Accountants have a reputation for using big long technical words to make themselves feel intelligent.
At Maslins, we don’t like jargon, but we understand other accountants do. To that end, we have created (and are continually expanding) this page to help you understand your current advisers.
JARGON TERMINOLOGY AND A LAYMAN EXPLANATION
Abbreviated Accounts – Small companies can file these with Companies House. Abbreviated accounts do not require a profit & loss account so can help to conceal some information that your competitors may find useful.
Accrual – A cost that has been incurred, but not yet paid for or invoiced. Examples include gas & electric charges, or professional advice given but not yet billed. The opposite of prepayments.
Accrued Income – Work that you have done but not yet invoiced. This is an asset as costs have been incurred, but the income is yet to be recognised. Opposite of defered income.
Aged Creditors Report – Funds payable from the business and the length of time they have been owed. Paying suppliers in line with their terms should ensure they are keen to deal with you again.
Aged Debtors Report – Funds due to the business and how long they have been due. Use as part of your credit control procedures, make sure you chase up debts before they become too old.
Amortisation – Very similar to depreciation, but typically used for intangible assets such as goodwill.
Annual Investment Allowance – Each business effectively gets 100% capital allowances on the first large chunk of eligible capital expenditure it incurs each year (amount varies each year, so check with HMRC/your accountant). The AIA specifically excludes cars.
Assets – Something the business owns that should lead to funds flowing in. Opposite of liabilities.
Audit – A statutory audit is required by fairly large businesses (for size definitions see here), and these must be undertaken by a firm of registered auditors. Most small businesses do not require an audit.
B2B – Business to business. When you sell predominantly to other businesses.
B2C – Business to consumer. When you sell predominantly to Joe Public.
Balance Sheet – A snapshot at a specific point in time of all the assets and liabilities of a business.
Benefit in Kind – Non-cash items used to reward staff. They are given a notional cash value which you pay tax on. Examples include company cars and health/life assurance.
Bookkeeping – Maintaining a detailed record of the receipts and expenses of your business. Most bookkeeping packages will also keep track of your assets and liabilities.
Capital Allowances – The tax equivalent of depreciation. HMRC don’t trust accountants to use a suitable depreciation policy, therefore they created their own.
Capital Expenditure – Buying things expected to last more than 2 years (eg van or printer). This is different to revenue expenditure, which includes consumables (eg fuel or ink cartridges).
Capital Gain – Profit made on the sale of an asset acquired with the intention of it being used in the business rather than resold. Examples include profit on sale of office buildings, or the business itself.
Cash Flow – How money has flowed in to/out of the business. A sale hits the profit and loss as soon as it is made, but doesn’t appear in your cash flow until you have been paid.
Company Secretary – A redundant role, companies no longer require a company secretary.
Contribution – Effectively the gross profit on each sale. These contribute towards the fixed costs/overheads.
Corporate Finance – Often refered to when talking about mergers and acquisitions (ie buying other businesses). Corporate finance specialists will help you value a business and obtain funding to buy it.
Corporate Recovery – Nice name for an insolvency practitioner. Struggling companies may ask a them to help save the business. If it is beyond being saved, they will liquidate it.
Corporation Tax Computation – Explains how figures in the statutory accounts are adjusted for tax purposes to give the figures that go on the corporation tax return.
Corporation Tax Return – HMRC form CT600. Includes key numbers from the computation in a standardised form for HMRC.
Credit Control – Making sure people who owe you money pay you. This can be before the sale is made (by performing credit checks) or after by chasing the customer with letters and phone calls.
Creditors – People who the business owes money to.
Debtors – People who owe the business money. You should chase these up on a regular basis to ensure they are converted into cash.
Defered Income – Where someone has paid you/been invoiced in advance of work being done. This is a liability as the sale is recognised, but the costs aren’t yet incurred. Opposite of accrued income.
Defered Tax – A fairly complex accounting principle which represents any timing differences between your accounting profit and your tax profit.
Depreciation – An accounting concept to write off the value of an asset over time. For example a new van may cost £15,000. After a year it may only be worth £10,000. Depreciation represents this fall.
Director – Limited Companies must have at least one director, controlling the overall running of the company. In small companies there may only be 1 director who also owns all the shares. Bigger companies often have many directors, both executive (involved in the day to day running of the business) and non-executive (only attend occasional board meetings to provide their point of view).
Dividends – Shareholders of Limited Companies may be entitled to dividends. Dividends are taxed on the individual at a lower rate than a salary, but they are paid out of after (corporation) tax profits.
Dormant – Where a company has not traded at all during a year. There is therefore no profit and loss account, and the balance sheet at the beginning and end of the period is exactly the same.
