What does it mean? Accounting terms explained
If you have questions about accounting terms then you’re in the right place! When you start managing your finances there’s lots of new accounting terminology to learn. From assets to turnover, find all the definitions you need to know as you get to know accounting.
Accounts payable (also known as purchase ledger)
A register containing information on which invoices have arrived from which suppliers, which have been paid and other information about the suppliers. This is money you owe.
Accounts receivable (also known as sales ledger)
Information on money your customers or other third parties owe you, such as outstanding invoices that have yet to be paid to you. Find out more about accounts payable and receivable.
Accrual VAT method
To do the accrual VAT method, you account for all invoices in your VAT Return on the date of the invoice and not the date the payment is made.
Recording financial transactions, which is part of accounting.
Allowable expenses are running costs for your business that can be deducted from your Self Assessment tax return. Some expenses are allowable, but some aren’t, like private purchases. Find out more about what you can claim as allowable expenses.
Balance sheet report
The balance sheet shows the company’s financial position at a certain point in time. You can see which assets are financed by equity and what liabilities you have. Find out more about your balance sheet report.
Budgeting is the ideal expectation of how much revenue your business will generate, usually over an annual period. Your budget should include the position you want to reach with your revenue, expenses and cash flow. Find out how to create a budget.
Capital has a couple of different meanings depending on how it's used.
- Capital in business: When you start a business, capital refers to the money you invest in the business to get it going.
- Working capital: Working capital is the money a business has available to pay for short term operating expenses including day-to-day costs.
- Capital in accounting: In accounting, capital refers to the assets and cash in the business.
Capital Gains Tax
Capital Gains Tax is paid when you dispose of an asset that has increased in value. You pay tax on the increase in value of the item on ‘chargeable assets’, whether you own it with someone else or on your own. Find out more about what you pay Capital Gains Tax on.
Cash flow is the money moving in and out of a business. Cash enters the business from your sales of goods or services, and cash leaves as a range of expenses for your business. Find out more about cash flow.
Cash VAT method
When you use the cash VAT method, you account for all the invoices in your VAT return on the date of the payment, not the date on the invoice.
Chart of accounts
Different types of accounts are used to register business transactions in your bookkeeping. All the accounts used by the company are collectively known as the chart of accounts. In Bokio, we use a predefined chart of accounts. Find out more about the chart of accounts.
Corporation Tax is paid on your profits if you run a limited company. You need to make sure you register for Corporation Tax separately. Find out more about Corporation Tax.
Debit and Credit
In double entry bookkeeping, there is a debit side and credit side. All debits must equal all of the credits for all transactions recorded. The debit column is to the left and the credit column to the right. There’s also a basic rule: “Assets increase in debit, while liabilities increase in credit”.
Depreciation is the method of spreading the cost of tangible fixed assets over their useful lifetime. Find out more about depreciation.
Dividends are payments you might receive if you own shares in a company. For example, as a shareholder of a limited company. They are normally paid annually, and come from the profits of the company. Find out more about dividends.
Double entry accounting
When you do double entry accounting yYou create bookkeeping records in different accounts in the chart of accounts. Each transaction is recorded with both a debit and a credit.
The difference between the value of the assets and the value of the liabilities of a company is described as equity. Find out more about equity.
Expenses are money spent by a business in the hope of creating revenue. Find out more about expenses.
A fiscal year is a period that a business uses for accounting. Once you have set the fiscal year in Bokio, it will be selected automatically when you date your accounting entries. You’ll also get notifications when your fiscal year is about to end. You will need to prepare year end accounts for this period or submit a Self Assessment tax return if you are self employed.
A fixed asset is something you have purchased for your business that has a long term life time in your company, and will be used for at least 3 years. Find out more about fixed assets.
Flat Rate VAT scheme
The Flat Rate scheme allows you to pay a fixed rate of VAT to HMRC. To qualify for the scheme you need to have a taxable turnover of £150,000 or less. Find out more about the Flat Rate VAT scheme.
Forecasting is the process of estimating how much income and expenses you will generate in the future. It’s usually done more regularly than creating a budget, as forecasting will be affected by any changes within the company. Find out more about forecasting.
Income tax is paid on your earnings, regardless of how you’re employed. If you’re not a PAYE employee you will pay your income tax by submitting a Self Assessment tax return, then paying the amount of income tax that is calculated.
IR35 is off-payroll working rules for clients, workers (contractors) and their intermediaries. IR35 makes sure that contractors pay about the same tax and National Insurance contributions as they would if they were an employee. Find out more about IR35.
Your journal in accounting is a record of all of your transactions in chronological order. Find out more about your journal.
Your ledger is a summary of financial accounts for the fiscal year. Find out more about the general ledger.
Your company’s debts which you owe are known as liabilities. These could include unpaid invoices and loans.
Liquidity describes how much you could pay off your current debts (liabilities) with your current assets. Find out more about liquidity.
Opening balances are the amount of money in an account. It is usually brought forward from an accounting period. Find out more about opening balances.
Making Tax Digital
Making Tax Digital is the process of submitting your VAT Return online using digital records. Businesses with a turnover of over £85,000 need to comply with Making Tax Digital. You need to register online for MTD, and make sure you are submitting your VAT Return with compatible software. Find out more about Making Tax Digital.
If you don’t comply with certain rules, submit your tax return late or make a ‘careless’ mistake, you can face a penalty. This depends on what you did wrong and what kind of tax you were paying, but it could be a fixed payment of a certain amount or a percentage of the tax due. Find out more about late filing penalties.
Profit and loss report
The profit and loss report shows the profit or loss for a specific period by adding up all the income and subtracting the expenses. This report gives you an insight into where your money is going. Find out more about how to use your profit and loss report.
Small business rate relief
Small business rate relief offers either a discount or the opportunity to not pay business rates on a property with a low rateable value of under £15,000. Generally it only applies if you have one property, but there are some exceptions. Find out more about small business rate relief.
Supplier invoices are issued by sellers, known as ‘suppliers’, for goods or services you have purchased for your business. Find out more about supplier invoices.
Your tax band is based on your taxable income. Which band you are in affects the rate of income tax you pay.
Trial balance report
The trial balance report lets you see a breakdown of all accounts in a debit and credit format for a particular period. It’s a great place to start when doing your year end accounts. Find out more about your trial balance report.
Turnover is the total of your revenue (sales) within a certain period of time. It can also be described as your income. Find out more about turnover.
Manage your finances with Bokio
With Bokio accounting software, you can do your bookkeeping and invoicing in the same place. We have everything you need to help you prepare for your Self Assessment tax return, submit your VAT Return for Making Tax Digital and keep the right financial records. If you need an extra hand, we can help you find an accountant to work with.
Accounting is kept simple with Bokio, so you have more time to spend running your business.
This article was updated August 2022