Accounting Jargon – Understanding Key Terms

Fri, Feb 19, 2021

Accounting Jargon – Our handy glossary to help you understand some of the terminology used by Accountants and Bookkeepers

As an outsourced finance function, we provide small businesses with bookkeeping, management accounts and finance director support. We appreciate that not everyone is as au fait with the terminology used, after all, that’s why they come to us.

Here’s a handy accounting guide pulled together by our Finance Manager, Kayleigh, which will help you to understand some of the regularly used jargon in accounting.

Accounting Jargon – A Glossary

Accruals – Accruals are costs that have been incurred during the period, but that haven’t yet been invoiced (but may or may not have been paid).

Accrual accounting – Accrual accounting is used by most businesses, this is the process of matching all income and expenses that occur in a certain period (regardless of when they have been invoiced/billed).

Acid-Test – A ratio between a business’ current assets that are easily converted to cash vs its current liabilities. An Acid-Test is a basic liquidity measure which determines whether a business can currently afford to satisfy its current liabilities.

Asset – An asset is something of value which is expected to be used to generate profits within the business. A good example of a direct asset in manufacturing would be a piece of machinery.

Bad debts written off – This is the complete write-off of aged receivables that you don’t expect to receive payment for.

Cash accounting – Cash accounting is a form of accounting used by limited businesses, usually sole traders, for tax purposes. It looks at when money has been spent and received. You can use accruals accounting for your main records but cash accounting for VAT, which has a few benefits for cashflow purposes.

Confirmation Statement – A Confirmation Statement is a document submitted to Companies House which confirms the identity of the directors and company secretary, as well as the registered office, the shares in issue, the industry of the company, and who has significant control over the company. It does not contain financial information about trading.

Depreciation – Depreciation is a way of allocating the cost of an asset over its useful life, so that the cost of using it is split over the long period of time it is used to generate profits.

Disallowable expense – An expense that is included when determining the trading profit of a business, but that is not allowed to reduce profits for tax purposes.

Dividend – Dividends are the distribution of profits to the shareholders of a company.

Doubtful debt – Doubtful debt is a provision against specific aged receivables (sales invoices) that you don’t expect to receive payment for.

General debt provision – General debt provision is a percentage of total debt that a provision is made for, to account for a small amount of various receivables not being paid. This type of debt provision is not tax deductible.

What is the difference between Statutory Accounts and Management Accounts? – Statutory Accounts must be filed with the Registrar of Companies and should be for 12 months (except in certain circumstances) and be delivered in specified formats.

Management Accounts are for the Managers or Directors of a business, so that they can monitor performance and make decisions. For this reason they can be much more bespoke, often giving more detail about different product lines/locations etc. and the period reported is often much shorter (generally monthly or quarterly).