Written by a Chartered Certified Accountant to explain the accounting terminology in simple English, the information is for educational purposes only; it cannot be used as legal or accounting advice. Have you noticed a typo or an error? Use a form to contact me.
Last page update is 17th November 2025.
A
Accounts and Ledger
The bookkeeping entries are grouped into Accounts (personal, real or nominal), forming an accounting ledger called a Book of Accounts. The bookkeeper’s responsibility is to enter the transactions accurately by using the correct accounts.
Accounting period
Accounting period is a timeframe which is typically 12 months; however, in some circumstances it can be a short or longer period. During this accounting period, a business reports its activities, and accounting reports are prepared and filed by accountants, as well as tax is calculated and paid in the correct time. The shorter and longer periods may happen if a business just started trading mid-year and decided to follow a calendar year filing. An accounting period may be based on a calendar year or a fiscal year. In the UK, your business may be registered at any time during the year, and if your business is from 01.06.2025, the 12-month accounting period will cover until 31.05.2026. Similarly, if you prefer to be aligned with a calendar year, it will be 01.06.2025 to 31.12.2025; and fiscal (in the UK April to March) 01.06.2025 to 31.03.2026. The revenue recognition and matching principle governs the accounting period.
Asset, definition and calculation
Assets an economic resources controlled by a business, charity or sole trader. An asset has a value and can either appreciate (increase in value over time) or depreciate (decrease in value over time), depending on the type of asset. An asset can produce or influence an increase in income for the business. Business owners may decide to sell an asset; if sold with a profit, this is called a gain and if not, a loss. Liability is a part of the basic accounting equation as Equity = Assets – Liabilities. You will find assets in the Balance Sheet reporting with classification into current and non-current assets, tangible and intangible assets.
Accounts Receivables
With accrual revenue recognition, we recognise once money is earned, and this means we need to “park” the outstanding invoice until the receipt somewhere. The account used for this purpose is called Accounts receivable, and you can find it on the Balance Sheet as a line under assets. So the funds are outstanding, and if we run an accounts receivable report, we will see the date of the invoice, the date by which we expect a payment, the invoice number, the client name, and the balance. Some software programs may offer more information; however, we need to clearly see how much our customers owe us and also what is the delay in payment in days. This report typically filtered into 0-30 days, 31-60 days, 61-90 days and so on. Any payment over 30 days is typically old debt and must be chased via email or by calling to remind the customer about a payment. Old debts over six months are typically written off by the accountant if there is a slim chance of getting paid.
Accounts Payables
Similar to accounts receivable, however, it is based on the payments we owe to our suppliers and the purchase invoices received.
B
Bookkeeping
Bookkeeping is the process of recording daily financial transactions into a bookkeeping system. The way of recording transactions can be done either on paper or in a digital format. The most common software systems used for bookkeeping are Xero, QuickBooks and Sage. The bookkeeping entries made ensure that funds earned as income or spent for business purposes are properly accounted for.
Bank reconciliation
Bank reconciliation is a manual process of matching what went through the business bank, credit card or petty cash accounts vs your accounting system. It is to ensure everything has been included and recorded accurately in the correct nominal accounts. For example, payment for rent to the rent account, salary to wages account, payment to suppliers and receipts from customers are allocated to the relevant outstanding invoices. The process begins with finding the last date of the period on the bank account and balance, then working through every record for the reconciliation period you are working on. For example, you may decide to do a reconciliation monthly, so the first week of your month is a closing and the reconciliation for the previous month (September). Every line on the bank statement should be reflected in your accounting records with evidence (invoice, receipt, in some exceptions like bank charges). Some items could be part of a larger contract, like bank charges, lease payments for equipment or a car. In those cases, you keep a document copy of the files and ensure you code (allocate) to the correct nominal code. As in our example, the bank balance as of 30th September should be the same in both the accounting software and our bank. Rarely, you may park unknown transactions in the suspense account, but clear those up as soon as possible.
Bad debt
A bad debt is an amount owed to the business. The bad debt is calculated when a company assess funds that it will never receive, so essentially cancelling it out from the receivable balance and moving into bad debt for a write off. The write-off is typically allowed if the funds are not received within six months from the date when it was due for payment. The bad debt can happen if a client goes bankrupt or becomes insolvent. More information here from the HMRC.
Balance sheet
A balance sheet is a financial report that lists the balance as of a chosen date (i.e. as of 30th September 2025) for assets, liabilities and equity.
