Accounting – Deciphering the Code

Accountants are a necessity in business, but sometimes it can seem like they are speaking another language. The terminology used by an accountant can seem overwhelming at first, but just what it is it that they are trying to say? In this article we aim to tackle some of the more obtuse phrases that are used when talking about you business’s accounts and putting them into a more understandable context.

Accounts Payable/Receivable

Accounts payable is the amount owed by a company for the products or services it has bought from external suppliers. This is  opposed to accounts receivable which is the amount customers owe to a company.

Auditing

An audit is equivalent to an evaluation of your business’s financial history, generally for the year. It is used to assess how a business is performing and if the information provided is valid and reliable.

Balance sheet

A balance sheet represents what a business is worth at a specific point in time, sort of like a snapshot. The sheet must equate to three main parts of the business –  these are assets, liabilities and ownership equity. The balance sheet can only be correct when the assets balance out the liabilities and ownership equity. The main formula accountants use for this is:  

Assets = Liabilities + Ownership Equity

Book keeping

A phrase we are all familiar with, but what is it actually? Book keeping is all about recording your day to day transactions as a business, mainly financial transactions such as sales. In essence the accountant keeps a record of your business transactions by maintaining and ensuring that they are accurate and up to date at all times.

IR35 advice

IR35 is an element of tax legislation created in April of 2000 to stop contractors working under the pretence of a contractor therefore taking advantage of the relevant tax benefits.

An example of this would be if an employee was to quit their fulltime position and then take up the same job with the same company, but as a contractor working through their own company.

Payroll

The Payroll is a list of a company’s employees and their salaries as well as bonuses and reductions. In accountancy this is a very important and unique document as the payroll can affect the net income of a company.

Return on Investment (ROI)

ROI is a measure to see how successful an investment has been by evaluating the profitability of the investment in question. An equation that is used to measure the success can be seen below.

ROI = Gain From Investment / Cost of Investment

VAT

VAT stands for Value Added Tax, a tax that is charged on most business transactions. VAT is added by businesses in the price they charge for goods and services to the consumer. The standard rate for VAT in the UK is 20%.

As we can observe, the terminology used by accountants can seem daunting and problematic to understand. Hopefully this glossary has given you a useful insight into some of the activities of an accountant, as well as a rudimentary understanding of some key accounting terms.