GLOSSARY
The words your accountant
assumes you know.
61 accounting, tax and payroll terms, each defined in a sentence and then shown with real numbers. Written for the person running the business, not for the exam.
A
- Accounts payable
- Accounts payable is the money a business owes suppliers for goods and services received but not yet paid for. It sits on the balance sheet as a current liability and in UK accounts is usually called trade creditors.
- Accounts receivable
- Accounts receivable is the money customers owe a business for invoices it has issued but not yet been paid for. It is a current asset on the balance sheet, and in UK accounts is usually called trade debtors.
- Accruals
- Accruals are costs or income belonging to an accounting period that have not been invoiced or paid by the end of it. Recording them shows what the business earned and used, not just what went through the bank.
- Aged debtors
- An aged debtors report lists every unpaid customer invoice grouped by how long it has been outstanding, typically current, 30, 60 and over 90 days. It shows who owes what, and which debts are turning into a problem.
- Allowable expenses
- Allowable expenses are business costs HMRC lets you deduct from income before working out tax. The test is that the cost was incurred wholly and exclusively for the business; a fair share of a mixed-use cost also qualifies.
- Annual accounts
- Annual accounts are the financial statements a business prepares each year: a profit and loss account showing income and costs, and a balance sheet showing what it owns and owes. Limited companies must file them at Companies House.
- Assets
- Assets are the things a business owns or is owed that have value: cash, unpaid customer invoices, stock, equipment, vehicles and property. They sit on one side of the balance sheet, with liabilities and equity on the other.
B
- Bad debt
- A bad debt is a customer invoice that will not be paid, because the customer has gone bust, disappeared or refused. It is written off as a cost, and VAT charged on it can usually be reclaimed.
- Balance sheet
- A balance sheet is a snapshot of what a business owns, what it owes and what is left for the owners, at a single date. Assets always equal liabilities plus equity, which is why it balances.
- Bank reconciliation
- Bank reconciliation is matching every transaction on the bank statement to an entry in the books, and every entry in the books to the bank. Anything left unmatched is a missing record or a mistake, found before it compounds.
- Bookkeeping
- Bookkeeping is the routine recording of every transaction a business makes — sales, purchases, payments, receipts and bank movements — categorised and kept up to date. Accounts, VAT returns and tax returns are all built from it.
C
- Capital allowances
- Capital allowances are how UK businesses get tax relief on equipment, vehicles and other long-lasting assets. Rather than deducting the cost as an ordinary expense, you claim an allowance against taxable profit, in one go or spread over years.
- Cash accounting
- Cash accounting records income when money arrives and costs when money leaves, rather than when invoices are dated. In the UK it is a VAT scheme and, as the cash basis, the default way most sole traders calculate taxable profit.
- Cash flow
- Cash flow is the movement of money into and out of a business over a period: what came in, what went out, what was left. It is not profit; a profitable business can run out of cash waiting to be paid.
- Chart of accounts
- A chart of accounts is the list of every category a business records transactions against — sales, materials, rent, bank, VAT, debtors — each with a nominal code. It is the structure the ledger and the accounts are built on.
- CIS (Construction Industry Scheme)
- The Construction Industry Scheme is HMRC's system for construction work, under which contractors deduct tax from subcontractors' labour payments and pay it to HMRC, with the subcontractor setting the deduction against their own tax bill.
- Companies House
- Companies House is the UK registrar of companies. Every limited company is created by registering there, and must file annual accounts and a confirmation statement with it, all of which is public.
- Corporation tax
- Corporation tax is the tax a UK limited company pays on its taxable profits. The company works out the bill itself, pays it nine months and one day after its year end, and files a return with HMRC.
- Credit note
- A credit note is a document that cancels all or part of an invoice already issued. It reduces what the customer owes, and it is the correct way to correct an invoice rather than deleting or editing it.
- Creditors
- Creditors are the people and organisations your business owes money to: suppliers with unpaid invoices, HMRC for tax not yet paid, and lenders. The total appears on the balance sheet as a liability.
D
- Debtors
- Debtors are the customers who owe your business money for invoices you have issued but they have not yet paid. The total is an asset on the balance sheet, but it is not cash until it arrives.
