Accounting & Tax Glossary

Whether you’re a business owner or individual navigating your finances, our glossary provides clear, concise definitions of key accounting terms. From ‘Abridged Accountants’ to ‘Writing Down Allowance’, we’ve got you covered. Our aim is to demystify the world of accounting, making it accessible and understandable for everyone. So, dive in and start exploring the language of accounting today.

What are abridged accounts?

Abridged accounts are a smaller and simpler set of accounts for filing at Companies House. They do not contain the period’s net profit figure, or a breakdown of assets, debtors or creditors.

Mico-entities and small companies can send abridged accounts if all members agree to it.

What is accountancy software?

Accountancy software is generally a cloud-based solution to manage and record the transactions of a business. Some examples are QuicksBooks, Xero and Dext, the modern software providers have installed many intuitive features. These include automatic bank feeds, the ability to include scanned receipts and invoices and chasing for payments. The use of this comprehensive software allows more efficient and accurate management of accounts receivable and payable as well as business forecasting and cash flow.

What does accounts payable mean?

This is the amount owed from the business to a supplier, i.e. bills to pay. At a period end, this will be included on the business’ balance sheet as a creditor, a liability of monies owed to third parties. It’s important to review this balance and ensure you’re reporting the correct amount and correcting amounts that are no longer payable.

What does accounts receivable mean?

This is the amount owed to the business from customers, i.e. outstanding invoices. At a period end, this will be included on the business’ balance sheet as a debtor, an asset of monies owed to the business. Software includes reports summarising the balances owed to the business, and some give you the ability to chase customers for payment with the push of a button.

What is an accrual?

An accrual is an accounting adjustment or provision for expenses not yet paid at the accounting period end. It allows the accounts to be prepared under the accruals basis. An accrual may, for example, be the inclusion of a period of electricity costs that have not yet been paid.

What is the accruals basis?

The accruals basis means accounting for income and expenditure based on invoice dates rather than cash received and paid. It means reporting financial statement results as if all income was received and paid by the accounting period end reflecting the true financial status.

What is an agent?

An agent is someone who acts on behalf of a business, for example an accountant. When formally authorised an agent can submit documents and speak to HMRC on behalf of an individual. When your accountant asks for authorisation, you may be sent a code by HMRC for you to share with your accountant, or your accountant may ask you to sign a 64-8 form.

What is the Annual Exempt Amount / AEA?

When it comes to capital gains tax, this is the amount of capital gains that can be made per annum before tax is payable. The tax-free amount is changed periodically by HMRC.

What is an annual general meeting / AGM?

The AGM refers to the annual meeting of shareholders. An AGM is an opportunity for shareholders to learn about the business’ finances, decisions, concerns and prospects. It may also involve a vote for a new chairperson

What is the Annual Investment Allowance / AIA?

When we look at accounting for capital expenditure, we are able to claim capital allowances instead of the actual expense. A type of capital allowance is the first year allowance, this allows businesses to deduct the full value of an item in one year. Only certain items are eligible for the first-year allowance.

What are assets?

Assets are resources owned by business and are reported on the balance sheet. Assets include fixed, current and non-current assets.

What is an audit?

An audit is an examination of financial statements by an independent organisation. Not all businesses require an audit, they may qualify for an audit exemption depending on level of turnover, value of assets and numbers of employees.

What is a balance sheet?

The balance sheet is a financial statement to show the value of everything the company owns, is owed and owes to other on the last day of the financial period. The balance sheet shows the business’ worth and overall financial health. A balance sheet is also known as a statement of financial position. A balance sheet must be prepared by all companies and submitted to Companies House.

What are benefits in kind

Benefits in kind are benefits that employees and directors receive which aren’t included in their salary or wages. These benefits, or perks, are sometimes taxable and are known as a benefit in kind. Benefits in kind must be reported to HM Revenue & Customs, usually via a P11D. An example is a company car. The employee will pay tax if they use the company car for private use, including driving to work from home. Other examples are medical insurance

What is bookkeeping?

Bookkeeping is the regular recording of business income, costs and expenses. It enables the reader to monitor how the business is performing and keep in track of money coming in and out of the business.

What are capital allowances?

