Glossary
Advance Rentals - Payments made by the lessee
at the beginning of a lease or contract
APR - The Annual Percentage Rate. The true cost
of borrowing after interest is compounded and all fees
and charges are incorporated.
Assets can be tangible or intangible and are
anything of realizable value; equipment, buildings,
money in the bank or in transit, cash in hand and money
owed to the business. Fixed assets are physical
items such as equipment, buildings, plant, and vehicles. Current
assets are cash, money in the bank, debtors etc. Non-current
assets are any assets that do not easily fit into
the previous categories.
Balance Sheet - A summary statement of all the
accounts of a business, prepared monthly, quarterly
and always at the end of each accounting year. It summarises
the financial position of a business or organisation
by showing and calculating the net result of assets,
liabilities and owners' equity.
Balloon Payment - A final loan payment that
is considerably higher than prior regular payments,
in order to pay off the loan. You may have a balloon
payment for a short-term loan that you anticipate refinancing.
In the case of vehicle contracts these are sometimes
not paid if the vehicle is returned at the end of the
contract. (See and ). The balloon size can vary within
certain limits and increase or decrease the monthly
payments (as can the deposit).
Buy Back - A lease which, upon completion, allows
for the title in equipment to be transferred.
Capital Allowances - The depreciation on
a fixed asset is shown in the Profit and
Loss Account and has the effect of reducing the
tax bill. Different types of capital equipment attract
different allowances. In the case of cars, this is
currently 25% per annum. However, this is subject to
a rule to the effect that the maximum claim for cars
costing in excess of £12,000 will be £3,000.
Consequently a car costing £20,000 will have
a capital allowance of £3000 and not £5,000
in the first year. However, there is provision for
a first-year allowance of 100% for new cars emitting
up to 120g/km CO2. All this is geared towards encouraging
people to buy vehicles that are more environmentally
friendly. In the example above, the Written down value
(see WDV) of the vehicle in the second year
will be £17,000. The £3,000 depreciation
appears in the Profit and Loss Account and has
the same proportional effect on the tax bill as other
costs. If the marginal rate of tax for the business
is 22% the tax saving will be £660. As the WDV declines,
so does the net annual tax benefit. In order to evaluate
the relative merits to your business of obtaining these
allowances through, for example Lease
Purchase or alternatively reclaiming all net costs
directly and at a flat rate through, for example, Contract
Hire , one needs to take into account these declining
allowances and compare over a period of time estimated
as being the useful life of the Asset.
Capital Assets - see Fixed Assets under Assets
Cash Flow - A report which shows the real flows
of money in and out of a business over a period of
time. These are usually for comparison against a Cash
Flow Forecast
Cash Flow Forecast - A report which shows the
predicted flows of money in and out of a business over
a period of time. Difficult if payments don't come
in on time or contingencies aren't allowed for. The
real purpose is to show what borrowing requirements
and costs will be and how to optimise any cash surplus.
This is a tool that many banks require to be used before
taking a new business account or increasing overdrafts
or loans.
Cost-benefit - A comparison of the costs of
a project and the benefits it is supposed to yield.
The usual stumbling block is underestimation of unexpected
and spiralling costs. Can be used outside the business
sector to see if a social good is justified in terms
if its cost. The difficulty here is often that the
benefits and costs can be difficult to translate into
monetary terms. How much value one puts on environmental
issues, for example, may well vary from person to person.
Depreciation - The value and utility of any
capital equipment will decline over time due to wear
and tear and because it may have been superseded by
better, more efficient designs with lower operating
costs (greener cars are an example of this). An allowance
(see Capital Allowance) is made for this by
writing down the value of the Asset (see WDV -
Written down value) in the Balance Sheet and
claiming it in the Profit and Loss Account.
As a result the capital stock of a business and the
economy as a whole remains competitively productive
by allowing in part for continual replacement (the
other part being the productivity of the equipment
- see Cost-benefit).
ECOPS - acronym for Employee Car Ownership Plans.
As distinct from Opt Out Schemes the employer underwrites
the finance plan thus avoiding the employee having
to pay a deposit or go through a credit check. The
benefit to the employer is the greater degree of control
over choice of car. See - and Personal .
Lessee - the person or entity that holds the
lease and pays the Lessor a rental or repayment as
agreed.
Liabilities - These include short-term or current
liabilities such as bank overdrafts, bank loans taken
out for the business and money owed by the business
to its suppliers and long-term liabilities such as
mortgages or long-term business finance and loans.
Usually shown on the right hand side of the Balance
Sheet. In the case of vehicles (and other items)
they are shown as an decreasing Asset value
and a decreasing Liability.
Net assets - Total Assets less total Liabilities.
Opt Out Schemes - the employer provides a cash
alternative to a company car. See - and for some of the pros and cons of
these choices.
P11D - an inland Revenue tax working sheet (P11D
WS2) available as a PDF from their website. The 'P11D
value' of a car really just means the relevant value
of the car for this form. The value required for the
Inland Revenue form P11D and often referred to as the
'list price' as distinct from the 'on the road price'
is usually the Manufacturers Retail Price, including
VAT, excluding GVED (Graduated Vehicle Excise Duty
- 'Road Tax' or 'Road Fund Licence'), first registration
fee and delivery charges. However, some manufacturers
may include delivery charges in their list prices.
The bottom line to all this is that drivers of company
cars will pay a car benefit charge at their marginal
tax rate which is a calculation that incorporates the
list price (as defined here), the CO2 output of the
car and the user's tax rate. You cannot reduce the
list price of the car by any discount received. If
you want to be able to play around with various options
to optimise the costs to the business and the employee
you can download our free and generate and print off any number
of configurations without having to go back to a website
to do it. You are also free to distribute copies to
as many employees as you like if they are to have a
say in the decisions. It is for this reason that many
firms are looking at providing a cash alternative in
Opt Out Schemes and ECOPS.
Profit and Loss Account (Also known as the Profit
and Loss Statement) - This shows the trading performance
of a business and is a summary of income, less cost
of sales and opening /closing stock and expense accounts,
resulting in the profit or loss of the business over
an accounting period.
SSAP21 - the first part stands for 'Statements
of Standard Accounting Practices' and number 21 concerns
the Accounting Practices for leases and hire purchase
contracts. Distinguishes between an operating lease
(for example Contract Hire) where rentals are treated
as a tax deductible expense, and other leases where
the risks and rewards are transferred to the Lessee and
therefore the car should be treated as an Asset with
a corresponding statement of payments due in total
(or fair value) as a Liability.
WDV - Written down values of Assets in
the Balance Sheet.
