A

Accountant‍

A professional who is responsible for keeping and interpreting financial records for businesses and individuals. They ensure that all financial transactions are legal and that the entity remains compliant with tax laws.

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Accounting Period

‍The specific span of time covered by a set of financial statements or tax returns. For small businesses, this is typically a month, a quarter, or a full fiscal year.

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Accounts Payable

‍The amount of money a business owes to its suppliers or vendors for goods and services received but not yet paid for. It is recorded as a liability on the balance sheet until the debt is cleared.

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Accounts Receivable

‍The money owed to a business by its customers for products or services delivered on credit. Managing this effectively is vital for maintaining a healthy cash flow in a small business.

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Accrual Accounting

‍An accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash actually changes hands. This provides a more accurate long term picture of a business's financial health.

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Accruals

‍Adjustments made at the end of an accounting period to recognise expenses that have occurred but have not yet been invoiced. For example, utility usage that has happened but for which no bill has arrived is recorded as an accrual.

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Amortization

‍The process of gradually writing off the initial cost of an intangible asset, such as a patent or trademark, over its useful life. It functions similarly to depreciation but applies specifically to non physical assets.

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Arrears

‍A legal term for a type of debt that is overdue after missing one or more required payments. Being in arrears can negatively impact a small business's credit rating and relationship with suppliers.

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Assets

‍Everything of value owned by a business or individual that can be converted into cash. These can be physical items like machinery (tangible) or non physical items like brand reputation (intangible).

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Audit

‍An official inspection of an individual's or organization's accounts, typically by an independent body. For small businesses, an audit ensures that financial statements are accurate and comply with regulatory standards.

B

Bad Debt

‍An amount of money owed to a business that is unlikely to be paid by the customer. Once a debt is classified as "bad," it is usually written off as an expense to reflect the loss.

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Balance Sheet

‍A financial statement that provides a snapshot of a business's financial position at a specific point in time. It details assets, liabilities, and owner’s equity to show the net worth of the entity.

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Bank Reconciliation

‍The process of matching the balances in a business's accounting records to the corresponding information on a bank statement. This helps identify discrepancies, such as uncashed checks or bank fees that haven't been recorded yet.

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Basis Point

‍A unit of measure used in finance to describe the percentage change in the value of financial instruments. One basis point is equal to 0.01%, or one hundredth of a percent.

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Billing

‍The process of sending invoices to customers to request payment for goods or services provided. Efficient billing cycles are essential for ensuring that a small business receives its income on time.

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Bookkeeping

‍The daily recording of a business's financial transactions, including sales, purchases, and payments. It serves as the foundation for the broader accounting process and financial reporting.

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Bootstrapping

‍A situation in which an entrepreneur starts a company with little capital, relying on personal finances or operating revenue. This method avoids outside investment but requires very strict financial management.

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Break even Point

‍The stage at which a business's total revenues equal its total expenses. Reaching this point means the business is neither making a profit nor incurring a loss for that period.

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Budget

‍A financial plan for a defined period, usually a year, that estimates future income and expenses. It acts as a roadmap to help small businesses manage their spending and reach financial goals.

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Business Entity

‍A legal structure formed to conduct business, such as a sole proprietorship, partnership, or corporation. The choice of entity affects how a business is taxed and the level of legal liability for the owners.

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C

Capital

‍The financial assets, such as cash or equipment, that a business uses to fund its operations and generate income. It represents the accumulated wealth of the business that is available for future growth.

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Capital Expenditure (CapEx)

‍Money spent by a business to acquire, maintain, or improve fixed assets such as buildings, vehicles, or equipment. These costs are usually capitalized on the balance sheet rather than being fully expensed in the year they are bought.

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Capital Gains Tax

‍A tax levied on the profit made from the sale of an asset, such as property or stocks, that has increased in value. For individuals and small business owners, this tax applies only when the asset is actually sold.

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Cash Accounting

‍A simple accounting method where transactions are only recorded when cash is actually received or paid out. Many very small businesses and sole traders use this method because it is easier to track.

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Cash Flow

‍The movement of money in and out of a business over a specific period. Positive cash flow means more money is entering the business than leaving it, which is crucial for survival.

