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Accounting Terms Business Owners need to know
Posted on by soldi_admin

Accounting terms can sound like jargon to most people! As a small business owner, it is important to have a base understanding of key accounting terms, so that you can be confident in the language around your business’s finances.

We have rounded up and simplified a list of the most common accounting terms we think you should know below. An accountant (a trained professional who records, analyses and works with businesses to understand finances) will often use these terms in meetings with clients. Save this post and impress your accountant next time you see them!

 

Let’s first talk about the Accounting Equation. It’s the absolute foundation of all accounting.

ASSETS – LIABILITIES = EQUITY – both sides must balance out otherwise there has been a mistake in your accounting. Pretty simple concept? In theory, yes…

Here’s our round up of key terms:

 

ASSETS: are anything that your business owns. (Examples include machinery, property or cash)

BOOKKEEPING: is the process of recording financial transactions properly for your business

CAPITAL: is the financial assets your business owns

ACCOUNTS PAYABLE: are expenses you haven’t paid yet, such as something purchased with credit

ACCOUNTS RECEVIEABLE: are services or products you have provided, but haven’t been paid for yet

ACCRUED EXPENSES: are expenses that have been factored into your accounts, but haven’t been paid yet such as salaries or future purchases

CASH FLOW: is cash that comes in and out of your business. Find out more about the importance of positive cashflow here.

COST OF GOODS SOLD: refers to the costs involved in providing your product and service (for example, buying the stock and staff)

DEBITS: increase assets or expenses decrease liabilities

DEPRECIATION: is the loss of value in an asset whilst it’s been in use, for example cars.

EQUITY: is a business’s worth or value of the owners investment in the business.

EXPENSES: are the costs to run your business. Expenses are categorised into fixed, variable, accrued and operating.

GROSS PROFIT: is your income from sales, minus cost of goods sold.

NET INCOME: is the bottom line of the business, once all cashflows have been considered.

INVOICE: is a list of goods or services provided, with a statement of the sum due for these which are given to clients.

LIABILITIES: are debts owned by the business

LIQUIDATION: is dissolving a business and selling off assets to create cash which pays off debt.

PAYROLL: is a list of your employees, and how much their salary or hourly wage is. It is the entire process of recording information through to paying your employees.

RETURN ON INVESTMENT: is how much you make or lose on an investment after your initial input.

REVENUE: is profit earned by your company.

TAX: is payable by most individuals and companies, to the HMRC and is a compulsory contribution based on income or business profit.

TAX DEDUCTIONS: are expenses individuals and business have that can be deducted from their tax bill. Common expenses include mileage, uniform, stationary and energy bills).

 

This list is NOT exhaustive, but we hope it’s made some of the most common accounting terms a little easier to understand 😊

 

Need help from an accountant? Soldi Partners are currently taking on new clients. Click here to get in touch.

Kindest,

Theresa

 

 

 

 

 

 

 

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Understanding Cashflow
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Understanding Cashflow

Cash flow is simply the cash that flows in and out of a business. Any cash received is an inflow, and money spent are outflows. Companies can value their business performance based on how much positive cashflow they have, which maximises the free cash flow (cash left after money spent).

A business has inflows of cash from sales, and spends on expenses such as supplies, wages, tax and rent. Positive cashflow after expenses have been paid indicates a company is performing well and is financially flexible, meaning they can invest money into other areas to continue growth, return money to shareholders and ensure future financial protection for the business.

Cash flow is analysed using a cashflow statement. Senior financial officers or accountants will use this to understand how well a business is managing their outflows vs the inflow, and to forecast performance for investors or growth projects.

It is important not to confuse cash flow and profit- cashflow represents a real time analysis whereas profit indicated how much money a company makes overall after expenses are deducted (on record).

How can Soldi Partners help?
Our fully qualified team work closely with businesses, carrying out bookkeeping duties and managing and forecasting cashflow. With an expert eye, and experience in keeping healthy cashflow, we can take on the bookkeeping burden and grant you more time to grow your business.

Want a free copy of a cash flow statement? Download one here.

Want us to discuss any particular topics? Let us know!

Kindest,
Theresa

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How can Xero benefit your business?
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If you are a small business owner or self-employed, you will know how important it is to ensure your finances are managed well.
Ensuring you have a clear picture of your finances, better enables you to deal with challenges that arise in running a business.
That, along with the implementation of Making Tax Digital (now due in 2026), it’s never been a better time to get on board with accounting software.
As an accountancy practice, we use and recommend Xero, and in this blog we will cover the benefits of using Xero for your business.

