Breaking Down Business Accounting Jargon: A Comprehensive Guide

Is accounting jargon making your head spin? You’re not alone. Let’s demystify the financial lingo so you can better understand your business finances and make informed decisions.

Why Understanding Accounting Terms Matters

As Chartered Accountants, we understand that diving into the world of accounting can feel overwhelming for a lot of business owners. Business owners often feel there is a million accounting jargon terms and concepts to understand. However, grasping these concepts is crucial for making informed decisions about your business’s financial health.

When you understand what your accountant is talking about, you can:

• Ask more meaningful questions
• Make better business decisions
• Feel more confident during financial discussions
• Take greater control of your business finances

Let’s break down these accounting terms into easy-to-understand sections, complete with examples of how they might come up in conversations with your accountant. No more accounting jargon!

Essential Accounting Terms without the Jargon: A-B

Account

The place where similar transactions are recorded. When combined, all accounts and their balances form what accountants call the Trial Balance.

Account Code

A number or abbreviated word used to identify a specific account in your accounting system.

Example conversation: “To view this year’s transactions, go to Accounting/Reports/Account Transactions in your software, then select the date range and enter the account code.”

Account Type

Indicates where an account appears in your financial statements – such as Sales, Expenses, Current Assets, or Liabilities.

Example conversation: “When creating that new account in your system, ensure it’s set as a Current Liability rather than Equity.”

Accounts

Abbreviation for financial documents showing your business performance (Profit and Loss Account) and financial position (Balance Sheet) for a specific period.

Example conversation: “We’ll prepare your tax returns after completing your accounts. Don’t forget to review and approve them!”

Accounts Payable

Money you owe to suppliers for goods or services purchased. Also known as Creditors.

Accounts Receivable

Money customers owe you for goods or services you’ve provided. Also called Debtors.

Adjusted Tax Value

The purchase price of a Fixed Asset minus all depreciation claimed to date. Also known as Carrying Value.

Example conversation: “Remember that the adjustable tax value in your depreciation schedule doesn’t necessarily reflect what you’ll get if you sell the asset.”

Annual Accounts/Report

These documents show your business performance over the year and include the Profit and Loss Account and Balance Sheet.

Assets

Physical or financial items your business owns, typically divided into:

• Current Assets: Expected to be used or converted to cash within 12 months
• Non-current Assets: Held longer than 12 months and used to generate revenue

Bad Debts

Sales recorded as income that you’re unlikely to ever receive payment for, which should be written off as an expense.

Example conversation: “Do you have any bad debts to report? When creating the credit note, code the line to bad debts.”

Balance Date

The final day of the period covered in your financial statements, often called Year-end.

Example conversation: “If you purchased that equipment before the balance date, we can include it in this year’s statements.”

Balance Sheet (Statement of Financial Position)

A snapshot showing everything your business owns and owes on a specific date, revealing your business’s financial value at that moment.

Example conversation: “Your bank will need to see both the balance sheet and profit and loss account to assess your business assets and liabilities.”

Learn more about this in our article: Understanding the Balance Sheet and Why It’s Important

Balancing Adjustment

When you sell a Fixed Asset for more or less than its Adjustable Value, creating a taxable event.

Example conversation: “If you sell that machine for more than its adjustable value, you’ll need to pay tax on the profit.”

Budget

Your projection of income and expenses over a specific period, usually set up in the same format as a Profit and Loss Account.

Business Expense

A cost that can be deducted from your taxable income, reducing your tax liability.

Example conversation: “Although you received that parking fine during work hours, it’s not considered a business expense. Fines and penalties can’t be claimed for tax purposes.”

Learn more about business expenses in our blog: What expenses are tax-deductible in NZ?

Core Accounting Concepts: C-D

Capital

The net balance of business assets belonging to the owner(s) – what would remain if all assets were sold and all debts paid. Also known as ‘Equity’.

Capital Expenditure

Money spent on items that will last longer than one year, such as vehicles or computers. For tax purposes, these are depreciated over time.

