Common Accounting Terms Explained for Business Owners

Accounting has a lot of vocabulary that gets used casually in conversation without ever being properly explained. Here are the terms that come up most often, in plain English.

The core numbers

• Revenue (or turnover): the total value of sales made in a period, before any costs are deducted.
• Profit: what is left once costs are deducted from revenue. Gross profit deducts only the direct cost of what was sold; net profit deducts everything, including overheads.
• Cash flow: the actual movement of money in and out of your bank account, which is not the same as profit because of timing differences between when a sale is invoiced and when it is paid.
• Margin: profit expressed as a percentage of revenue, used to compare profitability regardless of scale.

The balance sheet

• Assets: what the business owns, such as cash, stock, equipment, and money owed to you by customers.
• Liabilities: what the business owes, including supplier bills, loans, and tax due to HMRC.
• Equity: what is left over once liabilities are deducted from assets, effectively the owner's stake in the business.

Compliance terms

• Annual accounts (statutory accounts): the yearly financial statements every limited company must file with Companies House.
• Corporation Tax: the tax a limited company pays on its profits, filed separately from annual accounts via a CT600 return.
• Self Assessment: the system sole traders and company directors use to report personal income and pay tax to HMRC.
• VAT-taxable turnover: the rolling 12-month sales figure used to determine whether a business must register for VAT.

Reporting terms

• Management accounts: a monthly (rather than annual) report on profit, cash and balance sheet position, built for the owner rather than a regulator.
• Bookkeeping: the ongoing recording and categorising of financial transactions that everything else, from VAT returns to management accounts, is built on.
• Forecast: a forward-looking projection, usually of cash flow, showing what is expected to happen rather than what already has.

If a term keeps coming up in conversation with your accountant and it still is not clear, that is worth saying out loud rather than nodding along. A good adviser should be able to explain any of this in the context of your own numbers: if you would like that, get in touch.