Welcome back to our ultimate accountancy buster. Now, you confidently know the difference between amortisation and accruals (if you’re still unsure, check out part 1!), we continue our look at some of the common accountancy terms you’ll potentially come across while running your business.
Liabilities
How much money your company owes, such as short-term debts and taxes.
Limited Company (LTD)
A limited company is a form of business structure which is a separate legal entity from its shareholders and directors. This means the company assets and income are completely separate from its owners, so if the business runs into difficulties, personal assets, such as your house or car won’t be at risk. Find out more about the different business structures.
Limited Liability Company (LLC)
Although this is actually a US business structure, you may come across the phrase. Its structure is basically the same as a LTD.
Limited Liability Partnership (LLP)
LLPs are owned by its members and allow for a partnership structure where each partner’s liabilities are limited to the amount they have put into the business.
A common business structure for certain professions such as accountants, lawyers or architects, it allows you to capitalise on people’s different skill sets and expertise while also spreading the risk. Learn more about the key differences between LTDs and LLPs.
Liquidation
Liquidating or winding up a company is when a company stops doing business and employing people. Assets are converted into cash and used to pay off debts, with any money left going to shareholders.
Liquidation usually occurs when a company goes bankrupt and is unable to pay its debts. However, if you simply don’t want to run your company anymore, you can also opt for a members’ voluntary liquidation.
Liquidity
Liquidity is a measure of your company’s ability to pay off its short-term liabilities, such as wages, invoices and taxes. Ideally, you want your company to have strong liquidity as then you will be in a position to quickly get your hands on the cash needed to pay off any debts that suddenly arise.
Making Tax Digital (MTD)
Making Tax Digital (MTD) is a Government initiative to make it easier for individuals and businesses to get their tax right and keep on top of their affairs by using a fully digitalised tax system.
National Insurance (NI)
National Insurance is a tax on earnings and self-employed profits if you earn over a certain amount. It allows you to qualify for certain benefits and the State Pension.
National Insurance Contributions (NIC)
The amount you contribute to NI. There are difference rates and classes of National Insurance. HMRC’s website provides a full overview.
National Living Wage
The minimum wage employers must pay any employees over the age of 21.
National Minimum Wage
The minimum rate employers must pay any employees who are at least school leaving age and under the age of 21.
Net Assets
Are the value of your company’s assets (cash, computers, software, trademarks) minus all your liabilities (how much your company owes). Knowing the value of your net assets is important as it gives a reliable indicator of your company’s health.
Net Book Value
Refers to the value a company gives to an asset in its accounting records. It’s normally the value of an asset after accumulated depreciation has been deducted.
Net Loss
Refers to the total expenses which exceed the amount of money coming into a company over a given time period. This could be caused by factors such as an increase in the cost of goods sold, not keeping up with market demands or facing strong competition.
Net Profit
Refers to amount of money a business has made over a specific period of time after subtracting all the operating expenses, interest and tax.
On Credit
Buying items on credit, simply means you receive the goods now but pay for them later.
Operating Costs
Operating costs are any costs associated with producing and delivering your products and/or services. This includes items such as raw materials, machinery and salaries. If you’re not sure if the cost is an operating cost of an overhead (see below), work out if the cost would disappear if you stopped providing your particular product or service. If it does, then it’s an operating cost.
Overheads
Unlike operating costs, overheads are the day-to-day expenses of keeping your business running and costs you simply can’t avoid. This includes items such as rent, insurance and utility bills. It can also include some salaries, such as those for administrative staff.
P45
A P45 is an official certificate an employer must give an employee who leaves the company. It provides information on:
- Tax code
- Gross pay
- Amount of tax paid for the year
- Employer details
It should be given to a new employer to ensure they assign you to the correct tax code.
P60
A P60 shows the amount of tax you’ve paid on your salary in any given tax year. Employers must provide all their staff with a P60 by the 31 May every year for the previous tax year.
PAYE
Pay As Your Earn is the system which deducts Income Tax and National Insurance from an employee’s salary.
Payroll
Payroll is the process of paying your employees. It tracks how many hours they have worked, calculates their pay and then pays them. Bonuses, tips, statutory sick or maternity pay all need to go through payroll.
Processing payroll can be stressful and time-consuming, so it’s something we are more than happy to help you with.
Pension
A pension is an employee benefit that makes regular payments to an employee, so they have a fund set aside for when they retire.
Profit and Loss (P&L) Statement
Also known as an income statement, the P&L gives an overview of your company’s revenues, costs and expenses over a period of time. Normally produced on a yearly basis, it tells you if your business is capable of generating a profit which can help you decide if you should buy that new office equipment or consider expanding the business.
Hopefully, that’s given you a good insight to some of the more common accountancy terms you might come across.
Remember to come and check out part 3 next month where we will look at everything from retained profit to VAT.