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Cash Flow Statement

‍A financial report that shows how changes in balance sheet accounts and income affect cash and cash equivalents. It breaks down the analysis into operating, investing, and financing activities.

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Chart of Accounts

‍An organized list of every account in a business's accounting system, used to categorize all financial transactions. Each account is usually assigned a unique number to make tracking and reporting easier.

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Cloud Accounting

‍Accounting software that is hosted on remote servers, allowing users to access their financial data over the internet. This is popular among small businesses for its real time collaboration and automatic data backups.

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Collateral

‍An asset that a borrower offers to a lender as security for a loan. If the borrower defaults on their payments, the lender can seize the collateral to recoup the loss.

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Corporation Tax

‍A tax imposed on the profits of limited companies and other organizations. Small companies must calculate their taxable profit and file a return to the relevant tax authority annually.

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Cost of Goods Sold (COGS)

‍The direct costs attributable to the production of the goods sold by a company. This includes the cost of materials and direct labor but excludes indirect expenses like distribution.

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Credit

‍In double entry bookkeeping, a credit is an entry that records a decrease in assets or an increase in liabilities and equity. It is always positioned on the right side of a ledger account.

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Credit Note

‍A document issued by a seller to a buyer, indicating that a certain amount has been credited to the buyer's account. This is often used when goods are returned or if there was an error in the original invoice.

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Creditor

‍An individual or institution that has provided goods, services, or money to a business and is owed payment in return. Managing relationships with creditors is a key part of business creditworthiness.

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Current Assets

‍Assets that are expected to be converted into cash or used up within one year. Examples include cash, inventory, and accounts receivable.

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Current Liabilities

‍A business's debts or obligations that are due to be paid within one year. This typically includes accounts payable, short term loans, and accrued expenses.

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D

Debit

‍In double entry bookkeeping, a debit is an entry that records an increase in assets or a decrease in liabilities and equity. It is always positioned on the left side of a ledger account.

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Debtor

‍A person or entity that owes money to another party. For a small business, its customers who have not yet paid their invoices are its debtors.

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Deductibles

‍Expenses that a taxpayer or business is allowed to subtract from their total income to reduce the amount of income subject to tax. Common deductibles for small businesses include office supplies, travel, and marketing costs.

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Deferred Income

‍Money received by a company in advance of earning it, such as a deposit for work not yet started. It is recorded as a liability until the service is performed or the goods are delivered.

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Depreciation

‍The systematic reduction in the recorded value of a physical asset over its useful life. This allows a business to spread the cost of an expensive item, like a van or computer, over several years.

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Direct Costs

‍Expenses that can be directly tied to the production of specific goods or services. Examples include raw materials and the wages of the workers who physically make the product.

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Director's Loan Account

‍An account that records all transactions between a company and its directors that are not salary or dividends. It tracks whether the director owes the company money or the company owes the director.

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Dividends

‍Portions of a company's profit that are distributed to its shareholders. For small limited companies, dividends are a common way for owners to take income out of the business after tax.

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Double entry Bookkeeping

‍A system of accounting where every transaction is recorded in at least two accounts, as both a debit and a credit. This ensures that the accounting equation always stays balanced.

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Drawings

‍Money taken out of a business by the owner for personal use, specifically in sole proprietorships or partnerships. Unlike a salary, drawings are not considered a business expense and do not reduce the business's taxable profit.

E

EBITDA

‍An acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is used to analyze and compare the profitability of businesses by removing the effects of financing and accounting decisions.

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Employee Benefits

‍Non-wage compensation provided to employees in addition to their normal salaries or wages. For small businesses, this might include health insurance, pension contributions, or paid time off.

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Encumbered Asset

‍An asset that has a claim against it by another party, such as a mortgage on a building. This limits the owner's ability to transfer or sell the asset until the debt is cleared.

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Equity

‍The value of the business that remains for the owners after all liabilities have been paid. It represents the owner's "stake" in the business and is also referred to as net worth.

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Expenses

‍The costs incurred by a business in the process of generating revenue. These are subtracted from income to determine the business's profit or loss for a period.