Budget
A budget is a financial plan for expected income and potential expenses over a 12-month period or a few years. It is required to assess the business future and is typically built on either the historic amounts or the average for the sector. The budget document has an actual column as comparison values, as well as a YTD (year-to-date) balance to control spending.
C
Cash and accrual basis (revenue recognition principle)
There are two ways of revenue recognition: cash and accrual basis. Cash recognition is at the point when money is received for goods and services, or when a business pays suppliers. Accrual recognition differs because it recognises when money is earned (once a sales invoice is raised, but payment can be received in 14 or 30 days), and when expenses are incurred. The date of recognition is what separates these two methods.
Cash vs credit sale
Cash vs credit sale – both transactions are related to the exchange of goods. The difference is that in the first example, it is an exchange of goods or services for cash. In the second example, it is an exchange of goods or services for future payment.
Current assets and non-current assets
Tangible assets are then classified into two groups: current and non-current (or fixed assets. Current assets are liquid and readily available for business needs, and non-current assets are long-term held assets, typically over 12 months. Examples are: Current assets: cash, inventory (or goods for sale), monies due from clients (receivables), prepayments (in advance).
Capital expenditure
Capital expenditure – purchase of non-current assets (equipment, vehicles, furniture, buildings) used for over 12 months.
Credit note
A credit note is a business document, sent to a customer in case of product damage, failed delivery and is aimed to reduce the amount owed. The other reasons may be faults in products and returns, pricing errors, potential overcharge, or discount. The credit note can be applied towards an existing invoice to reduce its balance, and a payment is required, or it can be refunded directly as a transfer to the client. A credit note is a legally binding document. If applied towards an existing credit note must mention the sales invoice in a reference.
Chart of accounts
A chart of accounts is a list of all nominal codes used by the business. The examples of the nominal codes are software, rent, cleaning, administrative, legal and accounting and many more. Each business may choose to add the nominal codes that suit them best; however, it is important to avoid overcrowding and creating more codes than needed.
Cost of goods sold (COGS)
The cost of goods sold – direct costs involved in the production of the goods for sale. For example, raw material, assembly line workers’ labour costs,and packaging are direct costs.
D
Dividends
Dividends are payments to the shareholders of the company, according to the number of shares they have. Dividends are not a deductible expense and therefore do not reduce the corporation tax. Dividends are decided on the performance of the business, and if a company makes a loss, directors may decide not to pay dividends.
Director Loan
A director’s loan is a payment from the director to the business or vice around. Typically, a director’s loans are monies ot the business for the development or purchase of equipment, for any other business purpose. The repayment of the director’s loan is tax-free; however, any interest earned must be reported to the tax office. Businesses can also loan to the director; however, tax-wise, it is best to consult with an accountant. A director’s loan is found in the Balance Sheet under either liability or an asset.
Double-entry and system
The double-entry system is used in bookkeeping and means that every transaction has at least two parties. In other words, sale entry would be reflected in receiving cash, thus involving two accounts, for example: Sales and Cash or exchange of an item (sale) for money (cash).
Direct costs
Direct costs are expenses that a business pays to produce goods or services for sale. For example, this may include: labour costs, cost of raw materials, equipment costs, production or supply costs or shipping. Direct costs in the formula: Gross income = Revenue – Cost of Goods Sold.
Depreciation
Depreciation is the periodic allocation of a certain amount as a loss in the asset’s value. If you bought a car today, every year it will lose its original value until the worth of the car is residual, or very small. That loss in value is calculated through all useful life of an asset. What is a useful life? Well, it is a period you believe this asset would make the most of. As an example, the laptop may have 5 years of useful life, while a car may have 10 years. There are two methods often used in accounting to calculate the depreciation amount: straight-line and reduced balance. A straight line basically takes the price paid for the asset and divides it by the number of useful years. Price paid – 1000, 5 years – 200 per year is a loss in value or depreciation. Reduced balance or written down value method is taking a certain percentage and reducing the carried forward balance of value, paid 1000 in Year 1 and 20% is our depreciation percentage, at the end of Year 1 we have also 200 as a loss, but carried forward into Year 2 is now 800, 20% of that is 160, so we deduct 800 – 160 = 640 (which goes as carried forward to next year) and so on until NIL.
Delivery note
Delivery note – the document that accompanies the delivery of goods and needs to be signed by the customer upon delivery. The delivery note is also being used by suppliers to ensure that the correct goods are dispatched.
Debit and Credit entries
Debit entries are those that increase assets and expenses and decrease liability items. Credit entries are those that increase liability and equity, but decrease the assets. Think about DEA LER, where debit increases Dividend Expense Assets and credit increases Liabilities Equity Revenue.
