Small Business Accountants

31 Accounting Terms & Concepts You Need to Know

UK small business owners who understand core accounting vocabulary make better financial decisions, ask sharper questions of their accountants, and read their own reports more confidently. This article covers 31 essential terms from the basics (assets, liabilities, equity, revenue, expenses) through to the more specialist (depreciation, amortisation, accruals, working capital, gross margin, net profit). Each term includes a plain-English definition and a typical small-business example.

By Jordan Macey MAAT Reviewed by Noor Fiaz Updated 16 Apr 2026 6

Key takeaways

A working accounting vocabulary helps UK small business owners read their own reports and ask useful questions when reviewing management accounts with an accountant.
The accounting equation (assets equal liabilities plus equity) is the backbone of every balance sheet and keeps double-entry bookkeeping internally consistent.
Profit and cash are not the same: accrual-basis accounts can show healthy profit while cashflow is under strain, which is why the cashflow statement matters.
Gross profit (revenue minus cost of sales) and net profit (gross profit minus operating expenses and tax) tell different stories about business efficiency and overall performance.
Understanding depreciation, amortisation, accruals, and prepayments clarifies why reported profit differs from year-end cash movements.

General Accounting Terms You Need to Know

<p>Whether you're <a href="https://goforma.com/self-employed" target="_blank">self-employed</a> or running a small business, you need to stay on top of your business finances. </p><p>While you can delegate your company's financial affairs to your <a href="https://www.goforma.com/accountant-for-self-employed" target="_blank">accountant</a>, it's still important to have a good grasp of the essentials-such as basic accounting terms and concepts. With this knowledge, you'll be better able to communicate with financial professionals, team members and potential investors. <br></p><p>To help you get started, we've written up an introductory guide to accounting terms you need to know:<br></p><h3><strong>Accounts payable (AP)</strong> </h3><p>This refers to money owed to the business by its creditors (suppliers, vendors and other service providers). These are recorded as a liability on the balance sheet.<br></p><h3><strong>Accounts receivable (AR)</strong>-</h3><p>This refers to money owed to the business by its debtors (clients and customers). The amounts are recorded as an asset on the balance sheet.<br></p><h3><strong>Accruals</strong></h3><p>Accruals are amounts that are unaccounted for at the end of the accounting period. These can be expenses that have been incurred or revenue that has been earned, but aren't yet recorded in the accounts. <br></p><h3><strong>Assets</strong></h3><p>Any resource that is owned by a company. There are two main types of assets: current assets and non-current assets. Current assets are expected to be consumed within a year, while non-current assets are expected to be held for longer than a year.<br></p><h3><strong>Balance sheet</strong>-</h3><p>The <a href="https://www.goforma.com/small-business-accounting/what-is-balance-sheet-profit-loss" target="_blank">balance sheet</a> shows how much a business owns (assets), owes (liabilities) and the amount that is left over for its owners (owner's equity) at a point in time. <br></p><h3><strong>Cash flow</strong></h3><p>Cash flow refers to the total amount of money that is moving in and out of your business.<br></p><h3><strong>Chart of accounts</strong></h3><p>The <a href="https://www.accountingcoach.com/chart-of-accounts/explanation/2" target="_blank">chart of accounts</a> is a listing of all the accounts used in the general ledger of the business. <br></p><h3><strong>Cost of goods sold (COGS)</strong>-</h3><p>The total of all costs associated with producing your products or services. <br></p><h3><strong>Credit</strong></h3><p>An accounting entry that increases a liability or owner's equity account, or decreases an asset or expense account. The term may also be used to refer to an entry on the right side of a <a href="https://www.accountingcoach.com/blog/t-account" target="_blank">T-account</a>. <br></p><h3><strong>Debit</strong></h3><p>An accounting entry that increases an asset or expense account, or decreases a liability or owner's equity account. The term may also be used to refer to an entry on the left side of a T-account.