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F

Financial Statement

‍Formal records of the financial activities and position of a business, person, or other entity. The three main statements are the balance sheet, income statement, and cash flow statement.

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Financial Year

‍A 12 month period used for calculating annual financial statements and taxes. It does not necessarily have to align with the calendar year.

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Fixed Assets

‍Long term physical assets used in the operation of a business that are not intended for sale. Examples include land, buildings, machinery, and vehicles.

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Fixed Costs

‍Business expenses that remain constant regardless of the volume of goods or services produced. Rent and insurance are typical examples of fixed costs that must be paid even if no sales are made.

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Forecasting

‍The process of estimating future financial outcomes based on historical data and market trends. It helps small businesses plan for growth and prepare for potential financial shortages.

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Franchise

‍A type of license that grants a person access to a business's proprietary knowledge, processes, and trademarks. This allows the franchisee to sell a product or service under the business's name.

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Fringe Benefits

‍Extra benefits provided to employees beyond their standard salary, such as a company car or gym membership. These are often taxable and must be reported to tax authorities.

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G

General Ledger

‍A complete record of all the financial transactions of a business. It contains all the accounts needed to prepare the financial statements and is organized by the chart of accounts.

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Gift Aid

‍A scheme in some countries that allows charities to claim back the tax that donors have already paid on their donations. It increases the value of the gift at no extra cost to the donor.

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Goodwill

‍An intangible asset that represents the value of a company’s brand, customer base, and reputation. It is usually recognized when one business buys another for more than the fair market value of its physical assets.

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Gross Margin

‍A company's net sales revenue minus its cost of goods sold (COGS), expressed as a percentage. It shows how much profit a business makes on each dollar of sales before accounting for overhead costs.

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Gross Profit

‍The profit a company makes after deducting the costs associated with making and selling its products or providing its services. It is calculated by subtracting COGS from total revenue.

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Guarantor

‍A person or organization that promises to pay a debt if the borrower defaults on their loan. Small business owners often act as personal guarantors for business loans.

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H

HMRC

‍The UK's tax, payments, and customs authority (His Majesty's Revenue and Customs). Small businesses in the UK must register with HMRC to pay taxes like VAT and Corporation Tax.

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Holding Company

‍A company whose primary purpose is to own shares in other companies rather than producing goods or services itself. This structure can provide tax advantages and protect assets.

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I

Income

‍The money received by an individual or business in exchange for providing a good or service or through investing capital. It is the top line of the income statement before any expenses are subtracted.

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Income Statement

‍Also known as a Profit and Loss (P&L) statement, it summarizes the revenues, costs, and expenses incurred during a specific period. It shows whether a business has made a profit or a loss.

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Income Tax

‍A tax levied directly on personal income or the profits of a business. For sole traders, business profit is treated as personal income and taxed accordingly.

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Indirect Costs

‍Expenses that are not directly accountable to a specific product or service, often referred to as overheads. Examples include rent, utilities, and administrative salaries.

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Insolvency

‍A state of financial distress in which a person or business is unable to pay their debts when they are due. This can lead to legal proceedings such as bankruptcy or liquidation.

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Intangible Assets

‍Non physical assets that provide value to a business over the long term. These include intellectual property, such as patents, copyrights, trademarks, and brand recognition.

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Interest

‍The cost of borrowing money or the reward for saving it, typically expressed as an annual percentage rate (APR). Small businesses pay interest on loans and earn interest on their savings accounts.

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Inventory

‍The raw materials, work in-progress goods, and finished products that a business holds for sale. Managing inventory levels is critical to avoid tying up too much cash in unsold stock.

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Invoice

‍A document issued by a seller to a buyer relating to a sale transaction and indicating the products, quantities, and agreed prices. It serves as a formal request for payment.

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J

Journal

‍In manual bookkeeping, a journal is a chronological record of all financial transactions. Each entry includes the date, the accounts affected, and the amounts debited and credited.

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Joint Venture

‍A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity.

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K

K-1 Form

‍A tax document used in some jurisdictions to report a partner's share of the income, deductions, and credits of a partnership. It is used by the individual partner to file their personal tax return.

