Do your eyes glaze over when you look at a set of accounts? You will probably see several words and terms that you are not completely sure what they mean – so here is our guide to some common accounting terms.
Sundries: effectively the accounting term for miscellaneous, ie general expenses that do not fit into any other category or heading.
Tangible Fixed Assets: these are things which are not for resale but are instead for use in the business. The most common items which fall under this heading are land, vehicles, office equipment, plant and machinery.
Depreciation: this is the annual writing down in value of a tangible fixed asset over its useful life.
Intangible Fixed Assets: these don’t have a physical substance such as the equipment described above. Rather, they are items such as goodwill (explained in more detail below), patents and copyrights.
Amortisation: this is the annual writing down of an intangible asset over its useful life (ie the equivalent of depreciation for intangible assets).
Goodwill: effectively the premium a business pays when it acquires another business, and includes the value of the name, brand, customer base and general good relations.
Trade debtors: are amounts owed to the business in respect of sales where a customer has not yet paid for the goods or services they purchased.
Trade creditors: are amounts owing by the business to suppliers in respect of goods or services that have been purchased but not as yet paid for.
Prepayments: if your annual business insurance of £1,200 is due 1 month before the end of the accounting year, then 11/12 of this cost actually relates to the following accounting period so you have prepaid £1,100 of insurance.
Accruals: expenses should be matched to the period to which they relate, as is seen from prepayments. Accruals are just about the opposite – certain goods and services are only billed after the accounting period they relate to. The most common accrual in a set of accounts is the accountancy fee as the accounts can only be prepared after the year end!
Work in progress: where the business undertakes a large job, such as building a machine for a customer. At the year end the machine may not be complete so no sales invoice has been raised. However, if the job is 75% complete this proportion should be included as ‘work in progress’.