E
Equity
Equity or capital is the amount which the business owners or shareholders have invested, and they are owed to be paid back. Equity is a part of the basic accounting equation as Equity = Assets – Liabilities. In some sources, you may find that equity is also called owner’s or shareholders’ equity. In case a company is liquidated (business closed down voluntarily or by court order), the residue value left after assets are sold off and debts are recovered belongs to the equity holders. You will find equity figures at the bottom of the Balance Sheet report.
Expense
Expenses are amounts that are spent to run your business, for example, for rent, software, accountants, legal, travel and telephone.
F
Fiscal year
A fiscal year is a 12-month period to cover the accounting year and is counted from the date of business is incorporated (registered with the tax office). This is different for individuals in the UK, the tax year runs from 6th April until 5th April following year.
G
Gains
Gain – an additional income received, that is other than a regular business income, for example sale of a non-current asset above book value.
Goods received note (GRN)
Goods received note – an internal document, where a recipient of delivery confirms everything is in order.
I
Inventory
Inventory – items that are bought by a business for resale or manufacturing of goods, includes raw materials, work in progress and finished goods.
Inclusive or exclusive VAT (Registered business)
If your business is VAT(sales tax)- registered, you need to add the applicable rate as an additional, i.e 20% is a standard tax rate in the UK.
The difference is how to display the VAT on the invoice, either as inclusive, which means the total amount contains tax already or as exclusive, which means that we need to add the tax rate. Example, inclusive £120 (inclusive VAT), in other words £100 total and £20 tax, you can also calculate by 120 * 20/120 [ 20 is a standard rate and 120 is 100%+20%]. Example for exclusive is £100 (exclusive VAT) + £20 (20% VAT) = £120.
Income or revenue
Income is an increase in economic benefits, which can be regular business income (sale of goods) or irregular income (sale of machinery for extra cash). You will find income in the Profit and Loss report (also known as the Income statement). Gross income is sales less direct costs to produce goods or services.
Indirect costs
Indirect costs are the expenses incurred by a business to carry out its activities. These expenses are for running the business and not producing the goods and services, like direct costs. Medium and larger businesses may separate indirect costs into operating and administrative expenses. Operating expenses examples are warehouse rental, utilities, repairs and maintenance, general supplies, software, and depreciation of assets (see depreciation below). The administrative expenses could be split further into selling expenses (marketing, exhibition costs, social media, sales team costs) and general: office space rental, office supplies, insurance, travel and subsistence, telephone and broadband. Indirect costs can be variable and fixed; the difference is that fixed costs do not change once agreed, like the rent of the warehouse or an office, unless your company is moving into a large space. Variable costs could change periodically throughout the accounting year, for instance, you may have two exhibitions a year, or social media costs would be higher during some days like Christmas.
Inventory
Inventory is goods or materials that are sold by business to make a profit. In business, you need to record the opening balance of each item held in the inventory, and the closing balance after performing the inventory. The inventorisation is a process of calculating the value of each item as at a certain date of stock take. The inventory opening and closing are used in the calculation of COGS, as this opening inventory + purchases – closing inventory.
J
Journal entry
A journal entry is an entry into the accounting system that includes date, amount, description, nominal account, debit and credit amount. There are different types of journal entries, for example: reversing, transfer entries, and closing. Reversing entries are made at the end of the accounting period for closing purposes and are cancelled to be reinstated in the new period. Transfer entries are used to move funds between accounts of the same company. Closing entries are made as a part of the accounts production process and can be temporary to revenue, expenses or permanent to retained earnings.
L
Liability
Liabilities are a present obligation of a business to give an economic resource to another party as a result of past transactions. Liabilities are divided into current (due for payment within 12 months as short-term) and non-current liabilities (due for payment after 12 months as long-term). Liability is a part of the basic accounting equation as Equity = Assets – Liabilities. Liabilities are found in the Balance Sheet report and are divided into current and non-current groups.
P
Personal, real and nominal accounts
Personal accounts relate to individuals or companies (customer or supplier accounts, bank accounts). For personal account double-entry: debit receiver, credit giver. Real accounts are those that relate to tangible and intangible assets of the business. For real account double-entry: debit what comes in and credit what goes out. Nominal accounts are those that relate to the income, expenses, gains, and losses (salary, sales, purchases, rent, telephone). For a nominal account, double-entry: debit expenses and losses, and credit income and gains.