Capital allowances are the method for claiming tax relief on the purchase of assets known as ‘plant and machinery’. For tax purposes, the cost of these assets is not deducted from income, but instead capital allowances are claimed. There are various capital allowances available depending on the type of asset purchased.

What is capital expenditure?

Capital expenditure is the purchase of large items such as equipment and vehicles. These assets will be used by the business for several years and so are accounted for differently to other expenses.

What is Capital Gains Tax / CGT?

Capital Gains Tax is tax paid by individuals on the disposal of some assets where a profit is made. This can include selling, gifting and swapping an asset. Not all asset disposals will attract CGT, but it’s important to be aware of this tax.

What is capital introduced?

Capital introduced is where funds are introduced into the business by the business owner, where the business is a sole-trader or partnership.

What is cash accounting?

Cash basis accounting is where businesses include income and expenditure based on payment dates in their accounting and tax return. This is differtent to accrual accounting which uses invoice dates. Accounts prepared under the cash basis won't have a balance sheet.

What is cashflow?

Cashflow refers to the cash in and out of the business, and the business’ ability to meet its liabilities. A business can thrive, or a business can fail as a result of cashflow issues, so it’s important to be aware of this and produce a forecast allowing you to plan your finances.

What is a chart of accounts?

A chart of accounts is a list of all the accounts you use to record transactions, these will be the accounts that form each line of your profit and loss account and balance sheet. For example, one account could be ‘Insurance’, and you will record all insurance payments against this account.

What is a close company?

A close company is generally a limited company that’s under the control of five or fewer participators, or any number if those participators are directors. A participator is someone who influences a business and its finances and will often mean shareholder or investor. For example, a company owned and run by the same person is a close company. A company with five shareholders who are also directors will also be a close company. There may be other legal circumstances that make a business a close company.

What is Companies House?

Companies House is an agency of the Department for Business and Trade. It incorporates and dissolve companies, and register information that is available to the public, for example company information, filed reports and significant people. Incorporated businesses must file their accounts to Companies House by their filing deadline.

What is a company?

A company, or limited company is a legal entity in its own right. It is separate to those who own, run and manage it.

What does comparative mean?

The term comparative relates to information from a prior period. For example, when looking at reports, you can choose to add a comparative such ad information from the previous year to draw comparisons with the current period being reported.

What is the Construction Industry Scheme / CIS?

The Construction industry Scheme is the system for contractors to deduct money from sub- contractor's payments and pass it on to HMRC as an advance payment towards the subcontractor’s tax and NI.

What is corporation tax / CT?

Corporation tax is the tax a company pays on profits and chargeable gains from the UK and abroad. This also includes clubs, co-operatives, sports clubs and community groups.

What are cost of goods sold?

Cost of goods sold (COGS), also known as direct costs, include amounts paid to manufacture and deliver goods to customers. For example, the purchase of raw materials, the purchase of stock for resale, costs to get the stock ready for resale and employee wages. Knowing the true and total cost of goods sold allows businesses to price their products effectively, allowing for a profit margin.

Costs of goods sold can be shown separately from all other expenses so that gross profit can be calculated, before other expenses.

Cost of goods sold is slightly different to cost of sales, which is predominantly used in service businesses.

What are cost of sales?

Cost of sales (COS) are the costs involved in providing a service or product to a customer. This term is usually used by service businesses and will include employee wages and inventory. Reporting cost of sales separately to other expenses allows business to calculate gross profit and a gross profit margin, which is an important metric for businesses.

Cost of sales are slightly different to cost of goods sold, which is predominantly used in goods businesses.

What does credit mean?

In accounting we often refer to double entry book-keeping, a credit is a term of this, alongside a debit. Credits are recorded on the right of a manual ledger system, and shows an increase in income, a decrease in expenses and assets.

What are creditors?

Creditors are a type of liability, which are the amounts owed from the business to a person or business. Creditors can include accounts payable, or trade creditors as well as other creditors.

What is a CT600?

Form CT600 is the reference for a company tax return. The form must be completed by all incorporated businesses, and other eligible businesses to report financial results and calculate the corporation tax payable.

What are current assets?

Current assets are assets that are expected to be used or sold within one financial year. For example, stock purchased and accounts receivable.

What does debit mean?

