Accounting Glossary

The Secret Language of Accounting

Accounting has traditionally been a mysterious and secretive field, where grey-suited mystics mutter indecipherable incantations as they pore over cryptic tomes and manuscripts. In the RIFT, we believe that the prophetic power they wield should rest in your hands, and the first step is to learn their arcane language...

Accounting Year
The year covered by your business’ accounts. Every business must prepare accounts for a year at a time.  Accounting periods can be longer or shorter than a year

Account Receivable
An amount you are owed by a customer, also known as a trade debtor.

Accrual
When you've had the benefit of a transaction, but haven't yet paid for it, that's an accrual. This is usually when you have received the service but not the invoice, if you have received the service and the invoice then it is technically a trade creditor.

Accruals Basis
This is when you record a cost or income in your accounts when it's incurred, rather than when you've paid or received payment for it.

Acid Test
This is a strict test of whether you've got the cash flow to cover all your outstanding liabilities.

Assets:
Something of value that a business owns, can access or otherwise benefits from.

Audit
When an independent organisation take a close look at your finances and offers an opinion or judgement on them.

Bad Debt
When a debtor can't pay what they owe.

Balance Sheet
A cornerstone of accounting. A statement showing assets, liabilities and ownership interest. It shows the company position, under new international accounting standards this will be called your statement of financial position.

Bank Reconciliation
Checking to make sure that the balance on your bank statement matches the balance in your accounts.

Basis Period
The period for which a Sole Trader or Partnership pays tax each year.

Bill
An invoice from a supplier that, sooner or later, will need to be paid.

Bond
Another name for loan finance, more commonly used in the U.S.

CIS
HMRC’s way of collecting income tax from people who work in and around the building industry as subcontractors rather than employees.

Capital
Finance provided so a business can acquire assets and run its affairs. Often this can be the shares issued in the company, “share capital”

Capital Account
A business’s capital accounts record how much it owes to its owners.

Capital Allowances
A way of saving tax when your business buys a capital asset. It is a kind of tax relief.

Capital Asset
An asset that your business will find useful in the long term (two years or more, for instance), and whose cost is higher than your day-to-day running expenses.

Capital Expenditure
An important expenditure designed to shape the future of a business.

Cash
Includes cash on hand and deposits in a bank that you can access easily.

Cash Accounting
A way of simplifying your VAT accounting. Cash accounting is one way, meaning you pay VAT to HMRC when customers have paid you, rather than when you invoice them.

Charge
When we're talking about interest and taxes, this is the cost of interest and tax payable reported in a Profit and Loss statement (sometimes called P&L or income statement.)

Consumable Item
A small everyday item recorded in the day-to-day running expenses of a business.

Contingent Liabilities
A cost or other obligation that might need to bedealt with, depending on what happens in the future.

Corporation Tax Liability
The obligation of Limited Companies and other organisations to pay a tax on their profits to HMRC.

Cost of Goods Sold/Cost of Sales
Costs directly related to the goods or services provided by the organisation.

Credit
This is what a supplier agrees to allow a customer to make payment some time after delivery.

Credit Control
Making sure sure your customers don’t take longer than the agreed termsto pay you.

Creditor
A person or organisation to whom money is owed.

Current Asset
An asset capable of being converted into cash within the near future.

Current Liability
Money your business owes, which it will have to pay within a year.

Debenture
A name used for loan financing taken on by a company.

Debit
An entry in your accounts that increases what you own or reduces your profit. The opposite of this is a credit.

Debtor
A person or organisation who that owes money to your business.

Depreciation
A way of recording how an asset's value is gradually used up over time.

Dividend
An amount paid to Shareholders of the organisation as a reward for investment in the company. Dividends are paid out of retained taxed profits

Double-Entry Bookkeeping
An accounting system where every transaction is recorded once as a debit (its cost) and once as a credit (what you got for your money).

Drawings
Cash taken from the business for personal use.

EC Goods
Physical goods that are either bought from suppliers or sold to customers outside the UK, but in the wider EU.

EC Services
Services that a UK business supplies to EU customers outside the UK, or services that a UK business buys from the wider EU.

Earnings Per Share
Earnings for ordinary shareholders, divided by the number of shares the company has issued.

Employment Allowance
A reduction of up to £2,000 a year in an employer’s National Insurance contributions.

Equity
The ordinary share capital of an entity.

Equity Crowdfunding
A system allowing people to invest in a company that isn’t listed on the stock market, receiving shares in that company in return.

Estimate
A document given to a customer, showing how much you expect to charge them for goods or services.

Expense Accounts
Categories within a business’ books that show its day-to-day running costs.

Financial Year
The period from the 1st of April to the 31st of March in the following year.

Fiscal Year
The period from the 6th of April one year to 5th of April in the following year (in the UK). Also known as the tax year.

Fixed Asset
An asset that is not easily converted into cash and is held on a continuing basis.

Goodwill
The difference between the fair value of the amount paid for an investment and the fair value of the net assets acquired.

Gross
Before making deductions.

Gross Profit/Gross Margin
Sales minus the cost of sales, before deduction of other expenses.

HMRC
Her Majesty’s Revenue and Customs, responsible for the collection of taxes. Many people still refer to HMRC by its old name of the Inland Revenue.

