Accounting Glossary

The world of accounting is full of technical jargon that is often hard to follow. We’ve tried to strip this jargon away and create a plain-speaking glossary that covers the most common accounting terms you’ll find.

We’ll be updating this glossary regularly, so be sure to check back if there’s a term you can’t see.

A

Accounts Payable
An amount owing to a supplier for the provision of goods or services. Also known as a Trade Creditor.

Accounts Receivable
An amount due from a customer for the provision of goods or services. Also known as a Trade Debtor.

Accounts
A collection of documents that present accounting information over a set period, normally quarterly or annually. The main documents within a set of accounts are the profit and loss statement, balance sheet, cash flow statement, and statement of changes in equity, as well as accompanying explanatory notes. Also known as Financial Statements.

Accruals Basis
An accounting method. Revenue is reported as it is earned, and expenses are reported as they are incurred. This means that income and expenses are reported as they occur, not when the associated cash is received or paid.

Amortisation
An expense allocated systematically against an intangible asset over a period of time.

Asset
A resource controlled by an entity from which future economic benefits are expected to flow. Examples of assets include accounts receivable, cars, cash, investments, land and buildings, and plant and machinery.

Audit
An independent review of an entity’s financial statements that provides an opinion on whether the financial statements comply with generally accepted accounting practice.

B

Balance Sheet
One of the main financial statements. It provides an overview of an entity’s assets, liabilities and owner’s equity at a particular point in time. Also known as a Statement of Financial Position.

C

Cash
Refers to money that is readily available. Examples include cash on hand, bank deposits, and cheques.

Cash Basis
An accounting method. Revenue is reported as cash is earned and expenses are recognised when cash is paid. This method tends to be used by individuals and small companies.

Cash Flow Statement
Appears in financial statements. It provides details regarding the sources and use of cash over a given period. Information is usually presented in three sections, covering operating activities, investing activities and financing activities. Also known as a Statement of Cash Flows.

Company
An entity, legally separate from its owners, that is formed to carry on a business or investment activity. A company is one possible business structure and differs to a business structure as a sole trader or partnership. Your accountant or lawyer can advise on the best possible business structure for you.

Corporation Tax
A tax levied on companies each financial year. Companies are usually subject to corporation tax on their trading profits, investments, and any chargeable gains.

Cost of Goods Sold
The costs attributable to making and producing finished goods for sale, including raw materials. Also known as Cost of Sales.

Creditor
A person or organisation to whom the entity owes money. For example, if a bank lent money to a business, then the bank would be a creditor on the business’ balance sheet.

Current Asset
An asset that is reasonably expected to convert into cash within one year of the balance sheet date. Examples of current assets include cash, accounts receivable, and inventory.

Current Liability
A liability that is expected to be settled, usually within one year of the balance sheet date. Examples of current liabilities include accounts payable.

D

Debtor
Someone, be it a person or organisation, that owes the entity money.

Depreciation
An expense allocated systematically against an asset over its estimated useful life.

Dividend
An amount paid out of post-tax profits to a company’s shareholders. The amount of dividend a shareholder receives is often based on the number of shares they hold.

Drawings
Refers to cash taken from a business for personal use. The term is commonly used in the context of a sole trader business or partnership.

E

Equity
When referring to a business, equity is the difference between the entity’s assets and liabilities.

F

Financial Statements
A collection of documents that present accounting information over a set period, normally quarterly or annually. The main documents within a set of financial statements are the profit and loss statement, balance sheet, cash flow statement, and statement of changes in equity, as well as accompanying explanatory notes. Also known as Accounts.

Fixed Asset
Another term for property, plant and equipment held by a business. Items of property, plant and equipment are recognised as assets when their cost can be reliably measured and it is probable that future economic benefits will flow to the business as a result of holding the asset.

G

Going Concern
An accounting term that features within financial statements. A going concern is a business that can remain in business and meet all of its commitments. If a business is not described as a going concern then it is likely the business will go bankrupt.

Gross
The amount before any deduction is taken.

Gross Profit
Sales minus cost of sales.

I

Income Statement
One of the main financial statements that summarises the revenues, costs, and expenses that a business has incurred over a period of time. Also known as the Profit and Loss Statement.

