If you haven’t studied accountancy, some of the terminology can be a little overwhelming when you are trying to prepare the accounts for your business! We’ve put together a quick guide to help you understand what your accountant is talking about in your meetings together, so that’s one less thing you have to worry about.
Here are some of the most common terms, but if you still have questions, get in touch with our team and find our how we can help…
‘Overheads’ – the regular and necessary costs, such as rent and heating, that are involved in operating a business. These are allowable expenses.
‘Accounts Payable (AP)’ – the amount a company owes, for example to suppliers in return for goods or services. This is also known as creditors.
‘Accounts Receivable (AR)’ – this represents money that is due to be received (also known as debtors). This is essential to know for balancing your cash flow.
‘Corporation Tax’ – paid by all businesses in the UK and your rate depends on your yearly profits.
The small profits rate (companies with profits of £50,000 or less) is currently 19%.
The main rate (companies with profits between £50,000 and £250,000) is 25%, reduced by marginal relief.
Marginal Relief provides a gradual increase in Corporation Tax rate between the small profits rate and the main rate — this allows you to reduce your rate from the 25% main rate.
You’ll only need to know about this if you are a limited company, a foreign company with a UK branch or office, or a club/co-operative or other unincorporated association.
If you are a sole trader this type of tax does not apply.
Because you don’t get a bill for Corporation Tax, there are specific things you must do to work out, pay and report your tax. This is why so many people work with accountants to help them get everything in order!
‘Value Added Tax or VAT’ – what does this mean for my business? VAT is based on the value of goods or services, and if a business is registered for VAT, then it must charge VAT on all its taxable sales.
You have to register for VAT if your VAT taxable turnover is more than £90,000 (compulsory registration), but you can also choose to register if your turnover is less (voluntary registration.)
A VAT return is a specific form that VAT registered businesses file with HMRC, usually four times a year, to show how much VAT you’re due to pay them.
The amount is calculated by subtracting the amount of VAT reclaimable on purchases from the VAT due on sales. If the amount reclaimable on purchases exceeds the amount due on sales, you can reclaim the difference from HMRC.
’Cashflow’ – what does it actually mean in terms of business accounting?
As a clear way to view of money coming in and out of business accounts, the cashflow can be a good way to gauge a company’s financial health – both for themselves and for potential investors.
You can have:
⭐ Cash flow from operations (sales, expenses, wages, etc.)
⭐ Cash flow from investing (property or investment assets like stocks and shares)
⭐ Cash flow from financing (raising capital, investors input etc.)
Most businesses report their cash flow in a monthly, quarterly or annual cash flow statement.
‘Balance Sheet’ – what is is and why is it important?
The balance sheet is based on the equation: ASSETS = LIABILITIES + EQUITY
It’s one of THREE key financial statements a company will produce:
(1) the income statement
(2) the balance sheet
(3) the cash flow statement
‘Variance’ – the difference between what you thought would happen, and what actually happened!
A positive variance is when things have gone more favourably than expected, and a negative variance is the opposite. Having an overview of this is useful for communicating with stakeholders and investors, as well as adjusting future budgeting predictions.
If you would like help with any aspects of your business accounting, do get in touch with our friendly team who will advise on how we can help. Venton works with clients nationwide, and with businesses of all sizes.