Accounting terms explained

Key Accounting and tax terms explained to help you run your business effectively

Startup owners usually lack sufficient funds to hire a financial expert in the initial stages of their business cycle. Having access to a strong foundation can be extremely useful when faced with complicated business and tax decisions. Our in-house accountants have curated this guide to help you understand the accounting and tax terms you should know to run your business effectively.

Managing the finances of a startup can become very confusing. It’s advisable to speak to an accountant or a competitive startup accountant if you are just starting up and would prefer some hand-holding.

Related: You can also outsource your bookkeeping and accounting function to let you focus on what actually matters growing your business. Read more about how outsourcing can help you grow your business.

We will be discussing all the essential accounting terminologies that you should know about below:

1. Accrued expense: Accounting for an expense that has been incurred for providing a service but an invoice has yet to be received or payment yet to be made.
2. Accounts receivable: Accounts receivable is the balance money which is due for payment by customers of a business.
3. Accounts Payable: Accounts Payable is the account which lists all the expenses your company has incurred for buying goods and services from suppliers for which payment is yet to be made.
4. Accounting Period: Accounting period is a specified period in which businesses or their accountants prepare financial reports for every transaction that has been incurred in line with matching principle during that period.
5. Assets: An item or resource that has economic value to provide future benefit and is owned by the company. Assets can also help generate income, for instance, property on which you generate rental income or stock which can be sold to generate revenue. Assets have to be recorded and managed in different ways so it’s always good to contact a specialist on this issue.
6. Articles of Association: A detailed document that lays out the information on the company’s management, the appointed directors, and how the financial records will be kept and maintained.

In case of a limited liability partnership, it sets out every shareholder’s rights and percentage of ownership over the company.

1. Liabilities: The amount of money or debts owed by the company are its liabilities.
2. Audit: An audit is a systematic and independent procedure of examining the financial books of an entity to ensure the accuracy and validity of every transaction recorded in the financial statements. Auditors are regulated and provide their report to stakeholders they have been appointed to report to. You can check here if your company is exempt from audit or not.
3. Bad debt: The debt owed to the business which it is unable to recover. Bad debts are normally written off.
4. Balance sheet: A financial sheet that represents the financial position of a company in terms of its assets, liabilities and equities at a certain point in time.

Mentioned below is the equation that a typical balance sheet revolves around.

“Assets = Liabilities + Equity”

1. Cash flow projections: Cash flow projection is a statement which shows cash expected to flow into the business as revenues or out of business as expenses for a particular accounting period in the future.

1. Capital expenditure: Capital expenditures of a company is the cost incurred for buying and maintaining fixed assets like property, land or machinery.
2. Corporation tax: A tax levied on the company’s taxable profit for a particular accounting period payable to HMRC. Understand corporation tax in detail or hire an accountant to help you process your tax in order to save time and money.
3. Cost of goods sold: The cost incurred in the production of goods that are sold, for instance, labour wages and material cost.
4. Credit note: Also known as a credit memo, a credit note is a letter issued to the customer by the supplier or vendor. The credit note is used to notify the client about the amount credited either because of incorrect invoicing or provision of low-quality goods.
5. Current asset: Current assets are those assets that can be converted to cash and used in the business operations at short notice. Examples are cash, accounts receivables, and inventory.
6. Debit: Debit, listed on the left side of the column of account, is an accounting entry that either result in the increase of an asset or decrease in liabilities in the balance sheet of a company or an increase in the expenditure on the profit or loss.
7. Depreciation: Depreciation is the loss in the value of assets over time, due to wear and tear resulting by using the assets for business purposes.
8. Dividend: Dividend is the income that is paid out proportionally to the shareholders out of the company’s profits according to the shareholder’s percentage of ownership.

Related: Learn more about how dividends are taxed.