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KPI (Key Performance Indicator)

‍A measurable value that demonstrates how effectively a company is achieving its key business objectives. Small businesses use KPIs like net profit margin or customer acquisition cost to track progress toward specific financial targets.

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L

Ledger

‍A book or digital file that contains a summarized record of all transactions for a specific account. The general ledger is the master set of all these individual accounts.

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Liabilities

‍The debts and financial obligations that a business owes to outside parties. This includes loans, accounts payable, mortgages, and deferred revenues.

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Limited Company

‍A type of business structure where the owners' personal liability is limited to the amount they have invested. This means their personal assets are generally protected if the business fails.

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Liquidation

‍The process of closing a business and selling its assets to pay off its creditors. Any remaining funds after debts are settled are distributed to the shareholders.

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Liquidity

‍The ease with which an asset can be converted into cash without affecting its market price. For a small business, high liquidity means they have enough cash on hand to meet their immediate obligations.

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Long-term Liabilities

‍Financial obligations that are not due for at least one year. Common examples for small businesses include long term bank loans and mortgages.

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M

Management Accounts

‍Financial reports produced for the internal use of a business's managers to help them make informed decisions. Unlike statutory accounts, they are not required by law and can be produced as often as needed.

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Margin

‍The difference between the selling price of a product and the cost of producing it. It is usually expressed as a percentage of the selling price.

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Marketable Securities

‍Financial instruments that can be easily bought or sold on public exchanges, such as stocks and bonds. They are considered current assets because they can be quickly converted to cash.

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Mark up

‍The amount added to the cost price of goods to cover overheads and profit. For example, if an item costs $10 to make and is sold for $15, the mark-up is $5.

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N

Net Assets

‍The total assets of a business minus its total liabilities. This figure represents the actual value of the company and is the same as the total equity.

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Net Income

‍The total amount of money a business or individual earns after all expenses, taxes, and interest have been subtracted from total revenue. It is often called the "bottom line."

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Net Profit Margin

‍A ratio that measures how much out of every dollar of sales a company actually keeps in earnings. It is calculated by dividing net profit by total revenue.

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Nominal Ledger

‍Another name for the General Ledger, where transactions are categorized into "nominal" accounts like sales, purchases, and electricity.

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Non-current Assets

‍Assets that are not expected to be converted into cash within one year, also known as long-term assets. This category includes fixed assets like property and equipment.

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O

Opening Balance

‍The amount of funds in a company's account at the beginning of a new financial period. It is usually identical to the closing balance of the previous period.

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Operating Expenses

‍The costs required to run a business's day to day operations, such as rent, utilities, and insurance. These do not include the direct costs of producing goods.

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Overhead

‍The ongoing administrative and operational costs of running a business that cannot be linked to a specific product or service. Examples include office rent and marketing.

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Owner's Equity

‍The owner's investment in the business minus any withdrawals, plus any net income since the business began. It represents the owner’s claim against the assets of the business.

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P

PAYE

‍An acronym for Pay As You Earn, a system where employers deduct income tax and national insurance from employees' pay before giving it to them. The employer then pays these deductions to the tax office.

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Payroll

‍The process of calculating and distributing wages and salaries to employees. It involves tracking hours worked, calculating taxes, and making payments to both employees and tax authorities.

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Petty Cash

‍A small amount of physical cash kept on hand by a business to pay for minor, everyday expenses like coffee or postage stamps. It is usually managed by a specific employee and reconciled regularly.

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Prepaid Expenses

‍Payments made in advance for goods or services to be received in the future. These are recorded as assets on the balance sheet and moved to expenses as they are "used up."

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Profit

‍The financial gain realized when the amount of revenue earned exceeds the expenses, costs, and taxes needed to sustain the activity. It is the primary goal of most small businesses.

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Profit and Loss Report (P&L)

‍A financial statement that summarizes the revenues, costs, and expenses incurred during a specified period. It provides information about a company's ability to generate profit.

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Proforma Invoice

‍A preliminary bill sent to buyers in advance of a shipment or delivery of goods. It describes the items, their value, and other important information like shipping weight.

