Even with a great accountant by your side, having a working knowledge of industry terms can really come in useful. So to help you out in that regard, we’ve put together this article on key accounting definitions, which serves as a vastly more convenient and slightly more entertaining alternative to the dictionary. “Enjoy” the read and we’ll see you on the other side.
Accounts payable – Money that a company owes suppliers for goods or services.
Accounts receivable – Accounts receivable is money that suppliers owe a company for goods/services.
Accounting period – This refers to any timespan used for financial reporting; any transactions that occur during said time are considered to be part of the accounting period. Note that you’ll invariably have multiple accounting periods to juggle at once e.g. an annual accounting period for tax returns, monthly accounting periods for board meetings.
Accrual – (Yup, 4 in and we haven’t made it past ‘‘acc’’ yet 😅. Don’t worry, the pace picks up soon!) This is where work has been completed, but cash hasn’t yet been exchanged between the relevant parties.
Arrears – Where payment deadlines for a debt have been missed, the owing company is said to be in arrears.
Assets – Things with monetary value (e.g. machinery, buildings etc.) that a company owns. This can be intangible stuff too, such as trademarks or copyrights. Bit gutting to consider childhood icons like Tony the Tiger and The Honey Monster in such brutally capitalist light, but that’s the unfortunate legal reality.
Bad debt – This refers to owed money that is unlikely to be paid. A “good debt” pun here is a little *too* obvious, so I’ll spare you the unfunniness and move on.
Balance sheet – A document onto which assets, liabilities and shareholder equity (we’ll come onto the latter two in a bit) are recorded. Balances sheets are great for gaining insight into a company’s financial position.
Basic rate tax – This is the percentage charged on annual earnings above the Personal Allowance (£12,750) and below the higher-rate tax band (£50,270). The percentage payable on salaries falling between these figures is 20%; for dividends, it’s 7.5.
Benefits in kind – Many companies choose to attract workers by offering “perks” in addition to salary. These perks classify as benefits in kind provided that there is a personal element attached to them e.g. licence to flaunt the company Fiat outside of work hours. Benefits in kind are almost always taxed, with the taxable amount depending on the exact nature of the benefit.
Book value – The value at which an asset is entered on the balance sheet.
Cash flow – This is the money that comes in and out of a company at a specific point in time. Cash flow can be positive or negative depending on whether more money is going in or out.
Corporation Tax – Eligibility is generally considered a good thing, though Corporation Tax is a notable exception. If you own a limited company that turns over a profit, then you’re legally obligated to cough up 19% of that money as CT.
Creditors – Individuals or businesses that a business owes money to. Consequences for not paying creditors on time can range from whiny messages being attached to Paypal invoices (my sister) to credit rating damage (more serious enterprises).
CT600 – Whilst it might sound like the name of Star Wars’ newest droid, it’s actually the number reference of the Company Tax Return form. If you’re eligible for Corporation Tax, you’ll need to complete a CT600 every financial year.
Debtors – Individuals or businesses that owe a business money.
Deductible – An expense that can be removed from taxable income e.g. advertising. It’s worth highlighting that this is NOT tax fiddling, but an entirely legitimate way of reducing tax costs.
Deprecation – Oh, for a writer that could spell!
Depreciation – Where an asset decreases in value over time due to wear and tear, outdatedness etc.
Dividend – A sum of money issued by limited companies to their shareholders; the amount received depends on the number of shares held. Note that even in bumper years, there’s no obligation for companies to pay dividends – though shareholders would probably be a little peeved. I guess thank you notes don’t cut the mustard anymore.
I did think about defining ‘’expenses’’ here, but the novelty of a blank letter space was too appealing to ignore.
Fun recommences with…
Fair value – This refers to the expected price of an asset should it be sold on an open market.
Fixed asset – Buildings, machinery, equipment etc. that a company owns, earns money from and isn’t expected to sell within 12 months.
Goodwill – Intangible assets that a business pays for when it purchases another e.g. reputation, trade secrets, skill of management team. Note that goodwill doesn’t work on a “create your own” basis; instead, the purchasing company propose a goodwill value within their overall offer package.
Gross profit – Total profit minus the direct costs (e.g. inventory).
Higher-rate tax – My pipedream: I’ll need to earn between £50,171 and £150,000 for it to even be applicable. If you’re lucky enough to earn between those amounts, the taxman will take 40% of that portion as higher-rate tax.
Income – Money coming ‘in’ to a business.
Insolvency – When a person or company is unable to pay their debts on time i.e. a natural consequence of buying up the green properties in Monopoly.
Interim reports – Financial statements created during the tax year. When completed accurately and (somewhat) regularly, these can indicate whether or not you’re on track with any end of year goals.
Nope, nothing here.
Liabilities – Any financial responsibilities a company has (e.g. a bank loan).
Making Tax Digital (MTD) – This is a government initiative designed to digitise the tax process and allow returns to be completed with greater speed and accuracy. For some types of types of return (e.g. Corp. Tax), it’ll be a few more years before MTD comes into play, though it’s mandatory as of now for VAT returns. Currently, it seems as though MTD is being better received than the soundbitey title and software literacy concerns might suggest.
Margin – The percentage of a product’s sale price that can be classified as profit. I can’t think of a way to liven this one up, so it’s a bit of a lame duck to end on I’m afraid.
Interested to see letters N-Z of the accounting definitions?
Our jargon-busting sequel of ‘’Jaws: The Revenge’’ proportions can be found here.
Thanks for reading,