UK Accounting Terms: A Comprehensive Guide
Unlock the world of finance with our comprehensive guide to common accounting terms in the UK. From balance sheets to cash flow statements, gain a solid understanding of the language used in financial discussions and transactions. Whether you’re a business owner, student, or simply curious about finance, this guide will demystify complex concepts and empower you to make informed financial decisions. Start building your financial literacy today!
What is Basic Accounting?
Basic common accounting terms refer to recording a company’s financial transactions. In the language of finance, there are many terms you should know. It involves analyzing, making precis, and reporting these deals to regulators, oversight bodies, and tax collection organizations. The financial statements used in basic accounting terms are a summary of financial deals over an accounting period, summarizing a firms’s cash flows, operations, and financial position.
Basic accounting is one of the key functions in almost all types of business. It is typically performed by an accountant or a bookkeeper at a small company or by large finance departments with dozens of employees at larger companies. The reports that various streams of accounting generate, such as managerial accounting and cost accounting, are crucial in helping a company’s management make informed business decisions.
With accounting, it is possible to determine which products were successful, which business decisions were effective, and whether the company is generating revenue or making a profit. It would also be impossible to calculate how much taxes to pay, whether to buy or rent a property, or whether to merge with another company. In other words, accounting is not just about recording financial transactions. It measures a company’s success in achieving its goals and helps shareholders understand how efficiently their money is being used. This is why businesses must be proficient in accounting to make good decisions.
What is included in basic accounting terms?
The components of basic accounting include:
System of record-keeping
Companies must have a rational approach to record-keeping before they begin the accounting process. They have to set up accounts in which to store information. Accounts fall into the following classifications:
- Assets: These refer to resources or items that the company owns. Assets have future economic value that can be measured and expressed in monetary terms. A company’s assets include investments, cash, inventory, accounts receivable, land, supplies, equipment, buildings, and vehicles.
- Liabilities refer to the legal, financial obligations or debts companies incur during business operations. Liabilities can be limited or unlimited. They are settled over time by transferring economic benefits such as money, services, or goods. On the right side of a company’s balance sheet, liabilities include accounts payable, loans, mortgages, earned premiums, deferred revenues, and accrued expenses.
- Equity: This is also known as shareholder’s equity.
A company must return the amount of funds to its owners after selling all of its assets and paying off all of its debt. To calculate equity, subtract a company’s total liabilities from its total assets.
- Expenses: Expenses refer to the costs of operations that businesses incur to generate revenue. Common expenses include employee wages, payments to suppliers, equipment depreciation, and factory leases.
- Revenue: Revenue refers to the income that a company generates from its normal business operations. It includes deductions and discounts for returned products. Revenue is the gross income figure from which costs are subtracted to determine net income.
The accountant generates a number of business transactions and receives others from other departments of the company. They record these transactions within the accounts mentioned in the first point. Some crucial business transactions include:
- These are transactions in which products/services are transferred from buyers to sellers for cash or credit. The seller records sales transactions in their accounting journal by crediting the sales account and debiting either money or accounts receivable. They typically create an invoice for the customer, which details the amount owed
These are transactions that businesses require in order to obtain the materials and services necessary to accomplish their goals. Purchases made in cash are recorded as a debit to the inventory and a credit to money. If the purchase is made with a credit account, the credit entry would be recorded in the accounts payable account, and the debit entry would be recorded in the inventory account. Purchases often involve the issuance of purchase orders and disbursement of supplier invoices.
These are the transactions that refer to a company getting paid for providing services or goods to customers. The seller notes down the receipt transaction in the journal as a credit to accounts receivable and a debit to cash. The accountant consolidates all the company’s transactions related to an accounting period and sorts the information into three documents collectively called financial statements. The employer requires information about the number of hours that employees spend at paid labor to generate tax deductions, gross wage information, and other deductions resulting in net pay to employees. These statements include:
This document contains information about the firm’s revenues and minuses all expenses incurred to check the net profit or loss for the reporting period. It measures the ability of a company to expand its customer base and operate in an efficient manner.
This document contains data about a company’s holdings, liabilities, and equity as of the end of the reporting period. It shows the financial position of an organization as of a point in time and is carefully reviewed to determine an organization’s ability to pay its bills.
Statement of cash flows:
This document contains information about the purposes and sources of cash during the reporting time. It’s especially useful when the sum of net income that comes up on the income statement is different from the total change in cash for the reporting period.
Generally Accepted Accounting Principles (GAAP)
The principles, the Generally Accepted Accounting Principles (GAAP), are a set of guidelines that all accounting and finance professionals must apply to their accounting work. Just as a newspaper makes a style guide that sets standards for its writers and editors, the GAAP makes a standard that tells accountants when recording and reporting financial information. Also, investors and analysts can quickly understand their filings and financial statements when all accountants work as per the GAAP.
Example of basic accounting
To illustrate double-entry accounting, imagine your company will record sales revenue of $10,000; you would need to make two entries. These include a debit entry of $10,000 to increase the balance sheet account called “money” and a credit entry of $10,000 to increase the income statement account referred to as “Revenue.”
Another example might be the purchase of a new office desk for $250. In this example, you would need to enter a $250 debit to increase your company’s income statement “office furniture” expense account and a $250 credit to reduce your balance sheet “Cash” account.
The opposite also holds true: if you borrow money from a bank, your company’s assets will increase. However, your liabilities will also increase by the same amount. Double-entry accounting carefully reviews the accuracy because once you have completed your entries, the sum of the accounts with debit balance should match the sum of the credit balance accounts, making sure that you have captured both parts of the transaction.
The accounting cycle
The accounting cycle is the collective process of recording and sorting out a company’s financial transactions. A company must prepare its financial statements accurately to reflect its financial position. The workflow for this process is circular, moving from one accounting period to the next. In the past, these steps were completed manually and recorded in journals. The full accounting cycle includes nine steps. Today, most accountants use accounting software to process many of these steps simultaneously. Here’s a look at the steps in the accounting cycle:
- Journal entries are standards
- Posting from the journal to the general ledger
- Trial balance
- Adjusting entries
- Adjusted trial balance
- Financial statements
- Closing entries
- Post-closing trial balance
The accounting cycle starts with transactions. Every time a company closes a sale, buys an asset, gives a product, or pays off a debt, it initiates the accounting cycle. All financial activities involving the exchange of a company’s assets are considered transactions.