The A-Z of common accounting vocabulary
There’s a lot of lingo associated with accounting that can be overwhelming to get your head around. We’ve made a list of the most common terms with some simple explanations of what they are and how they might affect your business.
Accounts payable
What you owe to suppliers. Listed in the current liabilities section on the statement of financial position.
Accounts receivable
What is owed to you that you expect to collect within 12 months. Listed in the current assets section on the statement of financial position.
Balance date
This is the last date in your accounting year. For most businesses it’s March 31st. If you want a different balance date you need to apply to IRD in writing.
Balance sheet (aka statement of financial position)
A financial statement that reports your business’ assets and any claims against them (eg. liabilities and stockholders' equity) at a set date noted on the statement.
Business income
Income earned from goods and services sold and includes invoices issued but not yet paid.
Capital expenditure
Any money spent that created an asset for your business; eg. plant or machinery, improvements to things you already have that increase their usefulness or extend their life, and expenditure incurred in transporting an asset to its site and preparing it for use.
Company
A formal and legal entity in its own right, separate from its shareholders or owners.
Capital gain or loss
The difference between what you paid for something and what you sold it for.
Current liabilities
Short term liabilities due within 12 months; e.g. bank overdraft, creditors, loans, etc.
Depreciation
An allowance recognising that business assets decrease in value or eventually wear out over time, even with routine maintenance and repairs. It’s a way to allocate the costs of a fixed asset over the time that asset is useable and useful. The full cost is recorded in the books initially, but the value of the asset is gradually reduced as a depreciation expense every year.
Disposal
According to IRD, the term "disposal" includes:
- An asset that is compulsorily acquired
- An asset taken out of New Zealand (other than only temporarily)
- Changes in use or location of use of a business asset
- Ceasing intangible asset rights
- An asset that is irreparably damaged
- Any distribution of assets (including distributions of assets to the beneficial owners for no cost)
- Ceasing deemed ownership of a fixture or improvement
- An asset that is lost or stolen if that asset is not recovered in the income year when the loss or theft occurs
Dividends
Profits paid to shareholders
Drawings
Money taken out of a business to either live on and/or pay personal expenses. Drawings are not a business expense but part of the net profit.
Equity
The part of a business’ asset that belongs to the stockholders. Another way to look at it is, if you were to sell everything and paid off all liabilities, what you have leftover is your equity.
Expenses
The money you have to spend to make the business work and produce an income; eg. wages/salaries, rent, stationery etc. NB. expenses do not include capital expenditure.
Fringe benefit tax
A tax on benefits you give your employees other than their salary or wages. Read our blog on understanding FBT to find out what is and isn’t included. < LINK >
Gross income/profit
The difference between total sales and cost of sales. Listed as a category on the statement of earnings.
Imputation credit
A tax credit received from a company for tax it has already paid on the profits it derives.
Net profit
The income left over after taking out allowable expenses.
Non-profit organization (aka NPO)
Any society, association or organisation not carried on for the profit or gain of any member, and whose rules do not allow money, property, or any other benefits to be distributed to any of its members.
Operating Revenue
Income earned solely from the sale of goods/services. Operating revenue does not include income from investments or the sale of assets.
Provisional tax
A bit like ‘pay-as-you-go’ tax where tax is paid in installments throughout the year based on what you expect your income to be (or what it was last year).
Resident withholding tax (RWT)
Tax deducted from investment income, eg. banks deduct resident withholding tax before paying you the interest earned on savings or investments.
Sole trader
A person in business on their own; this person owns, controls and manages everything.
Tax credit
A credit for tax that has already been deducted or paid; eg. PAYE from wages or RWT (see above) deducted from interest you’ve earned.
Terminal tax
If you paid provisional tax (see above), terminal tax is the difference between that and what it turns out you actually owe. If you haven’t paid enough provisional tax then you must pay terminal tax. If you paid too much you can apply for a refund.
Withholding Tax
Tax deducted by your customer. If you invoice a contractor, they will deduct withholding tax before they pay you. This allows IRD to collect income tax as profit is earned during the year. It is often used for "higher risk" tax payers.
Hopefully this helps you understand some of the most common accounting terms you’ll come across in business. However, if it’s still a bit much and you’d like a helping hand, we take the stress out of managing your accounts, giving you the freedom to spend more time working on your business rather than in it. Get in touch to find out how we can help you.