When working with your accountant, you’ll probably encounter several terms, acronyms, and abbreviations with which you’re unfamiliar.
Don’t worry, you’re not the only one left scratching your head. Accountancy is, unfortunately, full of odd terminology that only makes sense to anyone who deals with financials on a daily basis.
At Trinity Accountants we try to use simple terminology and explain your accounts to you in ways you understand, but inevitably there will be words and concepts you’ll need to get your head around.
To help you out, we’ve decided to put together a list of the most common accounting terms you’ll need to be familiar with as a business owner.
This is definitely a ‘read it and bookmark it for later’ kind of blog!
This stands for ‘Profit and Loss’ and is one of the most common accounting terms you’ll encounter.
A P&L report is sometimes referred to as an ‘income statement’ and reveals your profits over a specific period of time.
It does this by comparing your firm’s total revenue with its total costs and expenses for that period. It’s one of the easiest ways to figure out how you can increase your profitability.
A balance sheet is a statement that provides evidence of a business’s equity and assets, giving an idea of how much the business is worth – your financial position.
If you’re looking for financial assistance from a bank or investor, it’s one of the first documents they’ll ask to see.
VAT is short for ‘Value Added Tax’, which is a government tax added to most products and services provided in the UK. This tax is paid for by whoever is purchasing the products.
VAT-registered businesses can also reclaim the VAT paid on purchases, which is then offset against the VAT they pay on their sales.
Your break-even point is the amount of revenue you’ll need to generate each month in order to cover your overheads.
To work out your break-even point, you’ll need to add up all your costs and expenses for the month. The resulting figure is the total amount of revenue you’ll need to bring in if you want the business to break even. Exceed that number, and you’ll be making a profit.
Debtors and creditors
A debtor is, quite simply, an entity who is yet to settle their invoice, and your debtors list will reveal which of your customers still owe you money.
Creditors are people or businesses to whom money is owed. So, in this instance, that would be you! Another example of a creditor is a credit card company or loan firm; their job is to provide credit so that a product or service can be purchased.
There are several types of tax return in the UK, therefore it’s vital you get your head around each one. Here are the most common you’re likely to run into as a business owner.
A VAT return includes how much VAT your business generated on sales and totals the VAT you can claim back as a result of business purchases.
Any business that is VAT registered has to submit a VAT return, which takes place once per quarter.
Income or self-assessment returns
This tax return is generally made by individuals who are self-employed and not paying tax through their employer.
A tax self-assessment is completed each year, which then allows HMRC to work out how much tax is due from that individual.
Corporation tax return
A corporation tax return is filed by any UK limited company each year to declare their profits. This then dictates how much corporation tax they pay.
Partnership tax return
This is a tax return completed by two or more people who work together to make a profit.
A partnership tax return declares the profits and losses of the partnership as a whole, accounting for the income and how it is distributed between partners. This information can then be used to help tax calculations.
CIS (Construction Industry Scheme)
This is a scheme implemented by HMRC to collect tax from workers who are subcontracted to the construction industry.
It was created to stop tax evasion by collecting the tax from the contractor before the rest of the payment is handed over.
Get in Touch
We hope our list of common accounting terms proves useful. Of course, if you come across a term that isn’t listed, or just need general accounting advice, please get in touch with the Trinity team.