1. Entity: Entity is an organization that exists independently of its members, and has its own goals and objectives to meet.
2. Equity: Equity is the ownership of an asset that declares the percentage of ownership of a shareholder in the company. It is also the amount a shareholder would return if all of the company’s assets are liquidated, with all of the debts paid back.
3. Expense: An expense is the outflow of money which results due to the cost incurred to meet daily business requirements to generate revenues or run the business.
4. Financial Forecast: A financial forecast is to predict future financial circumstances for the business based on analysis of the company’s past and present data.

Related: Cash flow projections are the result of cash flow forecasting, which is very important for business success. Learn more about financial forecasting (Visual Infographic)

1. Gross profit margin: Gross profit margin is a measure used to evaluate a company’s financial health by showing the amount of revenue left after deducting the cost of goods sold in an accounting period. This margin tells how profitably a product is being produced.
2. Intangible fixed asset: Intangible assets do not have any physical existence and are used by the company for long-term benefits say for customer retention. Examples of Intangible fixed assets include goodwill, intellectual property and copyrights.
3. Inventory: Inventory is a stock of items held and stored by the company for sales or business operations.
4. Limited liability company: A company where the owners are legally responsible for the firm’s debt or losses only by the amount of capital that they invest in the business to get onboard. There are ways to issue shares effectively for an LTD.

Setting up the finance function of a limited liability company is a complicated process. Speak to an accountant or a startup accountant to help you set up an effective financial infrastructure for your company.

1. Liquidity: The degree to which the company’s assets can be easily and quickly converted into cash (by buying or selling) represents the company’s liquidity, also key when looking at loan covenants or gearing.
2. Memorandum (for a company): A company memorandum is a public legal document prepared during the formation of a limited liability company. It sets out the main goals and objectives of the firm and defines the shareholder’s relation with the company.
3. Netbook value: The value of an asset recorded by the company in its accounting records after factoring in accumulated depreciation and any amortization of that asset.
4. Net profit: The amount of money left that the company earns a profit after deduction of all operating expenses, interests, dividends and taxes from the total revenues.

“Net profit = Total revenue -Total expenses”

1. Net assets: Also referred to as equity, a net asset is the amount of retained earnings or profits generated by the company, after paying out all the liabilities.

“Net assets= Assets-Liabilities”

1. Ordinary shares: The shares which entitle the owners to their fundamental voting rights in the company and yields them a dividend income after the payment of dividends to preferred shareholders.

Related: Read all about shares and share structures if you are thinking about starting a new company.

1. Partnership: A business partnership is a particular type of formal agreement made between two or more parties or individuals to start and manage a business as co-owners. A business partnership also demands to share an agreed and fair percentage of profits between each partner. If you are thinking about running a partnership you can start here.
2. Profit and loss account: A financial statement that is a complete presentation of the company’s revenues, expenses and profits for a particular accounting period. Also known as the income statement, preparing profit and loss account is essential to determine whether the company is enjoying net profits or suffering from net losses.
3. Retained earnings: The profit remaining in the company’s account after paying out dividends to every shareholder on board. Retained earnings can either be positive (net profit) or negative (net losses). It also shows the amount of profit the company has earned to date.

“Retained earnings (beginning) + Profits/losses — Dividends = Retained earnings (ending)”

1. Share certificate: A legal document that certifies the shareholder’s ownership over the shares of a company is a share certificate.

1. Sole trader: Also known as a sole proprietorship, a sole trader is a type of business that is managed and run solely by a single individual and is not separate to the business owner.

Operating a business as a sole trader is very challenging and will be fruitful taxwise only in certain circumstances, our in-house tax accountants have been trained to help make you make the right decision in choosing a sole-trader or LTD structure.

1. Tangible fixed assets: Unlike intangible fixed assets, tangible fixed assets have a real physical presence and are utilized for running daily business activities and meeting long term goals and objectives, such as cars, machinery, equipment etc.
2. Turnover: Turnover of a company represents the volume of sales and revenues it generates by running its operations.

Clear House Accountants are expert Accountants in London providing tailored financial services to multiple businesses regardless of their size. Our in-house accountants help our clients expand and grow through our bespoke services which are designed around our client’s problems and pain points.

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