We’ve pulled together some useful bookkeeping and accountancy terms for SMEs.

When it comes to your business, getting your accounts correct is imperative. Everything from buying stock, invoicing your customers, keeping records, and paying your staff is part of your accounting and this can be a very effective tool for determining and managing your business strategy. But you need to understand what each accountancy term means for your business. Hence our guide – do let us know if we need to add any more terms to it!

Bookkeeping vs accounting

Bookkeeping is the stringent recording of information

Accounting covers a vast array of services involving the analysis of this information including audits, generating financial statements and forecasting future business needs

Other useful accounting terms

A-D

Accounts payable: Money owed by your company to suppliers for goods and services

Accounts receivable: Money owed to your company following a sale

Accruals: A business record of either income or an expense. The transaction has happened but the payment has not been received/made  

Amortisation: Regular repayments of an asset over a fixed period

Arrears: When an invoice or bill isn’t paid on time. You may be in arrears through late payments, or your customers may be in arrears with paying your invoices.

Assets: Anything that your business owns which has a value. Assets can be: ‘fixed’: e.g. land, machines, buildings and vehicles; ‘current’: i.e. cash; and ‘intangible’: non-physical assets such as trademarks or patents.

Audit: An official examination of your accounts to ensure they have been completed accurately

Bad debt: This is money owed to your business that will not be paid

Balance sheet: A written statement detailing your company’s assets, liabilities, and capital at a point in time for a particular period.

Billing: Sending invoices to customers who have bought your goods or services

Capital – Money that has been invested in order to begin your business or when you are trading

Capital allowances – Capital allowances are a type of tax relief for businesses. They let you deduct some or all of the value of an item from your profits before you pay tax. You can claim capital allowances on: equipment, machinery, or business vehicles, for example vans, lorries or business cars

Capital gains tax (CGT) – When an asset is sold for a fixed price and you make a profit on the sale, the profit element is subject to capital gains tax. An accountant will help you determine the final amount as inflation and the age of the asset may be taken into account

Cash flow – The amount of money coming in and out of your business

Cash-flow forecast – The likely amount of money that will flow in or out of your business in the future. This is useful for planning future growth and may help you avoid fall into arrears with payments

Comparative analysis – Compares financial statements for two or more time periods

Cost centre – Businesses can split their accounts into departments and divisions, which can help them see where the most cash is being spent.

Credit note – a document that’s sent to the client which cancels any debt they might have, usually issued for poor service, or for receiving faulty or damaged goods

Creditors – a supplier who is owed money by a business

Current liabilities – Debts that must be settled within a year, such as short-term loans or money owed to suppliers

Deductibles: You can deduct purchases as business expenses which reduce the amount of income tax you owe

Deferred income – Income which you receive or record before it is earned

Depreciation – When the value of an asset decreases over time

Dividend – this refers to after-tax profits which are then distributed to the company’s shareholders

Double-entry bookkeeping – every aspect of a transaction is accurately recorded twice both as a credit and a debit

Drawings: Money taken out of a business by the owner for personal use.

E-L

Earned income – Money that comes from paid work

Embezzlement – The act of an employee stealing money or assets of the company

Equity – the business owner’s share of the company. Equity represents the stockholders’ investments together with any losses or retained earnings

Escrow – money held by a third party until certain conditions are met

Fiscal year – The 12-month period chosen to be the business’ accounting year. This is often April-March or January – December, but it does not have to be the case

Fixed assets – Vehicles, machinery or property that has a lifespan greater than 12 months

Goodwill: This covers non-physical (intangible) assets such as brand name and reputation. It is often recorded when one company buys another, and the price paid is higher than the value of the identifiable assets minus liabilities.

General ledger – a repository for compiling details about a business’ accounts. It provides the data needed for preparing accurate financial statements

Goodwill – the difference between the book value and fair value of a particular asset. An example of goodwill would be the overpayment which subsequently upholds a business’ reputation, but it could also be as simple as rewarding client for their ongoing custom/loyalty

Gross – profit margin before making any discounts or dedications

Gross margin – difference between the selling price of a product or service and the associated cost of it initially. For example, if an item is sold for £1,000 but cost £600 to make, then the gross margin would be £400 or 40%

Incorporated -This is the date that a business is legally established

Journal – a book or collection of books used to record business transactions

Joint venture – when two or more parties work together to supply services and goods. Joint ventures are often business partnerships, so both parties are responsible for operations

Key performance indicators (KPIs) – measurements used to calculate and record the performance of a company

Ledger – Books which contain all your financial accounts details

Liabilities – The debts owed by one business to another

Limited liability company (LTD) – a business where the owner’s liabilities are limited by the amount they’ve contributed

Limited liability partnership (LLP) – a partnership within which all partners have limited liability status

Listed company – a business with shares available to purchase and sell on the Stock Exchange

M-W

Margin – the difference between expenses and revenue

Maturity date – When a debt is due to be repaid

Net – the financial status of a business but only after expenses and other deductions have been made. The net amount will indicate the true value of a company. Otherwise known as net worth, net income or net profit

Net assets – value of assets and cash minus business liabilities

Nominal value – named value of a share once it’s been issued

Operating risk -This is a time when fixed operating costs are high and could cause profits to fluctuate

Overheads – Everyday ongoing business costs such as rent, wages and phone bills

PAYE – Short for ‘pay as you earn’. It is an income tax system where taxes and national insurance contributions are deducted before wages are paid.

Pay on delivery – A buyer who pays for goods or services only after receiving them

Profitability ratio -The ability of your company to make profits against sales, operating costs, assets and shareholder’s equity.

Profit and loss account – A statement detailing revenue, expenses and profit for a certain financial period

Provision – An amount in your accounts to cover a future liability.

Reserve account – An amount of funds set aside from profits to be used for a specific reason in the future

Retained earnings -Net income retained by a business and not distributed as dividends

Return on investment (ROI) -The amount of money/value gained versus the cost of an investment

Straight line depreciation – The expected wear and tear of an asset

Unearned revenues – Cash collected by a business ahead of providing goods and services

Unsecured loans –  Debts without any collateral attached

Working capital – The cash, accounts receivable and stock minus the accounts payable

Write-down – A partial reduction in value of an asset

Book our bookkeeping services and stand out from your competitors

Even after reading our glossary of accounting terms, you’re still unsure of what it all means – or if you simply want to outsource your bookkeeping and concentrate on running your business, then give us a call! We’re happy to chat things over  – and of course, tell you all about the benefits of Hour Hands working as your remote credit controller, payroll, or bookkeeper.

Hour Hands is an Xero Accredited Bookkeeper – meaning we are recognised as experts

To find out more simply call us on 01727 818262. We will ask how we can support you and offer a solution either on an hourly rate or package cost. The choice is yours – we simply want to help.