When you first decide to start a business, you may start with the business plan, the success strategy, the branding, and the business name - but when you start to use an accountant or do your own accounts, you can get overwhelmed with the number of accounting terms that come your way.To help guide you to some of the most used accounting terms you may encounter, we have compiled a short list of regularly used terms to help you understand what they mean to you, as a business owner.

Accounting Terms

Here is a list of some of the terms that may be used by accountants and what these actually mean for you!

• Self Assessment tax return - the tax return submission you must do showcasing your profits, income, and expenses each year.The deadline is 31st January. If you have any income as a sole trader you must file these each year.

• Director’s Loan Account (DLA) - the money in your Limited Company bank account doesn’t technically belong to you, it belongs to the company. You do, however, have access to the money through a Directors Loan.HMRC defines a director’s loan as money taken from your company that isn’t:

• A salary, dividend or expense repayment
• Money you’ve previously paid into or loaned the company.

So if you take money out for any other reason, the amount must be recorded in your personal DLA. At the end of your company’s financial year, depending on your activity, you’ll either owe the company money or the company will owe you money. This should be recorded as an asset or a liability in the balance sheet of your company’s annual accounts.

• National Insurance Contributions - National Insurance contributions is paid by employees, employers and self-employed and helps to build your entitlement to certain state benefits, such as the State Pension, Child benefit and jobseeker's allowance. It is not an annual tax, it applies to your pay each pay period. If you earn extra in one month, you will pay extra National Insurance, but will not be able to claim the extra back even if your pay is lower during the other months of the tax year. NIC starts once you earn more than £183 a week (2020-21)
• Dividends - If your limited company has made a profit, it can distribute these earnings to shareholders by way of a ‘dividend’. These are not counted as a business expense when calculating your Corporation Tax and it is illegal to pay a dividend if your company does not have sufficient reserves available to cover the dividend amount.
• Balance Sheet - the report that summarises the financial position of the business at the balance sheet date. This report summarises in detail the assets, liabilities, and capital of the business, alongside the balance of income and expenditure of the date specified. These help highlight what the business owns and what it owes in one report.
• Accounting Period - The period for which accounting reports such as financial statements and management accounts are prepared for.
• Accounts Payable (also known as Creditors) - This is the money owed by the business to another business. The business may have provided goods or services, and these are filed under “accounts payable”.
• Accounts receivable (also known as Debtors) - This is the money owed to your business by a customer, typically provided on credit.
• Accrual - this is an expense which has been incurred during the year but has not been paid during the year such as wages being paid in arrears.
• Prepayments Expenses that have been paid during the year but for which the services are yet to be received
• Closing balance - this shows the negative or positive balance that remains in an account at the end of the accounting period.
• Credit note - these are issued to reimburse a buyer either partially or fully. These can be used if a mistake is made on an invoice, or return of goods need to be made.
• Drawings - the sums of money that are withdrawn from the business for personal use.
• Petty Cash - these are the small amounts of cash withdrawn from the business bank to buy miscellaneous items. Receipts for these items are essential, as with all business expenses.
• Trial balance - reports made at the end of an accounting period which list the balance in each of the accounts which helps determine if any errors in recording transactions exist.
• Arrears - this is money that is overdue or currently owed.

I hope this list helps share some of the accounting terms you may encounter as a business owner and help to explain them to you in slightly more detail. This knowledge can help to give you more understanding of your business financials, and can help you to feel more prepared for discussions with your accountant.