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Understanding accounting terms is crucial for any business owner. At our accounting firm in Herne Bay, we believe clarity helps you make better financial decisions. To help you navigate your business finances confidently, here are essential accounting terms explained simply and clearly:
Essential Accounting Terms:
- Accruals and Prepayments: Recording money owed or paid in advance, matching actual business activities.
- Balance Sheet: An overview showing what your business owns and owes at a specific moment.
- Capital Allowances: Tax savings on significant business purchases like equipment or machinery.
- Cash vs Accrual Accounting: Cash accounting records transactions when money moves; accrual accounting tracks them when invoiced.
- Depreciation: Spreading out the cost of an asset (e.g., equipment) over its useful life.
- Directors’ Loan Account: Tracks money borrowed from or lent to your business by its directors.
- Dividend Tax Allowance: Annual tax-free limit on dividends you can receive from your business.
- IR35 Legislation: Rules determining if freelancers and contractors should pay tax as employees or as businesses.
- Making Tax Digital (MTD): The UK government’s initiative requiring digital records and online tax submissions.
- Payments on Account: Advance payments towards next year’s tax bill based on the current year’s tax liability.
- Profit & Loss Statement (P&L): Clearly shows business income and expenses over a period, indicating profit or loss.
- Retained Earnings: Profits reinvested into your business instead of being paid to owners or shareholders.
- VAT (Value Added Tax): Tax businesses must charge once annual turnover hits £85,000.
- Working Capital: Measures available funds to cover immediate bills and expenses.
Frequently Asked Questions Accounting Terms
What is cash in accounting terms?
Cash is money in physical form or held in accounts available for immediate use.
Is cash in hand illegal?
No, cash in hand isn’t illegal if properly declared for tax purposes.
How to prove cash in accounting?
Through receipts, invoices, and documented records of transactions.
Do you pay tax on cash in hand?
Yes, income received as cash must be declared for tax purposes.
What is the rule for cash in hand?
All cash income must be recorded accurately and declared to HMRC.
Is it illegal to keep cash at home in the UK?
No, it’s legal provided it’s declared for tax purposes.
How is cash recorded in accounting?
Recorded under current assets as part of your balance sheet.
Can I show cash as proof of funds?
Yes, bank statements or certified cash declarations can show proof of funds.
Why is cash high risk?
Cash is vulnerable to theft, loss, and fraud, and challenging to trace.
What is liquidity in accounting terms?
Liquidity refers to how quickly assets can be converted into cash.
Is liquidity an asset or liability?
Neither—it’s a measure of how easily assets can become cash.
What is plant in accounting terms?
Long-term assets used in business operations like machinery.
Is a plant an asset or liability?
A plant is an asset.
What is dividend in accounting terms?
Dividends are profits paid out to shareholders.
Are dividends an asset or expense?
Neither—dividends are distributions from retained earnings.
What is SOA in accounting terms?
Statement of Accounts—a detailed summary of financial transactions.
What is JV in accounting terms?
Journal Voucher—a document authorizing financial transactions.
What is equity in accounting terms?
Owner’s claim on the company’s assets after liabilities are paid.
What is debit and credit in accounting terms?
Debit refers to money flowing into an account, credit to money flowing out.
What is capital in accounting terms?
Money or assets invested into a business.
Is capital the same as equity?
Often similar; capital refers to funds contributed, equity is ownership value.
What is goodwill in accounting terms?
An intangible asset representing brand reputation, customer relations, etc.
How can accounting terms cause confusion?
Misinterpretation of terms or lack of clear explanations.
Are accounting and bookkeeping interchangeable terms?
No—bookkeeping focuses on recording transactions, accounting involves interpreting and reporting those transactions.
Need more clarity?
We’re here to simplify complex accounting terms. Contact us today for straightforward, jargon-free advice tailored to your business.
