: Separate your divisions for individual reporting.

Straight line depreciation: The expected wear and tear of an asset.

Simple interest – Interest applied to the original sum of money (not any accrued interest)

Sinking fund – A reserve of money to pay off debts or replace wasting assets

Stock holding period – The average amount of time that goods are held for before a sale

Subordinated debt – Money owed to unsecured creditors after a business has closed down/been liquidated

Total cost of ownership (TCO) – the real, accurate cost of an asset

Undeposited funds account – Also referred to as a cash-in-hand account, this is money the company has received but not banked 

Unsecured creditor – a creditor without a claim against a certain asset. If the business is dissolved, then the unsecured creditor is obligated to take their share of what’s left after secured creditors have been paid out.

Variance – THe difference between the estimated cost of goods or services and the actual cost. When the actual cost exceeds the planned cost, this is known a adverse variance, but when the actual cost is cheaper than the planned cost, then this known as favourable variance

How can the Hour Hands team help you?

Hour Hands is a team of experienced bookkeepers ready to support you with those urgent and important tasks that you just don’t have the time to complete. From reconciliations, to streamlining your bookkeeping, from credit management and preparing your accounts for tax returns – we can help you complete ongoing or one off tasks. 

Hour Hands is an Xero Accredited Bookkeeper – meaning we are recognised as experts

To find out more simply visit our website or call us on 01727 818262. We will ask how we can support you and offer a solution either on an hourly rate or package cost. The choice is yours – we simply want to help.