Start Here: Accounting and Business Terms Explained for Your New Business

Starting a business can be complicated enough, especially with all the new lingo that crops up along the way. Quite often in accounting the names and phrases attached to things make them sound far more complicated than they actually are. In this article we answer some of the most frequently asked questions about accounting terminology to help you get started.

A lot of these will pop up when you look at financial reports for your business. These two topics overlap heavily, but you might also find our separate guide to business reports useful.

Accounts payable

Accounts payable refers to the money a business owes to its suppliers for products or services which were purchased on credit. This is counted as a ‘current liability’ on your balance sheet, which you’ll be expected to settle within a year.

Accounts receivable

The term ‘accounts receivable’ refers to a sum of money owed to a business by customers who have purchased products and/or services on a credit basis. This outstanding sum is only considered a receivable once the customer has been invoiced. You might also hear these referred to as trade debtors.

Assets

An asset is an item of value the business owns. These can be divided into categories: current (cash and liquid items), long-term (property, equipment), as well as tangible and intangible (trademarks, patents). Assets include items such as vehicles, equipment, property and inventory that all have potential monetary worth.

Balance sheet

The balance sheet report outlines the financial position of a business, showing important contributing factors such as assets, liabilities and capital at a specific date. Balance sheets are particularly useful for investors who are looking to gain insight into what the business owns and owes, as well as the amount invested by other shareholders.

Bank reconciliation

This is the (tedious) process of making sure the transactions in your accounting records match your bank statements. Using good online bookkeeping software with a bank feed (like Pandle!) will make this a lot easier.

Bookkeeping

All businesses need to keep financial records to log every transaction that comes in and goes out, or even those which show funds moving around within the business. This process is more commonly known as bookkeeping, and is essential for staying on top of what’s what.

Break even point

This is the point at which your business has made enough money to cover its costs. Once you go past that break even point, your business is starting to make a profit – which is great news!

Cash basis

Using cash basis accounting means your business only needs to include invoices and liabilties on its tax return if the payment has actually happened – not just expected to happen. This can be useful for small businesses with limited cash flow, and where there’s usually a gap between the sale being recorded and the payment being received.

You’ll often see the term “accrual” used around this topic, but they’re the opposite to cash basis accounts. Accruals are the amount your business expects to get or spend, even though they haven’t yet been paid. For example, the bill you get from a supplier which you haven’t paid yet.

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. This type of insight is crucial when constructing a business plan or budgeting for your company.

Cost of Goods Sold (COGS)

Almost every business will need to spend money in order to make a sale, such as buying stock or paying a subcontractor first. Unlike business overheads or more general expenses, these costs relate directly to the sale you make – literally the cost of the sale.

Keeping track of these will help you manage the potential for making a profit on every sale.

Creditors and debtors

Managing creditors and debtors throughout your business will help you keep track of any payments which need making – either to you, or by you to someone else. Creditors are the people or organisations your business owes money to. You might sometimes see creditors grouped under the heading “Liabilities” in your records, because they represent a payment which still needs to be made in the future. Debtors are the other side of your records, because they’re the ones that owe you.

Dividends

Dividends are paid from a company’s profits in proportion to the number and type of shares the shareholder owns.

Expenses

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, wages), variable (utilities, supplies) and operating costs (day-to-day running costs).

Goodwill

This is what is known as an intangible asset as it is something of monetary worth which you can’t physically get your hands on. Goodwill normally describes the value of a business beyond it’s tangible assets, and can include things like what the brand recognition is worth in the marketplace. A buyer might be prepared to pay a lot of money for it!

Gross and net profit

Profit is what’s left in your business (hopefully!) once various costs and expenses have been deducted. Your gross and net profit figures show this at different stages. Gross profit is what you’re left with after taking away the cost of making your sales, whilst net profit is what you have after deducting everything.

Liability

A liability comes about when a company is legally bound to settle an outstanding debt or recurring payment (such as staff wages or loan repayments).

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.

Liquidity

This term is used to describe a business’s ability to meet its short term obligations using cash or other assets which can be easily converted into cash. Strong liquidity, for example, is when a business is experiencing high levels of trading activity, converting assets into cash at a fast pace.

Revenue

This is a sum of money that the business has earned over a specific time period, and includes payments which are expected but haven’t yet been received. Revenue can include net sales, exchange of assets, and interest, and is calculated prior to the deduction of any expenses.

It’s often used interchangeably with business turnover.

ROI

This abbreviation stands for ‘return on investment’ and is a useful measure used to analyse the financial performance of an investment made in the business. ROI is calculated by dividing the net profit produced by an investment by the cost of the investment. The result is usually shown as a percentage.

Self Assessment

This is HMRC’s system for collecting 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 submit a Self Assessment tax return to provide information about all taxable income and gains you receive during a tax year.

SIC Code

A Standard Industrial Classification (SIC) code describes the core activities of a limited company which is registered with Companies House. For instance, if you run a real estate agency then you’ll likely use the SIC code 68310.

UTR

This stands for Unique Taxpayer Reference and refers to the ten-digit number that is allocated by HMRC when you register for your business. The number is used to identify each business in relation to its tax affairs.

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