If you have ever nodded along in a meeting and then quietly googled a word afterwards, this is for you.
Accountants do not set out to confuse people. But the language of business and tax has built up over decades, and some of it can feel like a foreign language when you are trying to run a company, manage your finances, or simply make sense of a set of accounts.
This guide covers the terms that come up most often. No jargon, no unnecessary complexity, just straightforward explanations of what things mean and why they matter.
Business Structures
Sole Trader
The simplest way to run a business. As a sole trader, you and your business are legally the same entity. You keep all profits after tax, but you are also personally responsible for any debts the business incurs. You report your income through Self Assessment each year and pay Income Tax and National Insurance on your profits. Many people start out as sole traders and move to a limited company structure as they grow.
Partnership
Two or more people running a business together. As with a sole trader, the partners are personally responsible for the business's debts. Each partner pays tax on their share of the profits through Self Assessment. A partnership agreement is not a legal requirement, but it is a sensible thing to have in place from the start.
Limited Liability Partnership (LLP)
A structure often used by professionals such as solicitors and accountants. Partners have limited liability, which means their personal assets are generally protected if the business runs into financial difficulty. An LLP is a separate legal entity and must be registered at Companies House.
Ltd (Private Limited Company)
A limited company is a separate legal entity from its owners. The company can own assets, enter into contracts, and be liable for its own debts. If the business fails, shareholders can only lose what they have invested; their personal assets are protected. This is what "limited liability" means in practice. Most small and medium-sized owner-managed businesses in the UK are set up as private limited companies.
PLC (Public Limited Company)
A public limited company can offer its shares to the general public, including through a stock exchange. PLCs are subject to stricter regulation and must meet higher reporting requirements. The minimum share capital for a PLC is £50,000. Most PLCs are significantly larger organisations, but the structure is technically available to any company that meets the requirements.
Sole Director / Shareholder
In a small limited company, the same person is often both the sole director (responsible for running the company) and the sole or majority shareholder (the owner). This is a common arrangement for contractors and freelancers, but it comes with specific tax-planning considerations regarding salary, dividends, and directors' loan accounts.
Financial Statements
P&L (Profit and Loss Account)
Also called the income statement. The P&L sets out what the business has earned and what it has spent over a given period, usually a financial year. The difference between the two is either a profit or a loss. If your income exceeds your costs, you make a profit. If your costs exceed your income, you make a loss. Lenders, investors, and HMRC all review the P&L to assess how the business is performing.
Balance Sheet
Where the P&L shows what happened over a period of time, the balance sheet shows the financial position of the business at a single point in time. It lists what the business owns (assets), what it owes (liabilities), and what remains for the owners (equity or net assets). The two sides of a balance sheet always balance, hence the name.
Cash Flow Statement
A record of money actually moving in and out of the business. A business can be profitable on paper but still run into trouble if cash is not coming in at the right time to pay its bills. The cash flow statement is the document that reveals this. Many small businesses fail not because they are unprofitable, but because they run out of cash.
Assets
Things the business owns or is owed. Fixed assets are long-term items such as property, machinery, or vehicles. Current assets are shorter-term items such as cash, stock, and money owed to you by customers (trade debtors).
Liabilities
Money the business owes. Current liabilities are debts due within the next twelve months, such as VAT owed to HMRC or invoices from suppliers. Long-term liabilities include business loans that are repayable over a number of years.
Equity / Net Assets
What is left when you subtract liabilities from assets. In a limited company, this represents the value of the shareholders' stake in the business. In a sole trader's accounts, it is sometimes referred to as capital.
Income and Tax Terms
Turnover
The total income the business generates from its main activity before any costs are deducted. Turnover is not the same as profit. A business with high turnover but high costs may be making very little money, or even running at a loss.
Gross Profit
Turnover minus the direct costs of producing whatever you sell: materials, manufacturing costs, or the cost of goods bought for resale. It does not take into account overheads like rent, salaries, or professional fees.
Net Profit
What remains after all costs, both direct and overhead, have been deducted from turnover. Net profit is the figure that matters most for tax purposes and for understanding how the business is actually performing.
Dividends
A payment made to shareholders from the company's profits. In a small owner-managed limited company, dividends are one of the main ways a director-shareholder withdraws funds from the business. They are taxed differently to salary, at lower rates in most cases, though the gap has narrowed in recent years. Dividends can only be paid from distributable profits, not from money the company does not have.
Corporation Tax
The tax a limited company pays on its profits. Corporation Tax is currently charged at a main rate of 25% for companies with profits over £250,000, with relief available for smaller companies. It is calculated and paid at the end of the company's financial year, with payment typically due 9 months and 1 day after year-end.
Income Tax
Income Tax is the tax individuals pay on their earnings, including salary, self-employment profits, rental income, and dividends above the annual allowance. The rate you pay depends on how much you earn and which tax band you fall into. The tax-free Personal Allowance is currently £12,570, though this is frozen until at least 2028.
National Insurance Contributions (NICs)
Payments made by both employees and employers on earnings above certain thresholds. NICs fund the state pension and certain other benefits. As a sole trader, you pay NICs on your profits. As a limited company director, you and your company both pay NICs on the salary element of your remuneration. Dividends are not subject to NICs, which is one reason many small-company directors keep their salaries low.
