Plain-English definitions
Accounting glossary
77 accounting, invoicing and tax terms explained in plain English, with the formula and a worked example wherever the arithmetic is what people actually get stuck on.
Invoicing and documents
- Credit note (CN) A credit note is a commercial document issued by a seller to a buyer, reducing or cancelling the amount owed on a previously issued invoice due to errors, returns, or damages.
- Debit note A debit note is a commercial document issued by a buyer to request a credit, or by a seller to increase the amount owed on an existing invoice.
- Delivery note (DN) A delivery note is a commercial document accompanying a shipment of goods that lists the description and quantity of items enclosed without displaying their financial value.
- Estimate An estimate is an approximate calculation of the expected cost for a specific job or project, provided by a business to a potential client before work begins.
- Invoice An invoice is a commercial document issued by a seller to a buyer, detailing the products or services provided and specifying the amount owed for that transaction.
- Invoice number An invoice number is a unique, sequential code assigned to a sales document to identify a specific transaction, track payments and maintain accurate accounting records.
- Net 30 Net 30 is a standard payment term indicating that a buyer must pay their invoice in full within thirty days of the invoice date or the dispatch of goods.
- Payment receipt A payment receipt is a formal written document issued by a seller to a buyer to confirm that a specific sum of money has been successfully received for goods or services.
- Payment terms Payment terms are the specific conditions agreed upon between a seller and a buyer that dictate when and how an invoice must be settled.
- Proforma invoice A proforma invoice is a preliminary bill sent to buyers in advance of a shipment or service, detailing the estimated costs without creating a legal demand for payment or an accounting receivable.
- Purchase order (PO) A purchase order is a legally binding document issued by a buyer to a supplier, authorising a purchase and detailing the exact items, quantities and agreed prices.
- Quotation A quotation is a formal document given to a potential buyer that offers specific goods or services at a fixed price under defined conditions for a limited time.
- Recurring invoice A recurring invoice is a billing document sent automatically to a customer at regular intervals for ongoing services, subscriptions, or repeated product deliveries of the same value.
- Remittance advice A remittance advice is a document sent by a customer to a supplier to confirm that a payment has been made and to detail exactly which invoices the payment covers.
- Retainer invoice A retainer invoice is a bill sent to a client to collect an upfront deposit before work begins, securing your services and providing working capital for the upcoming project.
- Sales order (SO) A sales order is an internal document generated by a seller upon receiving a purchase order, confirming the details of the goods or services to be provided to the buyer.
- Statement of account (SOA) A statement of account is a document issued to a customer that summarises all financial transactions, including invoices and payments, over a specific period to show the current outstanding balance.
Accounting and bookkeeping
- Accounts payable (AP) Accounts payable is the total amount of short-term debt your business owes to suppliers and vendors for goods or services that you have received but have not yet paid for.
- Accounts receivable (AR) Accounts receivable represents the total amount of money owed to a business by its customers for goods or services that have been delivered but not yet paid for.
- Accrual accounting Accrual accounting is a financial method where you record revenue when a sale occurs and expenses when you receive goods or services, regardless of when the actual cash changes hands.
- Aging report An aging report is an accounting document that categorises a company's accounts receivable or payable based on the length of time an invoice has been outstanding.
- Bad debt Bad debt is a monetary amount owed to a business that is no longer recoverable because the customer is unable or unwilling to pay their outstanding invoice.
- Balance sheet A balance sheet is a financial statement that reports a company's assets, liabilities, and shareholder equity at a specific point in time to provide a snapshot of its overall financial health.
- Bank reconciliation Bank reconciliation is the process of matching the cash balances in your business accounting records to the corresponding information on your official bank statement to identify and correct any discrepancies.
- Cash basis accounting Cash basis accounting is a bookkeeping method that records revenue only when money is received and expenses only when money is paid out, regardless of when the invoice was issued.
- Cash flow statement (CFS) A cash flow statement is a financial report that shows the exact amount of money entering and leaving your business over a specific period, helping you track your actual liquidity.
- Chart of accounts (COA) A chart of accounts is a complete, organised list of every financial account used by a business to record transactions and prepare financial statements.
- Credit limit A credit limit is the maximum amount of unpaid invoices a business allows a specific customer to accumulate before requiring payment to release further goods or services.
- Double-entry bookkeeping Double-entry bookkeeping is a fundamental accounting method where every financial transaction requires at least two equal and opposite entries to keep the accounting equation perfectly balanced.
- Dunning Dunning is the systematic process of communicating with customers to ensure the collection of accounts receivable, typically involving a series of increasingly urgent payment reminders for overdue invoices.
- General ledger (GL) A general ledger is the master accounting record of a business, containing all financial transactions categorised by account to track assets, liabilities, equity, revenue and expenses.
- Journal entry (JE) A journal entry is a formal accounting record that logs a business transaction by showing the date, the accounts affected, and equal debit and credit amounts.
- Petty cash Petty cash is a small amount of physical currency kept on hand by a business to pay for minor, everyday expenses where using a bank transfer or cheque is impractical.
- Profit and loss statement (P&L) A profit and loss statement is a financial report that summarises a company's revenues, costs and expenses during a specific period to show whether it generated a profit or incurred a loss.
- Retained earnings (RE) Retained earnings represent the cumulative net profits a business has kept since its inception, after paying out any dividends or distributions to its owners or shareholders.
- Trial balance (TB) A trial balance is an internal accounting report that lists the closing balances of all general ledger accounts to verify that total debits equal total credits.
- Working capital (WC) Working capital is the financial metric representing the difference between a business's current assets and its current liabilities, indicating its short-term liquidity and operational efficiency.
- Write-off A write-off is an accounting action that reduces the recorded value of an asset to zero when it loses all its value or a customer fails to pay an outstanding invoice.
