Accounting & Tax Glossary
Plain-English definitions of key accounting, tax, and bookkeeping terms. Written for business owners and accountants alike.
Accounts Payable (AP)
Money your business owes to suppliers for goods or services received but not yet paid for. Appears as a current liability on the balance sheet.
Accounts Receivable (AR)
Money owed to your business by customers for goods or services delivered but not yet paid for. Appears as a current asset on the balance sheet.
Accrual Accounting
An accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when cash changes hands. Required for most limited companies in the UK.
Amortisation
The gradual write-off of an intangible asset's cost (such as patents, trademarks, or software) over its useful life. Similar to depreciation but for non-physical assets.
Audit
An independent examination of a company's financial statements and records to verify they are accurate and comply with accounting standards. Can be statutory (legally required) or voluntary.
Bad Debt
Money owed to a business that is unlikely to be collected. Written off as an expense when recovery is deemed improbable. VAT-registered businesses can reclaim VAT on bad debts after six months.
Balance Sheet
A financial statement showing what a business owns (assets), owes (liabilities), and the residual value (equity) at a specific point in time. Assets must always equal liabilities plus equity.
Break-Even Point
The sales volume or revenue level at which total costs equal total revenue — no profit, no loss. Essential for pricing decisions and business planning.
Use our free calculatorCapital Allowances
Tax relief that lets UK businesses deduct the cost of certain assets (equipment, vehicles, machinery) from taxable profits instead of claiming depreciation.
Cash Accounting
An accounting method where transactions are recorded only when cash is received or paid. Simpler than accrual accounting and available to smaller businesses.
Cash Flow Statement
A financial statement showing how cash moves in and out of a business over a period. Divided into operating, investing, and financing activities — one of the three core financial statements alongside the balance sheet and P&L.
Chart of Accounts
A complete list of every account in a company's general ledger, organised by category — assets, liabilities, equity, revenue, and expenses. Acts as the backbone of the accounting system.
CIS (Construction Industry Scheme)
A UK tax scheme where contractors deduct money from subcontractor payments and pass it to HMRC. The deductions count as advance tax payments for the subcontractor.
Contribution Margin
Revenue minus variable costs. Shows how much each unit sold contributes toward covering fixed costs and generating profit.
Use our free calculatorCorporation Tax
Tax paid by UK limited companies on their profits. The main rate is 25% for profits over £250,000, with a small profits rate of 19% for profits under £50,000.
Cost of Goods Sold (COGS)
The direct costs of producing goods or services sold by a business — materials, direct labour, and manufacturing overheads. Subtracted from revenue to calculate gross profit.
Use our free calculatorCredit Note
A document issued by a seller to a buyer reducing the amount owed, typically because of returned goods, overcharging, or damaged items. Adjusts both revenue and VAT records.
Debit and Credit
The two sides of every accounting entry in double-entry bookkeeping. Debits increase assets and expenses; credits increase liabilities, equity, and revenue. Every transaction must have equal debits and credits.
Declining Balance Depreciation
A depreciation method that applies a fixed percentage to the remaining book value each year, resulting in higher depreciation in early years.
Use our free calculatorDepreciation
The systematic allocation of an asset's cost over its useful life. Reflects wear and tear on equipment, vehicles, and other fixed assets in the accounts.
Use our free calculatorDividend
A distribution of profits to shareholders. In the UK, dividends are paid from after-tax profits and taxed at lower rates than salary income, making them common in owner-managed companies.
Double-Entry Bookkeeping
A system where every transaction is recorded in at least two accounts — a debit in one and a credit in another. Ensures the books always balance.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortisation. A measure of operating performance that strips out financing and accounting decisions.
Employer NIC
National Insurance Contributions paid by employers on top of employee salaries. Currently 15% on earnings above the secondary threshold of £5,000 per year.
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The residual value of a business after subtracting all liabilities from all assets. Includes share capital, retained earnings, and reserves. Also called net assets or shareholders' funds.
Fiscal Year
The 12-month period a business uses for annual accounting and tax purposes. In the UK, the tax year runs 6 April to 5 April; companies can choose any year-end date.
Fixed Assets
Long-term assets a business owns and uses to generate income, such as property, equipment, vehicles, and machinery. Also called non-current assets. Recorded on the balance sheet and depreciated over time.
Use our free calculatorFlat Rate VAT Scheme
A simplified VAT scheme where businesses pay a fixed percentage of gross turnover to HMRC instead of calculating the difference between input and output VAT.
Use our free calculatorGAAP (Generally Accepted Accounting Principles)
A set of accounting standards and rules that companies must follow when preparing financial statements. UK GAAP (FRS 102) applies to most UK businesses.
General Ledger
The master record of all financial transactions in a business, organised by account. Every journal entry feeds into the general ledger, which is used to prepare financial statements.
Going Concern
The assumption that a business will continue operating for the foreseeable future and has no intention or need to liquidate. Auditors must flag any doubt about going concern status.
Goodwill
An intangible asset that arises when one business acquires another for more than the fair value of its net assets. Represents brand reputation, customer relationships, and other non-physical value.