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Q

Quick Ratio

‍A measure of a company's ability to meet its short term obligations with its most liquid assets. It is calculated by adding cash and accounts receivable and dividing by current liabilities.

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Quota

‍A government imposed trade restriction that limits the number or monetary value of goods that a country can import or export. Small businesses involved in international trade must be aware of these limits.

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R

Receipt

‍A written acknowledgment that a person or business has received money or property in payment following a sale. It is essential for small businesses to keep receipts for tax deduction purposes.

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Retained Earnings

‍The portion of a business's net income that is kept in the business rather than being distributed to shareholders as dividends. These funds are often reinvested into the company for growth.

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Return on Investment (ROI)

‍A performance measure used to evaluate the efficiency of an investment. It is calculated by dividing the benefit of an investment by the cost of the investment.

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Revenue

‍The total amount of money brought in by a company's operations, before any expenses are subtracted. It is the "top line" figure on an income statement.

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S

Sales Ledger

‍A record of all the sales a business has made and which customers owe money. It is a sub ledger that feeds into the General Ledger.

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Self Assessment

‍The system used by tax authorities to collect income tax. Individuals and business owners must complete a tax return themselves to report their earnings and calculate the tax they owe.

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Shareholder

‍An individual or institution that legally owns a share of stock in a public or private corporation. Shareholders are the owners of the company and may receive dividends.

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Sole Trader

‍The simplest business structure where one person owns and runs the entire business. The owner is personally liable for all business debts, and business profit is taxed as personal income.

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Solvency

‍The ability of a company to meet its long term financial obligations. A solvent company has more assets than liabilities and can continue operating in the foreseeable future.

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Stock

‍The goods and materials a business holds for the purpose of resale. In a broader financial context, "stock" also refers to the shares of ownership in a corporation.

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Straight line Depreciation

‍A simple method of calculating depreciation where the value of an asset is reduced by the same amount each year. It is calculated by subtracting the salvage value from the cost and dividing by the years of life.

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T

Tangible Assets

‍Physical assets that a business owns and uses in its operations, such as buildings, equipment, and inventory. These assets have a clear market value and can be physically seen and touched.

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Tax Liability

‍The total amount of tax that an individual or business is legally required to pay to the government. This includes income tax, sales tax, property tax, and payroll tax.

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Tax Return

‍A form or set of forms filed with a tax authority that reports income, expenses, and other pertinent tax information. It allows taxpayers to calculate their tax liability or request a refund.

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Trial Balance

‍A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit columns. If the total of the debits equals the total of the credits, the books are considered to be in balance.

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U

Unearned Revenue

‍Money received by a business for a product or service that has not yet been provided. It is recorded as a liability on the balance sheet because the company still owes the customer that service.

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Unique Taxpayer Reference (UTR)

‍A unique 10 digit number issued to individuals and businesses by the tax office to identify them for tax purposes. You need this number to file a tax return or register for business taxes.

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V

Variable Costs

‍Expenses that change in direct proportion to the volume of goods or services a business produces. Examples include raw materials, packaging, and shipping costs.

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VAT (Value Added Tax)

‍A consumption tax placed on a product whenever value is added at each stage of the supply chain. Small businesses must register for VAT once their turnover exceeds a certain threshold.

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W

Working Capital

‍The difference between a company’s current assets and its current liabilities. It represents the liquid funds available for a business to conduct its daily operations and pay its short term debts.

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Write-off

‍An accounting action that reduces the value of an asset while simultaneously debiting a liabilities account. It is commonly used when a customer debt is deemed uncollectible.

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Work in Progress (WIP)

‍The value of goods that are currently in the production process but are not yet finished. In service businesses, this can also refer to billable time spent on a project but not yet invoiced.

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Y

Year end

‍The end of a business's financial or fiscal year. This is the time when final accounts are prepared, taxes are calculated, and financial reports are filed with the authorities.

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Yield

‍The income return on an investment, such as the interest or dividends received from holding a particular security. It is usually expressed as an annual percentage based on the investment's cost.

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Z

Zero rated VAT

‍A VAT rate of 0% applied to certain goods and services, such as most food and children's clothes. Although no tax is charged, businesses can still claim back the VAT they paid on their own related expenses.

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