Have you ever had a meeting with your accountant and heard them they say a bunch of random words that you don’t understand?
Here are a few key accountancy related terms and their definitions to help you out:
Audit – An independent review of financial statements to see whether they give a true and fair reflection of the activities of the company during their accounting period.
Accruals – A cost that a business has incurred but has not yet been paid for or invoiced. This is different to a creditor, as a creditor would have invoiced the business about money they owe.
Balance sheet – A financial statement prepared by accountants that provides a snapshot of the company’s assets and liabilities at a specific point in time.
Bookkeeping – Maintaining a detailed record of income and expenses of a business. This process aids accountants when preparing financial statements as the information is ready to be placed into the statements.
Creditors – People, usually suppliers, that the business owes money to.
Debtors – People, usually customers, that the business is owed money from.
Dividends – A payment made from the post-tax profits of a company to the shareholders of a limited company. Dividends are taxed at a lower rate than a salary.
Equity – Part of the bottom half of a balance sheet – it shows the funds available to shareholders and typically includes share capital and retained profits. Equity is equal to the net assets from the balance sheet.
General ledger – A set of numbered accounts that helps to keep track of financial transactions in order to prepare financial statements. This would include sales and purchase ledgers, as well as asset and liability ledgers. Bookkeepers allocate financial transactions into different ledgers.
Net assets – The net value of all assets of the business less all the liabilities of the business. Net assets are equal to equity from the balance sheet.
Prepayments – A cost that a business has been invoiced for or paid, but has not yet received the benefit. A typical example of this would be insurance for the year.
Profit and Loss account – A financial statement that shows a summary of all your income and expenses, providing a profit for the year at the end.
Retained profit – The sum of all previous year profits kept in the company, less any dividends paid out.
Tax evasion – Illegal ways to reduce one’s tax burden. This may include not declaring all income (cash deals) or creating fake expenses.
Trial balance – A list of all the ledgers in one document which shows their respective balances. It summarises both the profit and loss account and balance sheet together.
If you want help understanding the financials behind your business, fill out our contact us form and a member of our team will be back in touch.