In accounting we often refer to double entry book-keeping, a debit is a term of this, alongside a credit. Debits are recorded on the left of a manual ledger system, and shows an increase in expenses, a decrease in income and liabilities.

What are debtors?

Debtors are a business asset, they represent the amounts owed from another person or business to you. Debtors can include trade debtors (also know as accounts receivable), as well as other debtors.

What is deferred income?

Deferred income refers to income received in advance and relates to a later financial period. An example would be receiving income on the last day of your financial year for the next quarter. As this income relates to a later period it should not be included in the profit and loss account for this year, we therefore show it as deferred income. Deferred income is shown as a creditor on the balance sheet.

What is deferred tax?

Deferred tax is an accounting adjustment, it does not represent a physical tax liability. It relates to the amount of income tax payable in future periods in respect of differences between accounting and taxation profits.

What is depreciation?

Depreciation represents the amount an asset value decreases over time. Depreciation is an accounting entry to include an element of capital expenditure in the profit and loss account. As capital expenditure is show as assets on the balance sheet, we need to reflect the cost of these assets in the profit and loss account and we do this by charging depreciation. The depreciation is calculated taking into account the useful economic life of the asset (how long it’ll be useable) and taking a proportion of the cost to the profit and loss account each year.

What is Dext?

Dext is a software that allows users to capture receipts, invoices and record transactions in their accounting software. It used to be known as Receiptbank and came on the scene once businesses started using cloud technology for their accounting reporting requirements and was an add-on service to make accounting recording more efficient. Once an invoice is received, you can take a photo of it and upload it to Dext, which will create the accounting transaction for you to approve and post in your software.

What is a director?

A director is a person who runs and manages the company. Directors have responsibilities and duties, and their main focus is to make decisions in running the company so that it succeeds its goals. There are different types of directors, and this will depend on the business structure. Some businesses are owner managed, this means the shareholder is the director. Other businesses will have more directors, and these may not also be shareholders. Sometimes directors have a particular skill or role, for example a Finance Director (FD), or Chief Executive Officer (CEO).

There are also different types of directors, the main ones being executive directors and non-executive directors. An executive director is responsible for the running of the business, while a non-executive director doesn’t generally get involved in operations, they have an oversight.

What is the directors’ loan account?

A directors’ loan account summarises money taken from the company by a director, that is not salary or dividends. This is therefore a loan to the director that must be repaid, as the company and director are separate legal entities.

What is a directors’ report?

A directors’ report is a report in the financial statements that include confirmation of who the directors were in the financial period, all companies must prepare the statement. Other information is required for some companies.

What is a dividend?

A dividend is a distribution of company earnings to shareholders. They are often paid once or twice a year, known as a interim and final dividend. Statutory paperwork such as a dividend voucher must also be prepared. Dividends are usually paid at a rate per share.

What is a dormant company?

A company with no significant transactions in the financial year may be dormant. For example, a business that is not trading and doesn’t have any other income (I.e. investments) will have no significant transactions. A dormant company must still complete annual accounts and a confirmation statement but may not be required to submit a corporation tax return.

What is double-entry bookkeeping?

This is reference to the way bookkeeping is accounted for, and states that there are two sides to every transaction. For example the receipt of an invoice both increases your bank balance and reduces your accounts receivable balance.

What are drawings?

Money withdrawn from a business by the business owner is known as drawings. This relates to sole-traders and partners, ‘drawings’ from a limited company will likely be disclosed as a directors’ loan. Drawings can include monthly drawings which are regular amounts paid to the owners, as well as other drawings which may include where the business is paying for personal services such as life insurance or a mobile phone contract.

What is the Enterprise Investment Scheme / EIS?

The Enterprise Investment Scheme / EIS is a venture capital scheme designed to help smaller companies raise funds through investment. The scheme offers tax incentives to those investing in new shares in an EIS eligible company. As with most investments there are risks so you should speak to a professional before investing.

What is equity?

Equity is the money invested in the company by its owner, how much the owner would keep if they sold their share in the business. Equity is equal to assets less liabilities.

What are filleted accounts?

Filleted accounts are an option for small companies to send less detail to Companies House when filing the accounts. Filleted accounts do not include a profit and loss account, or a directors’ report.