Tax and VAT
- Corporate income tax (CIT) Corporate income tax is a direct levy imposed by a government on the net profits or taxable income earned by a registered company during a specific financial period.
- Customs duty Customs duty is an indirect tax imposed by a government on the import and export of goods, calculated based on the item's classification and its total assessed value at the border.
- E-invoicing E-invoicing is the automated creation, exchange and processing of invoices in a structured digital format between a supplier and a buyer, often directly integrated with government tax authorities.
- Excise tax Excise tax is an indirect tax levied by governments on the production, sale, or consumption of specific goods that are considered harmful to human health or the environment.
- Exempt supply An exempt supply is a sale of goods or services that does not attract value-added tax and prevents the seller from reclaiming the tax paid on their associated business expenses.
- Input VAT Input VAT is the value-added tax that a registered business pays on goods and services purchased for its own operations, which can typically be recovered from the tax authority.
- Output VAT Output VAT is the value-added tax that a registered business calculates and charges to its customers on the sale of taxable goods and services.
- Place of supply The place of supply is a tax principle that determines the jurisdiction where a transaction occurs, which dictates which country's tax authority has the right to collect value-added tax.
- Reverse charge (RCM) The reverse charge mechanism shifts the liability to report and pay value-added tax from the supplier to the buyer for specific cross-border or domestic transactions.
- Self-billing Self-billing is a commercial arrangement where a customer prepares and issues the tax invoice on behalf of their supplier, rather than waiting for the supplier to send a bill.
- Tax identification number (TIN) A tax identification number is a unique set of digits assigned to a business or individual by a government authority to track tax obligations and payments.
- Tax invoice A tax invoice is a legal document issued by a registered business to a buyer, detailing the goods or services provided and the specific amount of tax collected on that sale.
- Tax point A tax point, also known as the time of supply, is the specific date a transaction takes place for value-added tax purposes, determining which tax return period the transaction falls into.
- Taxable supply A taxable supply is any provision of goods or services made in the course of business that is subject to value-added tax under local tax laws.
- Value added tax (VAT) Value added tax is an indirect consumption tax assessed on the incremental value created at each stage of the supply chain, from initial production to the final sale.
- VAT return A VAT return is an official tax document submitted to a government authority that summarises a business's total sales, purchases, and the resulting value-added tax payable or refundable for a specific period.
- Withholding tax (WHT) Withholding tax is a government requirement where a payer deducts a set percentage of tax from a payment made to a supplier and remits it directly to the tax authority.
- Zero-rated supply A zero-rated supply is a taxable sale where the value-added tax rate is set to zero percent, allowing the seller to claim back the tax paid on their business expenses.
Inventory and costing
- Backorder A backorder is a customer request for a product that is currently out of stock but is expected to be replenished and delivered at a later date.
- Bill of materials (BOM) A bill of materials is a comprehensive list of the raw materials, components, and instructions required to construct, manufacture, or repair a finished product.
- FIFO First-In, First-Out is an inventory valuation method where the oldest purchased goods are recorded as sold first, leaving the most recently purchased items in your closing stock.
- Landed cost Landed cost is the total expense incurred to purchase inventory and transport it to your warehouse, including the original price of the goods, freight, insurance, customs duties, and clearing fees.
- Reorder point (ROP) A reorder point is the specific inventory level at which a business must place a new purchase order to replenish stock before running out completely.
- Safety stock Safety stock is an extra quantity of inventory kept on hand to prevent stockouts caused by unexpected surges in customer demand or sudden delays from suppliers.
- Stock Keeping Unit (SKU) A Stock Keeping Unit is a unique alphanumeric code assigned to a specific product variant to track inventory levels, sales and locations within a business.
- Stock take A stock take is the physical verification of the quantities and condition of items held in an inventory room or warehouse at a specific point in time.
- Weighted average cost (WAC) Weighted average cost is an inventory valuation method that calculates the average cost of all identical items in stock to determine the cost of goods sold and ending inventory value.
- Work order (WO) A work order is an internal document that authorises and details the specific tasks, materials and labour required to manufacture a product or complete a service.
Financial metrics
- Amortisation Amortisation is the accounting practice of gradually writing off the initial cost of an intangible asset over its useful life to match expenses with generated revenues.
- Break-even point (BEP) The break-even point is the exact moment when a business generates enough revenue to cover all its fixed and variable costs, resulting in neither a profit nor a loss.
- Cost of goods sold (COGS) Cost of goods sold is the total direct expense incurred to produce or purchase the items that a business successfully sells during a specific accounting period.
- Current ratio (CR) The current ratio is a financial liquidity metric that measures whether a business has enough short-term assets to pay off its short-term liabilities within one year.
- Days sales outstanding (DSO) Days sales outstanding is a financial metric that measures the average number of days it takes a business to collect payment from its customers after a credit sale has been made.
- Depreciation Depreciation is an accounting method used to allocate the cost of a tangible physical asset over its useful life, reflecting how much of its value has been used up.
- EBITDA EBITDA is a measure of a company's operating performance that excludes interest, taxes, depreciation and amortisation to show the pure cash profit generated by its core business operations.
- Gross margin Gross margin is a financial metric that reveals the percentage of revenue remaining after subtracting the direct costs of producing the goods or services sold by a business.
- Inventory turnover Inventory turnover is a financial metric that measures how many times a business has sold and replaced its total stock of goods over a specific period, usually a year.
- Net profit margin (NPM) Net profit margin is a financial ratio that shows the percentage of revenue remaining after all operating expenses, taxes and interest have been deducted from your total sales.
- Overheads Overheads are the ongoing business expenses that support your daily operations but cannot be directly traced to the creation of a specific product or service.
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