Finance/Accountancy Key Terms (BASICS)

Liabilities

Amounts a business owes to other people or organisations

Examples: Bank loans, unpaid supplier bills and outstanding taxes

Gross Profit

The amount remaining from revenue after deducting the cost of sales, It shows how much a business makes from its sales, before deducting operating expenses.

Formular: Revenue - Cost of Sales = Gross Profit

Example: A business generates £50,000 in revenue and has £20,000 in cost of sales. Its gross profit is £30,000

Operating Expenses (OPEX)

The ongoing costs of running a business that are not included in its cost of sales.

Such as Office rent, administration salaries, insurance, marketing, utilities

Example: A business spends £8,000 on rent, salaries and other operating costs in a month. Its operating expenses are £8,000.

Revenue

The value earned from the business’s ordinary trading activities before deducting expenses

Example: A plumber charges £250 for a job. The £250 is revenue, before deducting costs

Expenses

Costs incurred in running a business or earning revenue

Examples: Rent, wages, insurance, electricity and advertising

Assets

Things a business owns or controls that has economic value

Examples: Cash, computers, vehicles, stocks and money customers owe the business

Cost of Sales

The cost directly associated with producing or purchasing the goods or services that a business sells

Such as Raw materials, products purchased for resale, and direct production of labour

Example: A shop sells products for £10,000 that originally cost it £4,000. Its cost of sales is £4,000.

Delivery Cost

The costs a business incurs to transport goods from one location to another, such as delivering products to customers or transporting purchased goods from suppliers.

Examples: Courier charges, postage, delivery driver wages, fuel and transport fees.

Example: A business pays £300 to deliver products to customers. This is a delivery cost and is generally recorded as an expense.

Capital (Equity)

The Owner’s financial interest in the business after liabilities are deducted from assets

Example: A business has £10,000 in assets and £4,000 in liabilities. Its equity is £6,000.

Profit

The amount remaining after deducting all relevant business expenses, finance costs and tax from income. It shows the business's overall profit after these costs.

Example: A business has £6,000 gross profit, £3,000 in operating expenses and £500 in interest and tax expenses combined. Its net profit is £2,500.

Capital Expenditure

Money spent on purchasing, improving or maintaining long-term assets that provide benefits to a business over more than one accounting period.

Such as Buying machinery, vehicles, buildings or computer equipment.

Example: A business buys a machine for £20,000 that it expects to use for five years. This is generally capital expenditure, and its cost is usually recognised over its useful life through depreciation.

Revenue Expenditure

Money spent on the day-to-day running of a business, where the cost is generally recognised as an expense in the relevant accounting period.

Such as Rent, electricity, routine repairs, stationery and staff wages.

Example: A business spends £500 repairing a broken office printer. This is generally revenue expenditure and is recorded as an expense.

Receivables Ledger (Sales Ledger)

A ledger containing individual accounts for customers who owe money to the business for goods or services bought on credit.

Such as Customer invoices, payments received from customers, credit notes and outstanding balances.

Example: A business sells £2,000 of goods to a customer on credit. The customer's account in the receivables ledger records the £2,000 owed until payment is received.

Ledger

A collection of accounts used to organise and record a business's financial transactions, showing the movements and balances for each account.

Such as Bank account, sales account, rent expense account and individual customer accounts.

Example: When a business pays £1,000 in rent, the transaction is recorded in the relevant ledger accounts to keep track of the expense and the bank balance.

Nominal Ledger (General Ledger)

The main ledger containing the business's accounts for recording and classifying financial transactions. It includes accounts for income, expenses, assets, liabilities and equity.

Example: A business records £5,000 in sales revenue in its nominal ledger. These accounts are used to prepare the trial balance and financial statements.

Double Entry bookkeeping

A system of bookkeeping in which every financial transaction is recorded using at least two corresponding entries: a debit and a credit. The total debits must equal the total credits.

Example: A business buys equipment for £1,000 using money from its bank account. The equipment account is debited by £1,000, and the bank account is credited by £1,000.

Journal Entries

Records of financial transactions showing which accounts are debited and credited, along with the amounts and a description of the transaction. Journal entries are used to record transactions before or as they are posted to the relevant ledger accounts.

Example: A business records £300 of electricity expense that has been incurred but not yet paid. The journal entry debits electricity expense by £300 and credits accrued expenses by £300.

Trade Discount

A reduction in the listed price of goods or services, often offered to customers such as wholesalers or bulk buyers. It is usually deducted before the invoice amount is recorded.

Examples: Wholesale discounts, bulk purchase discounts and discounts offered to trade customers.

Example: A supplier lists goods at £1,000 and offers a 10% trade discount. The customer is charged £900 before any applicable VAT.

Early Settlement Discounts

A discount offered to a customer for paying an invoice earlier than the normal payment due date. It encourages faster payment and improves the supplier's cash flow.

Examples: Offering a 2% discount if an invoice is paid within 10 days instead of the usual 30 days.

Trial Balance

A list of all the balances in a business's nominal ledger at a particular date, showing debit balances in one column and credit balances in another. The total debits should equal the total credits.

Example: A business has total debit balances of £25,000 and total credit balances of £25,000. Its trial balance agrees.

Financial Statement

Formal reports that summarise a business's financial performance and financial position. They are prepared using accounting records and provide information to owners, investors, lenders and other users.

Example: A company prepares annual financial statements to show its profit for the year, the assets and liabilities it holds, and its cash movements

Opening Balance

The balance of an account at the beginning of an accounting period, carried forward from the previous period.

Examples: Opening bank balance, opening inventory and opening capital.

Example: A business begins April with £5,000 in its bank account. Its opening bank balance is £5,000.

Closing Balance

The balance of an account at the end of an accounting period, after all relevant transactions have been recorded.

Examples: Closing bank balance, closing inventory and closing trade receivables.

Example: A business has £5,000 in its bank account at the beginning of the month, receives £3,000 and pays £2,000. Its closing bank balance is £6,000.

Adjusted Trial Balance

A trial balance prepared after relevant year-end or period-end adjustments have been recorded, such as accruals, prepayments and depreciation.

Example: A business records £2,000 in depreciation before preparing its adjusted trial balance, ensuring that the ledger balances reflect that adjustment.