A-Z of accounting terms

Doing the accounts is probably not top of the list when running your own business. But no matter how eager you are to let the world know about your exciting new piece of technology or delicious food product, getting the numbers right is essential – and brushing up on your basic accountancy knowledge can be a very valuable first step.

Here are some of the less obvious accountancy terms that you need to know to help you stay financially fit, not faltering.

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

Accounts receivable: Money owed to a company from debtors following a sale or supply or service.

Accrual accounting: A business records revenue or expenses when a transaction takes place, rather than when payment is received or made.

Amortisation: Regular repayments of an asset over a fixed period.

Arrears: This is when you haven’t paid bills on time, such as your water rates or debt to a supplier.

Assets: These are things that your business owns which have value. They can be: ‘fixed’, such as land, machines, buildings and vehicles; ‘current’, such as cash; and ‘intangible’, referring to non-physical assets such as brand trademarks or technology patents.

Audit: An official examination of your account statements to ensure they have been completed accurately and fairly.

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

Balance sheet: A written statement detailing a company’s assets, liabilities and capital at a certain point in time for a particular period. It also details the balance between income and expenditure.

Billing: Sending invoices to customers, clients or suppliers who have bought your goods or services.

Cash flow and cash-flow forecast: The amount of money coming in and out of your business. Keeping a close eye on it can help you plan future growth and avoid falling into arrears with payments.

Cash conversion cycle: The time taken to convert cash from your operations into cash generated from sales.

Comparative analysis: Compares financial statements for two or more time periods.

Consolidated financial statements: The combined financial statements of a parent company and its subsidiaries.

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

Credit notes: A business sends this to a buyer if a mistake has been made on an invoice or if goods need to be returned.

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: Money taken from post-tax profits and distributed to shareholders.

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

Earned income: Money that comes from paid work.

Equity: A share of a company.

Fiscal year: Businesses choose a 12-month period as their accounting year.

Fixed assets: Vehicles, machinery or property with a lifespan of over 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.

Gross profit: The total revenue of a business minus cost of sales.

Gross margin: The difference between how much a product or service costs and what it is sold for.

Incorporated: This is the date that a business is legally established.

Ledger: Books which contain all your financial accounts details.

Liabilities: The debts owed by one business to another.

Maturity: When a debt such as a loan is due to be repaid.

Net: Your financial status after expenses and deductions have taken place. Used in net worth, net income and net profit.

Operating risk: This is 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 a 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: Put in your accounts to cover a future liability.

Reserve account: A business can set aside an amount of funds from its 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: The amount of money gained versus the cost of an investment.

Segmental reporting: Separate your divisions for individual reporting.

Straight line depreciation: The expected wear and tear of an asset.

Unearned revenues: The 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 value reduction of an asset.

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