Glossary of commonly used accounting terms

Professionals, in all walks of life, throw jargon and acronyms around as if everyone understands, often without thinking that some people, in fact most, don’t!

Accountancy and bookkeeping are no different, when you’re your immersed in it, living and breathing these terms every day we sometime forget that, to most people, these words are a foreign language.

Well, fear not, we’re here to help you through it! In this blog we’ll demystify some of the most common terms and phrases associated with accounting and bookkeeping for small businesses.

We hope you find this info useful, if we’ve missed anything email us and let us know.

Accounting Period

Small businesses usually run their accounts or ‘books’, as they’re sometimes called, for 12 months. This is called the ‘accounting period’.

If your business is a limited company, the accounting period will run from the day the company was formed to the day before the anniversary, 12 months later, e.g. 1 July to 30 June.

If you’re a sole-trader or partnership, you’ll usually end your accounting period on 31 March or 5 April and start a new set of accounts the day after. This is to fit in with the self-assessment tax year.

All transactions that occur between the start and end dates of your accounting period should be reported as part of the accounts for that period.

Accounts Payable

‘Accounts payable’ is a term used to describe money that you owe to other businesses, employees or anyone else. If you’ve received an invoice from a supplier and haven’t yet paid it, this is an example of an accounts payable item.

Accounts Receivable

‘Accounts receivable’ is just the opposite to accounts payable. If you’ve raised an invoice and sent it to one of your customers but they haven’t paid it yet, then it’s an example of accounts receivable.

Accrual

Some expenses, employee’s wages for example, are usually paid at the end of every month, after they’ve done the work that earned the money. However, the amount we owe them is building up, or accruing every day or even every hour that they work, this is ‘accrual’ in action.

The same is true for some forms of income, such as interest on savings. Although the interest is paid monthly or even annually, it is accruing daily and is an example of accrued income.

To ensure accuracy in the accounts, all income and expenses should be recorded in the month that they were accrued which may not be when they were paid or received.

Assets

An asset is anything your business owns that could be turned into cash or is already cash. For most small businesses, assets will be physical things that you can touch such as cash, stock, vans, furniture, buildings etc. These are known as ‘tangible’ or ‘fixed’ assets

Larger businesses may also have assets that you can’t touch, such as copyrights, trademarks and patents, these are known as ‘intangible’ assets.

Balance Sheet

The ‘balance sheet’ is essentially a list that shows the value of your assets, the things you own, and the value of any liabilities, or debts, that you owe to others. It is used to arrive at the overall value, or equity, of the business at any given time by using the formula assets – liabilities = equity.

Business Entity

‘Business Entity’ is a term used to describe any form of organisation that has been set up to trade as a business. There are four categories into which most businesses fall, they are sole trader, partnership, limited liability partnership or limited company.

Capital Allowances

When you buy a fixed asset (see below) you are often eligible to claim a Capital Allowance, which allows you to get some or all of the tax benefit in the year that you buy the item.

Capital Gains Tax (CGT)

CGT is a tax that maybe due if you sell an asset for a profit. Not all assets are liable for CGT, there are some exceptions such as your main residence and animals. You should check with your accountant if you’re not sure if an asset you’ve sold is liable for CGT.

Confirmation Statement

If you own a Limited Company or a Limited Liability Partnership (LLP) you must confirm the main details of the business to Companies House each year. They want to know if any shareholder details, directors details or head office details have changed so that the public records can be updated.

Dividend

When a Limited Company makes a profit and after they have paid any tax on the profit, the remainder can be paid out to the shareholders in a form of profit sharing based on the proportion of the company they own. This payment is called a dividend.

Drawings

When a sole trader or partnership makes a profit, the owners can ‘draw’ the money out of the business account into their own personal bank account. These payments are known as drawings.

Financial Year

The financial year applies to Limited Companies and runs from 1st April in one year to 31st March the following year. The start and end of a businesses’ accounting period is often different to these dates.

Fiscal Year

The tax year, as laid down by the government, runs from 6th April of one year to 5th April the following year. Another term for tax year, often used in government documents, is fiscal year.

Fixed Asset (Non-current asset)

A fixed asset, sometimes called a non-current asset, is an item of equipment, often an expensive one, that will be used by your business over a few years.  Examples of fixed assets are machines, vehicles, buildings, etc.

Invoice

If you have supplied goods or services to a customer, it is normal practice to issue an invoice to the customer. This document details the cost of the goods, any taxes that were added and the total amount that is to be paid. All business should keep records of the invoices that they issue.

Limited Company

A Limited Company is a business that has a legal identity of its own and is separate from the owners and directors. The business can have debts that it is liable for that do not automatically become the liability of the owners in the event that the business fails, the shareholders liability it ‘limited’ to the value of their investment.

Partnership

This is a business structure where two or more people agree to start a business together. There is normally a partnership agreement written up which contains all the details of how the partnership will be owned and run. The partners can own equal or different amounts of the business. The partners will usually share the profits according to their share of ownership.

A Limited Liability Partnership (LLP) is form of partnership in which, similar to the shareholders of a Limited Company, the individual partners have limited liability for the business debts and the business has a legal identity of its own.

Profit

Usually business, particularly companies, report two profit figures called the gross profit and the net profit.

Gross profit is the amount of profit that was made from selling the goods or services and in the simplest of terms it’s the difference between how much you sold the product for and how much you paid for it.

Net profit is the amount of money that was left after all the business expenses have also been accounted for. This is the money that is left to be withdrawn from the business, after any taxes have been paid.

Reconciliation

This is the process of matching your accounting transaction to your bank statements and bank balance.

Self-Assessment

This refers to the system that HMRC uses to collect tax from sole traders and those who are self-employed. It’s often just referred to as your tax return.

Sole Trader

A sole trader is a type of set-up where the owner and the business are one and the same. Whilst the owner should keep their personal and business accounts separate there is no legal difference and as such the owner is personally liable for all of the business debts but also gets to keep all of the profits.

Value Added Tax (VAT)

VAT is a tax the government applies, currently at 20%, to most goods and services. There are some exceptions such as children’s clothes which are known as ‘zero rated’ goods and some such as gas and electric which is charged at 5%. If your sales exceed £90,000 per year, or you expect them to, you probably need to be VAT registered and should talk to your accountant. If you have to register, you must then charge VAT to all your customers, but you can also reclaim most of the VAT you pay out.