Accounting Terminology TranslatorScott Williams
Accounting reports have many different phrases to refer to the same things. They vary between countries and even between accountants. 12Faces has adopted a standard terminology for our materials. However, if you or your accountants use a different terminology, the list below will assist translating from yours to ours. yellow belt
For a larger list of accounting terminology, Google a term or check this list of accounting terminology
Revenue is the total amount of money generated by the sale of goods or services related to your company’s normal activities.
It can include amounts from interest, rent and dividends.
When analysing your business results, you would normally use the Income from Sales (Sales Revenue) when comparing with COGS and Overheads and similar information.
Cost of Goods Sold (COGS)
The costs involved in producing the goods and services you sell.
Typically this would include:
- Any expense that is incurred only when you produce an item. If you stopped producing that item, there would be no cost.
- Raw materials that go into the product.
- Consumables, like energy related to the product.
- Casual or outsourced labour.
- Permanent labour is a fixed cost. It does not increase or decrease according to production, it is not included.
- Variable Costs
- Production Expenses
- Cost of Sales, often used for service businesses
- Operating Expenses
- Operating Costs
- Cost of Sales (COS); often for businesses selling services rather than products
Gross Profit is the difference between Revenue and the cost of making a product or providing a service (COGS), before deducting overheads, payroll, taxation and interest payments.
Gross Profit = Revenue – COGS
- Gross Margin (USA)
- Sales Profit
Overhead Costs are the expenditures which cannot be conveniently traced to, or identified with, any particular cost unit/product.
They are costs that do not change in direct proportion to the Revenue or production volumes.
Typically this would include:
- Fixed / permanent labour
- Fixed Costs
Operating Profit measures the efficiency and profitability of a business based on its core business functions.
Operating Profit = Gross Profit – Overhead Costs
For a business, this may be different from the Profit reported for tax purposes. That will allow for any ‘tax friendly’ expenses that are independent of the realities of your business.
This might include such things as:
- Grants for innovation and growth.
- Wage subsidies and incentives.
- Accelerated depreciation on assets purchased.
- Net Profit
When undertaking 12Faces analyses on your business, we encourage you to remove any such “one-off” Revenue and Expenses from the Profit figure you use.
This will ensure that you are working with the profitability of your business rather than a tax-minimising strategy, which may cause you to optimise for the wrong goal.
The EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) starts with the Operating Profit you submitted.
It then adjusts to a Profit figure that better reflects where you want to be for management purposes.
To do this the EBITDA figure:
- Adds back Deprecation if it has been charged.
Although this is a future cost you do need to know, it can be distorted by, for example, instant tax write-offs to show greater cash cost than really occurred.
- Adds back Interest Paid.
The money to run your business can be drawn from many sources with different interest rates. Adding this back removes any bias.
- Deducts any underpaid Salary to the owners.
Profit is being over-represented compared to a Profit with a realistic Owners salary deducted.
- Deducts any Expenses being paid as a subsidy by the Owners.
These are, ideally, costs paid by the business if it was able.
For further information on EBITDA go to the following link:
- Earnings Before Interest Tax Dividends and Amortisation (EBITDA)
A Wikipedia article which goes into greater detail.