Ok, so what is Xero? In a nutshell, it’s a cloud accounting software designed with the small business owner in mind. It is multi-functional and offers a clear picture of your finances at any given time.
From sending invoices to tracking projects, you can do it all on this piece of software.

What are the benefits of using Xero?

Anytime, Anywhere. In the words of Xero themselves. The software comes with an app so you can access what you need wherever you are. From creating invoices on the go, to reconciling payments, Xero makes it easy to do any accounting business quickly and efficiently. You can also have multiple users meaning team collaboration is at your fingertips.

You can sleep well in the knowledge that the software Is secure, data is protected and accurate, and can easily be used in collaboration with your accountant, saving time so you can get on with business. You’ll get handy analytics too so you can really build a picture of your business finances.

Late payments messing with your cashflow? With Xero you can get paid up to twice as fast by linking the software with online payment platforms, meaning you can add a ‘pay now’ button to your invoices making payments easier to track and easier to pay. You can even automate chasing late payments!

Would you like to eliminate having to sift through boxes of receipts and invoices? Xero is cloud based meaning all your documents are stored safely – no need for paper copies!
Another way this software saves you time is by linking your bank feed taking away the need for manual bookkeeping processes and ensures bank reconciliation.

As business owners, we know you wear many hats. By using an accounting software such as Xero, you are winning back much valued time to dedicate to growing your business.

Have any questions? Get in touch and we will be happy to chat!

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A guide to going self-employed
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Going self-employed can be both an exciting and lucrative move, with some of the benefits including setting your own work schedule and being able to scale your business. You can create what the perfect job looks like to you.
However, it’s also a challenge that comes with responsibilities – you will be in charge of your own destiny and that takes courage, determination and a particular mindset. You’ll have to take on multiple roles to ensure you are adhering with self-employment regulations and you may find this overwhelming at times.

It is your responsibility to ensure you research your options to make sure you are making the right decision for you.

We have put together a handy guide of things you will need to consider before going self-employed.

It’s on you.
Until you scale your business, (if that is the intention) then everything is on you and you will be working alone. From customer service to finances, there will be a lot to keep on top of.
Joining local networking groups for business owners is a good way to connect with likeminded individuals and gain that support you may feel is lacking. It’s also a great way to market yourself.

It may not be flexible in the short term.
Being self-employed is a great way to create a better work life balance as you can pick and choose what you do. However, with the loss of a regular pay day, it may be that you need to take on as much work as possible at first to establish the business in order to give you a flexible future. You may also find yourself tackling admin and customer service in between your working hours.

There are financial responsibilities.
Registering as self-employed means you will have an obligation to complete a self assessment tax return each year. This is to declare your income and pay the correct amount of tax owed. When you are self-employed, you are able to claim for certain expenditures which will alter your tax bill, so always get some advice from an accountant about how that works. Remember, an accountant is your business partner and will want to help you pay less tax.

You’ll have to keep accurate and up to date records of receipts and invoices too. Your accountant can advise you on what the best software to use for this is – HMRC will be implementing Making Tax Digital soon which means you will have to use approved software such as Xero to complete your assessments.

As your tax doesn’t get paid as you earn, you must also remember to put money aside so you are prepared for the tax bill!

Depending on your earnings threshold, you may also need to consider being VAT registered.

You’ll need to broaden your skills.
When you are self-employed you will have to undertake admin, market yourself, pitch for work and more.
Linked in offer some brilliant training videos across lots of different topics, including communication skills, which can be helpful for business owners.

You will have different rights.
Being self-employed means you wont have the same rights as employees. That includes no sick or holiday pay, and losing employer pension contributions.

Don’t forget insurance!
You’ll need to get business insurance for added protection. Whether someone injures themselves at your workplace, or you flood a customers property – you need to get covered.

Use professionals.
Setting up solo can be daunting and there is a lot to remember. By hiring a professional accountant or bookkeeper, you can relax in the knowledge that all of your finances are being looked after, and you can concentrate on growing your business.

Does this article resonate? Are you thinking of going self employed? Did you find this blog helpful? We would love to hear from you.

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How to remain motivated beyond January
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It’s tempting to jump on the new year, new me, mindset in January. However, as we come to the end of another cold and dark month, people’s good intentions start to break down. Relate?
So, how can you remain motivated to keep working on your goals beyond January?
We have collated some top tips to keep the fire in your belly alight and stay inspired beyond the long, dreary January days.

