Jargon for Dummies
These are considered to be an asset to your business. Accounts receivables are any monies owed to you by clients or customers. Usually you create a sales invoice which is then money owed to you.
Accounts payable represents the amount that a company owes to its creditors and suppliers (also referred to as a current liability account). It could be purchase invoices that need to be paid to your supplier or money borrowed from a bank. Accounts payable is recorded on the balance sheet under current liabilities.
Assets are the physical items you own that have value. These could include current assets, which are things like stock, cash and accounts receivable, or fixed assets, which include items such as buildings, vehicles, equipment or property.
This refers to any accounts receivables that you are not able to collect. For example, if the client will not respond or they have been declared bankrupt.
A balance sheet shows a business’s assets, liabilities, and owner’s equity at a specific point in time. They offer a snapshot of what your business owns and what it owes, as well as the amount invested by its owners, reported on a single day. A balance sheet tells you a business’s worth at a given time, so you can better understand its financial position.
Capital is the money used to build, run, or grow a business. Capital most commonly refers to the money used by a business either to meet upcoming expenses, or to invest in new assets and projects.
A cash flow statement is a financial statement that shows how cash entered and exited a company during an accounting period. Cash coming in and out of a business is referred to as cash flow.
Depreciation is the process of deducting the total cost of something expensive you bought for your business. But instead of doing it all in one tax year, you write off parts of it over time. When you depreciate assets, you can plan how much money is written off each year, giving you more control over your finances.
Equity is the ownership of any asset after any liabilities associated with the asset are cleared. For example, if you own a car worth £25,000, but you owe £10,000 on that vehicle, the car represents £15,000 equity. It is the value or interest of the most junior class of investors in assets.
You may already be familiar with the term equity as it applies to personal finances. For instance, if someone owns a £400,000 home with a £150,000 mortgage on it, then the homeowner has £250,000 in equity in the property.
It’s the same general concept in business—it’s what owners (or partners or shareholders) own after subtracting what they owe.
Expenses are divided into different types for accounting purposes:
Fixed expenses – Costs that do not vary with changing sales or production; for example, rent, wages or utility bills.
Variable expenses – Those that do vary according to conditions, such as number of sales; for example, if you sell more fish and chips you need to buy more fish and chips to start off with.
Accrued expenses are expenses that are reported for accounting purposes but have not yet been paid.
An accounting period is any time frame used for financial reporting. Transactions that fall within a given date range form part of the statements or reports for that accounting period. An accounting period, or reporting period, is often 12 months.
Accrual accounting is an accounting method where revenue or expenses are recorded when a transaction occurs vs. when payment is received or made. Put simply a record is made of the sale on the date the sale was made even though the money for this sale has not yet been received.
Cash accounting records the sale or purchase on the day the money either entered the bank or left the bank which is in contrast to Accrual accounting.
Accountants use codes to record financial transactions within a bookkeeping system. These codes make up the Chart of Accounts.
Cost of goods sold means the total costs a company incurred when creating a product or providing a service. If an electrician rewires your house his cost of sales would be materials used on the job. labour, fuel, equipment hire, for example. A bookkeeper’s cost of sales could be stationery and her time spent on the job.
A dividend is a payment a company can make to shareholders if it has made a profit. Dividends are not a taxable expense to the company and you must not pay out more dividends than there is available profit within the company.
Gross profit is the sale price less the cost of goods used to make the sale. If I made a cake it would be the cost of the cake mixture, the packaging and my hourly rate charged for making the cake.
Net profit is a term used for your sale less the cost of goods sold less your fixed expenses like rent or software charges, less depreciation on your assets and finally less tax charged on profit made.
A liability is when a business or individual owes money to another person or organisation such as bank loans and credit card debts.
Overhead costs refer to all indirect expenses of running a business. These ongoing payments support your business but are not directly linked to creating a product or service. They are expenses are not dependant on whether your business is doing well or not. They would be things like rent, insurances, staff costs.
Retained earnings are the amount of profit a company has left over after paying all its direct and indirect costs, taxes and dividends to shareholders. This money for instance is spare to use to invest in new equipment for instance.