Key accounting terms and concepts

Bookkeeping is a very important part of running a small business.

It involves tracking all financial transactions, including income, expenses, assets and liabilities, to ensure that your business's financial records are accurate and up to date.

Understanding these basic terms and concepts of accounting will help you maintain accurate financial records for your small business.

1. Assets

Assets refer to any resources your business owns, such as cash, inventory, equipment, or property. They are recorded on the balance sheet and represent the value of what your business owns.

2. Liabilities

These are debts or liabilities that your business has. These can include loans, accounts payable or accrued expenses. Liabilities are also shown on the balance sheet.

 3. Equity

Equity is the ownership stake in a company after deducting liabilities from assets. It is calculated by subtracting total liabilities from total assets and is shown in the balance sheet.

 4. Income

Income refers to the money your business earns from sales or services provided. It can also include interest earned from investments or rental income.

5. Expenses

Expenses are all the costs incurred in running your business such as rent, utilities, salaries, consumables, etc.

6. Employee payroll taxes

Employee payroll taxes refer to deductions from employee salaries for tax purposes, such as national insurance contributions and PAYE.

7. Depreciation

Depreciation refers to the gradual loss of value of an asset over time due to wear and tear or obsolescence. It is recognised as an expense in the income statement over its useful life rather than being written off immediately on purchase.

8. General Ledger

The general ledger records all financial transactions in chronological order. It serves as a basis for preparing financial statements.

9. Balance Sheet

A snapshot of the financial position of your business at a particular point in time, usually at the end of an accounting period. It shows assets, liabilities and equity.

10. Profit and Loss Statement

A profit and loss statement, also known as an income statement, shows how much your business has earned or lost over a given period after expenses have been deducted.

11. Cash Flow Statement

 A cash flow statement tracks cash inflows and outflows within your business over a certain period. It helps you determine if your business has enough cash to cover your expenses.