Last week during the customary Sunday night viewing of BBC TV series Dragon’s Den, we were slightly taken aback to see an aspiring entrepreneur look vacantly into space when asked if he knew what revenue was. Then we got to thinking, just because somebody has a fantastic idea or an incredibly creative thought process, doesn’t necessarily mean they’re going to have the formal business and financial knowledge to back it up.
So we’ve outlined some of the most popular terms in accountancy to help you along your journey to entrepreneurial competency.
Revenue – Okay, so for those of us who are feeling a little confused about what the term ‘revenue’ actually encompasses… This is a sum of money that represents the total amount of income received by the business through the sale of products and/or services over a specific time period. Revenue can also include net sales, exchange of assets and interest and is calculated prior to the deduction of any expenses.
Expenses – Oh and just in case you weren’t 100% percent sure about what expenses are either… Quite simply, these refer to the money that is spent and the costs created by the businesses. Expenses come in a number of different forms with the most prominent being fixed (rent, loan payments, wages), variable (utilities, supplies) and operation (day-to-day outgoings).
Self-Assessment – This is a process employed by HM Revenue & Customs (HMRC) to collect income tax and leaves the business owner responsible for ensuring that they are paying the correct amount of tax, by the stated deadlines. The system requires you to complete a form to provide information about all taxable income and gains you receive during the financial year, which must be submitted by the end of the tax year (April 5th). This can be done online or on paper and sent via post.
UTR – This stands for Unique Taxpayer Reference and refers to the ten-digit number that is allocated by HMRC when you register for your Self-Assessment. The number is used to identify each individual business when dealing with all tax-related issues and must be obtained as soon as you decide to work for yourself or start up your own business venture. To receive your UTR you will need to provide the date you began trading, the company name, the company registration number, the company’s registered address, the nature of the business and the date your annual accounts will be completed.
Balance sheet – This is a physical or digital report that outlines the financial position of a company. The statement reveals information about important contributing factors such as assets, liabilities and capital from the preceding financial period. Balance sheets are particularly useful for investors who are looking to gain insight into what the companies owns and owes, as well as the amount invested by other shareholders. A balance sheet must follow this formula: liabilities + shareholders’ equity = assets.
Audit – This is a thorough review of a company’s financial records to ascertain how valid and tax-efficient their accounts are. Audits help to better understand the financial systems and processes but in place by businesses and allow insight into the reliability of the information provided. Tax evasion and fraud are two of the main issues that this process aims to clamp down on.
Assets – An asset is an item of economic value that is owned by an individual or company and is usually one that can be converted into cash value. These can be divided into four main categories: current (cash and liquid items), long-term (property, equipment), prepaid and deferred (insurance, rent, interest) and intangible (trademarks, patents). Assets include items such as vehicles, equipment, property and inventory that all have potential monetary worth.
Liability – A liability comes about when a company is legally bound into an obligation whereby they must settle an outstanding debt. Liabilities can be split into two main categories, the first being current liabilities which are debts payable within one year. The second form of liability is long-term, which means the debts are payable over a longer period.
Dividends – A dividend is the sum of money paid out to a company shareholder in exchange for investment into the business. Most commonly this is paid annually and typically comes in the form of cash but can also be delivered through values such as stock share and property too. Dividends are the proportional distribution of the company’s earnings.
Cash Flow Statement – This is a summary of the actual or predicted cash incomings and outgoing for any given accounting period, be it monthly, quarterly or annually. Cash Flow Statements allow a better and more thorough understanding of where money is coming from and where it will eventually be going. The type of insight is crucial when constructing a business plan or budgeting for your company.
Accounts payable – Quite often in accounting the names and phrases attached to things make them sound far more complicated than they actually are and this is definitely one of them. All accounts payable refers to is the money that businesses owe to vendors for products and/or services that they have previously purchased on credit. This is essentially counted as a currently liability on the company’s balance sheet as they will be expected to settle the outstanding balance within a year.
Accounts receivable – Similarly, the term ‘accounts receivable’ simply refers to a sum of money that is owed to a company from customers who have purchased products and/or services on a credit basis. This outstanding sum is only considered an account receivable once the customer has been invoiced.
Liquidity – This terms is used to refer to the extent to which a company has access to either assets or items that can be easily exchanged for money. Strong liquidity, for example, is manifested when a business is experience high levels of trading activity in which operations are converting assets into cash at a fast pace.
ROI – This abbreviation stands for ‘return on investment’ and is a useful measure used to analyse the financial performance of a business in relation to the amount invested in it. You can arrive at an ROI sum by calculated by dividing the company’s net profit by the cost of the investment and the result is most commonly presented as a percentage.
Goodwill – This is what is known as an intangible asset as is it something that is of monetary worth but is not something that you can physically get your hands on. Goodwill comes into play when a buyer acquires an existing business but pays more than the fair market value of its net assets which can be calculated by subtracting the total liabilities from the total assets.
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We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!