- Depreciation
- Depreciation spreads the cost of a long-lived asset, such as a van or a machine, over the years it is used, so each year's accounts carry a share of the cost rather than all of it at once.
- Director's loan account
- A director's loan account records money moving between a limited company and its director that is not salary, dividend or expenses. It shows at any moment whether the company owes the director, or the director owes the company.
- Dividends
- Dividends are payments a limited company makes to its shareholders out of profit after corporation tax. They are not a business cost, can only be paid from profits the company has, and are taxed on the recipient.
- Double-entry bookkeeping
- Double-entry bookkeeping records every transaction twice, as a debit in one account and an equal credit in another, so the books always balance and every pound can be traced to where it came from and where it went.
E
- EBITDA
- EBITDA is earnings before interest, tax, depreciation and amortisation: a business's operating profit with financing costs, tax and non-cash charges for assets stripped out, used to compare underlying trading performance.
F
- Fixed assets
- Fixed assets are things a business buys to use for more than a year rather than to sell: vehicles, equipment, computers, property. They sit on the balance sheet at cost less depreciation, not in the profit and loss.
G
- General ledger
- The general ledger is the full record of every transaction a business has posted, organised by account. Every invoice, payment, payroll run and journal lands here, and the profit and loss and balance sheet are built from it.
- Gross profit
- Gross profit is turnover minus the direct costs of the goods or services sold, such as materials, stock and subcontract labour, before overheads. It shows whether what you sell makes money before the cost of running the business.
I
- Input and output VAT
- Output VAT is the VAT you charge on sales; input VAT is the VAT you pay on business purchases. A VAT-registered business pays HMRC output less input for each period, or reclaims the difference if input is higher.
- Invoice
- An invoice is a document sent to a customer requesting payment for goods or services supplied. It states what was provided, the amount due, when payment is expected and, for VAT-registered businesses, the VAT charged.
J
- Journal entry
- A journal entry is a manual posting to the ledger that moves value between accounts, debits equalling credits. It records adjustments that do not come from a bank transaction or an invoice, such as depreciation or accruals.
L
- Liabilities
- Liabilities are amounts a business owes to others: unpaid supplier bills, VAT and tax due, loans, and money owed to directors. They sit on the balance sheet opposite assets, split between those due within a year and the rest.
- Limited company
- A limited company is a business registered at Companies House as a legal entity separate from its owners. It pays corporation tax on its profits, and its shareholders' liability is limited to what they have put in.
M
- Making Tax Digital (MTD)
- Making Tax Digital (MTD) is HMRC's requirement that businesses keep digital records and file returns from compatible software rather than retyping figures into a website. It applies to VAT-registered businesses and is being extended to income tax in stages.
- Margin
- Margin is profit expressed as a percentage of the selling price. Gross margin deducts only the direct cost of what was sold; net margin deducts everything, including overheads. Unlike markup, it is measured against price, not cost.
- Mileage allowance
- Mileage allowance is HMRC's flat rate for business miles driven in your own vehicle, claimed instead of actual running costs. For cars and vans it is 45p a mile for the first 10,000 business miles a year, then 25p.
N
- Net profit
- Net profit is what is left of a business's income after every cost has been deducted: cost of sales, overheads, interest and, depending on the version quoted, tax. It is the bottom line of the profit and loss account.
- Nominal code
- A nominal code is the number identifying each account in a business's chart of accounts, such as 4000 for sales in a common UK layout. Every transaction is posted to one, so the books can be totalled by category.
O
- Opening balance
- An opening balance is the amount in an account at the start of an accounting period, or on the day a business first sets up its books. It is the previous period's closing figure carried forward.
- Overheads
- Overheads are the running costs of a business that do not change with each sale: rent, insurance, software, office salaries and similar. They are deducted from gross profit to arrive at net profit.
P
- P45
- A P45 is the form an employer gives an employee when they leave, showing pay and tax deducted in the tax year to date and their tax code. The next employer uses it to continue deducting the right tax.
- P60
- A P60 is the end-of-year certificate an employer gives every employee still employed on 5 April, summarising total pay, tax and National Insurance deducted in the tax year. It must be issued by 31 May.
