Jargon Buster

(in conjunction with Plain English Campaign)

AER
This stands for annual equivalent rate. It is quoted by financial institutions, such as banks, to show how much the interest rate would be if the interest was worked out just once a year. It is intended to make it easier for people to judge how much interest they pay (or receive) when it is being worked out more than once a year. It is also intended to make it easier to compare different products.

APR
This stands for annual percentage rate. It is intended to give people a more accurate idea of how much they are being charged when they borrow money.

Assets
These are things which are owned such as buildings, vehicles, stock and money in the bank.

Balance sheet
A balance sheet is a summary of an organisation’s financial position. It lists the values, in the books of account on a particular date, of all the organisation’s assets and liabilities. The assets and liabilities are grouped in categories, to paint a picture of the organisation’s strengths and weaknesses.

Balloon payment
Some loan and finance agreements have lower repayments than normal in return for a high final payment. This is called a balloon payment.

Book value
This is the value of a fixed asset, such as a building or machine, as recorded in an organisation’s books. It is usually the amount paid for the asset less an amount for depreciation.

Capital allowances
You can sometimes claim capital allowances when you buy long−term assets, such as machines, to use in your business. You claim part of the cost each year against your profits, before your tax is worked out.

Capital commitment
If, before the end of its financial year, an organisation has agreed to spend money after the end of its accounting period on buying fixed assets, it is called a capital commitment. This is shown in the financial statements.

Capital expenditure
If you spend money buying or improving fixed assets, it is called capital expenditure.

Capital receipt
This is money received from selling fixed assets, such as buildings or machines.

Chargeable asset
This is an asset on which capital gains tax may have to be paid, if it is sold or disposed of.

Credit scoring
This is a way of working out the risk of not being repaid if money is lent. Points are awarded for the answers given by the potential borrower to a series of questions. A high score means that the risk of them not being able to repay is low.

Current assets
These are short−term assets which are constantly changing in value, such as stocks, debtors and bank balances.

Depreciation
Depreciation is the drop in value of an asset due to wear and tear, age and obsolescence (going out of date) as recorded in an organisation’s financial records.

Depreciation provision
This is money set aside (or provided) in a set of accounts to reflect the drop in value of fixed assets caused by wear and tear, age and obsolescence (going out of date).

Fixed asset
A fixed asset is one which is intended to be used for several years. Examples are buildings, machinery and vehicles.

Fixed interest rate
This is an interest rate which does not change during the life of a loan.

Hire purchase
This is a form of credit which allows the purchaser to have possession of the goods shown in the hire purchase agreement. Ownership passes to the purchaser when they have paid all the instalments and any fee.

HPI

HPI is a vehicle checking company that produces a report on the vehicle’s history.

Intangible assets
Intangible assets cannot be touched. Examples are goodwill and patent rights.

Net book value
This is what an asset cost, as recorded in the books of account, less all the depreciation taken off the asset for age and wear.

Operating lease
Under this type of lease, ownership of the leased goods stays with the lessor (the company leasing out the goods).

Tangible assets
If an asset can be physically touched, it is a tangible asset.

Thank you to Plain English Campaign who gave us permission to use their financial terms. For their complete version of ‘The A to Z of financial terms’, please visit www.plainenglish.co.uk