1. New routine getting boring? Update it. Pick out the bits that have worked well for you and alter the things that aren’t serving you as well as you intended. Just because you committed to a new routine doesn’t mean it can’t be adapted if it’s not quite working. This mantra can be applied to lots of areas too – always ask the question “Is this still serving me as it should?”

2. Have a shower when you get up. Having a shower decreases levels of melatonin throughout the body which increases your energy levels. It also encourages your blood flow which boosts oxygen levels within the brain making you feel more alert. Don’t think about it. Just do it. (It will get easier as the mornings warm up!)

3. Listen to a motivational podcast. I love the High Performance with Jake Humphries and Diary of a CEO with Steven Bartlett to give me new ideas and outlooks for both business and personal reasons. It’s both reassuring and inspiring to listen to some of the successful people tell their stories.

4. Track your January achievements. Put a positive spin on January and write down all of those small wins and achievements. If you can do it in January… you’ll do it in February and so on. Take it one month at a time.

5. Identify Key tasks. Breaking down those big goals into smaller and more achievable tasks is a classic way to avoid overwhelm and increase the likelihood of success. We are already in chapter two of twelve!

6. Remain positive. Having a positive attitude takes daily practise. But once you learn how to see the positive, see the lesson and see the potential in every situation, you will begin to see your life change.

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Government Announces phased mandation of Making Tax Digital for ITSA
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Self-employed individuals and landlords will have more time to prepare for Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA), following a government announcement today (19 December 2022).

Understanding that self-employed individuals and landlords are currently facing a challenging economic environment, and the transition to Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) represents a significant change to taxpayers and HMRC for how self-employment and property income is reported, the government is giving a longer period to prepare for MTD. The mandatory use of software is therefore being phased in from April 2026, rather than April 2024.
From April 2026, self-employed individuals and landlords with an income of more than £50,000 will be required to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software. Those with an income of between £30,000 and £50,000 will need to do this from April 2027. Most customers will be able to join voluntarily beforehand meaning they can eliminate common errors and save time managing their tax affairs.
The government has also announced a review into the needs of smaller businesses, and particularly those under the £30,000 income threshold. The review will consider how MTD for ITSA can be shaped to meet the needs of these smaller businesses and the best way for them to fulfil their Income Tax obligations. It will also inform the approach for any further roll out of MTD for ITSA after April 2027.
Mandation of MTD for ITSA will not be extended to general partnerships in 2025 as previously announced. The government remains committed to introducing MTD for ITSA to partnerships in line with its vision set out in the government’s tax administration strategy.
Victoria Atkins, Financial Secretary to the Treasury, said:
It is right to take the time to work together to maximise the benefits of Making Tax Digital for small businesses by implementing the change gradually. It is important to ensure this works for everyone: taxpayers, tax agents, software developers, as well as HMRC.
Smaller businesses in particular should be able to experience the benefits of increased digitalisation of Income Tax in a way which meets their needs. That is why we are also today announcing a review to establish the best way to achieve this.
Jim Harra, Chief Executive and First Permanent Secretary, HM Revenue and Customs, said:
HMRC remains committed to the delivery of Making Tax Digital as a critical part of our strategy for digitalising and modernising the tax system, but we want to make sure we get this right and deliver it effectively.
A phased approach to mandating MTD for Income Tax will allow us to work together with our partners to make sure that our self-employed and landlord customers can make the most of the opportunities this will bring.
The announcement relates to MTD for ITSA only. Making Tax Digital for VAT has already been implemented and is demonstrating the benefits to businesses and the tax system of digital ways of working.
Further information
A copy of the Written Ministerial Statement made by Victoria Atkins, Financial Secretary to the Treasury, on 19 December 2022 is available on UK Parliament: Written questions, answers and statements.
Under MTD for ITSA, businesses, self-employed individuals and landlords will keep digital records, and send a quarterly summary of their business income and expenses to HMRC using MTD-compatible software. In response they will receive an estimated tax calculation based on the information provided to help them budget for their tax. At the end of the year, they can add any non-business information and finalise their tax affairs using MTD-compatible software. This will replace the need for a Self Assessment tax return.
GOV.UK guidance on Making Tax Digital for Income Tax will be updated shortly.
Before today’s announcement, MTD for ITSA was mandated from April 2024 for customers with a total gross income over £10,000 from self-employment and property in a tax year, with partnerships mandated from 2025.

