Getting to grips with all of the bookkeeping terminologies might feel a little overwhelming at first, but it’s actually quite simple once the terms are broken down into much simpler definitions for everyone to understand. To help you keep detailed records of your financial transactions and actually understand what the stuff that actually matters to you means, we’ve compiled an easy-to-follow glossary below.
Accounting Period: The time period for which financial information is being tracked, usually done monthly.
Accounts Payable: When a company buys goods which need to be paid back quickly, it’s known as accounts payable - basically money owned by a company to creditors.
Accounts Receivable: This is money owed to your business by a customer for products and services.
Arrears: Money owed to you or that you owe which is overdue and unpaid.
Assets: All items owned by a company which helps them run it. This includes money, equipment, buildings, vehicles etc.
Balance Sheet: A report which breaks down your business’ financial situation. It includes the assets, liabilities and the capital of the business. Overall, a balance sheet helps to show what your business owns and owes.
Billing: Sending invoices to your customers that have purchased services or goods from your business.
Bookkeeping: This term refers to the process of keeping records of the financial affairs of your business.
Budget: A financial plan created which estimates how much a business will earn, detailing what the money will be spent on during the upcoming year.
Capital: The money which personally belongs to the business owner.
Cashflow: The process of the money which goes in and out of the business.
Chart of Accounts: A full list of accounts used in a business to categorise financial transactions. It includes assets, liabilities, equity, income, cost of goods sold and expenses.
Closing Balance: The positive or negative amount of money that stays in your account at the end of the accounting period, either at the end of the month or year.
Costs of Goods Sold: All of the direct money that’s spent to make or buy the goods or services a company plans to sell to its customers.
Creditors: The people or businesses your company owes money to.
Debtors: The people or businesses that owe you money.
Deductible: Expenses that are claimed as business expenses. They reduce business profits but also reduce the amount of income tax owed.
Depreciation: How much the value of a fixed asset reduces over time. Depreciation accounting focuses on the process of how much value will be lost over time.
Equity: The amount business owners contribute to the business from their personal fund less how much has been withdrawn for personal use.
Expenses: Any costs that come about for the purpose of keeping the business running.
Factoring: Receiving money instantly from a finance company without having to wait for customers to make a payment.
Financial Statements: Reports that are made to show how well a business is doing and its value, making it easier to calculate the amount of income tax that needs to be paid.
Gains and Losses: Any losses a business might suffer through foreign currency transactions, sale of assets and other capital transactions.
Gross Profit: The profit figure of a business total revenue minus the direct cost of any sales.
General Ledger: The books where all of a company’s accounts are summarised.
Income Statement: A financial statement which outlines a business’ financial activity (sales less expenses and costs) over a certain period of time, ending with the net profit or loss.
Interim Reports: Financial reports that are produced before the year has ended. This helps business owners, banks and loan companies understand how well a business is doing throughout the year.
Inventory: An account which tracks all of the products that are going to be sold to customers.
Journals: This is where bookkeepers keep records of daily transactions.
Liabilities: Liabilities are all of the debts a company owes such as loans and unpaid bills.
Loss: When the gross income is less than the outgoing expenses, then a loss has been made.
Margin: This is the difference between the selling price of goods and the cost price. You might buy something for £50 and sell it for £100, so the margin would be £50.
Net Profit: This is a result of deducting business expenses from the gross profit.
Opening Balances: If you want to transfer your accounts from one system to another, or one year to the next year, you’ll need to post the closing balances from one to the opening balances of the other.
Overheads: Ongoing business expenses that help companies operate on a day to day basis. This includes things like rent, wages, phone bills and more.
Payroll: The way a company pays its employees. This involves reporting many aspects to the government such as taxes to be paid and compensation.
Petty Cash: A small amount of cash that’s kept to buy your everyday items such as supplies, stationery, stamps and more.
Profit and Loss: A financial report which shows the revenue and expenses over a period of time.
Purchase Ledger: Records of the purchase and expenses, showing a list of every invoice and how much a business owes.
Reconciliation: When you compare two sets of records to make sure they’re both the same. For example, comparing a bank account with a cash book.
Remittance: An amount of money that a business sends to customers for goods and services. This is a document which is submitted with it.
Retained Profits: Money that’s kept in the business rather than paid to owners and shareholders.
Revenue: The amount of money a business receives. It’s shown at the top of the profit and loss account report.
Sales Ledger: A record of all the sales for every customer with all of their details recorded.
Subsistence: Money which is paid to cover travelling on business, overnight stays and other expenses related to a trip.
Turnover: The value of services or goods that are sold in a specific time period.
VAT: Value Added Tax. If you’re registered VAT then you’ll need to add VAT to your sales invoices so you can claim back from purchases.
Write Off: This refers to any debt from customers that businesses don’t expect to be able to collect, so it needs to be written off from the sales ledger.
Undeposited Funds: Payments that have been received by cash, cheque (yes, people still use those) or credit cards that are yet to be paid into the bank.
Year-End: The end of a financial year where accounts need to be produced at the end of each year.
Get Started With Making Tax Digital
Now that you know the basic definitions of the most popular bookkeeping terms you’ll come across often, it’s time to take the next step so that you’re ready for the Making Tax Digital deadline.
We are in the process of creating a Making Tax Digital summary sheet for you to use whenever you feel necessary. Keep your eyes peeled as this will be available for you to download soon!