What is the first year allowance / FYA?

A type of enhanced capital allowance allowing you to deduct 100% of the cost of an asset in the first year. Not all purchases are eligible for FYA.

What are fixed (tangible) assets?

Assets acquired that have a value and a useful economic life for more than one financial period are known as fixed assets. These are not expensed through the profit and loss account but recorded on the balance sheet.

What is a Furnished Holiday Let / FHL?

A furnished holiday let is a property based in the UK or European Economic Area (EEA) that is furnished, let on a commercial basis and meets various criteria. Properties that qualify as furnished holiday lets attract different tax reliefs to other rental properties.

What is the general ledger?

A general ledger is a report showing various details of all transactions in the reporting period. A report may be run for the entire accounting year and will list all transactions including date, amount, tax codes and any narrative.

What are general partners?

General partners are partners who are responsible for managing the business and have unlimited liability for the partnership’s liabilities.

What does going concern mean?

Going concern is an accounting concept where it is assumed the business will continue to trade for the foreseeable future, deemed to be a period of at least 12 months. Where there are questions and concerns about the ability to trade, a note may need to be presented in the accounts.

What is goodwill?

Goodwill is an asset that is not tangible, it is often referred to as being the reputation of the business, the client base. When a business is sold, the goodwill it has built up is often considered as part of the cost of the business.

What is gross profit?

Gross profit is the financial gain the business has made after deducting cost of sales. For example, a business manufacturing goods would deduct the costs to make those goods from turnover to determine the gross profit. Gross profit can be expressed as an amount, and as a percentage known as gross profit margin. Gross profit margin can be calculated by taking gross profit and dividing it by turnover then multiplying it by 100 to arrive at a percentage.

What is His Majesty’s Revenue and Customs / HMRC?

HMRC is the UK's tax, payments and customs authority. They are the authority you submit self-assessment and corporation tax returns to, and they collect money through taxes. HMRC provides targeted financial support to families and individuals.

What is an income statement?

An income statement is a financial report, also known as a profit and loss account which summarises income and expenses as well as gross and net profit for the period of the report. The income statement is included in the financial statements and submitted to Companies House.

What is income tax / IT?

Income tax is paid by individuals on employed, self-employed, property and other taxable income. It can be paid through Pay As You Earn (PAYE) on employment and pension income, or through a self-assessment tax return.

What is incorporation?

Incorporation is the process of registering a new or existing business as a limited company with Companies House. Once registered, you will receive a certificate of incorporation to confirm the company legally exists.

What is an Individual Savings Account / ISA?

An Individual Savings Account / ISA is a savings account that offers tax-free investment. There are limits on the amount you can invest in an ISA each year, which are different depending on the type of ISA. Types of ISA include cash, stocks and shares, innovative finance, lifetime and junior.

What is Inheritance Tax / IHT?

Inheritance tax is tax paid on the estate of someone who has died. Where the value of someone’s estate is over the tax-free threshold, inheritance tax may be payable at 40%. Furthermore, inheritance tax may be payable on gifts made before death.

What are intangible assets?

Intangible assets are long term resources with no physical presence, i.e. goodwill, reputation and brand. Intangible assets are included on the balance sheet.

What is inventory?

Inventory is another term for stock. It relates to raw materials for making goods and goods for resale. A valuation should be conducted each year so that the balance sheet shows an accurate value.

What is a journal?

A journal is an accounting transaction usually used by an accountant or bookkeeper to record a transaction between two accounts. They are used where the transaction is not a sales invoice or bank payment. For example, a journal may be used to move something that was posted to the wrong account, or to make an accounting entry like the posting of depreciation.

What are liabilities?

All amounts owed by the company, including accounts payable and loans are liabilities. They are presented on the balance sheet.

What is a limited company?

When a business registers with Companies House it becomes a limited company. The limited element means that the company is limited by shares or by guarantee. A limited company is a separate entity to its owners and the people running the company. This business structure therefore offers financial security to the owners who are not liable for the company’s debts.

What is limited liability?

Limited liability in the context of business finance refers to exposure to risk and liability. For example, if a business were to fail would you be liable to the debts of the business? Limited liability means that your exposure would be limited – usually to the amount you have invested. Some business structures mean individuals have limited liability; these include limited companies and limited partnerships.