<br></p><h3><strong>Depreciation</strong></h3><p>The measurement of the decline in the worth of an asset. </p><p>Common methods of depreciation include: <a href="https://www.accountingtools.com/articles/2017/5/15/straight-line-depreciation" target="_blank">straight line</a>, <a href="https://www.accountingtools.com/articles/2017/5/17/units-of-production-depreciation" target="_blank">units of production</a>, <a href="https://www.accountingtools.com/articles/2017/5/17/sum-of-the-years-digits-depreciation" target="_blank">sum-of-years-digits</a> and <a href="https://www.accountingtools.com/articles/2017/5/17/double-declining-balance-depreciation" target="_blank">double-declining balance</a>. <br></p><h3><strong>Dividends</strong>-</h3><p><a href="https://www.goforma.com/corporation-tax/what-are-dividends" target="_blank">Dividends</a> are a payment of profit that a limited company distributes to its shareholders. </p><p>It is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off.<br></p><h3><strong>Generally Accepted Accounting Principles (GAAP)</strong>: </h3><p>In the UK, the <a href="https://www.icaew.com/technical/financial-reporting/uk-gaap" target="_blank">GAAP</a> is a set of accounting standards published by the UK's Financial Reporting Council (FRC) for reporting financial information.<br></p><h3><strong>General ledger</strong></h3><p>A record of all the accounts that a business uses. </p><p>The accounts are classified into three categories: assets, liabilities and equity accounts. <br></p><h3><strong>Profit & loss (P&L)</strong></h3><p>The <a href="https://www.goforma.com/small-business-accounting/what-is-balance-sheet-profit-loss" target="_blank">P&L</a> is a financial statement that shows how much money your business has made or lost. <br></p><h3><strong>Liabilities</strong></h3><p>Debts and obligations of a company. </p><p>There are two main types of liabilities: current liabilities and non-current liabilities. Current liabilities (otherwise known as short-term liabilities) are due within a year, while non-current liabilities are due after a year. <br></p><h3><strong>Equity</strong></h3><p>Equity can have several meanings in accounting. </p><p>Firstly, it refers to the net amount of finances an owner has invested in the company.It can also refer to the residual value of assets less liabilities, as represented by the accounting equation ‚ÄòEquity = Assets - Liabilities'.<br></p><h3><strong>Expenses</strong></h3><p>Costs incurred by a company for revenue generation. </p><p>A few common types of expenses a business may incur are: </p><ul><li><strong>Fixed expenses</strong>: The total amount of the expense doesn't change over the short-term, despite changes in sales volume or other business activities. Examples include lease and rent payments.</li><li><strong>Variable expenses</strong>: As its name suggests, the total amount of the expense varies in proportion to changes in sales, production or other business activities. Examples include salaries, utility expenses or costs of raw materials. </li><li><strong>Operating expenses</strong>: Expenses incurred for activities that aren't directly related to the production of goods or services. Examples include administrative expenses, or legal and financial fees.<br></li></ul><h3><strong>Net income</strong></h3><p>Otherwise known as net profit, net income refers to a business' financial position when the total revenue is more than the total expenses. <br></p><h3><strong>Present value (PV)</strong></h3><p>Present value is a calculation that measures the current value of a sum or stream of money to be received in the future, through adjusting for inflation and interest. <br></p><h3><strong>Return of investment (ROI)</strong></h3><p>A metric of profitability used to measure the gain or loss that an investment generates, relative to the sum of money invested.<br></p><h3><strong>Revenue</strong></h3><p>The amount of money a company receives from selling its goods or providing its services. </p><p>It refers to the amount earned before expenses are deducted. <br></p><h3><strong>Trial balance</strong></h3><p>A <a href="https://www.myaccountingcourse.com/accounting-basics/trial-balance" target="_blank">trial balance</a> is a report that lists the balances of all general ledger accounts of a business at a specific point in time.</p><p>An expense should be recorded in the same period that the related revenue is earned.</p>

Top Accounting Concepts

We've outlined key accounting concepts you need to know, in order to have a better understanding of how your small business accounting works:

Accrual concept

All revenues and expenses are to be taken into account for the period in which they are earned or incurred, regardless of whether cash is received or paid out.

