Accounting and Tax Terminology for owners of small businesses


It's not always clear what accountants and tax advisers are referring to - we often forget that this could be your first time hearing the term, especially if you have recently started a small business and have not yet needed to prepare accounts and tax information. Here are some common accounting and tax terms and links to follow if you need more information – let us know if anything is missing that you would like explained!


ORGANISATIONS


Her Majesty’s Revenue and Customs (HMRC) – a government body responsible for collecting company and personal taxes – there is a wealth of information here (don’t be overwhelmed – take one page at a time or ask for our help!)

https://www.gov.uk/


Companies House – a government body that is responsible for tracking all limited companies in the UK. It is not responsible for the self-employed/sole trader. Limited companies must file accounts with Companies House each year, and these must be in a certain format. Any changes to directors, share capital, etc must also be notified to Companies House.

https://www.gov.uk/government/organisations/companies-house


TRADING TYPES


Self-employed – there are two types of self-employed workers – sole traders and partners


Sole Trader– this is a person carrying on a business/trade in their own name

https://www.gov.uk/working-for-yourself


Partner – one of at least two people carrying on trade together in a partnership

https://www.gov.uk/set-up-business-partnership


Freelancer – this is the same as a sole trader


Limited Company – this is an entity that you form to run a business/trade if you want to keep it separate from you as an individual. See my blog on the pros and cons of trading via a limited company https://www.greenshootsaccounting.co.uk/post/manage-your-blog-from-your-live-site

https://www.gov.uk/limited-company-formation


Partnership – two or more people in business together under a partnership agreement. Each partner has liability for the debts of the partnership.

https://www.gov.uk/set-up-business-partnership


TAX


Corporation Tax - tax that a limited company pays to the government on its profits – which are its sales less allowable expenses. The self-employed do not pay corporation tax, they pay income tax on their income.

https://www.gov.uk/corporation-tax


Income Tax – also known as personal tax - tax that an individual pays to the government on their income (be that from self-employment, employment, interest or dividends).

https://www.gov.uk/income-tax


Notice of Coding - this is a document issued by HMRC to inform an employee and employer of their tax code – the employer will use this code to deduct tax so it is important to check that it is accurate. That said, any difference in tax paid versus owed will be trued up at the end of the tax year either automatically or via a tax return.

https://www.gov.uk/tax-codes


Pay As You Earn (PAYE) – this is the term used for the deduction of tax by your employer – employers must deduct tax from the amount they pay you (if applicable) and pass it to the government. Employers use the notice of coding to know how much tax to deduct. At the end of the tax year the amount you have paid is compared to the amount due, usually via a tax return – you will either need to pay the difference or will receive a refund.


Tax Return – at the end of each tax year the government (HMRC) requires the self-employed and limited companies to declare their income and allowable expenses in an online form which is know as a tax return (also known as an Income tax return or a corporation tax return). Based on this return they will calculate the payment/refund amount due from/to the individual or limited company.


ACCOUNTING


Income/turnover - these are terms used to describe the sales of the business


Cash Flow – the term used to describe the movement of cash in the business – cash inflows are for example from sales or loans – cash outflows from costs of the business and tax payments. It is important to manage (forecast) cash flow on a regular basis to ensure all payments can be met on time.


Profit and Loss – this is the record of the sales and costs of a business – it can differ from cash flow because of the use of accounting concepts called accruals and

prepayments – it is a document that is needed at year end for all types of trade to manage the business effectively and to determine the tax due.


Balance Sheet – this records the assets (eg cash in bank and machinery) and the liabilities (eg money owed to suppliers/owner ) of a business and is required to be filed with Companies House annually for limited companies.


Debtors – people that owe the business money – for invoices sales not yet paid


Creditors – people that are owed money by the business – fur invoiced supplies not yet paid


Accruals – amounts due to be paid but not yet paid – for example a tax payment coming up


Prepayments – amounts paid but with a benefit in the future – for example yearly long insurance paid at the beginning of the year


Assets – anything owned by or owed to the company – for example cash and debtors are assets


Liabilities – anything owed by the company to others – for example creditors are liabilities


Shares – these are the units that make up the ownership of the company – for example a company may have 100 shares which can then be split between the owners who pay to own the shares


Share Capital – the amount the owners of the business have paid for the shares

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