31 Accounting Terms & Concepts You Need to Know

Jordan Macey

April 21, 2021

accounting terms guide

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Small Business Accounting

General Accounting Terms 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

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.

Assets

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.

Balance sheet

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

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.

Credit

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.

Debit

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.

Depreciation

The measurement of the decline in the worth of an asset.

Common methods of depreciation include: straight line, units of production, sum-of-years-digits and double-declining balance.  

Dividends

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.

General ledger

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.

Liabilities

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

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 ‘Equity = Assets - Liabilities’.

Expenses

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.

Net income

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.

Revenue

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.

Trial balance

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.

Top Accounting Concepts

We've outlined key accounting concepts you need to know, in order to have a better understanding of how your small business accounting works:

Accrual concept

All revenues and expenses are to be taken into account for the period in which they are earned or incurred, regardless of whether cash is received or paid out.

This differs from cash basis accounting, which recognises income and expenses when they are received or paid.

Accounting period

Only financial records relating to a specific time period should be included.

For example, if you were preparing a cash flow statement for the first quarter of 2020, you wouldn’t include transactions from December 2019.

Consistency concept

Once a specific accounting method is chosen, that method should continually be used unless there are legitimate reasons for not doing so.

This ensures that financial statements across different accounting periods can be reliably compared.

Going concern

There is the assumption that your business will continue its operations for the foreseeable future.

Following this, businesses may defer the recognition of revenue and expenses to a future period.

Conservatism concept

Revenue should be recognised only when there is a reasonable certainty that they will be received, while expenses and liabilities are recognised sooner—when there is a reasonable possibility that they will be incurred.

Economic entity concept:

The finances and transactions of a business are to be kept separate from that of its owners, partners, shareholders or related businesses.

Materiality concept:

Any financial transactions that could materially affect business decisions should be recorded.

An item is considered material if not including the information creates significant impacts on the decisions of users of the financial statements. This results in relatively minor transactions being recorded, so that the financial statements represent an accurate overview of the company’s financial position.

Matching concept:

An expense should be recorded in the same period that the related revenue is earned.

Limited Company Expenses Guide

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Limited Company Expenses Guide

Limited Company Expenses Guide

What's Inside:

  • Allowable business expenses
  • Employee expenses
  • Travel expenses
  • Office & equipment expenses
  • Professional services expenses
  • General expenses
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Limited Company Expenses Guide

What's Inside:

  • Allowable business expenses
  • Employee expenses
  • Travel expenses
  • Office & equipment expenses
  • Professional services expenses
  • General expenses

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What is a Balance Sheet? Guide

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.

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What are benefits in kind? Guide

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.

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Small Business Guide to Debits and Credits Guide

Small Business Guide to Debits and Credits

As a self-employed person or small business owner, getting a good grasp of accounting fundamentals can feel like an uphill task.

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.

We've touched on key accounting terms & concepts and the differences between bookkeeping and accounting. Below, we'll dive in to explain what debits and credits mean in accounting.

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What are Debtors? Guide

What are Debtors?

The term ‘debtor' 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.

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What are Written Down Values? Guide

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.

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What are Taxable Supplies? Guide

What are Taxable Supplies?

A taxable supply is any supply made in the UK which is not exempt from VAT.

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What are Aged Debtors? Guide

What are Aged Debtors?

An aged debtors report shows a list of customers (debtors) who owe your business money, as well as the amount owed at any given time.

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What are Supplier References? Guide

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.

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UK Spring Budget 2021: 19 Things You Need to Know About the Budget Guide

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.

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What is Statutory Sick Pay? Guide

What is Statutory Sick Pay?

Statutory Sick Pay (SSP) is the amount of money mandated by law that every employee must be paid if they are too sick to work. Employees have to meet certain eligibility criteria to qualify for SSP.

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What is Statutory Paternity Pay? Guide

What is Statutory Paternity Pay?

Statutory Paternity Pay is the amount of money that must by law be paid to the father of a new baby while he is away from his job.

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What is Taxable Turnover? Guide

What is Taxable Turnover?

Taxable turnover is the turnover on which the seller is liable to pay tax.

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What is the Accounting Reference Date? Guide

What is the Accounting Reference Date?

The Accounting Reference Date (ARD) is the date on which a company's financial year ends, and when it has to submit its annual accounts.

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What are Interim Accounts? Guide

What are Interim Accounts?

Interim accounts are accounts prepared during the tax year to show the current financial position of a company.

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What are Credit Notes? Guide

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.

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What is Amortisation? Guide

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.

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What are Fixed Assets? Guide

What are Fixed Assets?

Fixed assets are property or equipment that a company owns, and uses in its day-to-day operations for income generating activities. These include machinery, equipment, buildings and land.

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What are Current Liabilities? Guide

What are Current Liabilities?

Current liabilities, otherwise known as short-term liabilities are due within a year.

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What are Authorised Agents? Guide

What are Authorised Agents?

Through the agent authorisation process, a client is able to authorise an agent to deal with HMRC on their behalf. Further information is available on the HMRC website.

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What are Rechargeable Expense: expensing a client? Guide

What are Rechargeable Expense: expensing a client?

Rechargeable expenses are expenses that are incurred during the performance of your work that you can recharge or recover from your client or agency.

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