Not sure of the difference between amortisation and depreciation? Get confused by capital expenditure and capital gain? You’re not the only one! And while we really do believe in providing jargon-free accountancy services, sadly accountancy is littered with a host of terminology which, as much as we try, we can’t avoid using.
So, to help you out, here’s our first in a serious of accountancy jargon busters, which will include the most common accountancy terms you might come across while running your business.
Accounting Period
An accounting period is a period of time which covers certain accounting functions. It can be a week, month or year. Think of it as a reporting period when you review certain aspects of your business. For example, an annual accounting period could be used for income tax returns, a quarterly one for VAT and a monthly one for sales figures.
Accounts Payable
This is the money a company owes for payment of goods and services.
Accounts Receivable
This is the money owed to the company, normally by its customers.
Accounting Software
Accounting software stores all your financial transactions ensuring your accounts are always up to date. Most also do various accounting and bookkeeping tasks.
Find out more about choosing the right software package for your business.
Accruals
Accruals refer to income or assets which are recorded in one accounting period but aren’t realised until a future one. You can have either revenue or expense accruals.
For example, if you agree a 3-month contract but will only be paid on completion, then that fee will be accrued each month until the end of the project.
Amortisation
Amortisation is an accountancy practice of spreading the cost of an intangible asset, such as a trademark, over the course of its useful life. In essence, the cost of that intangible asset is written off over a period of time.
Assets
Assets are anything your company owns which has a current or future economic value to your business. They can be something already owned by you or anything that is owed to you by a customer.
They can be classified as:
- Current: including cash, cash equivalents, accounts receivable and stock inventory
- Fixed: items that have an expected life longer than a year, such as computer equipment, software, vehicles and buildings
- Financial: such as cash, stocks, bonds and bank deposits
- Intangible: items that don’t have a physical presence, such as trademarks, brand recognition and patents.
Audit
You’ll often hear of big companies being audited. It basically means someone independent of the organisation is examining the financial information in the company’s annual report to ensure everything is above board.
Annual Accounts
Annual Accounts also called Company Accounts or Statutory Accounts are an overview of the financial performance of an organisation over a 12-month period. They are a legal requirement for limited companies, limited liability partnerships and charities.
If you need any help preparing your annual accounts, find out more about how we can help you.
Balance Sheet
A balance sheet is a financial statement that provides a snapshot of your company’s financial status at a specific point in time. It’s one of the key financial statements your business definitely needs as it provides details of all your assets and liabilities.
Benefit in Kind
Things like company cars, health or life insurance are examples of non-cash items used to reward employees i.e. a benefit in kind.
Bookkeeping
A detailed day to day record of all the transactions in and out of the business. Good bookkeeping keeps you financial organised. If you would rather be focused on running your business than keeping an eye on all your financial transactions, bookkeeping is something we can help you out with.
Capital Assets
These are significant purchases which will be useful to your business over a long period of time, such as computers or machinery.
Capital Gain
The increase in value of a capital asset’s value from the day it’s purchased to the day it’s sold.
Capital Gains Tax
If you sell something which has increased in value since you bought it, you will be charged Capital Gains Tax on the profit made.
Capital Expenditure
Also known as CapEx, this refers to funds used to buy, upgrade and maintain physical assets such as property, buildings, technology or equipment.
Cash Flow
Cash flow simply refers to the money moving in and out of your business at a specific moment in time. Ideally, you want a positive cash flow, as this means more money is coming in than going out which is important for long-term business growth.
Chart Of Accounts
A Chart of Accounts, if managed properly, gives you an overview of every area of your business that makes or spends money. It lists all the accounts you must use to record financial transactions in your General Ledger (see below) and allows you to categorise your transactions correctly. The chart of accounts is split up into:
- Asset accounts – items the business owns
- Liability accounts – debts the business owes
- Equity accounts – funds put into the business and drawings by owners
- Revenue accounts – money received by the business
- Expense accounts – money paid out by the business
Cost of Goods Sold
Refers to the costs of producing the items sold by a company during a given timeframe. It includes materials, labour, manufacturing as well as any overheads.
Corporation Tax
Tax paid by companies on their profits to HMRC. If you would like help ensuring your Corporation Tax Return is done correctly and on time, we’ll be more than happy to help.
Current liabilities
Current liabilities are any short-term debts and money owed to suppliers. This includes items such as payroll, expenses, income taxes, interest payable, rent and utility bills.
Creditors
People who the business owes money to.
Debtors
People who owe the business money.
Depreciation
Depreciation refers to the gradual decrease in value of a fixed asset as it gets older and faces obsolescence. It is a process which continues until the asset reaches the end of its useful life. Computer equipment or software are good examples.
Dividends
These are a portion of a company’s earnings which are paid to the shareholders. In most cases it will be as cash, but it can also be issued as stock. Dividends are normally paid quarterly but can also be paid monthly or annually.
Dormant
If a company isn’t doing any business or receiving any type of income, then, for Corporation Tax purposes, HMRC will consider it dormant.
Drawings
This is money or other assets taken out of the business, such as dividends.
Equity
If your business was to go out of business tomorrow and all your assets liquidated and debts paid off, equity would be the amount divided between your shareholders.
Fixed Cost
A cost which never changes no matter how much your business sells. Examples include rental costs, insurance and some utility bills.
General Ledger
This is the place where all business transactions are recorded and serves as the basis for any accounting system. It tends to be broken down into five main sections: assets, liabilities, equity, revenue and expenses. The General Ledger must always be in balance between credit and debit amounts, hence the phrase ‘balance the books’.
Gross Profit
Refers to the profit a business has made after subtracting all the costs for producing and selling its goods or services.
Insolvent
If a business or person does not have enough money or assets to pay their debts, they are considered insolvent or bankrupt.
Inventory
This is a list of all the stock a business has in its various stages of production, which means it includes raw materials, goods in production and goods already available for sale.
Hopefully, this list has helped you get your head around some of the most common accountancy terms you’re likely to come across, but if you have any queries do get in touch. And of course, check back next month for part 2.
