31 Accounting Terms & Concepts You Need to Know
Whether you're self-employed or running a small business, you need to stay on top of your business finances.
While you can delegate your company's financial affairs to your accountant, it's still important to have a good grasp of the essentials-such as basic accounting terms and concepts. With this knowledge, you'll be better able to communicate with financial professionals, team members and potential investors.
To help you get started, we've written up an introductory guide to accounting terms you need to know:
Accounts payable (AP)
This refers to money owed to the business by its creditors (suppliers, vendors and other service providers). These are recorded as a liability on the balance sheet.
Accounts receivable (AR)-
This refers to money owed to the business by its debtors (clients and customers). The amounts are recorded as an asset on the balance sheet.
Accruals are amounts that are unaccounted for at the end of the accounting period. These can be expenses that have been incurred or revenue that has been earned, but aren't yet recorded in the accounts.
Any resource that is owned by a company. There are two main types of assets: current assets and non-current assets. Current assets are expected to be consumed within a year, while non-current assets are expected to be held for longer than a year.
The balance sheet shows how much a business owns (assets), owes (liabilities) and the amount that is left over for its owners (owner's equity) at a point in time.
Cash flow refers to the total amount of money that is moving in and out of your business.
Chart of accounts
The chart of accounts is a listing of all the accounts used in the general ledger of the business.
Cost of goods sold (COGS)-
The total of all costs associated with producing your products or services.
An accounting entry that increases a liability or owner's equity account, or decreases an asset or expense account. The term may also be used to refer to an entry on the right side of a T-account.
An accounting entry that increases an asset or expense account, or decreases a liability or owner's equity account. The term may also be used to refer to an entry on the left side of a T-account.
The measurement of the decline in the worth of an asset.
Dividends are a payment of profit that a limited company distributes to its shareholders.
It is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off.
Generally Accepted Accounting Principles (GAAP):
In the UK, the GAAP is a set of accounting standards published by the UK's Financial Reporting Council (FRC) for reporting financial information.
A record of all the accounts that a business uses.
The accounts are classified into three categories: assets, liabilities and equity accounts.
Profit & loss (P&L)
The P&L is a financial statement that shows how much money your business has made or lost.
Debts and obligations of a company.
There are two main types of liabilities: current liabilities and non-current liabilities. Current liabilities (otherwise known as short-term liabilities) are due within a year, while non-current liabilities are due after a year.
Equity can have several meanings in accounting.
Firstly, it refers to the net amount of finances an owner has invested in the company.It can also refer to the residual value of assets less liabilities, as represented by the accounting equation ‚ÄòEquity = Assets - Liabilities'.
Costs incurred by a company for revenue generation.
A few common types of expenses a business may incur are:
- Fixed expenses: The total amount of the expense doesn't change over the short-term, despite changes in sales volume or other business activities. Examples include lease and rent payments.
- Variable expenses: As its name suggests, the total amount of the expense varies in proportion to changes in sales, production or other business activities. Examples include salaries, utility expenses or costs of raw materials.
- Operating expenses: Expenses incurred for activities that aren't directly related to the production of goods or services. Examples include administrative expenses, or legal and financial fees.
Otherwise known as net profit, net income refers to a business' financial position when the total revenue is more than the total expenses.
Present value (PV)
Present value is a calculation that measures the current value of a sum or stream of money to be received in the future, through adjusting for inflation and interest.
Return of investment (ROI)
A metric of profitability used to measure the gain or loss that an investment generates, relative to the sum of money invested.
The amount of money a company receives from selling its goods or providing its services.
It refers to the amount earned before expenses are deducted.
A trial balance is a report that lists the balances of all general ledger accounts of a business at a specific point in time.
An expense should be recorded in the same period that the related revenue is earned.
5 Key Benefits of Accounting Software when Self Employed
As a self-employed person or small business owner, sing a spreadsheet to manage your accounting may once have sufficed in the initial stages of running your business.
But as your company grows, the following occurs: your financial data becomes increasingly complex, you're adding on new accounts and you may be bringing on additional staff. You now require a scalable solution-and you're wondering if it's time to transition from spreadsheets to accounting software.
If you're still on the fence, and unclear about the value that an accounting software brings to your business, here are five key benefits you'll reap if you make the switch:
Small Business Guide to Debits and Credits
As accountants who specialise in small business needs, we're familiar with the challenges that you face-and have put together a series of articles to help you easily understand the basics of accounting.
Moving to the Cloud: Excel to Accounting Software
With the rollout of Making Tax Digital (MTD) in April 2019, it has become mandatory for all VAT-registered businesses to keep their financial records in digital format, and submit their VAT returns using MTD-compatible software.
While you can continue to use spreadsheets for your business records, you'll need bridging software to make them MTD-compatible. Here's a quick explanation of the term: bridging software is a tool that takes data from your spreadsheet, and "translates" the information digital in the correct format to HMRC's system.
Perhaps it's time to look into online accounting solutions that can manage your VAT processes within a single system.
UK Spring Budget 2021: 19 Things You Need to Know About the Budget
1. Furlough scheme extended to September 2021
The government has committed to continue paying 80% of employees' wages when they are unable to work, with employers not having to make any contributions until July 2021.
2. Support for the self-employed extended to September 2021
As part of the covid support package from the government, the the Chancellor confirmed that he will extend the self employed income support scheme with those submitting a self assessment tax return before midnight 2nd March being eligible.
