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Updated by Vidit Agarwal on Jan 24, 2019
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Accounting & Bookkeeping Glossary UK

Confused over the meaning of certain accounting & bookkeeping terms? Use our glossary of basic terminology to look it up

1

What is Accrual Accounting and How Accrual Accounting works?

What is Accrual Accounting and How Accrual Accounting works?

Accrual Accounting is a method of recording expenses or revenues in the books of accounts at the time of its occurrence not at the time when the cash is paid or received. For ex – XYZ Ltd. Company sold two vehicles to ABC Company on 15th December 2018 & ABC Company has done the payment for the same on 25th December 2018. As per accrual basis of accounting, XYZ Ltd. has to enter this income in their records on 15th December 2018 at the time of its recognition and not on 25th December 2018. If XYZ Ltd. Company is also using the same method i.e. Accrual basis of accounting, ABC ltd. must enter the expense in their books on 15th December rather than considering the payment date i.e. 25th December 2018.

2

Balance Sheet: What it is & how it works?

Balance Sheet: What it is & how it works?

Balance Sheet provides company's financial position on a particular date. This is one of the important financial statement and very useful for accountants, bankers, creditors, investors, management, suppliers, customers, competitors, government agencies, and labor unions. It is also known as “statement of financial position”. With the help of balance sheet, you can easily know what company owes to other parties as well as what other parties owes to company on a particular date. Balance sheet even helps bankers in deciding whether company qualifies for a loan or not. With the help of Balance sheet, you can easily understand the financial position of the company.

3

Gross Profit V/s Net Profit

Gross Profit V/s Net Profit

Gross profit means revenue minus Cost of goods sold. Gross profit is the revenue derived from sale or service after deducting the direct cost associated with buying, manufacturing, selling or shipping the product to the customer. Certain fixed costs & rent is always excluded from the revenue. For ex – If you sold an item for £10 and it actually costs you £6. Then, the Gross profit will be £10-£6 = £4. In this example – we deduct the revenue (£10) from the cost of goods sold (£6) and calculated the gross profit (£4).

Net profit means Gross profit minus all indirect expenses. Net profit is the revenue derived from selling product or service after deducting all expenses including COGS. To calculate net profit, you have to deduct each and every cost you incurred for running a business in a particular year. It includes costs such as Utility bills, rent, marketing cost, distribution cost, salaries, car cost etc.

4

What is an Invoice Number?

What is an Invoice Number?

Invoice number helps in identifying each and every invoice as well as making difference in comparison to other invoices. It also helps in tracking payments. An invoice is not considered a legal document without an invoice number.

Invoice Number is a unique assigned number to each and every invoice.

How to build Invoice Number?

Invoice number can be made in many different ways. Different peoples use different methods and even come up with their own sequencing method too. The method used should be consistent, easy to understand while doing audit work. There are two rules which should be followed by each & every company while numbering invoices –

  1. Always use sequential and chronological invoice number
  2. Always use unique invoice number.
5

Amortisation – Track the Value of your Assets

Amortisation – Track the Value of your Assets

Amortisation is the process of routinely decreasing the value of an intangible asset in order to show how its worth has reduced over time, or the process of paying off a debt over time by making regular payments. Amortisation is more commonly used to denote reduction in value of intangible assets, such as intellectual property, patents, trademarks, copyrights, etc.

6

Cash Flow Forecast - Why use a Cash Flow Forecast?

Cash Flow Forecast - Why use a Cash Flow Forecast?

Cash flow forecast is not only important when you are starting a business but it is equally important when your business is well settled and has started to make profits. Because even if your business has started to make its profits, cash crunch or shortage may happen especially when you are awaiting payment for a bulk order and thus you should stick to the general principle of cash flow management which says that you should always expedite cash inflows i.e. payment from the customers, interests from the bank accounts etc and slow down cash outflows such as purchase of stock and equipment, loan repayments etc provided it is within reasonable time limit.

7

Cash Flow Statement – What is a statement of Cash Flows

Cash Flow Statement – What is a statement of Cash Flows

A cash flow statement also known and referred as statement of cash flows constitutes the critical set of financial statement or information required for successful operation of a business and presents the accounting data in three main sections:

  • Operation-related activities such as sales of goods and services
  • Investment-related activities such as sale or purchase of an asset
  • Financing activities such as borrowings or sale of common stock
8

What does Equity mean?

What does Equity mean?

Equity is the value attributable to the owner of a business. It’s a combination of owner’s equity & liabilities. It is also called as shareholder’s equity/Owner’s equity/Stockholder’s equity or a net worth.

Owner’s equity = Assets - Liabilities

For example – Suppose the cost of your home is £300,000 & you have mortgage of £100,000
Equity = Assets – Liabilities
Equity = £300,000 - £100,000 = £200,000

9

What is Reducing Balance Method?

What is Reducing Balance Method?

Reducing Balance Method, also known as declining balance depreciation or diminishing balance depreciation, the depreciation is charged at a fixed rate like straight line method (also known as fixed installment method or straight line depreciation). However, unlike fixed installment method, the rate percent is not calculated on cost of asset but on the book value of asset, which in turn is calculated by subtracting depreciation from its cost. However, before we delve any further, it is important to look into the definition and cause of depreciation.