Example conversation: “Since those new rims and mags will increase the car’s value beyond its purchase price, we’ll need to capitalize those assets.”

Carrying Value

The purchase price of a Fixed Asset minus all depreciation claimed to date.

Example conversation: “Since you sold the car for more than its carrying value, you’ll need to pay tax on the recovered depreciation.”

Cash Flow Forecast

An estimation of all cash coming in and going out of your business, including income, expenses, asset purchases, and loan repayments.

Cash Flow Statement

A report showing all cash transactions during the year, categorized as operating, financing, or investing activities.

Chart of Accounts

A complete list of all accounts and their codes within your accounting system.

Example conversation: “You can add your own account and code to the chart of accounts, or we can handle that for you.”

Cost of Sales/Cost of Goods Sold

Direct expenses related to making a sale or providing a service, such as inventory purchases, materials, subcontractor costs, and production wages.

Example conversation: “You can include freight in your cost of sales, or move it to operating expenses if you prefer.”

Creditors

Amounts you owe suppliers for goods and services purchased. Also known as Accounts Payable.

Debtors

Amounts customers owe you for goods and services sold. Also known as Accounts Receivable.

Depreciation

A non-cash expense that accounts for the wear and tear of fixed assets over time, spreading the cost over the asset’s useful life and reducing your taxable income.

Example conversation: “That new refrigerator can be added to your depreciation schedule and depreciated over time.”

Learn more about depreciation in our article: Understanding Depreciation: A Key to Maximizing Your Tax Benefits

Depreciation Rate

The rate at which a Fixed Asset’s cost is spread over its expected useful life, calculated using methods such as:

• Prime Cost (same amount each year)
• Diminishing Value (percentage applied to the remaining value)

IRD depreciation rate finder can be found here.

Direct Costs/Direct Expenses

Expenses directly related to making sales or providing services, such as inventory, materials, subcontractors, and production wages.

Dividends

One method of distributing company profits to shareholders.

Example conversation: “To address that overdrawn shareholder account, we could distribute a dividend.”

Drawings

Money or assets taken from the business for personal expenses.

Example conversation: “Since doctor fees are personal expenses, they should be recorded as drawings.”

Important Financial Terms: E-I

Equity

The net value of business assets belonging to the owner(s) – what would remain after selling all assets and paying all debts.

Expenses

All business costs incurred during the year, except for personal expenses (drawings), capital expenditure, and penalties/fines.

Financial Position (Balance Sheet)

A snapshot showing everything your business owns and owes at a specific moment, typically presented as a Balance Sheet.

Financial Year

A twelve-month period, usually from July 1 to June 30 in the Australian context.

Fixed Assets

Physical assets used in business operations for more than a year, such as property, equipment, vehicles, and furniture.

Financial Statements

Documents showing your business performance (Profit and Loss) and position (Balance Sheet) for a specific period.

Example conversation: “Once you upload your year-end information to our portal, we can begin preparing your financial statements.”

Franking Credit (AUS) or Imputation Credit (NZ)

A tax credit representing income tax already paid by a company, which is passed on to shareholders with dividends. This prevents double taxation of company profits. In NZ imputation credits are claimed against dividend income. Australian franking credits cannot be claimed in New Zealand.

Example conversation: “You currently only have enough imputation credits to pay a dividend of $45,000.”

Fringe Benefit Tax

FBT is a tax on benefits employees receive through their employment, such as company cars with personal use privileges.

Funds Introduced

Money or assets you contribute to your business, either to start it or support ongoing operations.

Example conversation: “Yes, we can bring your personal tools into the business through funds introduced.”

General Ledger

A comprehensive list of all transactions during a financial period, showing dates, descriptions, and amounts.

Example conversation: “We’ve printed the full general ledger and highlighted expenses that can’t be claimed for tax purposes.”

Goodwill

An intangible asset representing a business’s reputation and customer base, typically calculated as the purchase price minus the value of physical assets.