3. Universal Credit uplift to stay for 6 months
The £20 weekly uplift in Universal Credit has been extended for a further 6 months, with Working Tax Credit claimants being eligible for a £500 one-off payment.
What are benefits in kind?
For self-employed persons or employers, it can be challenging trying to understand the rules surrounding benefits in kind. These can be complicated; some benefits are taxable while others aren't, and it gets tricky figuring out which rules apply to your situation.
To make things a little easier to understand, we've written up a quick guide below. After reading our guide, you'll understand what benefits in kind are, have a clearer idea of which ones are taxable (and which ones aren't), and get an overview of what you need to do when it comes to reporting and paying taxes on benefits in kind.
Do keep in mind that this isn't a definitive guide, as HMRC's decision to impose a tax varies by situation. If you need specific advice, doconsult our specialist accountants at Forma.
Your Balance Sheet and Profit & Loss explained
Here's where our article comes in, so you can quickly get a grip on the basics.
When do you need accounting software?
In the early stages of starting up your company, managing your accounts via spreadsheets may suffice.
But as your business grows, you may find yourself spending an inordinate amount of time on getting your business finances and accounts sorted out.
Perhaps you're not entirely sure if you should stick with our current practices-or seek out a new way to handle your accounting.
We'll explore this in our article below, where we dive into five signs that indicate it's time for small business owners to make the switch:
What are Accruals?
Accruals refer to revenue that have been earned, or expenses that have been incurred but aren't yet recorded in a company's accounts.
Examples of accrued expenses include wages payable, bonuses, interest on loan and goods received.
One example of accrued revenue is accrued interest.
On the balance sheet, accrued expenses are recorded under the current liabilities section, while accrued revenue are recorded under the current assets section.
What are Assets?
An asset is any resource that is owned by a company. There are two main types of assets: current assets and non-current assets. Current assets are expected to be consumed within a year, while non-current assets are expected to be held for longer than a year.
What are BACS and CHAPS payments?
CHAPS-an abbreviation for Clearing House Automated Payment System-is a same-day bank-to-bank payment system. It is typically used for large, one-time payments, as the transfers are relatively expensive to process. There are no upper or lower limits to the amount that can be transferred.
BACS, or Bankers' Automated Clearing Services enables payments to be made electronically from one bank to another. The transfer method handles all debit and credit card transactions, has an upper limit of £250,000 per transfer and is mainly used for low-value transactions. BACS payments take three working days to clear.
What are Bank Deposits and depositing cheques?
A bank deposit involves placing money into an account with a banking institution. Depositing a cheque is one way to make a deposit. You can also deposit cash or make a funds transfer.
What are Cost of Sales?
The cost of sales is the accumulated total of all costs used to create a product or service, which has been sold. The cost of sales is a key part of the performance metrics of a company, since it measures the ability of an entity to design, source, and manufacture goods at a reasonable cost.
What are Credit Notes?
A credit note is a document that a business issues to its customers. It is used whenever an invoice needs to be changed and re-issued, such as when a customer changes or cancels an order, or is charged an incorrect amount.
What are Creditors?
A creditor is an individual, company or entity that has provided goods or services to a business and is owed money. In the balance sheet, a creditor may be listed under the current liabilities or long-term liabilities section.
What are Debtors?
The term ‚Äòdebtor' refers to an individual or company that owes money, or is in debt to an individual or organisation. An example would be a customer that has purchased a product or service from your business. In the balance sheet, debtors are listed under the current assets section.
What are Invoice numbers?
An invoice number is a unique number that is assigned to each invoice. This number is one of the most important elements of every invoice. Its role is to identify transactions, so it needs to be unique. Invoice number can contain only numbers or letters and numbers. It may contain date of issue, name of project or task.
What are Money Transfers?
Retained profits, or retained earnings are profits that a firm has earned to date (after deducting dividends or other distributions paid out to investors) and are retained in the company's accounts. In a balance sheet, retained profits are included under the owner's equity section.
What are Supplier References?
A supplier reference (or trade reference) refers to a report detailing the payment history between a business customer and its supplier or vendor. It enables a supplier to check your creditworthiness and find out if you're a reliable customer before they offer you credit.
What are Written Down Values?
Written-down value, otherwise known as the book value or net book value is the value of an asset after accounting for depreciation or amortisation. It represents the present worth of an asset from an accounting perspective.
What banks does FreeAgent integrate with?
Presently, FreeAgent supports over 40 feeds from banks worldwide. You may refer to their resource to see which banks are listed, or search for your bank using the search tool in the Banking area of FreeAgent.
What is a Balance Sheet?
A balance sheet is a financial statement that provides a snapshot of the financial condition of a company, showing how much it owns (assets), owes (liabilities) and the amount that is left over for its owners (owners' equity) at a specific point in time. It is typically completed at the end of a month or a financial year.
What is a Profit & Loss Account?
The profit and loss account (P&L) is a financial report that shows the revenue, expenses and profit or loss of your company over a specific accounting period.
This period can be a month, a quarter or a year. A P&L is also commonly referred to by other terms, such as the income statement, statement of operations, financial results statement and earnings statement.
What is Amortisation?
In business accounting, amortisation is a method of calculating the value of a business asset over time. It is the process of spreading out the cost of an asset over its useful life.
In relation to loans, amortisation refers to the spreading out of loans into a series of fixed monthly installments.
What is an Annual Return?
An annual return (AR01) is a document that all businesses are required to submit to Companies House each year. It details general information about a company, such as its ownership, capital position and management. The annual return has been replaced by the confirmation statement (CS01) since 30 June 2016.