What is a limited liability partnership / LLP?

A limited liability partnership is a type of partnership. Unlike a partnership an LLP is incorporated with Companies House and must submit accounts annually. An LLP is not required to pay corporation tax, instead the profits are distributed to members and reported to HMRC via self-assessment. An LLP differs to a partnership and the main benefit is that it offers partners protection to liabilities.

What are limited partners?

Limited partners do not have control over business decisions or the operations of the business. Their liability is limited to the amount they contributed to the partnership.

What is a limited partnership?

A limited partnership is a special type of business partnership that is made up of at least one general partner and one limited partner. These partners may be natural persons or corporate bodies. A limited partnership is not a separate entity from its partners. Scottish limited partnerships are separate legal entities allowing them to hold assets and enter into contracts in their own right. A limited partnership must register with Companies House, like limited companies and limited liability partnerships.

What is a loss?

Where a business’ costs exceed income, the financial result will be a loss. A new business may have incurred a lot of start-up costs which have contributed to the loss. The growth plan of the business may show how the business is going to improve financial results going forward. A loss in an established business will be a concern and it is important to review and assess the financial results to enable effective decisions.

What is Making Tax Digital (MTD)?

Making Tax Digital is the Government’s programme to update the UK’s tax system, making it more effective, efficient and easier for taxpayers to get right. The programme requires eligible businesses to keep digital accounting records in compatible software and submit quarterly updates to HMRC.

What is a micro-entity?

A micro-entity is a very small private limited company with turnover, assets and employees below a certain amount. There are different accounts reporting requirements for micro-entities, small companies and larger companies. It is important to ensure you are correctly classifying your business and complying with regulations.

What is national insurance?

National Insurance (NI) is paid by individuals and businesses to HMRC. NI contributions are paid to qualify individuals for state pension and other benefits. There are several types of national insurance, known as class 1, class 2, class 3 and class 4. The class you pay will depend on your circumstances. For example, an employed individual may pay class 1, whereas a self-employed individual may pay class 2 and 4. Class 3 are voluntary contributions and are usually paid to fill any NI gaps to ensure an individual qualifies for a full state pension.

What are net assets?

Net assets are business assets minus liabilities. This is the same as equity, which uses the same calculation. Net assets are important because they show the financial health of the business. A negative net asset balance shows that a company has more liabilities than they can afford and could represent a struggling business.

What is net profit?

Net profit is calculated as income less expenses and less tax. It is also known as operating profit and is the last line of the profit and loss account. Net profit is the amount that is distributed to owners. Accounting net profit is different to taxable profits.

What are non-current assets?

Non-current assets are long term investments, fixed assets and intangible assets. They are assets that are not easily converted to cash within a year.

What is operating profit?

Operating profit is calculated as income less expenses before tax. Operating profit gives business owners a measure of how well the business is running and how efficient the business is.

What are overhead costs?

Overhead costs refer to expenses that are incurred for the running of the business. Examples of overhead costs include electric and gas costs, insurance and other utilities.

What is a P11D?

A P11D is a form used by employers to report employee’s taxable benefits, that are not included through payroll, to HMRC. A taxable benefit may include the provision of company cars and health insurance. A P11D may be required each year and has a filing deadline of 6th July.

What is a P11D(b)?

A P11D(b) form must be submitted alongside a P11D to report the Class 1A National Insurance that the employer owes to HMRC. A P11D(b) has a filing deadline of 6th July.

What is a P45?

A P45 form is issued by employers to employees when they leave a post. The form confirms the total pay the employee earned and tax paid for the tax year that the employee left in. The form contains part 1 (copy for employee), part 2 (copy for new employer) and part 3 (for completion by new employer).

What is a P60?

A P60 form is issued by employers after the end of the tax year to confirm various payroll details. A P60 must be received by the end of July and employees will find this form is required as evidence, for example when applying for a mortgage.

What is a partnership?

A partnership is a business owned by two or more people who share responsibility, liability and profits. A partnership does not formally file their accounts, but will complete a partnership tax return. Partners are required to disclose their share of partnership profits on their self-assessment tax return.

What is Pay As You Earn / PAYE?