This differs from cash basis accounting, which recognises income and expenses when they are received or paid.

Accounting period

Only financial records relating to a specific time period should be included.

For example, if you were preparing a cash flow statement for the first quarter of 2020, you wouldn’t include transactions from December 2019.

Consistency concept

Once a specific accounting method is chosen, that method should continually be used unless there are legitimate reasons for not doing so.

This ensures that financial statements across different accounting periods can be reliably compared.

Going concern

There is the assumption that your business will continue its operations for the foreseeable future.

Following this, businesses may defer the recognition of revenue and expenses to a future period.

Conservatism concept

Revenue should be recognised only when there is a reasonable certainty that they will be received, while expenses and liabilities are recognised sooner—when there is a reasonable possibility that they will be incurred.

Economic entity concept:

The finances and transactions of a business are to be kept separate from that of its owners, partners, shareholders or related businesses.

Materiality concept:

Any financial transactions that could materially affect business decisions should be recorded.

An item is considered material if not including the information creates significant impacts on the decisions of users of the financial statements. This results in relatively minor transactions being recorded, so that the financial statements represent an accurate overview of the company’s financial position.‍

Matching concept:

An expense should be recorded in the same period that the related revenue is earned.

Frequently asked questions

What are the most important accounting terms for a UK small business owner?

The essentials are revenue, cost of sales, gross profit, overheads, operating profit, net profit, assets, liabilities, equity, debtors, creditors, accruals, prepayments, depreciation, and working capital. Understanding these 15 gives a business owner enough vocabulary to read a monthly management accounts pack, follow a year-end meeting with an accountant, and spot changes in performance or cashflow before they become problems.

What is the accounting equation?

The accounting equation states that assets equal liabilities plus equity. Every balance sheet must satisfy this equation, and every transaction under double-entry bookkeeping maintains it. If a business buys £5,000 of equipment with a loan, assets rise by £5,000 and liabilities rise by £5,000, keeping the equation in balance. If a director puts in £10,000 of personal cash, assets rise and equity rises by the same amount.

What is the difference between gross profit and net profit?

Gross profit is revenue less direct cost of sales, such as materials and direct labour. It shows how much is left to cover overheads and still generate profit. Net profit is gross profit less operating expenses, interest, and tax. Net profit is the bottom-line amount retained in the business. A UK business can have healthy gross profit but little net profit if overheads are too high, signalling a cost-reduction opportunity.

What is the difference between revenue and income?

In UK accounting, revenue typically means money earned from the core business activity, such as sales to customers. Income is a broader term that includes revenue plus secondary sources like interest, rental income from investment property, or gains on disposal. The profit and loss statement usually shows revenue at the top, then other income further down. HMRC also uses income loosely in self-assessment to mean total taxable earnings.

What does accrual accounting mean?

Accrual accounting records income when earned and expenses when incurred, regardless of when cash changes hands. It contrasts with cash basis accounting, which only records a transaction when money moves. UK limited companies must use accrual accounting for statutory accounts. Sole traders and partnerships with turnover up to £150,000 can elect cash basis for self-assessment, but accrual gives a truer picture of business performance over any given period.

What is working capital?

Working capital is current assets minus current liabilities. It represents the short-term funding a UK business has available to meet its obligations over the next 12 months. Positive working capital usually means the business can pay its bills as they fall due; negative working capital can signal cashflow stress. Working capital is managed actively by shortening debtor days, extending creditor days, and keeping inventory at sensible levels.

Why are depreciation and amortisation different?

Depreciation spreads the cost of a tangible fixed asset, such as machinery or a vehicle, over its useful life. Amortisation does the same for intangible assets like software licences, patents, and goodwill. Both reduce the asset's carrying value on the balance sheet and appear as an expense in the profit and loss statement. UK tax relief, however, comes not from accounting depreciation or amortisation but from separate capital allowances or the Corporate Intangibles Regime.