Business Accounting Terms Every Small Business Owner Should Know

Running a small business means wearing many hats—and one of the trickiest can be handling your finances. Whether you’re a sole trader, freelancer, or limited company director, knowing the basics of accounting helps you:

• Make smarter business decisions
• Stay compliant with HMRC
• Communicate clearly with clients, suppliers, and accountants

This glossary breaks down the most common accounting terms in plain English, so you can feel more confident managing your accounts.

Core Financial Terms

Cashflow
The movement of money in and out of your business.

• Positive cashflow: more money coming in than going out.
• Negative cashflow: more money going out than coming in.

Capital
Money or assets invested into the business by owners, shareholders, or lenders.

Assets
What your business owns that has value—such as cash, stock, equipment, or property.

Liabilities
What your business owes, like loans, supplier invoices, or tax bills.

Balance Sheet
A financial snapshot showing your assets, liabilities, and equity at a specific point in time.

Profit and Loss (P&L)
A report that shows your income, expenses, and overall profit (or loss) over a set period.

Tax and HMRC Terms

Corporation Tax
A tax on company profits, paid by limited companies.

Self-Assessment
The process of reporting personal income and paying tax directly to HMRC—commonly used by sole traders and freelancers.

Capital Allowances
Tax relief allowing businesses to deduct the cost of certain assets (e.g. machinery, equipment) from taxable profits.

VAT (Value Added Tax)
A tax charged on most goods and services in the UK. Businesses above the VAT threshold must register, charge VAT, and file VAT returns.

PAYE (Pay As You Earn)
The system employers use to collect Income Tax and National Insurance from employees’ wages.

Payments on Account
Advance tax payments made by self-employed individuals towards their next Self-Assessment bill.

Company and Legal Terms

Sole Trader
A self-employed person who owns and runs their business as an individual.

Limited Company
A legal structure where the business is separate from its owners, offering limited liability protection.

Confirmation Statement
An annual filing that limited companies must submit to Companies House to confirm company details.

Director’s Responsibilities
Company directors must keep accurate financial records, file accounts, and act in the company’s best interests.

IR35
Tax legislation that determines whether a contractor is genuinely self-employed or should be treated as an employee.

PSC (Personal Service Company)
A limited company often set up by contractors to provide services to clients.

Employment and Payroll Terms

Employee
An individual working under a contract of employment, earning a salary or wages.

Employer
A business or individual hiring staff and responsible for wages, tax deductions, and benefits.

Contract of Services vs. Contract for Services

• Contract of services: employment agreement.
• Contract for services: a business agreement with a self-employed contractor.

P45
A form given to employees when they leave a job, showing tax paid so far that year.

P60
An annual form summarising an employee’s total pay and tax deductions for the year.

Benefits in Kind
Non-cash perks provided by employers (e.g. company car, private health insurance) that may be taxable.

Accounting Processes and Reports

Accruals
Expenses recorded when they’re incurred—not just when they’re paid.

Depreciation
The reduction in value of an asset (like equipment or vehicles) over time.

Amortisation
Similar to depreciation, but applied to intangible assets like patents or trademarks.

Trial Balance
A report that lists all general ledger balances to check that debits equal credits.

Aged Creditors
A report showing amounts your business owes suppliers, broken down by due date.

Aged Debtors
A report showing amounts owed to your business by customers.

Journals
Manual accounting entries used to record adjustments or corrections in the books.

Practical Business Terms

Invoice
A bill you send to clients requesting payment for goods or services.

Credit Note
A document issued to correct or cancel an invoice, usually when a refund or discount is given.

Expenses
Costs incurred while running your business (e.g. travel, office supplies, software).

Marketing
The activities and strategies used to promote and sell products or services.

Target Market
The group of customers most likely to buy from your business.

Franchise
A business model where you operate under an established brand in exchange for fees or royalties.

Final Thoughts

Accounting terms may feel overwhelming at first, but you don’t need to master them all overnight. Start with the essentials—cashflow, invoices, expenses—and build up as your business grows.

If you’d like support with bookkeeping, tax returns, or VAT, working with a qualified accountant (or using an online accounting tool) can save time, reduce stress, and help you stay compliant.

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