As cloud accounting providers, we feel strongly about eliminating jargon and making accounting simple and accessible for everyone.

In this spirit, we’ve compiled this handy guide to the most commonly used accounting terms for your reference.

Glossary of Accounting Terms

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Accounts payable – Amounts due for payment to suppliers of goods or services, also described as trade creditors.

Accounts receivable – Amounts due from customers, also described as a trade debtors.

Accounts – Financial statements prepared at the end of a period to reflect the profit of loss or the period and financial position at the end of the period.

Accounting period – Time period for which financial statements are prepared (e.g. month, quarter, year).

Accruals basis – The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate (see also matching).

Amortisation – Process similar to depreciation, usually applied to intangible fixed assets.

Articles of association – Document setting out the relative rights of shareholders in a limited liability company.

Assets – Something a business owns/uses, e.g. equipment or rights to a trademark.

Audit – An audit is the independent examination of, and expression of opinion on, financial statements of an entity.

Bad debt – It is known that a credit customer (debtor) is unable to pay the amount due.

Balance sheet – A statement of the financial position of an entity showing assets, liabilities, and ownership interest at a date.

Called up (share capital) – The company has called upon the shareholders who first bought the shares, to pay for their shares.

Capital – An amount of finance provided, generally by the owners or shareholders, to enable a business to acquire assets and sustain its operations.

Capital expenditure – Spending on non-current (fixed) assets of a business.

Cash flow projections – Statements of cash expected to flow into and out of a business over a particular period.

Companies Act – Legislation to control the activities and administration of limited liability companies.

Corporation tax – Tax payable by companies, based on the taxable profits of the period.

Cost of goods sold – Materials, labour and other costs directly related to the goods sold or services provided.

Cost of sales – See ‘cost of goods sold’.

Credit (terms of business) – The supplier agrees to allow the customer to make payment some time after the delivery of the goods or services. Typical trader credit periods range from 30 to 60 days but each agreement is different.

Credit note – A document summarising the reduction in charge on an invoice (bill), usually because the customer has returned defective goods or has received inadequate service.

Credit sale – A business entity sells goods or services and allows the customer to make payment at a later date.

Creditor – A person or organisation to whom money is owed by the business.

Current asset – An asset that is expected to be converted into cash within the trading cycle. Contrasting a Fixed asset that is held to use within the business long term.

Current liability – A liability which is expected to be settled in the entity’s normal operating cycle, generally within 12 months after the balance sheet date.

Debit (in bookkeeping) – Entries in the debit column of a ledger account representing increases in assets or expenses, or decreases in liabilities or income.

Debtor – A person or organisation that owes money to the business.

Deferred income – Income invoiced, or paid for, in advance of providing the service resulting in the income being deferred to a later accounting period, to when the service is provided.

Deferred taxation – Income & expenditure may be recognised at different time for accounting and tax purposes. Deferred tax is a way to balance this timing difference in the accounts.

Depreciation – The apportionment of the cost (or value) of a fixed asset against profits over its useful life.

Director(s) – Person(s) appointed by shareholders of a limited liability company to manage the affairs of the company.

Dividend – Amount paid to a shareholder, out of a company’s post tax profits, as a reward for investment in the company. The amount of dividend paid is proportionate to the number of shares held.

Drawings – Cash taken for personal use, in sole trader or partnership businesses, treated as a reduction of ownership interest.

Entity, entities – Something that exists independently, such as a business which exists independently of the owner.

Equity – A description applied to the ordinary share capital of an entity.

Expense – Generally the running costs of a business.

Financial statements – Documents presenting accounting information which is expected to have a useful purpose, commonly known as ‘the accounts’.

Fixed asset – An asset that is held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administrative purposes on a continuing basis in the reporting entity’s activities. Examples are equipment, vehicles, land and buildings.

Fixed cost – One which is not affected by changes in the level of output over a defined period of time.

Forecast – Forecast estimate of future performance and position based on stated assumptions and usually including a quantified amount.

Going concern basis – Financial statements are prepared on this basis assuming that the business will continue operating into the foreseeable future.

