Understanding your bookkeeping and accounts can be complicated enough, but if you don’t know the lingo, that certainly doesn’t help! Lots of the terms used aren’t even applicable to cash basis sole traders which can make things even more confusing!
I’m going to break some of it down for you here, into easier-to-understand explanations, so that you can tackle your accounts and bookkeeping from a place of confidence and understanding.
Accounts – The record of the transactions that happen within your business. This might be in a spreadsheet or in accounting software but it shows all the profit and loss for a business over a given period of time.
Accounting Period – the amount of time that the profit and loss report statement is looking at, usually April to April in the UK to fit the Tax Year for sole traders.
Accruals – the accruals concept is one of the core features of accounting, but thankfully not one you need to worry about if you use cash basis accounting. It is the principle of recording all transactions, costs, payments and events recorded in the period that they belong, not necessarily when they are paid. For example, you send an invoice to a client but it doesn’t get paid for a few months. You record that income on the date of the invoice, not on the date of payment.
Assets – something with current or future value to the business. There are different types of assets depending on the type of items, but buildings, equipment, and cash are all business assets.
Audit – an independent external check or review of an accounting system and its elements.
Bad debt – when a credit customer (the debtor) cannot pay their invoice and there is no chance you are ever going to recover it, this invoice would be written off as bad debt.
Balance sheet – a statement showing a business’s financial position and assets on a set date point.
Capital – finance provided by the owner to allow a business to continue or start trading or to acquire assets that the business cannot afford. Capital can be drawn out again once the business is in more profit. It’s important to understand what is capital and what is income within your business.
Capital expenditure – money spent on fixed assets for the business, such as the purchase of land or buildings.
Cash flow– the movement of money in your business, either in through sales or out through expenses.
Cash flow projections – a cash flow projection or cash flow forecast maps out the expected money in and out of your business. A good cash flow can help you to identify times when you might not have enough to cover the expenses you are due to pay.
Cost of goods sold (or cost of sales) – the cost of materials or labour needed to create the product that is sold. This is used to help determine the profit margin on a particular item.
Credit sale – a product or service is given to a customer, but payment is to come later, or via a staggered payment plan.
Creditor – someone or a business that is owed money by the business.
Debtor – someone or a business that owes money to the business.
Depreciation – the loss of value over time of a business asset. This is something that is done so that the right value of your assets are in the balance sheet of your business, it’s important to remember not to include this in your tax return.
Drawings – the amount of cash the owner takes from the business for personal use.
Expense – money paid out as part of business running costs e.g. to buy material, pay insurance or for business cards.
Inventory – list of stock (or stock) held for manufacture or ready for sale. When you are using cash basis accounting you don’t need to complete an inventory.
Invoice – a bill sent to detail the cost of an item or service.
Liabilities – debts owed by a business.
Profit – income minus expenses, it shows how much a business has generated in cash in
Profit and loss account – a financial statement showing the sales and expenses (profit and loss) of a business over time. This is the one you look at when you are filing your tax return.
Retained earnings – accumulated profits that can be used for future investment.
Sole trader – an individual owning and operating a business alone and under their name.
Stock – materials and products held for sale.
Turnover – sales and revenue of a business.
You may come across more words and terms that can be found here, but these will be the main ones used by sole traders using cash-based systems.
If these terms are still confusing, or you’re really muddled with your bookkeeping and accounts, then it may be best for you to seek some training or support in terms of outsourcing your bookkeeping to Handmade Accounts, but for the most part, I hope this has unmuddled your mind and shone some light on to the confusing terms of bookkeeping!