10

Difference between Debtor and Creditor

Difference between Debtor and Creditor

A debtor is a person or an enterprise that owes money to some other party. A debtor is a person or enterprise that owes money to another party. Conversely, a creditor is a person, enterprise or bank who has lent money or extended credit to another party.

Read More - Difference between Debtor and Creditor

11

What is Limited Cost Trader and How do you know if you're a Limited Cost Trader?

What is Limited Cost Trader and How do you know if you're a Limited Cost Trader?

As per the HMRC (Her Majesty’s Revenue and Customs), a limited cost trader is defined as one that spends less than 2% of its sales on goods (not services) for a given accounting period. In other words, HMRC classifies you as a limited cost trader, if you buy only few goods. You are a limited cost trader if your expenditure on goods including VAT is either:

  • Less than 2% of its VAT inclusive sales for a quarter, or
  • More than 2% of its VAT inclusive sales for a quarter but less than $250.
  • Also the sales should not include the cost of following items such as: a. Capital expenditure (See Also: Difference between Revenue Expenditure and Capital Expenditure) b. Food and drink for the business or its staff c. Vehicles, vehicle parts and fuel, unless vehicles are owned by your business, for example if you own and run a taxi hire company. d. Payment for services including rent, accountancy fees, advertising costs, internet bills, phone bills etc. e. Gifts, promotional items and donations. f. Any services which is anything that isn’t goods. g. Training and memberships. h. Capital items for example office equipment, laptops, mobile phones and tablets. i. Goods you resell or hire out unless that’s your main business activity. j. Any software you download k. Bespoke software designed specifically for you
12

Net Profit Margin: What it is and How to Calculate Net Profit Margin

Net Profit Margin: What it is and How to Calculate Net Profit Margin

Net Profit Margin is an important determinant of how an organization is performing. However, it is worth noting that an organization’s performance cannot be single handed determined by its net profit margin. There could be several factors contributing to an organizations’ performance such as an increase in sales may not result into profit if the company is inadequately managing its expenses. In contrast, a decrease in sales may lead to profit augmentation if the company keeps its expenses in check.

Net Profit Margin Formula

Net profit is calculated as: Total Revenue – Total Expenses
Net Profit margin as such will be: Net Profit/Total Revenue (Multiply it by 100 to get it as percentage)

13

What is Activity-Based Costing (ABC) and How Does it work?

What is Activity-Based Costing (ABC) and How Does it work?

Activity-Based Costing (ABC) is usually adopted in the manufacturing business as it augments the consistency of cost data, therefore generating closely true costs and improved categorisation of costs experienced by an organisation during its fabrication process. This costing system is adopted in customer profitability analysis, product line profitability analysis, product costing, service pricing, and target costing. It is also immensely popular since organisations can cultivate a much improved corporate strategy and focus if prices are better computed.

14

Remittance Advice and its need

Remittance Advice and its need

Remittance advice is a document or notes to suppliers sent from customers to their sellers informing them about the payment of their invoice. Remittance advice generally contain information such as invoice amount, invoice number, method of payment, and text notes. Please note that remittance advice is not mandatory; they are optional but nevertheless sent as a mark of courtesy to sellers as it helps them match invoices with payments. As remittance advice is optional, it can be sent in a number of ways. If the payment is done via cheque, then the remittance advice could be sent along with it. Remittance advice work as a proof of payment received and is thus equivalent to a receipt from a cash register.

15

What is General Ledger Account?

What is General Ledger Account?

A General Ledger Account is a set of accounts that back the main categories (assets, equity, and liabilities) which are recorded in the chief financial reports such as the P&L. These items are generated by posting transactions in the cash book, general journals book, purchases book, sales book. A general ledger is an essential document for any business; hence, it is imperative to know how it works. A general ledger builds a foundation for all of the financial reports for any organisation and can assist in understanding the financial working of an organisation. A general ledger has a classic layout that is used by most organisations in their accounting records, and comprises of two sections:

  • All debit transactions are listed on the left side
  • All credit transactions are listed on the right side
16

What is Margin of Safety?

What is Margin of Safety?

The Margin of Safety is the variance amongst the sum of anticipated profitability and break-even point. Margin of safety formula is equivalent to current sales subtracted from the breakeven point divided by present sales. There are two uses to define Margin of Safety: Budgeting & Investing.

Example

XYZ and Co. purchased a new machinery to increase the productivity of biscuits manufactured. The new machinery is intended to upsurge the operating expenses by £1,000,000 per annum, and the sales will similarly expand. Post the purchase of machinery, the business attained sales revenue of £4.2 million, with a break-even point of £3.95 million – generating a Margin of Safety of 5.8%

17

Revenue Expenditure V/s Capital Expenditure

Revenue Expenditure V/s Capital Expenditure

Revenue Expenditure is defined as the amount spent or expense incurred, on a consistent basis, towards performing functional activities of the business such as cartage or freight paid, purchasing stock etc. Revenue expenditure can be further categorised as Direct Expenses and Indirect Expenses.

The capital expense incurred by an organisation for owning any longstanding capital asset or to augment the working capability of any prevailing capital asset, or to upturn its life cycle to generate additional cash flows or to reduce the production cost, is referred to as Capital expenditure. The various types of capital expenditure include the following:

  • Purchase of information technology items
  • Purchase of plant and machinery
  • Purchase of electric power tools
  • Any permanent additions to prevailing set of fixed assets

Read More in detail - Difference between Revenue Expenditure and Capital Expenditure