Accounting & Tax Glossary

The money the business owes suppliers for bills received but not yet paid. Also called creditors or the purchase ledger. Watching it alongside the bank balance is central to managing cashflow.

The money customers owe the business for invoices that have been issued but not yet paid. Also called debtors or the sales ledger. Ageing this figure shows how much is overdue and by how long.

An adjustment that recognises a cost or income in the period it relates to, even though the invoice has not yet arrived or been paid. For example, accruing for an electricity bill you have used but not yet received. Accruals are usually posted as a journal and reversed in the next period.

A record of every change made to the books — who made it, when, and what changed. A trustworthy audit trail is written so it cannot be edited or deleted after the fact, which is why accountants value one that is enforced by the system rather than kept by hand.

The process of matching the transactions in your accounting records against the bank statement, so the two agree. Reconciling regularly catches missing entries, duplicates and errors, and gives confidence that the cash figure in the books is real.

The organised list of all the accounts a business uses to record money — assets, liabilities, income, expenses and equity — each with a name and usually a code. It is the skeleton of the books; a well-structured chart makes reports meaningful.

A summary account in the general ledger — most commonly Accounts Receivable, Accounts Payable and VAT — whose balance should equal the total of the underlying sub-ledger (all the individual customer or supplier balances). Reconciling a control account to its sub-ledger is a core check that the books are intact.

A document that reduces or cancels a previously issued invoice — the correct way to adjust a sale rather than deleting the invoice, which would break the number sequence and VAT records. It posts the reverse of the original invoice.

A method where every transaction is recorded in at least two accounts — one debit and one matching credit — so the books always balance. It is the foundation of reliable accounting: because the debits and credits must be equal, the trial balance ties by construction and errors are easier to catch. Real accounting software keeps a double-entry ledger underneath, even when the interface hides it.

A direct entry into the ledger used for adjustments that do not come from an invoice or bill — accruals, prepayments, depreciation, opening balances or corrections. A journal must balance (debits equal credits) before it can be posted.

The complete record of every account in the business — bank, sales, expenses, VAT, and so on — with every transaction that has touched each one. The general ledger is where all the bookkeeping ultimately lives, and every figure on a report should trace back to it.

A control that freezes a period of the books once it has been filed or finalised, so entries in that period cannot be quietly changed or added. A lock enforced by the database, rather than just the interface, is a genuine control an accountant can rely on.

The opposite of an accrual: a cost paid in advance that belongs to a future period, such as annual insurance paid up front. A prepayment moves the portion not yet used out of this period so profit is not understated.

A list of every account with its debit or credit balance at a point in time. Because of double-entry, the total debits must equal the total credits — if they do, the books "balance". The trial balance is usually the first thing an accountant asks for at year end.

A capital allowance that lets a business deduct the full cost of qualifying plant and machinery from its profits in the year of purchase, up to an annual limit. It is the most generous first-year relief for most small companies.

The way a business gets tax relief on capital assets — equipment, vehicles, fixtures — instead of ordinary expense deductions. The Annual Investment Allowance gives immediate relief on qualifying spend up to a limit; the rest is relieved over time through writing-down allowances on pools.

A VAT scheme where you account for VAT when money actually changes hands, rather than when the invoice is issued. It can help cashflow because you do not pay VAT to HMRC until your customer has paid you.

The tax a limited company pays on its taxable profits. The taxable profit is the accounting profit adjusted for items like disallowable expenses and capital allowances. Companies file a CT600 return with HMRC and pay within nine months and a day of the year end.

A simplified VAT scheme for smaller businesses where you pay a fixed percentage of your VAT-inclusive turnover to HMRC instead of working out VAT on every sale and purchase. It trades some accuracy for simplicity and can suit businesses with few VATable costs.

HMRC’s programme requiring businesses to keep digital records and submit tax returns through compatible software rather than by hand. MTD for VAT is already in force; MTD for Income Tax Self Assessment is being phased in. "MTD-ready" means the records are kept digitally in the required form.

A reduction that eases the jump between the small-profits and main rates of Corporation Tax, so companies with profits between the two thresholds pay an effective rate that rises gradually rather than in one step. It is affected by the number of associated companies and the length of the accounting period.

A tax charged on most goods and services in the UK. A VAT-registered business adds VAT to its sales (output VAT) and reclaims VAT on its purchases (input VAT), paying the difference to HMRC. Registration is required once taxable turnover passes the VAT threshold.

The RTI report an employer sends to HMRC each pay run, showing what each employee was paid and the tax and National Insurance deducted. An Employer Payment Summary (EPS) is a separate report used for things like reclaiming statutory pay or claiming the Employment Allowance.

Contributions paid by employees and employers (and the self-employed) that fund state benefits and the state pension. Employees pay Class 1 above a threshold; employers pay a separate employer contribution. Company directors are calculated on an annual basis.

The document an employer gives an employee when they leave, showing pay and tax to their leaving date. The employee gives it to their next employer so the correct tax code and figures carry over.

The end-of-year certificate an employer gives each employee showing their total pay and the tax and National Insurance deducted for the tax year. Employees use it as proof of income, for example when applying for a mortgage or completing a tax return.

The system through which employers deduct Income Tax and National Insurance from employees’ wages and pay it to HMRC. The employee’s tax code tells the employer how much tax-free pay to apply before deducting tax.

The legal duty on employers to automatically enrol eligible workers into a workplace pension and pay in a minimum contribution. Workers can opt out, but the employer must assess and enrol them first, based on their age and earnings.

The system requiring employers to report payroll to HMRC on or before each payday, rather than once a year. The main report is the Full Payment Submission (FPS). Filing RTI to HMRC requires recognised, submitting software or a payroll bureau.

The minimum pay an employer must give an eligible employee who is off sick, for a limited number of weeks. Related statutory payments include Statutory Maternity Pay (SMP) and Statutory Paternity Pay. They are calculated by rules set each year.

A running record of money that moves between a director and their company outside of salary, dividends or expenses. If the director owes the company money at the year end, tax charges can apply, so the balance is watched closely.

A payment of profit by a company to its shareholders, made from profits after Corporation Tax and only where the company has sufficient distributable reserves. For a director-shareholder, dividends are often part of how they take money out of the company, and they are taxed differently from salary.

The document a company must give a shareholder for each dividend paid, recording the date, the shareholding and the amount. The shareholder keeps it for their own tax records, and the company keeps a copy.

The amount of income you can receive each tax year before paying any Income Tax. It is reduced for higher earners — tapered away by £1 for every £2 of income over £100,000 — and disappears entirely once income is high enough.

HMRC’s tax calculation for a Self Assessment year, showing how the Income Tax due was worked out. Mortgage lenders often ask self-employed applicants and company directors for it, usually alongside the matching Tax Year Overview. The formal SA302 is issued by HMRC once a return is filed; a calculation in the same format prepared by an accountant or software is accepted by many, though not all, lenders.

The system HMRC uses to collect Income Tax from people whose tax is not fully handled through PAYE — the self-employed, company directors, landlords and others. You report income on a tax return (SA100 and its supplementary pages) and pay any tax due, usually by 31 January after the tax year.