Bookkeeping and tax related terms

Accounting year
The 12 month period you use to draw up your accounts which need not coincide with the tax year running from 6/4 to 5/4.

Annual Investment Allowance
A tax allowance that you can use to claim back some or all of the cost of buying new assets, eg equipment, for your business.

What the business owns.

Bank reconciliation
Bank reconciliation involves aligning the data in your cashbook with that in your bank statement. Discrepancies are usually due to timing differences eg cheques written up in cashbook but not yet cleared at the bank or standing orders that have gone out of the bank account but have yet to be posted into the books.

Basis period
Period in which profits are taxed: usually your chosen accounting period except in the first few years of trading when special opening and early years rules apply.

Capital allowances
Tax allowances that you can use to claim back some of the cost of assets, eg equipment, used in your business.

Capital expenditure
Spending on long term business assets eg fixed assets like plant & machinery, computers etc. In other words, spending on items that last longer than the accounting period.

Capital gains
Gains from selling an asset or investment (but not a product or service) for more than you paid for it.

Capital Gains Tax
A tax on gains from selling an asset or investment (but not a product or service) for more than you paid for it.

Capital introduced
Money you put into the business to fund its operation but not sales income. The opposite of drawings.

Readily available money like banknotes or a positive balance in your current account. If you run out of cash, your business goes under because you can no longer pay your bills.

Cash flow
Flow of cash into and out of your business. Profit is not cash! It is possible to make a profit and yet run out of cash eg if you have to pay your suppliers before you get paid by your customers. Bills have to be paid in cash so running out of it signals imminent death for the business. This is why cash flow forecasting is so important.

A book or spreadsheet that records all cash into and out of the business. Cash in bookkeeping speak includes cheques and credit card payments ie any money that's paid to or by you.

Construction Industry Scheme. Construction industry specific taxation rules governing the payment of subcontractors by contractors. In essence the contractor is required to act as an unpaid tax collector by deducting CIS tax from the labour part (excl VAT) of the subcontractor's invoice.

Cost of sales
Also known as cost of goods sold, is the cost directly associated with the selling of a product eg cost of materials plus any labour directly involved in manufacturing but not so called overheads like lighting and other expenses. Cost of sales are also referred to as direct costs or variable costs because they vary directly with sales whereas overheads are generally fixed costs.

Those to whom you owe money.

Current year basis
Profits are taxed in the year in which they were made.

Debits and credits
Double-entry bookkeeping requires that each transaction be posted in at least two accounts. One receives a debit entry, written on the left, whilst the other receives a credit entry, written on the right. Debits and credits must always balance!

Those who owe you money.

The loss in value of an asset, eg equipment, over its useful lifetime.

Money drawn out of the business for your own personal use. The opposite of capital introduced.

Extended trial balance
An extended trial balance (or worksheet) extends the trial balance with extra columns for adjustments like eg accruals, prepayments and depreciation. The resultant, adjusted trial balance, is used to prepare the trading and profit & loss account and balance sheet at year end.

First Year Allowance
Capital allowances that apply to new purchases of equipment in its first year of life.

Fixed assets
Long term assets like property, plant and machinery lasting beyond 12 months.

Her Majesty's Revenue & Customs are tax collectors.

Document detailing the sale of products or services. You send out sales invoices to your customers and receive purchase invoices from your suppliers. The till receipts you keep to claim back expenses are purchase invoices.

What the business owes.

National Insurance Contributions
National Insurance Contributions (NIC’s) are a form of tax payed by both employed and self employed people. The latter pay two types of NIC’s, namely Class 2 and Class 4.

Pay As You Earn. Income tax for regular employees working for a company and for company director's employed by their own company.

From a bookkeeping perspective, payroll means the processing of employee pay, PAYE income tax, NIC's and all other statutory deductions.

Petty cash
Small fund held in cash for the purchase of everyday items for business use eg things like staples, postage stamps etc.

Petty cash voucher
Document detailing a petty cash purchase, used in conjunction with a not very explicit till receipt so that the expenses can be written up accurately in the books. Can also be used in the absence of a till receipt but don't make a habit of it as if you suffer a tax inspection HMRC might suspect you're getting creative with your expense claims!

Purchase ledger
Details your suppliers and what you owe them.

Business income usually from sales but also from interest, dividends etc. Also known as turnover.

Revenue expenditure
Expenditure on items that are typically used up within the accounting period eg postage & stationery, computer consumables and motor expenses like petrol etc but not purchases of fixed assets like motor vehicles, computers etc.

Sales ledger
Details your customers and what they owe you.

Self assessment
A system of taxation in which you have to calculate your own tax liability. Used by HMRC to tax sole traders.

Tax relief
Things you can deduct from your income to bring down your tax bill eg a business loss.

Tax year
The tax year runs from 6/4 to 5/4.

Trial balance
A list of each and every account in the books along with its debit or credit balance for the period (eg monthly, yearly). Debit and credit totals should be equal.

Business income usually from sales but also from interest, dividends etc. Also known as revenue.

Value Added Tax is a tax on goods and services.

VAT input and output tax
Input tax is VAT paid on purchases and expenses. Output tax is VAT charged on sales. Net VAT payable/reclaimable to/from HMRC:

Net VAT = Output tax - Input tax

VAT threshold
Turnover above which you must register for VAT.

Writing Down Allowances
Capital allowances to compensate for the depreciation of equipment used in the business.