(This article is taken from Gov.uk for your information)

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Autumn Statement 2022 – Lowdown for Small Business
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The much-anticipated Autumn Statement – announced by Chancellor Jeremy Hunt yesterday – included a number of measures that will have an impact on small businesses and landlords in the UK. Here’s a roundup of the key takeaways.

Business tax and National Insurance changes
Rate of Class 2 National Insurance to increase
From 6th April 2023, the rate of Class 2 National Insurance for self-employed people will increase to £3.45 per week.

VAT registration threshold to remain at £85,000
The Chancellor confirmed that the threshold for VAT registration will remain at £85,000 worth of VATable sales until 1st April 2026.

Employment Allowance to remain at £5,000
The Employment Allowance – which reduces or cancels out employer’s National Insurance for certain employers – will remain at £5,000.

Corporation Tax rate to remain at 19% for smallest companies
From 1st April 2023:

companies that make a taxable profit of £50,000 or less per year will continue to pay Corporation Tax at the ‘small profits rate’ of 19%
companies with taxable profits between £50,001 and £250,000 a year will pay Corporation Tax at a rate of 25% with a ‘marginal rate relief’ deduction
companies with taxable profits of £250,001 or more a year will pay Corporation Tax at a rate of 25%
National Minimum Wage thresholds increased
From April 2023, all thresholds for the National Minimum Wage will increase. Meanwhile, the National Living Wage will increase by 9.7% to £10.42 an hour for those aged 23 and over.

Increase in bills capped for the smallest businesses affected by reductions in rate relief
For the smallest businesses affected by reductions or changes in eligibility to small business rate relief or rural rate relief, the increase to their bills will be capped at £600 per year from 1st April 2023.

Research and Development (R&D) changes to be implemented
For expenditure on or after 1st April 2023, the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%. The small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%.

Personal tax and National Insurance changes
Additional rate of tax threshold reduced
The threshold for the additional rate of tax will be reduced from £150,000 to £125,140 from April 2023.

Changes to this and other Income Tax thresholds for non-savings and non-dividend income currently apply to England and Northern Ireland only. The Scottish government has yet to announce changes to Income Tax rates or thresholds. The Welsh government has the power to vary Income Tax rates but has never yet done so.

All other changes, including changes to the thresholds where they apply to savings or dividend income, apply UK-wide.

All other Income Tax and National Insurance thresholds frozen until April 2028
The existing thresholds for all rates of Income Tax and National Insurance will be frozen until April 2028, including the Personal Allowance.

Dividend allowance cut
In April 2023 the dividend 0% tax allowance will be cut from £2,000 to £1,000. In April 2024, it will be reduced further to £500.

Changes to the Annual Exempt Amount for Capital Gains Tax
The Annual Exempt Amount for Capital Gains Tax will be reduced from £12,300 to £6,000 from April 2023. In April 2024, it will be reduced further to £3,000.

Electric cars will no longer be exempt from Vehicle Excise Duty
From April 2025, electric cars will cease to be exempt from Vehicle Excise Duty.

To learn more about the changes announced in the Autumn Statement, you can read the full report on the government’s website.

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Things to consider before you start a business
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Whether you’ve had a lightbulb moment, a brilliant idea, or you have had enough of your day job, if you are considering starting a business there’s a lot to think about.
From legal obligations to scaling the business – it’s going to take lots of work and it is a big deal!
At Soldi Partners we help lots of new businesses lift off and have put together a list of considerations before you take the jump!
If you are reading this article then you are already on the right track – research, whether it’s market research or looking into the best accountants in your local area, is imperative when planning a new business.
Coming in at number one is BUSINESS PLAN. A business plan is the structure of the outfit. Having goals set and how you will achieve them will keep the business steering in the right direction and enable you to visualise and detail where you are starting, and where you want to go. Not forgetting, if you want potential investors or bank loans you’ll need a solid business plan. It’s helpful to evaluate your business plan yearly to ensure you are on track to achieving the goals and outcomes you set out.
Don’t know where to start? There are some brilliant templates on Canva.com to get you started, and thousands of free resources on the internet. (Watch this space for downloadable resources coming to this website soon).