PAYE is a system for employers to collect income tax and NI from employment as part of the business’ payroll. The system deducts income tax and NI from an employee’s salary so that employers can pay this over to HMRC on the employee’s behalf.

What is a PAYE Settlement Agreement / PSA?

A PAYE settlement agreement allows businesses to make one annual payment for the tax and NI on minor benefits received by all employees. Businesses can apply to get a PSA online or by post.

What are payments on account / POA?

Payments on account are the payments for income tax that self-assessment individuals may be required to pay. They are advance payments towards a tax bill. Those with a tax liability of less than £1,000 or where 80% of the tax liability is collected by PAYE are not required to make payments on account. Payments on account are due by 31st January and 31st July and are based on the previous year's tax liability.

What is a Person with Significant Control / PSC?

A Person with Significant Control is someone who owns or controls a company, also known as beneficial owners. PSCs must be identified and reported to Companies House, any changes in PSCs should be reported within 14 days. Most PSCs hold more than 25% of shares and voting rights in a company and have the right to appoint or remove the majority of the board of directors.

What is the personal allowance?

The personal allowance is the amount an individual can earn before paying income tax. The personal allowance can be affected by the level of income you earn, those with high earnings may not have a personal allowance at all.

What are prepayments?

Prepayments are an accounting entry included in the financial statements to reflect an adjustment for payments made in advance. So that the accounts are reported on an accruals basis, it is important to report expenses that relate to the financial period, not expenses that are paid in the financial period. For example, insurance costs may be paid at the end of the financial period but relate to a period after the year and so the cost that relates to that later period must be excluded.

What is profit?

Profit is the amount that income exceeds expenses. Some accounts show different types of profits, including gross profit, operating profit and net profit. Gross profit is the amount of income left over after the payment of cost of sales, whereas net profit is the amount of income left over after all expenses. Net profit is therefore a lower number.

What is a profit and loss account?

A profit and loss account is a financial statement that shows turnover and expenses and the profit or loss made in the financial year. A profit and loss account is also known as an income statement. It can be produced through software for any period of time, so a business can monitor financial results on a monthly or quarterly basis. An annual profit and loss account will be included as part of the financial statements.

What is QuickBooks?

QuickBooks is a bookkeeping software provider. As well as their desktop packages they offer Making Tax Digital compliant software to make sure you’re completing your bookkeeping and meeting your tax requirements. QuickBooks offers various software packages to suit all businesses. QuickBooks’ online software features various time-saving features including automatic bank feeds, sending invoice reminders and intuitive software learning to remember previous transactions and pre-populate fields for you.

What is a Relevant Legal Entity?

A Relevant Legal Entity is a corporate body that owns or controls a UK company, limited liability partnership (LLP), UK Societas, or an eligible Scottish partnership (ESP). It would qualify as a Person with Significant Control (PSC) if it were an individual.

What are retained earnings?

Retained earnings are the accumulated profits not yet distributed by a dividend to business owners. They are profits that have built up over time and represent a measure of business worth.

What is the Seed Enterprise Investment Scheme / SEIS?

The Seed Enterprise Investment Scheme is a scheme designed to help small start-up companies raise funds through investment. The scheme offers tax incentives to those investing in SEIS eligible companies. As with most investments there are some risks, and SEIS is riskier than EIS, so you should speak to a professional.

What is share capital?

Share capital are shares the company has issued. Share capital is recorded on a company’s balance sheet at the nominal value of the shares, so 100 £1 shares will be reported as £100.

What is a shareholder?

A shareholder owns shares in a company. A shareholder who owns all the shares in a company owns the entire company. Where there are more shareholders, they own part of the company in proportion to the number of shares they hold.

What is a side hustle?

A side hustle is the term used for individuals who choose to supplement their income by offering an additional service alongside their main source of income. This could include re-selling goods online or creating goods and selling them. Where individuals have a side hustle that meets the criteria for a trade they should be aware of the tax implications.

What is a small company?

A company is classified as a small company when it has turnover, balance sheet total and employees below a certain threshold. A small company is larger than a micro-entity. There are different accounts reporting requirements for micro-entities, small companies and large companies. It is important to ensure you are correctly classifying your business and complying with regulations

What is a sole trader?