- PAYE
- PAYE (Pay As You Earn) is the system employers use to deduct income tax and National Insurance from employees' wages before paying them, and to report and send those deductions to HMRC. Most businesses with staff must operate it.
- Payments on account
- Payments on account are advance payments towards next year's Self Assessment bill, each half of this year's, due on 31 January and 31 July. They are deducted from the following year's bill once it is worked out.
- Payslip
- A payslip is the itemised statement an employer must give each worker on or before payday, showing gross pay, every deduction such as tax, National Insurance and pension, and the net amount actually paid.
- Profit and loss account
- A profit and loss account is the statement showing a business's income, the costs set against it, and the resulting profit or loss over a period, usually a month, quarter or year.
R
- Retained profit
- Retained profit is the cumulative profit a company has kept in the business after Corporation Tax and dividends, shown in the balance sheet. It belongs to the shareholders but has not been paid out to them.
- RTI (Real Time Information)
- RTI (Real Time Information) is HMRC's system for reporting PAYE. Employers send a Full Payment Submission on or before each payday showing who was paid, how much, and the tax and National Insurance deducted.
S
- Self Assessment
- Self Assessment is the system through which individuals report income HMRC does not already know about — self-employment, rent, dividends, capital gains — on an annual tax return, and pay the tax due by 31 January.
- Sole trader
- A sole trader is an individual running a business in their own name, with no legal separation between themselves and the business. They keep all the profit after tax and are personally liable for all of its debts.
- Statement of account
- A statement of account is a summary sent to a customer listing every invoice, credit note and payment on their account over a period, ending with the balance they currently owe.
T
- Trial balance
- A trial balance is a list of every account in the ledger with its debit or credit balance at a date. The two columns should total the same, which checks the double-entry arithmetic before accounts are prepared.
- Turnover
- Turnover is the total value of sales a business makes in a period, before any costs are deducted. For a VAT-registered business it is normally stated net of VAT.
U
- UTR (Unique Taxpayer Reference)
- A UTR (Unique Taxpayer Reference) is the ten-digit number HMRC issues to identify a taxpayer for Self Assessment or Corporation Tax. It is permanent, and it is needed to file a return or register for CIS.
V
- VAT
- VAT (Value Added Tax) is a tax added to most goods and services sold in the UK, at a standard rate of 20%. Registered businesses charge it on sales, reclaim it on purchases, and pay HMRC the difference.
- VAT flat rate scheme
- The VAT flat rate scheme lets a small business pay HMRC a fixed percentage of its VAT-inclusive turnover, set by trade sector, instead of output less input VAT. Simpler, but you give up reclaiming VAT on most purchases.
- VAT margin scheme
- The VAT margin scheme lets businesses selling second-hand goods, works of art, antiques or collectables pay VAT only on the difference between what they paid and what they sold for, rather than on the full selling price.
- VAT return
- A VAT return is the periodic report, usually quarterly, a VAT-registered business sends HMRC showing VAT charged on sales, VAT reclaimed on purchases, and the net amount owed or refunded. It must be filed digitally under Making Tax Digital.
W
- Working capital
- Working capital is a business's current assets — cash, stock and money owed by customers — less its current liabilities such as supplier bills, VAT due and short-term borrowing. It is what the business runs on day to day.
Y
- Year end
- Year end is the last day of a business's accounting period, the date its annual accounts are drawn up to. A company's is set when it is formed; a sole trader's is commonly 31 March or 5 April.
COMMON QUESTIONS
Questions people ask.
Why does a software company have an accounting glossary?
Because most of the questions we get asked are not about software. People want to know what an accrual is, or whether a P60 matters, before they can decide anything else. Answering plainly costs us nothing and saves an evening of searching.
Are these definitions the official HMRC ones?
No. They are plain-English explanations for someone running a business, with a worked example each. Where a term has a precise legal or HMRC meaning, the page says so and points at gov.uk rather than paraphrasing it.
Do the examples use real tax rates?
Only where a rate has been stable for years, such as the standard rate of VAT. Anything that moves at a Budget is left as 'the current figure on gov.uk', because a glossary that quietly goes out of date is worse than one that sends you to the source.
Can I suggest a term that is missing?
Yes, through the contact page. The list started with the sixty terms that come up most in conversations with small business owners and their accountants, and it grows from what people actually ask.