Gross Profit

Sales (revenue) minus Cost of Sales. This is the profit left to cover your overheads.

Income

Money customers pay for your products or services. Also called Revenue or Sales.

Instant Asset Write-off

A tax provision allowing small businesses to immediately claim the full cost of eligible business assets as a tax deduction. This is currently $1,000 + GST.

Example conversation: “If those new computers qualify for the Instant Asset Write-off, we can claim their full cost as an expense this year.”

Intangible Assets

Non-physical assets that add value to your business, such as goodwill, trademarks, and patents.

Essential Business Finance Terms: J-S

Manual Journal

A transaction that doesn’t flow through your bank account, typically prepared by accountants for year-end adjustments.

Example conversation: “We’ll create a manual journal entry to correct that.”

Net Profit

The bottom line of your profit and loss account – your sales minus all business expenses.

Owners’ Equity

The net value of business assets belonging to the owner(s) after all liabilities are paid.

Profit and Loss Account (Statement of Financial Performance)

A financial statement showing your business’s income and expenses over a specific period.

Example conversation: “You can see the vehicle reimbursement listed as other revenue in your profit and loss account.”

Provisional Tax Installments

A system allowing businesses to spread tax payments across multiple installments rather than making one large payment.

Example conversation: “Your next provisional tax payment is coming up soon. We’ll send you a reminder email.”

Learn more about provisional tax from our article: The Ins and Outs of Provisional Tax in NZ

Reconciliation

The process of ensuring information in your accounting system matches other documents, such as bank statements.

Reconciliation (in accounting software)

The process of assigning each bank transaction to the appropriate account code.

Example conversation: “We haven’t prepared your Business Activity Statement yet since you haven’t reconciled your transactions.”

Retained Earnings

The accumulated net profit from all past years, minus any dividends paid to shareholders.

Revenue

Money customers pay you for products or services. Also called Income or Sales.

Sales

Money customers pay you for products or services. Also called Income or Revenue.

Share Capital

The nominal amount paid by shareholders to establish a company, typically reflected as the number of issued shares at $1 each.

Shareholder Loan Account

A record tracking a shareholder’s transactions with the company, including funds introduced, drawings, and shareholder salary.

Example conversation: “Looking at your shareholder current account, you’ll notice it’s negative – what we call an overdrawn current account.”

Statement of Cash Flows

A report showing all cash transactions during the year, categorized as operating, financing, or investing activities.

Final Accounting Concepts: T-Z

Year-end

The final day of the period covered in your financial statements. For most New Zealand businesses, this is March 31.

Example conversation: “Don’t worry about making that adjustment yourself – we’ll handle it at year-end.”

Xero

A popular online accounting platform that tracks bank transactions, records expenses, generates reports, and more.

Learn more about Xero: Is Xero Right for My Business?

Understanding Your Financial Landscape

Learning accounting terminology isn’t just about speaking your accountant’s language – it’s about gaining clarity on your business’s financial health. When you understand these terms, you can:

1. Make more informed business decisions
2. Spot financial trends and issues early
3. Communicate effectively with financial professionals
4. Take greater control of your business finances

Remember that removing accounting jargon and building financial literacy is an ongoing journey. Start with the terms most relevant to your current business situation, and gradually expand your knowledge as your business grows.

Moving Forward with Confidence without Accounting Jargon

The next time you meet with your accountant, try to:

• Ask about terms you don’t understand
• Request examples that relate to your specific business
• Take notes on key financial concepts
• Review your financial statements with your new knowledge

Building your accounting vocabulary will empower you to take greater control of your business finances and make more informed decisions for future growth.

Remember, even the most experienced business owners started with basic financial literacy. By continuing to learn and apply these concepts, you’re setting yourself up for long-term business success and putting an end to accounting jargon.

 

Need personalized advice about accounting for your small business? Contact Business Like NZ Ltd today to discuss how we can support your financial needs and help your business thrive. All while speaking in a language you understand!