Basic accounting terms 101

Whether you’re a startup, a sole trader or a growing business, getting to grips with your bookkeeping and accounts can be a daunting task. But with a few key terms under your belt, keeping on top can be that bit easier.

We’ve broken down some basic accounting terms for you, and sorted them into a (very) rough accounting journey. Of course all business’ accounts vary, but this guide aims to get you started.

Still struggling with something specific? Give us a call – we’d love to help.

Revenue

The amount your business earns before paying its expenses, typically the money received from the sales of goods and services.

Expenses

Expenses are monthly costs that help to keep your business running. They can be broken down into:

• Fixed: expenses that remain the same, short-term, regardless of fluctuation in sales. For example, lease and POS system payments.
• Variable: an expense that varies in proportion to sales and production, including salaries and materials.
• Operating: expenses that aren’t directly related to the production of your goods or services. This might consist of legal and financial fees or travel costs.

Creditors

Any supplier, service provider or vendor providing goods or services to your business. For example, the company who sources your raw materials.

Accounts payable (AP)

Money that’s owed by your business to your creditors. This could be an invoice for a delivery of raw materials.

Net income

Also known as your net profit. Your net income is what’s left after you’ve removed your total expenses from your total revenue.

Assets

Resources owned by your business. These can be current assets, which are expected to be used within a year, for example raw materials. Or they can be non-current assets, which you expect to hold for over a year. With non-current assets, think investments, for example.

Liabilities

Your business’ debts and obligations. Liabilities differ from expenses, and they’re typically longer term debts than monthly expenses. For example, a liability could be a long-term loan or your employees’ wages.

Balance sheet

The balance sheet is how much the business owns (it’s assets), how much it owes (it’s liabilities), and the amount left over for its owners (equity).

Financial statements

Year-end reports compiled at the end of each financial year. Your financial statements indicate how well the business is doing and its value. They’re also used to calculate the income tax owed. Bookkeepers need to have reconciliations completed, transactions recorded, sales taxes and PAYE processed and all paperwork available for the statements to be completed.

Cloud accounting

The most secure way to manage business accounts is to keep them online, in the cloud. Data and software is encrypted and protected, and is accessible by you anywhere, anytime, from any device.

Forecast

An estimate of your business’ future performance and position. It’s typically based on financial statements and stated assumptions.

Dividends

When your business distributes profits to your shareholders. This money is only taken from the pot remaining after all expenses, liabilities and taxes have been paid.

If you’re looking for some accounting support, we’d be delighted to help. We’re a friendly team of accountants and business advisors who are passionate about helping businesses of all shapes and sizes. We’re all about making your life easier by giving you the knowledge and tools you need to make your business fly.

Get in touch.