It’s no secret that accounting and bookkeeping have a lot of jargon floating around. Even working within the industry, there’s an awful lot to keep up with, and sometimes even I have to look up a term or two! So I find it baffling that some bookkeepers expect their clients to understand what they’re talking about straight off the bat. The way I see it, it’s my job to make sure my clients understand their business numbers and financial position in the best way possible, which means speaking in plain, easy to understand English. Which is why today I’m going to take you through the A-Z of bookkeeping jargon, and what it all means. Even if you think you know a lot of it, give it a read, you never know you might learn something new!
Accounting Period
First up, your accounting period. This is any time frame you use for financial reporting. Most businesses will have an accounting period of 12 months, but some will start a new accounting period every 6 months or every quarter. Any transactions that fall within that date range will form your statements and reporting for that period.
Accounts Payable
This is the name for any expenses that you’ve built up and that haven’t been paid yet. For example, if you order some stock and pay for it on delivery, the amount you owe the supplier will sit in ‘accounts payable’ from when the invoice is raised until it’s paid. Keeping on top of this means you’ll avoid late payment fees from suppliers.
Accounts Receivable
The other side of the coin, and the complete opposite of accounts payable. Accounts receivable is the money that’s currently owed to you. This includes any sales or commission that you’ve made that you haven’t been paid for yet. Once the money has been paid, it’s moved out of accounts receivable.
Accrual
Another account that’s similar to the last two. This is where any revenue or expenses that have been earned or incurred but haven’t been paid for or paid to you sit. It’s usually reserved for things like interest. For example, if the company has a savings account that earns interest, the interest that’s been paid would be recorded as an accrual on the company’s financial statements.
Assets
Anything that your business owns that has monetary value. That includes things like cash in the bank, stock, vehicles, property, assets, equipment and more. These assets are kept track of on a central register for your whole business. The might lose value (or depreciate) over time, and when their value reaches zero they’re ‘written off’ and taken off the asset register.
Balance Sheet
This is a financial statement that gives a report on your business:
- Income
- Expenditure
- Assets
- Liabilities
- Equity
Don’t worry, I’ll go through all of those terms later! Your business will usually only need to prepare a balance sheet once a year to cover the 12-month period, but they can be generated to cover any time period of accounting period to give you a clearer overview of your business’s health.
Business Entity
This is the term used to describe any organisation or company that has been formed to conduct business. There are 4 broad categories that your business can fall into:
- Sole trader
- Limited Company
- Limited Liability Partnership
- Partnership
I’ll go into what each of those is in part 2!
Capital Asset
These are a type of asset that will be useful to your business over a long period of time. Usually this is more than 2 years. To be classified as a capital asset, it must also cost more than your day-to-day running costs. Capital assets are usually large or expensive pieces of equipment, or investments.
Capital Allowances
When you buy a capital asset, you might be eligible for Capital Allowance. This makes your purchase a tax-deductible expense, and it saves you money. Yay! There are some requirements the asset has to meet to qualify for capital allowances, so make sure you check with HMRC or your accountant before you buy.
Capital Gains Tax
If you sell or dispose of an asset that’s increased in value since you bought it, then you’ll be expected to pay capital gains tax on the profit you made from that sale or disposal. This tax is only applied to the profit portion, not to the complete value of the sale.
Cash Basis Accounting
This is a type of accounting that includes your income and expenses based on the dates that money was received or paid out. It’s most popular with sole traders and partnerships, because you don’t pay tax on any money you haven’t actually received. So, if your business tends to send big invoices at the end of the year, it can be a good way to save money, because you don’t have to pay tax on invoices that haven’t been paid yet.
Confirmation Statement
A document that all Limited Companies and Limited Liability Partnerships are required to submit to Companies House every year. It contains all of the details of partners, directors and shareholders, what their share of control is in the business, and some other basic information on your business. This will need to be reconfirmed every 12 months.
That’s all I have time for today, I don’t want to overload you too much! I’ve split this post into two parts, so keep an eye out for part 2 coming soon. If you have any of the questions about the terms I’ve covered so far, just get in touch with me today, and I’ll be happy to help.