VAT (Value Added Tax)
VAT is a tax charged on most goods and services at the standard rate of 20%. Businesses with a taxable turnover above the registration threshold (currently £90,000) must register for VAT. Once registered, you charge VAT on your sales and can reclaim VAT on most business purchases. The difference is paid to or reclaimed from HMRC, usually quarterly. There are reduced rates and exemptions for certain goods and services.
PAYE (Pay As You Earn)
The system HMRC uses to collect Income Tax and National Insurance from employees as they are paid, rather than at the end of the tax year. If you run a payroll, even just for yourself as a director, you will be operating PAYE. The figures need to be reported to HMRC each time you pay wages through a process called Real Time Information (RTI).
Self Assessment
The system through which individuals report income that has not been taxed at source. This applies to sole traders, partners, directors of limited companies, landlords, and anyone with more complex tax affairs. A Self Assessment tax return must be filed each year, and any tax owed must be paid by 31 January following the end of the relevant tax year.
Capital Gains Tax (CGT)
Capital Gains Tax is the tax on the profit made when you sell or dispose of an asset that has increased in value. CGT does not apply to your main home in most circumstances, but it does apply to things like investment properties, shares, and business assets. The rules around CGT on business assets can be complex, and the rates differ from those on income.
Allowable Expenses
Costs the business can deduct when calculating its taxable profit. For a cost to be allowable, it generally needs to be wholly and exclusively for business purposes. Common examples include office rent, accountancy fees, travel costs, and equipment. Expenses that have a personal element, such as a phone used for both work and personal calls, may need to be apportioned.
Company Administration
Companies House
The government body where all limited companies and LLPs in the UK must be registered. Companies House maintains a public register of company information, including confirmation statements, accounts, and details of directors and shareholders. Failure to file documents on time results in financial penalties.
Confirmation Statement
A document filed at Companies House once a year confirming that the information held about your company is accurate and up to date. It covers things like the registered office address, details of directors and shareholders, and the company's Standard Industrial Classification (SIC) code. It is not a financial document, but it is a legal requirement.
Articles of Association
The rules that govern how a company is run. They set out matters such as how directors are appointed, how decisions are made, and how shares can be transferred. Every limited company must have articles of association. Most small companies use the standard model articles provided by Companies House, though these can be amended.
Share Capital
The total value of shares issued by a company. Many small companies are set up with a share capital of £1 or £100, which has no bearing on the business's actual value. Share capital appears on the balance sheet and represents the amount shareholders have paid for their shares.
Retained Earnings
The cumulative profits the company has retained rather than distributed to shareholders as dividends. Retained earnings sit on the balance sheet and represent the pool of money from which dividends can legally be paid.
Directors' Loan Account (DLA)
A running record of all money that moves between a director and the company outside of salary, dividends, and expenses. If you take money from the company that is not a dividend or salary, it is treated as a loan and recorded in the DLA. An overdrawn DLA, where you have taken out more than you have put in, can trigger a tax charge if not repaid within nine months of the company's year-end.
Accounting Terms
Accruals
The practice of recording income and expenditure in the period they relate to, not when cash is actually received or paid. Most businesses prepare accounts on an accruals basis. For example, if you receive an invoice in March for work done in March, it is recorded in March even if you pay it in April.
Depreciation
The way the cost of a fixed asset is spread across its useful life in the accounts. If you buy a piece of equipment for £10,000 that you expect to use for five years, you might write off £2,000 each year as depreciation. This gives a more accurate picture of costs than showing the full purchase price in the year of purchase.
Amortisation
Similar to depreciation, but applied to intangible assets rather than physical ones. The cost of a patent, a trademark, or purchased goodwill, for example, may be amortised over its expected useful life.
Creditors
People or businesses the company owes money to. Also called accounts payable. Your suppliers, HMRC for unpaid VAT, and your bank for a loan are all creditors.
Debtors
People or businesses that owe the company money. Also called accounts receivable. When you raise an invoice, the customer becomes a debtor until payment is made.
Bad Debt
Money owed to the business that is unlikely to be recovered. Once a debt is formally written off, it may be claimed as an allowable expense for tax purposes, provided certain conditions are met.
Bookkeeping
The day-to-day recording of financial transactions. This is distinct from accounting, which involves analysing, interpreting, and reporting on the figures. Good bookkeeping is the foundation on which accurate accounts are built.
Trial Balance
A list of all the accounts in the accounting system and their balances at a given point in time. It is used to check that debits and credits are equal before financial statements are prepared. If they do not balance, there is an error somewhere.
Year-End
The last day of a company's financial year. For most companies, this is a date chosen at incorporation. It does not have to be 31 March or 5 April, though those are common. The year-end triggers the preparation of annual accounts and a Corporation Tax return, and the filing of documents with Companies House.
Working With Your Accountant
Understanding these terms will not replace the need for professional advice, but it will make conversations with your accountant more productive and help you make better-informed decisions. If you come across a term not on this list, or want to talk through what any of this means for your specific situation, we are here to help.
At PG Owen, we work with businesses across Bath, Warminster, and Midsomer Norton. Your first consultation is free of charge and without obligation.