Once you have a plan, you are going to need to think about the LEGALITIES of starting a business. If you set up a company, you’ll have certain legal responsibilities to adhere to including filing important paperwork to HMRC and paying corporation tax. If you opt for self-employment, you’ll need to remember to file a tax return yearly or you could face penalties. An accountant will be able to talk to you about what the best option for your circumstance is.

Regarding accountants, the next piece of advice is to KNOW YOUR NUMBERS. It can be easy to go in blind when starting a business but getting a grip of your finances from the start will help you in the long run. You’ll need to consider your overheads and costs, whether you need investment, what your margins will be and much more. Hiring an accountant or bookkeeper will be invaluable for your business – and professional services are tax deductible. You can read more reasons to hire an accountant here.

If you have a BUSINESS PARTNER, it’s a good idea to think about a shareholder’s agreement. This will protect you both if there are any disputes down the line. It can and does happen! Business partners are often family members or friends, and it can feel unnatural to have these agreements in place, but nonetheless imperative to future proof the business.

Figuring out how you are going to MARKET your product or service is important. Do some research, look at what your competitors are doing, think about a budget and plan. Outsourcing things like logo’s, branding and website is beneficial if budget allows – making the right marketing choices will be hugely impactful on how successful your business is.
Finally, speaking to other business owners will be invaluable on your journey. Being a business owner isn’t a 9-5 – it can feel like a 24/7! You will likely wear many hats when you start your journey and networking with other likeminded people who can help, advise, or even just empathise is going to be a huge support for you. You’ll find plenty of UK business support groups on Facebook and there will be dedicated business networking groups in your area that not only provide support but often end in business relationships and referrals too.

I hope you found this helpful, and wherever you are on your business journey, Good Luck!

For more business start up support, Enterprise Nation have a wealth of information, advice, and events.

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VAT registered businesses must act now for MTD
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From Tuesday 1st November, VAT registered businesses not already signed up to Making Tax Digital, will no longer be able to use their existing VAT online account to file their monthly or quarterly VAT returns. It is now a legal requirement to sign up to Making Tax Digital and use compatible software to file returns. If you don’t you may face penalties.

It’s easy to sign up – using the following steps.

1: Choose a MTD compatible software that is right for you. You can find a list of options on gov.uk or talk to your accountant.

2: Check the permissions in your software, and allow it to work with MTD. You can then file your returns easily.

3: Keep digital records for your current and future VAT records.

Your accountant may offer training in the compatible software you choose, or offer packages with their practice that includes it.

If you need help or advice about Making Tax Digital for VAT – contact Soldi Partners.

 

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What’s in Kwasi Kwarteng’s Mini Budget?
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New Chancellor Kwasi Kwarteng set out a mini-budget on Friday with some headline grabbing tax cuts, which he says are the biggest in a generation.

What do they mean for you?

 

Income Tax.

Kwarteng has cut the basic rate of income tax from 20% to 19%, effective April 2023. The Government estimates 31 Million people will benefit from £170 more a year.

Basic rate applies to people who earn between £12,571 and £50,270 Per Annum.

He has also abolished the higher rate income tax of 45%, instead keeping one single rate of 40% for people who earn over £50,270.

 

Corporation Tax.

The Chancellor has decided to stop the planned rise in corporation tax to 25%, opting to keep it at the current 19%.

 

National Insurance.

The recent rise in NI contributions will be reversed from November 6th. Since April, both workers and employers have paid an extra 1.25% in the pound.

 

Stamp Duty.

There are changes to when and how much stamp duty you pay now when you buy a property in England and Northern Ireland.

The price in which you pay has now doubled from £125k to £250k. (First time buyers don’t pay until £425k)

From then the rates are:

5% £250k-925k

10% £925k-£1,500,000

12% £1,500,000 +

 

Energy.

The big talking point this summer. Kwasi Kwarteng has announced there will be a freeze on energy bills for both residential and businesses, costing the government an estimated £60 Billion for 6 months.

 

Working and Investments.

Companies can invest tax free annually at £1M indefinitely.

IR35 rules are going to be simplified.

Regulations are changing so pensions funds can increase UK investments.

Share options for employees have been doubled from £30k to £60k.

New and start up companies will be able to raise up to £250k under a scheme giving tax relief to investors.

 

Good news if you are a banker. The limitations on bankers’ bonuses have been scrapped.

 

For a more detailed overview of the plans, go to gov.uk .

If you’d like to discuss how the changes will affect you or your business, as always, give Soldi Partners a call.

Kindest,

Theresa.

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