Glossary / Terminology

Turnover (Sales/Gross Sales/Sales Turnover)

This represents the total income received by a business for its trading activities, being sales and/or services. The figure is shown after discounts given to customers have been deducted.

Cost of Sales (cost of goods sold)

This includes purchases to provide the finished goods as well as Freight, Duty and Railage Inwards. For companies engaged in manufacture, this figure will include cost of raw material and factory labour, as well as overheads such as electricity, rent and supervision.

Calculation

Cost of Sales is determined by taking the closing stock of the previous year, adding the purchases for the current financial year and then subtracting the closing stock for the current financial year.

Gross Profit (Operating Income)

Gross Profit is the difference between the actual sales that have taken place and the cost of the goods sold. Gross Profit can also be the difference between the total cost to render services and the income generated.

Calculation

Gross Profit is determined by taking the Turnover and subtracting Cost of Sales

Interest Earned (Other Income)

This is income reflected from sources other than the normal trading activities of a company such as dividends from unlisted investments and net surplus on disposal of fixed assets

Expenses

All the expenses listed, represent the other expenses incurred by the company to retail or render a services. It covers items such as rent, salaries, telephone, repairs etc.

Director's Remunderation is shown as an expense. If Directors exploit the company, this will have a very definite effect on the company's profits. When interpreting profit, this must be taken into consideration.

Depreciation

Almost all fixed assets (buildings, machinery, vehicles) but not land are subject to a decline in value through wear and tear. For this reason, a proportion of the initial cost of the asset is deducted each year from the asset to show its reduced value. This depreciation represents an expense (loss in value) to the business and is therefore deducted in the income statement.

Net Income before tax

The total profit/loss earned after deducting all operating expenses from the gross profit (before tax is deducted).

Net Income after tax

This is the amount a company has earned during the year, after incurring expenses and paying taxes.

Retained income or accumulated loss at beginning of year

For companies, the net profit after tax can either be ploughed back into the business and this will be reflected in the Balance Sheet under Retained Income, or a portion can be paid out to the company's shareholders as dividends. The balance will then go to Retained Income. For Sole Proprietors the net profit is transferred to the capital account in the Balance Sheet.

Retained income at the beginning of the current year equals the retained income at the end of the previous year.

Dividends are not a business expense. They are a distribution of corporate profits, after taxation, to the owners/shareholders. In a sense, they are a reward to the shareholders for investing in the Company.

Retained income at end of the year

The net profit (after tax) for the previous year, plus the net profit (after tax) for the current year equals the Retained income at the end of the year. This figure is carried over to Distributable Reserves in the Balance Sheet.