Hello and welcome back for part 2 of my latest series, jargon-busting for bookkeeping. If you missed part 1, don’t worry, you can read it here. If you’re all caught up and ready to go, then let’s dive back into the A-Z of bookkeeping jargon and what it all means. Starting with D!
Double-Entry
A system where every transaction has equal debit and credit entries. This type of accounting means that every transaction is recorded twice, and is one of the most accurate ways of accounting, since it’s easier to detect mistakes or fraud than single entry.
Drawings
Essentially just withdrawals from your bank accounts. This is usually when you transfer money from the business account to the personal one, but it can also be used for transactions for personal items that are made from your business account. Drawings are mostly used by sole-traders, while directors will use a Director’s Loan account.
Financial & Fiscal Year
These two terms are often used interchangeably, despite being different things. So let’s clear some confusion up here.
- The financial year runs for 12 months at a time, and applies to any businesses that pay corporation tax, like limited companies. It dictates when you’re expected to submit tax returns and VAT returns, and your annual company accounts. Companies can choose their own financial year, but most choose the 1st April to the 31st March to match government tax cycles.
- The fiscal year, on the other hand, runs from the 6th of April to the 5th of April the following year. It’s just another word for the tax year – that’s all!
General Ledger
The main book or software file holding all of your financial accounts. This used to be a big physical book, which is where it got its name. Nowadays its often the accounting software a business uses, since it combines all financial movements into one place.
Invoice
A document you send out to customers detailing the product or service you’re providing, the cost, when payment is due and how payment should be made. This document is used in both your accounts to show where your earnings are coming from, and in your client’s accounts to show what their expenses are. I gave a detailed rundown of what your invoices should include last month, which you can read here.
Liabilities
Debts or money or other financial responsibilities that your business owes to others. There are many different forms this could take, like hire-purchase agreements and bank loans down to unpaid invoices from your suppliers.
Limited Company
One of many ways you can structure a business, and one of the most common. A limited company is separate from any of the individuals working in and running it. These people are known as shareholders and directors. The benefit of this structure is that if the company runs into legal trouble, the directors and shareholders couldn’t be held personally liable. For example, if the company were to go into debt, the shareholders couldn’t be pursued for payment of those debts. Even if the company only has one individual as a director and shareholder, that company is a separate legal entity.
Limited Liability Partnership (LLP)
Another of the four main business structures. A Limited Liability Partnership (which is also known as an LLP) is a structure where each individual partner running the business has limited liability. It’s in the name really!
It’s closer to a limited company than a traditional partnership, because in a traditional partnership the liability falls on all of the partners equally, because the partnership itself doesn’t have a separate legal identity. In an LLP, the partnership is a legal entity in its own right, so has its own liabilities. That means that the individual partners of the LLP aren’t liable for the entire debts of the LLP. This is a very common business structure for legal firms, as a way to protect individual partners from any issues caused by other partners’ advice or actions.
Overheads
There are indirect, ongoing business expenses that keep your business running, but aren’t tied directly to making a specific product or service. This can include things like rent, insurance and utilities – things that your business has to pay as a baseline whether your business makes a sale or not.
Partnership
The third type of business structure. A partnership is an agreement between two or more people to enter into a shared business together. It’s a less formal agreement than a limited company, and when set up each of the partners will have a share of ownership in the business. This is usually split into percentages that are agreed on by all. That doesn’t have to be 50% each, or split equally if there’s more than one partner.
Profit
The amount of money you make in your business. It’s usually split into gross profit and net profit, which helps you understand how much it costs to run your business as well as determine the value of your business. Profit is split into two types:
- Gross profit is your total turnover for the period, minus the cost of sales.
- Net profit is the amount of money your business has made once all of the other expenses have been removed. So once you’ve paid the cost of sales and anything else you need to run your business, your net profit is what’s left.
Reconciliation
This is the process of matching up your transactions to your bank statements and bank balance. You’ll need to reconcile your books regularly, either monthly or quarterly, to make sure you’re staying on top of payments in and out, and so that you know how well your business is performing.
Self-Assessment
This is the system that HMRC uses to assess and collect tax from sole traders and the self-employed. It’s often just referred to as your tax return, and it needs to be filled in and submitted by the 31st of January every year.
Sole Trader
The final of the 4 main business structures. A sole trader is someone who is the only person responsible for their business, operating on their own. They’re the exclusive owner, responsible for all of the liabilities, and entitled to keep all of the profits after tax.
Trial Balance
This one is more of an internal accounting report, and it lists all of the general account balances in two columns, debts and credits, to verify that the total debts equal the total credits, and everything balances. It’s essentially a mathematical check before preparing for any final statements you might want to run.
Turnover
The total income a business makes from selling goods or services. It can also be called gross revenue of total sales, depending on who you talk to. It doesn’t include sales tax or VAT, customer discounts, loans, money from investors or selling old business equipment.
VAT
VAT stands for Value Added Tax, and it’s a tax that’s applied to most goods and services in the UK at the point of sale. Not all businesses have to be registered for VAT – you have to meet certain criteria, and there are a few different VAT rates that apply depending on the type of business you run, what you sell and who you’re selling to. You can also register for VAT voluntarily, which many companies do for different reasons. Once you become VAT registered, you have to charge VAT on all relevant sales, and to pay VAT to HRMC on a quarterly basis. Because the VAT you charge isn’t your money, it needs paying back. A common way to manage this is to set up a separate bank account just for your VAT payment, and transfer the VAT charged directly into it when invoices are paid. You can also reclaim some VAT you pay on purchases. And here we are at Z! I hope this guide has been helpful, if only to make some of the jargon-filled articles about bookkeeping a little easier to understand. If any of this is still confusing, or it’s raised questions about how you do things in your own business, I would be more than happy to help. Just get in touch with me using my contact form, and book your free consultation.