what does that mean?

a few accounting terms explained


Assets

Assets are the value of possessions owned by the business. They could be tangible assets (such as cash, investments, money owed, supplies, equipment, land or buildings) or intangible assets (such as patents or trademarks).


Balance sheet

A balance sheet is a business statement that shows what the business owns (assets), what it owes (liabilities), and the value of the owner’s investment (owner’s equity) in the business. This report forms part of your financial reporting and is vital not only for lending purposes but also to ensure that your books balance.


Bank reconciliation

Bank reconciliation is the act of matching the information in a company’s accounts to the transactions and money in the bank account. This is a good way to ensure all income and expenditure is accounted for and within a healthy business, it should be conducted regularly.


Capital

Capital is often stated as what’s left over when a company’s liabilities are deducted from its assets – also referred to as working capital. In more general terms, capital is the financial resource available for a business to use. In this context, capital may include investments or profit retained at the end of a tax year. Capital is vital to keep a business running and ensure it can pay its bills.


Creditor

A creditor is somebody (or an entity like a company) to whom money is owned by a debtor.


Corporation Tax

Corporation tax is the tax applied to business profits and capital gains made by a business.


Debtor

A debtor is a person or organisation that owes money. This will often be owed for services or goods, or because they have borrowed money. In most instances, the debtor will have a legal obligation to pay the debt. The person they owe the money to is known as a creditor. In a company, individual debtors might be recorded in a sales ledger, which is sometimes called a debtors’ ledger.


Dividends

Dividends are a way to distribute a percentage of a company’s earnings to its shareholders. They typically take the form of cash but can also be stock or property. They are paid out of a company’s available profit after tax. This can be taken from retained profits from previous years, as well as profits from the current period. Dividends can be used to encourage investors in the business.


Drawings

A drawings account (sometimes called a drawing account) is used by sole proprietors or partnerships to draw (i.e. take) money from a business.


Employment Allowance

This allows employers and charities to claim back up to £3,000 every tax year from their employers’ Class 1 National Insurance (NIC). This means that if you pay less than £3,000 in a tax year, you won’t need to pay any Class 1 NIC. You can only claim Employment Allowance for one PAYE scheme.


Financial Management

Financial management is the planning, directing, monitoring, organising and controlling of money to accomplish business objectives and return maximum value to stakeholders. It’s a specialised process that is directly associated with senior management and may involve identifying resources, devising a financial plan and establishing procedures to collect data and make financial decisions.


Fixed Assets

Fixed assets are the things a company owns and requires to create revenue – such as machinery to manufacture goods, or the premises. Fixed assets usually are not the product or service offered to end consumers, and are usually not expected to be turned into cash outside of untypical circumstances. One example of this is the sale of plant machinery to make way for an upgrade after it has been used for five years within the business.


Gross Profit

Gross profit is the difference between sales income and the cost of the goods sold. It does not include the costs of overheads such as distribution, or payroll, tax and interest payments. Sometimes, gross profit is expressed as a percentage.


Making Tax Digital

Making Tax Digital (MTD) is HMRC’s requirement for businesses to digitally keep and maintain financial records relating to tax, and to report taxes digitally, via software that’s linked to HMRC’s computers.


Essentially, the introduction of Making Tax Digital means businesses should use computer software for their accounting, so can no longer rely on paper book-based ledgers. MTD was live as of 1 April 2019 for VAT payments, while other forms of business tax will likely follow in the future. VAT-registered businesses above the VAT threshold (currently £85,000) must submit VAT returns via software and keep their VAT records digitally.


P11D

You need to file this form for each director and for each employee earning more than £8,500 a year. The P11D shows any benefits-in-kind that an employee receives, such as a company car or interest-free loans.


Reverse Charge for VAT

The reverse charge is a part of the VAT regulations and can apply when VAT-registered businesses buy from companies based outside the UK. Put simply, if the reverse charge applies then it shifts the requirement to account for VAT from the seller to the buyer. It therefore requires the buyer to pay the amount of VAT that would have paid if the purchase had been made in the UK.


For businesses that are VAT-registered, you need to include this reverse charge in your VAT return for the quarter and also need to include it in things such as invoices. If you reclaim VAT, you can also reclaim the reverse charge amount – so the reverse charge is little different in reality to other VAT payments but it must be accounted for to maintain VAT compliance.


Working Capital

Working capital is the amount of available money you have to run your business.

It’s calculated by deducting your liabilities from your liquid assets (the things you own that are cash or can be converted to cash quickly with little loss of value).


Inventory, property or money owed from your customers isn’t included in your working capital calculation. Having a good working capital means you can cover your overheads and run your business. It’s a good measure of how well your business is doing.


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