A sole trader is a self-employed individual trading as a business on their own. They are the sole owner of an unincorporated business. Sole traders have control over their business, its assets and net profits. The individual and the business are one and the same, they are not separate entities in the way a shareholder and company are. A shareholder therefore bears all the risks too.

What is stakeholder?

A stakeholder is a person who has an interest and is affected by the business. This can include customers, employees, shareholders and the local community. Businesses must consider their stakeholders as decisions a business make could adversely affect stakeholders and result in repercussions to reputation and even financial results.

What is a statement of financial position?

A statement of financial position is also known as a balance sheet. It is a financial statement to show the value of everything the company owns, is owed and owes to other on the last day of the financial period. The statement of financial position shows the business’ worth and overall financial health. A statement of financial position must be prepared by all companies and submitted to Companies House.

What is stock?

Stock is goods bought for resale but unsold at the end of the financial year. It relates to raw materials for making goods and goods for resale. A valuation should be conducted each year so that the balance sheet shows an accurate value. Stock is also known as inventory.

What are taxable profits?

Taxable profits are accounting profits that have been adjusted for tax purposes. Adjustments for tax will include the removal of depreciation charges which are replaced with capital allowances. Any other disallowable income and expenses will be removed. Taxable profits are the profits that are subject to tax.

What is a trial balance?

A trial balance is an accounting report of closing account balances at the report date. The trial balance is presented in two columns, one for debits and one for credits. The columns should agree, meaning the report balances. If the report does not balance, there has been an issue with the double entry bookkeeping.

What is turnover?

Turnover is a term for sales revenue and income. Turnover is reported on the income statement or profit and loss account. Turnover is often used to classify a business, for example the level of annual turnover is used to determine whether a company is a micro-entity, small or large. Annual turnover is also used to establish whether a business should be registered for VAT.

What is a Unique Tax Reference / UTR?

A Unique Tax Reference is a reference number given to individuals and companies by HMRC. The reference is required to submit a tax return and will be used in all correspondence, as well as a reference for tax payments.

What is unlimited liability?

Unlimited liability in the context of business finance refers to exposure to risk and liability. For example, if a business were to fail would you be liable to the debts of the business? Unlimited liability means that your exposure would be unlimited meaning you are fully liable. Some business structures mean individuals have unlimited liability; these include sole traders and partners of ordinary partnerships.

What is Value Added Tax / VAT?

VAT is tax added to goods and services. A VAT registered business must charge VAT on their sales, this is known as output VAT. A VAT registered business can then recover input VAT on their purchases. Once the VAT period end has passed, a VAT return must be submitted to HMRC which calculates the balance of VAT payable to or repayable from HMRC. A business that is not VAT registered does not charge VAT on their sales and cannot recover VAT on purchases.

What is the VAT threshold?

The VAT threshold represents the level of taxable turnover at which a business must register for VAT. Taxable turnover means turnover that would be taxable for VAT. Income that would be exempt from VAT is not included in this total. A business must monitor their level of turnover and there are two tests to determine if a company should register for VAT.

What is a Venture Capital Trust / VCT?

A Venture Capital Trust / VCT is a company whose shares trade on the London Stock Exchange. Its goal is to make money by investing in other VCT qualifying private owned companies. By investing in a VCT, you are investing in smaller businesses not listed on the London Stock Exchange. Smaller businesses can grow faster than larger businesses, which may be attractive to investors. Investing in VCTs offers tax incentives and are high risk and you should always consult with a professional before making investments.

What is working capital?

Working capital is calculated as assets less liabilities, it gives an indicator of business efficiency and financial health of the business. Good working capital means that your business will be in a better position should any unexpected cash outflows arise.

What is writing down allowance / WDA?

Writing down allowances are a type of capital allowance applied to plant and machinery. They give tax relief on the value of assets owned. The rate of WDA will depend on the ‘pool’ that the asset has been put in, which is determined by the type of asset.

What is Xero?

Xero is an online bookkeeping software provider. Xero offers Making Tax Digital compliant software to make sure you’re completing your bookkeeping and meeting your tax requirements. Xero offers various software packages to suit all businesses. Xero’s software features various time-saving features including automatic bank feeds, sending invoice reminders and intuitive software learning to remember previous transactions and pre-populate fields for you.