The A-Z of Accounting

Accountancy words

The A-Z of Accounting

Accounting has a lot of phrases that we accountants use regularly but may just sound like jargon to you. So, we’ve chosen 26 words or phrases that we use and explain them in laymen’s terms.

A = Asset. An asset is something owned by a company that has future economic value, which can be measured and expressed in pounds and pence! For example, equipment, land, buildings, machinery and vehicles are just some assets businesses own.

B = Balance Sheet. The balance sheet reports the assets, liabilities, and owner’s/shareholders’ equity at a specific point in time, usually at the end of a company’s financial year. It illustrates the business’s net worth. The balance sheet is also referred to as the Statement of Financial Position.

C = Chart of Accounts. The chart of accounts is a financial organisational tool that provides a list of all account names/categories used by a business for recording the various financial transactions. This chart is then used to prepare the financial statements (Balance Sheet and Profit and Loss Account)

D = Depreciation. Accountants use depreciation to allocate the costs of a fixed asset over a period in which the asset is useable to the business. The asset’s value is effectively reduced over time to eventually write it off, which helps lower your tax bill.

E = Equity. Equity is the part of a business that the owner or owners actually own. If you watch Dragon’s Den, the Dragon often asks for a percentage of equity in the business in return for their investment. This means they physically will own that percentage of the company.

F = Financial Accounts and Reports. To understand the position of your business, you need to look at the financial accounts and reports, such as balance sheets, profit and loss accounts and aged debtor and creditor reports. These can then flag up any concerns.

G = General Ledger. The general ledger tracks all of a company’s accounts and transactions and serves as the foundation of its accounting system. It’s typically divided into five main categories: assets, liabilities, equity, revenue, and expenses.

H = Historical Cost. The historical cost is how much an item was worth when introduced into a business. The item will be reported in the balance sheet as the cost at the time of introduction, which may differ from its current economic or market value.

I = Inventory. Inventory is an accounting term that refers to goods that are in various stages of being made ready for sale. For example raw materials, work in progress and finished goods. Inventory is generally the largest current asset (which are items expected to sell within the next year) that a company has.

J = Job Costing. Job costing enables managers to keep track of expenses on manufacturing their company’s products. These include overheads, material costs and direct labour costs, which are allocated to each customer order separately.

K = KPI. Key performance indicators measure the effectiveness of a function within an organisation, and are especially important in accounting. By tracking and comparing KPIs, such as the time it takes invoices to be paid, managers can spot long-term trends and short-term problems.

L = Liability. A liability is a debt owed from one company to another company or person during the course of business operations. These can be classed as either current liabilities, such as suppliers, wages and taxes, or long-term liabilities, such as a loan, that is paid over a period greater than 12 months.

M = Management Accounts. Management accounting involves preparing and providing regular financial and statistical information to business owners/managers so that they can make day-to-day and short-term managerial decisions. They can include information such as cash currently available, amounts owed to the business, sales revenue analysis and cash flow forecasts.

N = Nominal Accounts. Nominal accounts, also known as general ledger accounts, are the backbone of any accounting system. They are used to categorise the financial transactions of a business during its financial year. Examples include sales, wages, fuel, rent, materials, gas, electric, stationery, advertising and software to name just a few. They allow businesses to keep a track of income and expenses in each different category during the year. At the end of each year the financial accounts are compiled using these nominal accounts.

O = Overheads. These are the costs that are required to run a business that can’t be linked to producing a product or service. For example, premises, energy bills, advertising, insurance, telephones, travelling, admin wages, etc. are all overheads. They do not include direct costs, such as materials or wages of staff that are directly involved in creating a product or service.

P = Payroll. Payroll is the total amount that the business must pay to its employees for period of time on a given date. It is usually managed by the accounting or HR department of a business. Payrolls in small businesses may be handled directly by the owner or an associate.

Q = QuickBooks. QuickBooks is an accounting software package developed and marketed by Intuit. It is mainly geared towards SMEs and offers cloud-based versions that are Making Tax Digital compliant. It allows businesses to easily see in real time who owes them money, who they owe money to and their cash position all in one place.

R = Reconciliation. Reconciliation is an accounting process that uses two sets of records to ensure figures are correct and in agreement. For example, a bank reconciliation compares the items on a bank statement to the transactions that have been entered into the accounting system. It confirms whether the two are the same or if anything is missing which then needs inputting. The two should always match and balance at the end of each month. Reconciliation provides consistency and accuracy in financial accounts.

S = Sole Trader. A sole trader is a self-employed person who owns and runs their own business as an individual. A sole trader business doesn’t have any legal identity separate to its owner, leading many to say that as a sole trader you are the business.

T = Tax Deductible Expenses. These are sometimes referred to as allowable expenses and are expenses that a business incurs that are wholly and exclusively for business use. Examples include accounting fees, rent, advertising, travel, motor expenses, telephone, computers, etc. These expenses reduce the profit of a business, which ultimately leads to a reduction in the amount of tax to pay.

U = Unpresented Cheques/Funds. Unpresented cheques are cheques or funds (for example BACS payments) which have not yet cleared through the banking system. It is a term used in the preparation of a bank reconciliation statement. As a result, a bank balance may be higher than the cash book balance until those funds have been cleared through the banking system.

V = Variable Costs. Variable costs are costs that increase or decrease as the quantity of the good or service that a business produces changes, e.g. raw materials and packaging. These are in contrast with fixed costs which are expenses that remain the same and must be paid regardless of production output and sales. Fixed costs and variable costs make up the two components of total cost.

W = Working Capital. Working Capital is the finances that a business requires to meet their everyday financial obligations, such as paying suppliers and staff and replenishing stock. It is a measure of a company’s liquidity and ability to function efficiently to cover their daily operations. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital.

X = Xero Accounting Software. Xero is a cloud-based accounting software platform for small and medium-sized businesses, very similar to Quickbooks. It allows businesses to easily see in real time who owes them money, who they owe money to and their cash position all in one place.

Y = Year End Accounts. A year end is the completion of an accounting period. At this time, businesses need to carry out procedures to close their books and prepare their accounts. These procedures are key to creating a company’s financial statements such as balance sheets and profit and loss statements. An accounting year does not necessarily correlate with the calendar year and can be different dates for different companies. For personal tax purposes, the year end is set by the government. It starts on 6th April and ends on 5th April the following year.

Z = Zero (break even point). The break-even point represents the sales amount that is required to cover total costs, i.e. total sales = total costs. The profit/loss is therefore zero. The main purpose of calculating the break-even point is to determine the minimum amount needed for a business to make a profit.