Income Tax
A tax that individuals pay on their income. Income covers items such as employment income, profits from a sole trade, pension income, and investment income. However, not all income is subject to income tax. Some exceptions include any premium bond or national lottery winnings.

Intangible Asset
An asset that has no physical presence. Examples of intangible assets include goodwill, patents, and trademarks.

Inventory
Refers to the cost of raw materials, work-in-progress, and finished goods that can be sold to customers. Also known as Stock.

L

Liability
A present obligation that has arisen as a result of past events. The settlement of the obligation is normally achieved by the business paying an amount to lenders or suppliers. Examples of liabilities include bank loans and trade creditors.

Limited Liability Company
Usually refers to a company where shareholders have their liability limited to the amount of capital they have contributed.

Liquidity
The measure of whether a person or organisation can generate enough cash to meet their immediate or short-term obligations. In accounting terms, a company is considered liquid if its current assets can meet its current liabilities.

N

National Insurance Contributions
Payments made by employers and employees to fund certain state benefits and pensions. For the 2018/19 tax year, which runs from 6 April 2018 to 5 April 2019, you pay national insurance if you are an employee and earn above £162 a week, or if you’re self-employed and make a profit of £6,205 or more a year.

Net
The amount remaining after deductions have been taken.

Net Assets
Total assets minus total liabilities. In a sole trader business, net assets are known as owner’s equity. In a company, net assets are known as shareholders’ equity.

Net Profit
The amount remaining once all expenses have been deducted from total revenue. These expenses include all operating expenses, interest, and tax.

O

Ordinary Share
Represents equity ownership in a company. Holders of ordinary shares are usually entitled to vote at the company’s meetings and may be entitled to share in the profits of the company.

P

Partnership
In a partnership, two or more entities such as individuals or companies enter into an agreement to carry on a trade or business for profit and to share in those resulting profits. A partnership is one possible business structure and is different to a sole trader or company business structure. Your accountant or lawyer can advise on the best possible business structure for you.

Personal Allowance
UK resident individuals are entitled to a personal allowance. A personal allowance is the amount of income you do not have to pay tax on. For the 2018/19 tax year, which runs from 6 April 2018 to 5 April 2019, the personal allowance is £11,850. There are different allowances for certain groups, such as those that are over 65 or those who have taxable income in excess of £100,000.

Preference Share
A share that usually entitles its owner to a fixed dividend, the payment of which takes priority over any dividend that an ordinary shareholder is entitled to.

Profit
The remaining amount once costs have been deducted from sales. Often used as a measure of a business’ success. See Gross Profit and Net Profit for further information.

Profit and Loss Statement
One of the main financial statements that summarises the revenues, costs, and expenses that a business has incurred over a period of time. Also known as the Income Statement.

R

Retained Earnings
Cumulative earnings of a company that have been retained for future re-investment or for future distribution to the company’s owners.

S

Shareholder
An owner of one or multiple shares in a company. See Ordinary Share and Preference Share for further information.

Sole Trader
A sole trader is a self-employed individual who runs their own business. A sole trader is personally responsible for any profits or losses their business makes. A sole trader is one possible business structure and differs to a business structure as a company or partnership. Your accountant or lawyer can advise on the best possible business structure for you.

Statement of Cash Flow
Appears in financial statements. It provides details regarding the sources and use of cash over a given period. Information is usually presented in three sections, covering operating activities, investing activities and financing activities. Also known as a Cash Flow Statement.

Statement of Changes in Equity
One of the main financial statements. It shows the changes to each shareholder’s equity account over an accounting period. Also known as a Statement of Shareholders’ Equity.

Statement of Financial Position
One of the main financial statements. It provides an overview of an entity’s assets, liabilities and owner’s equity at a particular point in time. Also known as a Balance Sheet.

Stock
Refers to the cost of raw materials, work-in-progress, and finished goods that can be sold to customers. Also known as Inventory.

T

Turnover
The sales of a business.

Trade Creditor
An amount owing to a supplier for the provision of goods or services. Also known as Accounts Payable.

Trade Debtor
An amount due from a customer for the provision of goods or services. Also known as Accounts Receivable.

W

Working Capital
Calculated by subtracting current liabilities from current assets. Refers to the amount of money or assets a business can use in its day-to-day operations.