Accounting terms, explained simply
Plain-English definitions of every accounting term you'll encounter as a business owner.
A
Accounts Payable
Money your business owes to suppliers and vendors.
Accounts Receivable
Money owed to your business by customers.
Accrual Accounting
Recording income and expenses when they occur, not when cash changes hands.
Aged Receivables
A report grouping outstanding invoices by how long they have been unpaid.
Amortization
Spreading the cost of an intangible asset over its useful life.
Assets
Everything your business owns that has value.
Audit
An independent examination of a company's financial records to verify accuracy.
B
Balance Sheet
A snapshot of your assets, liabilities, and equity at a point in time.
Bank Reconciliation
Matching your accounting records to your bank statement to spot errors.
Bookkeeping
The process of recording all financial transactions of a business.
Break-Even Point
The point at which total revenue equals total costs - no profit, no loss.
Budget
A financial plan projecting expected income and expenditure over a period.
Burn Rate
How quickly a business spends its cash reserves, usually per month.
C
Capital Expenditure (CapEx)
Spending on long-term assets like equipment, property, or vehicles.
Cash Basis Accounting
Recording income and expenses only when cash actually changes hands.
Cash Flow
The movement of money in and out of your business.
Cash Flow Forecast
A projection of future cash inflows and outflows to predict your bank balance.
Chart of Accounts
A complete list of all accounts used in your accounting system.
Contra Account
An account that offsets the balance of a related account, such as accumulated depreciation.
Corporation Tax
Tax levied on a company's profits by the government.
Cost of Goods Sold (COGS)
Direct costs attributable to producing the goods sold by a company.
Credit
An accounting entry that increases liabilities or equity, or decreases assets.
Credit Note
A document reducing the amount a customer owes - the reverse of an invoice.
Current Assets
Assets expected to be converted to cash within one year.
Current Liabilities
Debts and obligations due within one year.
D
Days Sales Outstanding (DSO)
The average number of days it takes to collect payment after a sale.
Debit
An accounting entry that increases assets or decreases liabilities or equity.
Deferred Revenue
Money received in advance for goods or services not yet delivered.
Depreciation
Allocating the cost of a tangible asset over its useful life.
Dividend
A portion of company profits distributed to shareholders.
Double-Entry Bookkeeping
A system where every transaction affects at least two accounts equally.
Drawings
Money a sole trader or partner takes out of the business for personal use.
E
EBITDA
Earnings before interest, taxes, depreciation, and amortization - a measure of core profitability.
Equity
The owner's stake in the business - assets minus liabilities.
Expense Claim
A request by an employee to be reimbursed for business costs they paid personally.
Expenses
The costs incurred in running the business.
F
Financial Statements
Formal records of a business's financial activity - P&L, balance sheet, and cash flow.
Fiscal Year
A 12-month accounting period used for financial reporting and tax purposes.
Fixed Assets
Long-term physical assets like machinery, vehicles, and property.
Fixed Costs
Costs that remain the same regardless of how much you produce or sell.
Free Cash Flow
Operating cash flow minus capital expenditure - the cash truly available to the business.
G
General Ledger
The master record of all financial transactions of a business.
Going Concern
The assumption that a business will continue operating for the foreseeable future.
Goodwill
An intangible asset representing the premium paid when acquiring a business above its net asset value.
Gross Margin
Gross profit expressed as a percentage of revenue.
Gross Profit
Revenue minus the cost of goods sold - before operating expenses.
H
I
Income Statement
Another name for the Profit & Loss statement - shows revenue, expenses, and net income.
Intangible Assets
Non-physical assets with value, such as patents, trademarks, and software.
Inventory
Goods held by a business for sale or use in production.
Invoice
A bill sent to a customer requesting payment for goods or services.
L
M
Management Accounts
Internal financial reports produced regularly to help business owners make decisions.
Margin
Profit expressed as a percentage of revenue - shows how much of each sale you keep.
Markup
The amount added to cost price to arrive at the selling price.
Matching Principle
Expenses should be recorded in the same period as the revenue they helped generate.
N
O
P
Payroll
The process of calculating and distributing employee wages and salaries.
Petty Cash
A small amount of cash kept on hand for minor business expenses.
Profit & Loss Statement
A financial report showing revenue, expenses, and profit over a period.
Purchase Order (PO)
A formal document sent to a supplier authorizing the purchase of goods or services.
R
Reconciliation
Comparing two sets of records to ensure they match.
Retained Earnings
Cumulative profits kept in the business rather than paid out to owners.
Revenue
The total income generated by your business before any deductions.
Revenue Recognition
The accounting principle determining when revenue is recorded.
S
Sales Tax
A government-imposed tax collected by businesses on the sale of goods and services.
Sole Trader
A business structure where one individual owns and operates the business personally.
Statement of Cash Flows
A financial statement showing cash generated and used across operating, investing, and financing activities.
Straight-Line Depreciation
Spreading an asset's cost evenly over its useful life.