Although ExpressVAT and XpressoBooks are Cash Book Systems that don’t require you to understand the accounting terminology, you will probably need to get a clear idea of what are some terms just to understand your accountant.
Accrual VAT method
VAT return figures are calculated based on the date of any invoices you have sent out and not the date a payment has been made.
Assets are anything that can be exchanged for money (including Cash itself) and even investments owned by a company:
- Stock (inventory), Cash and cash equivalents
- PPE (Property, Plant, and Equipment, Cookers, Hotplates, Power Drills)
- Land, Buildings, Vehicles
- Furniture, Machinery
Balance Sheet (BS)
Balance Sheet is a financial statement/report that lists all of a company’s assets, liabilities, and equity. A balance sheet therefore balances the two sides of the equation Assets = Liabilities + Equity. If the two sides are not equal there is a problem in the accounting system.
A Cash Book is the place (or program/App) in which all the receipts and payments of money of a company are recorded. XpressoBooks and ExpressVAT are Cash Book systems which are much easier to manage for cash-based business.
Cash VAT method
Cash VAT method means that all the invoices in the VAT return are calculated on the basis of the date of the payment of an invoice not the date printed on the invoice.
Chart of accounts
Different types of accounts (Gas, Electricity, Sales, Telephone, Groceries, etc.) are used to allow easy tracing of your transactions in your bookkeeping. The list of all these accounts are called “The Chart of Accounts”. In ExpressVAT and XpressoBooks there is a default chart of accounts but this can be added to and amended.
Debit and Credit & Double entry accounting
When you are using an accounts system you use a system called double entry bookkeeping where there is a debit side and credit side to all transactions – the accounting system should look after the dual posting. All debits must equal all of the credits for all entered transactions.
The debit column is usually listed on the left and the credit column on the right when you see columnar figures.
Understanding Debits and Credits is not needed in a CashBook System (like ExpresVAT and XpressoBooks) but an explanation of how to understand Debits and Credits is in Order. A rule of thumb is that a Debit will increase an Asset and decrease a liability and A Credit will increase a liability and decrease an Asset.
These are the fixed and day-to-day costs that a business incurs:
- Fixed expenses: Payments such as Rent, electricity, telephone that are regular expenses (technically electricity and telephone are variable,
- Accrued expense: An expense that hasn’t been paid yet – for instance you pay your gas bill every month or every three months but for Gas that you have had previously used,
- Variable expense: Wages, electricity gas are in effect “fixed” and yet variable
- Operating expenses: Expenditure not directly related to the production of goods or services. This could include advertising, Rates and Insurance.
Equity is the difference between the value of your assets and the value of your liabilities.
A fiscal year is a period that a business uses for accounting purposes. It does not need to be from January to December but does have to be 12 months.
Gross Profit (GP)
Gross Profit is the figure that indicates the profitability of a company in pounds. The Gross Profit only takes the value of Stock Purchases into account and not any other operating expenses or overheads. The calculation is simply the takings (revenue) minus the cost of goods sold in a period.
Gross Profit Percentage (GP%)
Gross Profit percentage is VERY important for a small business as HMRC have (internal) tables of expected GPs in different areas of industry. For example if the Gross Profit is £10,000 and the turnover is £20,000 we have a Gross Profit Percentage of 50% by dividing the Gross Profit by the turnover. If the GP% is much different to what is expected by HMRC (without valid reasons) then expect a VAT visit.
Income Statement (Profit and Loss P&L)
The Income Statement (often referred to as a Profit and Loss, or P&L) is the financial statement that shows the revenues, expenses, and profits over a given time period. Revenue earned is shown at the top of the report and various costs (expenses) are subtracted from it until all costs are accounted for; the result being Net Income.
A ledger in accounting parlance is a record of all the accounts used to store the bookkeeping entries. At the end of the year the ledgers are used to create the balance-sheet and income-statement (profit and loss).
Liability is what your company owes to others (your debtors).
These can include:
- Unpaid or part paid invoices
- Loans (Bank Debt, or from directors of the company)
- Money owed to suppliers
- Tax owed
- Wages owed
Limited liability company (LTD)
A Limited Company is a corporate structure where the directors cannot be held accountable for the company’s debts or liabilities. This means that the owners of the company (the directors) cannot lose their house (unless the house was used as security for a loan). For example, the company was sued or they couldn’t pay their Tax or creditors the owners would be safe.
Purchase ledger (Accounts Payable in American English)
Purchase ledger is a “book” or “records containing information on the status (paid or not paid) of invoices received, and from which suppliers. In a nutshell what you owe for purchases you have made.
Sales Ledger (Accounts receivable in American English)
Sales ledger is the recorded information on money you are owed by customers or other parties, basically, outstanding invoices you have not been paid for.
Standard VAT Accounting Scheme
With the Standard VAT Accounting Scheme a business simply pays the 20% VAT charged on sales in the previous quarter. The business can reclaim VAT that was paid on purchases so that VAT payable (or reclaimed) is the difference between the VAT charged on sales and the VAT paid on purchases.
A secured loan allows the taking out of a loan by using an asset (usually a home) as security on that loan. If repayments are not kept up to date the assets secured against that loan may (will probably) be repossessed by the lender.
Stock (Inventory in Americaneze)
This is the term used for assets (goods, items) that have been purchased specifically to sell to customers but are as yet not sold. As more goods are sold (and others have not been purchased) the Value of the Stock position (inventory) will be lower.