Goodwill – The excess of the fair value of a business and the value of the underlying assets recorded in the accounts. See also intangible.

Gross – Before making deductions.

Gross profit (or margin) – Sales minus cost of sales before deducting administration and selling expenses (see also gross margin).

Intangible fixed asset – An asset, such as a right, that cannot be touched (e.g. a trademark or Goodwill).

Inventory – Stocks of goods held for manufacture or for resale.

Invoice (bill) – A document from supplier to buyer summarising goods or services supplied and the price payable.

Leasing – Acquiring the use of an asset through a rental agreement.

Liabilities – Debts owed by a business.

Limited liability – Most commonly used to describe the limit of liability of a shareholder (member) to contribute to the assets of a company if it goes into liquidation.

Limited liability company – Company where the liability of the owners is limited to the amount of capital they have agreed to contribute.

Liquidity – The extent to which a business has access to cash or items which can readily be exchanged for cash.

Materiality – Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.

Memorandum (for a company) – Document setting out main objects of the company and its powers to act.

Net assets – Assets minus liabilities (equals ownership interest).

Net book value – Costs of non-current (fixed)( asset minus accumulated depreciation.

Net profit – Sales minus cost of sales minus all administrative and selling costs.

Nominal value (of a share) – The amount stated on the face of a share certificate as the named value of the share when issued.

Ordinary shares – Shares in a company which entitle the holder to a share of the dividend declared and a share in net assets on closing down the business.

Partnership – Two or more persons (or companies) in business together with the aim of making a profit.

Prepayment – An amount paid for in advance for and benefit to the business, such as insurance premiums or rent in advance. Initially recognised as an asset, then transferred to expense in the period when the benefit is enjoyed. (Also called a prepaid expense).

Profit – Calculated as revenue (income) minus expenses.

Profit and loss account – Financial statement presenting revenues, expenses, and profit. Also called income statement.

Provision – A liability of uncertain timing or amount.

Provision for doubtful debts – An estimate of the risk of not collecting full payment from credit customers, reported as a deduction from trade receivable (debtors) in the balance sheet.

Registrar of Companies – An official authorised by the government to maintain a record of all annual reports and other documents issued by a company.

Reserves – The claim which owners have on the assets of a company because the company has created new wealth for them over the period since it began. Most common example is retained earnings.

Retained earnings – Accumulated past profits, not distributed in dividends, available to finance investment in assets.

Secured loan – Loan where the lender has taken a special claim on particular assets or revenues of the company to give extra protection in the event of the loan remaining unpaid.

Share capital – Name given to the total amount of cash which the shareholders have contributed to the company.

Share certificate – A document providing evidence of share ownership.

Share premium – The price paid for shares in a company over and above their nominal value.

Shareholders – Owners of a limited liability company.

Sole trader – An individual owning and operating a business alone.

Stakeholders – A general term devised to indicate all those who might have a legitimate interest in receiving financial information about a business because they have a ‘stake’ in it.

Stock – A word with two different meanings. It may be used to describe an inventory of goods held for resale or for use in business. It may also be used to describe shares in the ownership for a company. The meaning will usually be obvious from the way in which the word is used.

Tangible fixed assets – A fixed asset (also called a non-current asset) which has a physical existence. Used to differentiate it from an Intangible fixed asset.

Trade creditors – Persons or businesses who supply goods or services to a business in the normal course of trade and allow a period of credit before payment must be made.

Trade debtors – Persons or businesses who buy goods or services from a business in the normal course of trade are allowed a period of credit before payment is due.

Turnover – The sales of a business or other form of revenue from operations of the business.

Working capital – Finance provided to support the short-term assets of the business (stocks and debtors) to the extent that these are not financed by short-term creditors. It is calculated as current assets minus current liabilities.

Work-in-progress – Cost of partly completed goods or services, intended for completion and recorded as an asset. Akin to stocks.

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Posted by Clear Books

One Comment

  1. I think that it is very important for business owners to understand accounting. This really helps me to understand a lot of terms easily and I think that with this, I can easily do accounting faster and easier. Thanks for sharing this article.

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