Gross Profit
Revenue minus the direct cost of goods sold (COGS). Shows how much money is left after covering production costs before deducting operating expenses.
Use our free calculatorGross Profit Margin
Gross profit expressed as a percentage of revenue. Calculated as (Revenue − Cost) ÷ Revenue × 100. A key indicator of pricing efficiency and production cost control.
Use our free calculatorHMRC
His Majesty's Revenue and Customs — the UK government department responsible for collecting taxes, administering the tax system, and enforcing tax law.
Invoice
A document sent by a seller to a buyer requesting payment for goods or services. Must include specific details (date, amounts, VAT if applicable) and serves as the primary record for accounts receivable.
Journal Entry
A record of a financial transaction in the accounting system, showing the accounts affected, the amounts debited and credited, and the date.
Liability
A financial obligation a business owes to others. Current liabilities (due within 12 months) include trade payables and tax owed. Non-current liabilities include long-term loans and mortgages.
MACRS Depreciation
Modified Accelerated Cost Recovery System — the US tax depreciation method that assigns assets to property classes with predetermined recovery periods.
Use our free calculatorMaking Tax Digital (MTD)
A UK government initiative requiring businesses to keep digital records and submit tax returns using compatible software. Currently mandatory for VAT-registered businesses.
Markup
The amount added to cost price to determine selling price, usually expressed as a percentage of cost. Markup of 50% on a £100 item means selling at £150.
Use our free calculatorMateriality
The threshold above which missing or incorrect information in financial statements could influence decisions. Auditors use materiality to determine what errors need correcting.
Net Profit
Total revenue minus all expenses including operating costs, interest, taxes, and depreciation. The bottom line — what the business actually keeps.
OCR (Optical Character Recognition)
Technology that reads text from images of documents like receipts and invoices. Used by tools like Dext and AutoEntry to automate data entry in accounting.
Use our free calculatorOverheads
Ongoing business expenses not directly tied to producing a specific product or service — rent, utilities, insurance, and administrative salaries. Also called indirect costs or fixed costs.
Payback Period
The time it takes for an investment to generate enough cash flow to recover its initial cost. Shorter payback periods indicate lower risk.
Use our free calculatorPAYE (Pay As You Earn)
The UK system where employers deduct income tax and National Insurance from employee wages before paying them, then send the deductions to HMRC.
Petty Cash
A small amount of cash kept on-site for minor everyday expenses like office supplies or postage. Managed through an imprest system where the float is topped up to a fixed amount periodically.
Prepayment
An expense paid in advance before the goods or services are received or consumed. Recorded as a current asset on the balance sheet until the benefit is used up, then moved to expenses.
Profit and Loss Statement (P&L)
A financial statement summarising revenue, costs, and expenses over a period (usually monthly, quarterly, or annually). Shows whether the business made or lost money.
Profit Margin
The percentage of revenue that remains as profit after costs are deducted. Can refer to gross margin (after COGS) or net margin (after all expenses).
Use our free calculatorProvisions
Amounts set aside in the accounts for probable future liabilities or losses where the exact amount or timing is uncertain. Common examples include warranty claims and restructuring costs.
Reconciliation
The process of matching transactions in your accounting records against bank statements to ensure they agree. Essential for accurate books and catching errors.
Retained Earnings
The cumulative net profits a business has kept rather than distributing as dividends. Shown under equity on the balance sheet and represents reinvested earnings.
Return on Investment (ROI)
A measure of an investment's profitability, calculated as (Net Profit ÷ Cost of Investment) × 100. Used to compare the efficiency of different investments.
Use our free calculatorRevenue Recognition
The accounting principle that determines when income should be recorded. Under IFRS 15 / FRS 102, revenue is recognised when a performance obligation is satisfied — not necessarily when cash is received.
RTI (Real Time Information)
A system requiring UK employers to report payroll information to HMRC every time employees are paid, rather than at year-end.
Sales Tax
A consumption tax imposed by governments on the sale of goods and services. In the US, rates vary by state. In the UK, the equivalent is VAT.
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The UK system where individuals and some businesses report their income and calculate their own tax liability, filing a tax return annually with HMRC.
Straight-Line Depreciation
The simplest depreciation method — the asset's cost minus salvage value is divided equally across its useful life. Same expense each year.
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A report listing all account balances at a specific date to verify that total debits equal total credits. Used to check the books balance before preparing financial statements.
Turnover
The total revenue a business generates from its normal activities over a period. In the UK, VAT registration is required once taxable turnover exceeds £90,000.
VAT (Value Added Tax)
A consumption tax charged on most goods and services in the UK. The standard rate is 20%, with a reduced rate of 5% and zero rate for certain essentials.
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A quarterly submission to HMRC showing the VAT charged on sales (output VAT) minus VAT paid on purchases (input VAT). The difference is either paid to or reclaimed from HMRC.
Use our free calculatorWorking Capital
Current assets minus current liabilities. Measures a business's ability to meet short-term obligations and fund day-to-day operations. Positive working capital means the business can cover its near-term debts.