Equity – The bottom half of a balance sheet. Equity is the funds attributable to the shareholders and typically includes the share capital plus retained profits. This should equate to your net assets.
Fixed Asset – Asset acquired to be used rather than resold. Usually held for over 1 year. Examples include computer equipment, a lease on a property, or a van.
Fixed Cost – A cost which does not change regardless of your level of sales/purchases. Examples include property rent and rates, or the salaries of back office staff.
GAAP – Generally Accepted Accounting Principles. The rules that dictate how accounts are prepared.
Goodwill – An intangible asset that represents the value of a business over and above its identifiable assets. Businesses are typically sold for more than the book value of their net assets.
IFRS – International Financial Reporting Standards. The international equivalent of UK GAAP.
Insolvent – Where you have negative net assets. In other words the total value of your liabilities exceeds the total value of your assets.
Intangible Fixed Asset – An asset that you cannot see or touch, but does hold value. Examples include a strong brand name, patents held, or goodwill.
Liabilities – A debt the business owes that should lead to funds flowing out of the business. Opposite of assets.
Limited Company – A separate legal entity to its owners. Many businesses choose to operate via a Limited Company either for the limited liability, or for tax reasons.
Limited Liability – Shareholders of companies have limited liability. This means (provided they do not act negligently or fraudulently) should the company fail, the most they can lose is their share capital.
Liquidation – In insolvent cases, this is where a company’s assets are all sold off quickly in order to raise cash to hopefully pay the creditors before closing the company down. In solvent cases, all creditors will be paid, sometimes this is tax motivated or simply to have a professional formally overseeing the closure of the company.
Net Assets – The net value if you sum up all the assets and deduct the value of all the liabilities. If you end up with a negative figure, you have net liabilities and the business is insolvent.
Net Book Value – Most commonly used for fixed assets. The net book value (or carrying value) is the cost, less all depreciation to date. This will often broadly represent market value, though this will not necessarily be the case.
Net Current Assets – The net value if you sum up all the current assets and deduct the value of all the current liabilities. Can be a more useful tool to decide how easily you can pay your day to day bills.
Overheads – Costs which don’t directly relate to sales. These are typically also fixed costs, so things like rent & rates, accountancy fees, depreciation.
Prepayment – Something you have been invoiced for, but have not yet received the benefit. Examples include insurance paid up front, or a software licences invoiced in advance. The opposite of accruals.
Profit & Loss Account – A summary of all your income and expenditure over a given period.
Registered Office – A company’s address that Companies House send official documents to. You should typically either choose your main place of work, or your accountant/solicitor’s office.
Retained Profit – The sum of all profits (after tax) to date, less dividends paid out.
Revenue Expenditure – Buying things which are used up in the day to day running of your business (eg petrol or ink cartridges). This is different to capital expenditure, which includes things expected to be used over a longer period of time (eg a van or a printer).
Self Assessment Tax Return – Or personal tax return. You need to fill in one of these if you are self employed, have other complex income (eg buy to let properties), or HMRC simply request you to do so.
Share Capital – Limited Companies typically have share capital. Whoever owns the shares owns the company. There may be many shareholders all owning a very small percentage of the company each, or one person (or other company) who owns 100%. Shareholders typically have a right to dividends, attend the AGM (annual general meeting), and vote on major decisions involving the company.
Tax Avoidance – Reducing your tax burden in ways that fully comply with the law (legal). This ranges from ensuring you claim allowances to complex offshore schemes which HMRC constantly try to stop (the latter are often on the edge of the law, so can be disagreement on whether they are tax avoidance or tax evastion).
Tax Compliance – Assisting a business to meet all of its tax obligations. This generally involves ensuring their returns are accurate and submitted on time, and that payments are also made on time.
Tax Evasion – Reducing your tax burden in ways that do not comply with the law (illegal). This typically involves not declaring all your income (“cash deals”) or inventing non-existent expenses. Don’t do it.
Tax Haven – A country with very low rates of tax. If you still live in the UK and/or your business is run from the UK, you will pay UK tax.
Tax Planning – Helping a client (legally) reduce their tax burden. Many accountants emphasise this but are often just saying what you want to hear. Ask them to be more specific and see if they squirm.
Trial Balance – A list of all general ledger codes and their respective balances. Only really required by accountants, but basically it summarises both your balance sheet and profit & loss into one document.
Variable Cost – A cost which changes with your level of output. Examples include raw material costs or costs of subcontractors paid by the hour.
If there are any specific bits of terminology/jargon that your accountant uses, e-mail us and we’ll reply with a simple explanation and probably add it to this page to benefit future readers too.