Glossary of Common Business Financial Terms

The matching principle is an accounting concept requiring expenses to be recorded in the same period as the revenues they help generate. This principle ensures accurate financial reporting by aligning costs with associated revenues, promoting consistency and comparability in financial statements. It is fundamental in accrual accounting.

In business financials, "cash" encompasses the most liquid assets, including currency, bank deposits, and cash equivalents. These are readily available funds crucial for daily operations, paying expenses, and managing short-term obligations, reflecting a company's liquidity and financial health.

A balance sheet is a crucial financial statement that provides a snapshot of a company's financial position at a specific point in time. It details the company's assets, liabilities, and equity, offering insight into what the company owns, owes, and the shareholders' stake. The balance sheet helps stakeholders assess the financial health and stability of the business, following the fundamental accounting equation: Assets = Liabilities + Equity.

Goodwill in business is an intangible asset representing the excess value paid during an acquisition above the fair market value of identifiable net assets. It encompasses factors such as brand reputation, customer loyalty, employee relations, and proprietary technology, reflecting the acquired company's potential for future profitability.

Depreciation is the accounting process used to allocate the cost of a tangible asset over its useful life. It helps businesses spread out the cost of an asset and match it with the revenue generated from its use. Common methods include straight-line depreciation, declining balance, sum-of-the-years' digits, and units of production. This process impacts financial statements by reducing the asset's book value and recording depreciation expense.

Allocations refer to the method of distributing financial resources, budgets, or costs to various departments, projects, or cost centres. This practice helps organisations manage expenses, track performance, and ensure efficient use of resources.

Accruals in accounting involve recognising revenues and expenses that have been incurred but not yet recorded in the financial statements. This practice ensures that income and expenses are matched to the period in which they are earned or incurred, providing a more accurate picture of a company's financial performance.

An income statement, also known in the UK as a profit and loss account, is a financial document that summarises a company's revenues, costs, and profits or losses over a specific period. It is essential for assessing a company's financial performance and includes key components such as revenue, cost of sales, gross profit, operating expenses, operating profit, other income and expenses, profit before tax, tax expense, and net profit.

Capital expenditure (CAPEX) refers to the funds a company uses to acquire, upgrade, and maintain physical assets such as property, buildings, machinery, and technology. These investments are made to enhance a company's operational capacity, efficiency, or asset longevity and provide long-term benefits. Unlike operating expenses, CAPEX is capitalized and depreciated over the useful life of the asset.

Operating expenses (OPEX)) are the ongoing costs required for running a business's core activities. These include salaries, rent, utilities, supplies, maintenance, advertising, administrative costs, and other day-to-day expenses. Effective management of operating expenses is crucial for maintaining profitability and business sustainability.

Book value is an accounting term representing the value of an asset or company as recorded on the balance sheet. It is calculated by subtracting accumulated depreciation, amortization, or impairment costs from the original cost of an asset. For a company, book value is the net asset value, found by deducting liabilities and intangible assets from total assets. It is a key indicator used by investors to assess whether a stock is undervalued or overvalued compared to its market value.

The cash flow cycle, also known as the cash conversion cycle, represents the time it takes for a business to convert its investments in inventory and other resources into cash flows from sales. This cycle includes the stages of purchasing inventory, production or preparation, sales, accounts receivable, and collection. Efficient management of the cash flow cycle is crucial for maintaining liquidity, enhancing profitability, and ensuring the business can meet its financial obligations.