While online accounting systems like Xero, Quickbooks or Sage help automate many tasks, knowing the most essential accounting terms is necessary to hit the ground running. The following list will give you an idea about some terms used in accounting and bookkeeping that you should get familiar with to be able to handle your business’ taxes on your own.
Accounting period - The time period in which financial information is being tracked. Most businesses track their financial results on a monthly basis, so each accounting period equals one month. Other businesses choose to track financial results on a quarterly or annual basis. Businesses that track their financial activities monthly usually also create quarterly and annual reports.
Accounts payable - The account used to track all outstanding bills from vendors, contractors, consultants, and any other companies or individuals that the company purchases things from.
Accounts receivable - The account used to track all customer sales that are made by store credit. This doesn’t refer to credit card sales, but rather to sales in which the customer is given credit directly by the store and the store needs to collect payment from the customer at a later date.
Assets - All the things a company owns in order to successfully run its business, and are owned outright without lien or loan, such as cash and investments, buildings and property, accounts receivable, warehouse inventory, equipment and supplies.
Balance sheet - The balance sheet is an important aspect of business as it records the basic accounting formula of assets. The financial health of the business can be seen from the balance sheet as it presents a snapshot of the company’s financial position at any point in time
Bills vs expenses – When you add business costs to your cloud accounting software, you’ll need to select whether they’re bills or expenses. If the cost has been paid for already, it’s an expense, and if it is still to be paid it’s a bill. You would typically receive an expense as a receipt and a bill as in invoice.
Bookkeeping vs Accounting – Accounting is a fairly broad term and includes bookkeeping, analysis and tax advice, whereas bookkeeping on its own refers to all things involved in ensuring company tax records are in order.
Business expenses – Generally, the amount of taxable income equals company revenue minus allowable expenses. This means that the more expenses you claim, the lower the tax. You can only claim business costs that were incurred “wholly and exclusively” in relation to your business.
Cash vs Accrual Accounting - Some smaller businesses can use the cash basis method of accounting. The income of a business is recorded as any payments arrive and business expenses are recorded as they’re paid. Accrual accounting is a more popular method and is based on receiving and issuing documentation (e.g. invoices), rather than payments.
Cost of goods sold - The sum of money a company spends on making or developing products for their customers
Dividends - Small business owners have the option to pay themselves through dividends. These are payments made to company shareholders based on the company’s profit. The main difference between this and a salary is the level of taxation and social security contributions.
Equity – This is all the money invested in the company by its owners. The equity is shown differently depending on the business size. Small businesses show equity in a Capital account, whereas larger businesses show their equity in shares of stocks.
Expenses – The money spent by the company that isn’t directly related to the sale of individual goods or services
General ledger – This is where all the company’s accounts are summarized, and it contains the balance sheet and the income statement accounts. Here all business transactions are recorded, including sales, credit purchases, office expenses and income losses.
Gross margin - Gross margin or profit is the total number of sales that have been made, subtracted by the associated costs, such as manufacturing costs, wholesales costs, material, and supplies.
Income statement - The financial statement that presents a summary of the company’s financial activity over a certain period of time, such as a month, quarter, or year. The statement starts with Revenue earned, subtracts the Costs of Goods Sold and the Expenses, and ends with the bottom line — Net Profit or Loss.
Interest - The money a company needs to pay if it borrows money from a bank or other company. For example, when you buy a car using a car loan, you must pay not only the amount you borrowed but also interest, based on a percent of the amount you borrowed.
Inventory - The account that tracks all products that will be sold to customers.
Invoice - An invoice is one of the most common business documents that companies use. They are issued after the sale but before the payment. It works as evidence for the transaction, listing all details, such as company names, product or service description, dates, amounts, taxes, and payment details. They can be issued using a spreadsheet or online software.
Invoice vs Receipt – Invoices tend to be more common, however sometimes you’re expected to issue a receipt, and thus it’s essential to know the difference. Invoices are issued as a request for payment, meaning that they’re sent to the buyer after the sale but before the payment. Receipts, on the other hand, are issued as an acknowledgement for payment – after the money arrives.
Journals – This is where bookkeepers keep organised records of daily company transactions. Each of the most active accounts - including cash, Accounts Payable, and Accounts Receivable - has its own journal.
Liabilities - All the debts the company owes, such as bonds, loans, and unpaid bills.
Loss – This is when a service or product sells for less than what it cost to supply or manufacture it, or when expenses have exceeded revenues of a particular asset.
On credit/on account - On credit or on account means that products or services have been sold with the use of credit. Payment has not immediately been provided for these items, and there may be interest charges involved with the payment.
Payroll - The way a company pays its employees. Managing payroll is a key function of the bookkeeper and involves reporting many aspects of payroll to the government, including taxes to be paid on behalf of the employee, unemployment taxes, and workman’s compensation.
Receipts – This is the total amount of cash collected in business transactions over the course of one day, excluding other non-cash revenue.
Revenue – This is all of the money that’s collected in the process of selling the company’s goods and services, or through other means such as selling assets the business no longer needs or earning interest by offering short-term loans to employees or other businesses.
Self-employed vs Limited Company - One of the most important decisions that all business owners need to make at the very beginning is whether to start as a sole trader (self-employed) or as a limited company. While self-employed have fewer responsibilities, limited companies may seem like more reliable business partners especially for companies looking to establish long-term relationships.
Tax records - Tax records are all of the documents related to how taxes are calculated including all documentation related to income tax, VAT, sale invoices, sale receipts, expense-related documentation, records on company assets, bank statements, as well as employee records.
Trial balance – This is how you test to be sure that all books are in balance before you end the accounting period and pull together information for the final financial reports. The trial balance is recorded in the general ledger and includes debits and credits.
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