Proforma invoice
A proforma invoice is sent by the seller before the issuance of the actual sale invoice. A proforma is used to communicate the expected costs, any fees or delivery arrangements. A proforma is not a legally binding document and is not a tax invoice for VAT purposes. A proforma invoice does not have to be detailed, but is used regularly to pre-agree before sending an actual invoice. There could be a difference between a proforma and a quote (see below) in terms of legal obligation to buy, upon verbal or written agreement to purchase. Proforma anticipates payments shortly after it is sent, while a quote anticipates the acceptance of the quote, followed by an actual invoice (which could take a month or two down the line). A proforma follows the negotiation process and is a finalisation of what has been agreed, while a quote can be rejected or lapse (if the quote timeframe has expired).
Payment Terms
Payment terms on the invoice are an important message to the customer about discounts, early repayment or late payment interest. It also covers the accepted by the seller methods of payment, and the due date by which the seller expects to receive the funds.
Purchase order
Purchase order – an internal and non-legally binding document that is sent to its customers by a supplier to confirm what is being ordered and at what price. Once confirmed by a client, the purchase order is copied into the purchase invoice.
Purchase invoice
A purchase invoice is a business document received from a supplier of goods or services, which is legally binding, and payment needs to be made according to the terms of conditions. The contents are similar to the sales invoice and should include customer and supplier’s details, purchase order reference (if applicable), date of invoice, due date for payment, delivery address (if applicable), description of services and goods, supplier with price per unit, tax and total invoice amount, payment terms and any comments. The payment invoice is entered into the system, and if paid on credit (with say 30 days), the amount is recorded under the Aged payables account until payment is made. After the payment is made, the double entry will remove the balance from aged payables for this supplier, and the contra goes to the bank account.
Petty cash
Petty cash – a small amount of cash held in the office for immaterial purchases, like tea, milk or biscuits.
Payroll
A payroll is the processing of weekly, monthly or ad-hoc payments to the employees or temporary workers. The payroll includes calculation of salary, tax payments and deductions, holiday and sick leave adjustments, posting on the accounting system, sending the report to the tax office, paying all necessary taxes and distributing the payslips. A payslip is a document that an employee should receive after their salary is paid to show all tax calculations and the net amount paid.
Posting
A posting is an entry onto the accounting software, like Xero, QuickBooks or Sage.
M
Matching principle
The matching principle is related to the accrual revenue recognition and states that the cost of goods sold expenses should be recorded in the same accounting period when revenue is recognised. In other words, businesses should report the expenses (that helped to generate that revenue) in the same period as that revenue. This would show a clear and accurate picture of the operational side of business.
R
Revenue expenditure
Revenue expenditure – costs of running the business on a day-to-day basis, like gas, utilities, water, and rent.
Remittance advice
Remittance advice – a document that confirms receipt of payment for the services or goods delivered.
S
Sales quote
A quote is typically not legally binding to buy a document sent to the customer by a seller for goods or services at a specific price. The format of the quote is very similar to the sales invoice, but it is not a tax invoice, and can be refused by your customer or by you. The quote is sent to the customer for approval or rejection, and becomes legally binding once either verbal or written acceptance is received. This means you need to pay for the goods or services. The accepted quote is then copied into a sales invoice. A quote is given for approval with a timeframe, so it could be 30 days, and then it expires, and a new quote needs to be sent.
Sales invoice
A sales invoice is a legally binding document, which could be based on a quote (see above) or issued directly to the customer for goods and services. Sales invoice includes information about the customer and supplier; invoice number; date of invoice, delivery and expected date for payment; detailed information about the goods and services, price, tax if applicable, total for the entire invoice and details how to pay. It can also include any message for failing to pay on time and an interest charge for this.
Statement
Statement – a document from an accounting system, showing the customer’s balance and sent either by post or digitally to remind them how much they owe to pay.
T
Tangible and intangible assets
Tangible assets that a business owns can be physically seen and touched, like equipment, machinery. Intangible assets that are also owned by a business cannot be physically seen, and examples are goodwill, copyrights, and trademarks.
Trial Balance
A trial balance is an accounting report that shows all ledger balances as the total of debit and credit amounts. The trial balance ensures all debit equals to all credits.
Charity-related
Restricted funds (Charities)
Restricted funds – money given to the charity for a specific purpose, like a grant for youth education. These must be tracked and spent only as intended.
Unrestricted funds (Charities)
Unrestricted funds – general donations that can be used towards business running costs and other needs.
Designated funds (Charities)
Designated funds are a portion of unrestricted funds that are used for a specific program or a project.