IAS
International Accounting Standard, issued by the IASB’s predecessor body.

Impairment
A reduction in the value of an asset, beyond the expected depreciation.

Income Accounts
Records in a business’s books showing how much it has earned.

Intangible
Usually means assets with value but no physical form, like intellectual property rights.

Interest on Loans
The percentage return on a loan required by the lender.

Inventory
Stock held for use in the production process or for resale.

Investors
People or organisations that have provided money or capital to a business in exchange for ownership shares.

Invoice
A document asking a customer to pay for goods or services supplied to them and detailing the goods/services provided

Invoice Accounting
The standard way of calculating your VAT return. You pay VAT to HMRC when you’ve invoiced your customers, regardless of when they actually pay you.

Journal
An accounting mechanism that moves an amount from one nominal account to another.

Key Performance Indicators (KPI)
Measurements that help in understanding the performance of a business.

LLP
A Limited Liability Partnership is a hybrid between a Partnership and a Limited Company.

Liability Accounts
Categories in a business’ books that show how much it owes.

Liabilities
Obligations to pay in some specified way for agreed transactions.

Limited Company
A business that's considered to be a "legal person", separate from its owners and its managers.

Liquidity
The extent to which a business has access to cash or items that can readily be exchanged for cash.

Long-Term Liability
Money that a business have to pay in more than a year’s time.

Management Accounting
Reporting financial information from within the business for use by management only.

Market Value (of a share)
The price for which a share could be sold.

Minority Interest/Non-Controlling Interest
The ownership in a company held by people other than the parent company.

National Insurance
Money paid to HMRC by employees, employers, and the self-employed. It is related to social benefits, state pension etc

Net
After making deductions.

Net Assets
A business' assets minus its liabilities.

Net Profit
The value of sales, minus all the costs involved.

Nominal Accounts
The categories in your records where transactions are posted in double-entry bookkeeping.

Operating Margin
A way of measuring the profitability of a business, by measuring how much of its revenue is left over after paying its variable costs.

Ordinary Shares
These represent a part ownership in the company and grant the holder certain voting rights and dividends.

P11D
A form that lets HMRC know about certain benefits you’ve received from your employer, apart from your salary.

P45
A form that an employer must give to an employee who’s leaving their job.

P60
A form that shows how much taxable salary the employee was paid in the tax year, and how much tax was deducted from their wages.

PAYE
Short for Pay As You Earn, this is one of the ways HMRC collects Income Tax.

Payment on Account
The amount of Income Tax and class 4 National Insurance that some business owners have to pay to HMRC for a future tax year.

Preference Shares
Shares in a company that give the holder a preference to receive dividends before any ordinary share dividend is declared.

Premium
An amount paid in addition, or extra.

Prepayment
Money paid in advance for a business cost.

Profit
Calculated as revenue minus expenses.

Profit and Loss Report
A summary of the business’ income, minus its day-to-day running costs, over a given period of time.The International standard term for this is” income statement”.

Provision
A liability with an unknown timing or amount.

Prudence
Not overstating gains and assets and not understating losses and liabilities.

Purchase Ledger
A list of all the purchase invoices ever received from suppliers, and when they were paid.

RTI
Real Time Information. As of April 2013, this is the new way to report wages, salaries, PAYE and National Insurance to HMRC.

Return on Capital Employed
A measure of the value a business gains from its assets and liabilities. A business with a lot of capital investment will have a lower ROCE than one with less that manages to makesimilar profits out of it.

Sales/Revenue
Money received by the business in exchange for goods and services.

Sales Ledger
A list of all the sales invoices ever issued by a business and when they were paid.

Self Assessment
The form that many business owners need to send to HMRC each year to report how much they have earned and from what sources.

Share Capital
The total amount of cash that Shareholders have contributed to the company.

Sole Trader
A business owner who is not legally separate from their business and whose business has no other owners.

Stock
The value of the goods that you have on hand to sell to your customers. If you sell services rather than goods, you won’t have any stock.

Tangible Fixed Asset
A fixed asset that has a physical existence.

Tax Code
A mechanism that HMRC use to deduct tax from wages or pension income under the PAYE scheme.

Tax Year
See Fiscal Year. It's the same thing.

Trade Creditor
A supplier who has supplied your business with goods services that you haven’t yet paid for.

Trade Debtor
A customer who hasn’t yet paid you for your goods or services.

Trial Balance
A trial balance is a report that shows the total of all your business’s accounts, its assets, liabilities, income, costs and capital, as at a given point in time

True & Fair View
This is a legal requirement for UK companies not using the ISAB system when preparing their financial records.

VAT
Value Added Tax. It’s a tax on the sale of most goods and services.

VAT Flat Rate Scheme
An alternative way for small businesses to work out how much VAT to pay to HMRC each quarter, designed to be simpler.

VAT Return
The form

Accounting has traditionally been a mysterious and secretive field, where grey-suited mystics mutter indecipherable incantations as they pore over cryptic tomes and manuscripts. In the RIFT, we believe that the prophetic power they wield should rest in your hands, and the first step is to learn their arcane language...

Call us on 01233 653006 today.

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