Does your accountant confuse you with jargon???
This simple, quick and easy guide can help you understand some key terms…
Being a business owner comes with many responsibilities. One of these is the chore of making sure accounts are prepared and submitted to Companies House. Many business owners outsource this chore to an accountant which is wonderful until its time for the accounts meeting and they start going through the accounts using loads of technical jargon and you don’t have a clue what they’re talking about.
Not to worry though… take a read of these 10 accounting terms so you know exactly what they’re on about and can finally understand your accounts.
- Profit & Loss (P&L) – the profit and loss statement shows all your income and expenses during your accounting period. These are broken down into categories, so you can identify how much money relates to each account code, this gives you a good idea of how much you have spent on each category and your overall profit made.
- Balance Sheet – the balance sheet shows all of your assets, liabilities and capital at a particular time. It provides a snapshot into what the company owns and owes as well as how much shareholders have invested.
- Turnover – the turnover is the total sales income the company has generated during the financial year, net of any VAT. This is not the profit.
- Gross Profit – the gross profit is the total turnover less the cost of goods sold meaning it is the revenue left after deducting the cost of making or providing your product/ service.
- Net Profit – the net profit is the gross profit less your operating costs and tax meaning the money left over after all expenses have been deducted from the income.
- Debtors / Creditors – debtors are somebody that owes the business money (a typical example of this is an outstanding sales invoices that is still to be paid) and creditors are somebody which you owe money to (a typical example of this is an outstanding purchase invoice that you are yet to pay)
- Asset – an asset is property owned by the business which has a monetary value. Assets come in many forms such as objects (machinery, cars etc.), money owned (bank balances), money claimable (debtors) or intangible assets (copyright, trademarks).
- Liability – a liability is an obligation that the business must pay examples of this are creditors, bank loans, taxes due, etc.
- Equity – a business’ equity is simply the value of the assets minus the liabilities. It is important that a business doesn’t go into negative equity as this could mean that it cannot afford to pay off its liabilities.
- Cash Flow – this is the movement of funds within the business regardless of whether they are balance sheet or profit and loss items.
As a firm of accountants we try and keep the use of jargon to a minimum. We cannot promise we won’t use any as sometimes there are no suitable alternative terms. However we do promise that we will always take our time to ensure you understand what we mean.