Accounting Terminology Across the Globe
Whether you're studying accounting in school, working in the accounting department of an international organization or just reviewing financial statements as an investor, you may occasionally encounter terminology that’s unfamiliar. When you do, take a moment to understand the exact meaning of an accounting term and how it's used.
Over the last several years, we've seen many countries adopt International Financial Reporting Standards (IFRS), but those standards have, for the most part, focused on recognition, rather than terminology. The International Accounting Standards Board (IASB) has recognized English as its official language, but differences in culture and language result in some variation of interpretation and application.
To demonstrate how accounting terminology can vary worldwide, consider the following examples:
For most companies in the United States, the first item on the balance sheet is the most liquid: cash and cash equivalents. This line item includes cash in bank accounts, currency and checks on hand but not yet deposited, petty cash, and other other highly liquid assets. In New Zealand, those assets are referred to as cash and liquid deposits. It’s safe to assume that most American English speakers would understand that terminology easily, but other differences are not as subtle.
In the United States, we're accustomed to seeing the term common stock to describe a security that represents ownership in a corporation. In the United Kingdom, what we call common stock is referred to as called-up share capital. In France, the word for a share of stock is action, so shareholders are called actionnaires; however, you typically won’t find that term on a balance sheet. There, you will see ownership equity in a corporation referred to simply as capital. Russian financial statements use the term share capital.
In the United States, we use accounts receivable to refer to the money a company is owed from its clients because it has delivered a product or service. In New Zealand, that amount would be presented as debtors. In the United Kingdom, those amounts are called trade debtors.
In the United States, the raw materials, work-in-process products and finished goods that are ready for sale are called inventories. In New Zealand, those assets are called stocks.
When a company accepts a deposit from a customer in advance of delivering any goods or services, under U.S. GAAP, the company would not recognize that deposit as income, but rather, as a liability that may have to be repaid to the customer in the future. In the United States, that liability would be presented as a customer deposit on the balance sheet. In Brazil, those figures might be called guarantee deposits.
The financial statements of companies headquartered in Saudi Arabia feature a line item you won’t find on financial statements in the West: zakat. Zakat is an alms tax paid by Muslims. It’s required under Islamic law and is used for charitable or religious purposes.
The term "sundry" is familiar to speakers of American English, but we would rarely expect to see it used in financial statements. However, U.K. financial statements may use the terms sundry expenses and sundry income in place of other operating expenses and other operating income.
Even the basic components of an income statement differ when you compare U.S. and Swedish financial statements. In the United States, an income statement typically presents revenues and expenses. In Sweden, it presents receipts and disbursements.
Financial statements in the United States differentiate between depreciation (a reduction in the value of an asset over time) and amortization (expensing the cost of an intangible asset over its projected life). In Finland, one term, poisto, combines the two meanings. Where things get tricky is that American English also uses the word, amortization, to explain paying off debt through fixed payments over a period of time (e.g. a mortgage or a car loan). The Finnish language has another term for the repayment of debt by a borrower: lainan takaisinmaksu.
This is just a small sample of the differences in accounting terminology across the globe, but it demonstrates how difficult it can be to read the financial statements of a foreign company, even if those financial statements are presented in English.
You may be able to work your way to an understanding using Google Translate, but keep in mind that differences in language and cultural aspects of accounting can make a perfect understanding elusive.