FINANCIAL LITERACY • 26 AUGUST 2023 • 16 MIN READ

What's your accountant talking about?

SECTIONS

A-B

C-D

E-I

J-S

T-Z

Like most business owners, we love when clients understand what we do, and are keen to know more about our world.

Our aim is to help business owners interpret the information we provide. We realise certain words and phrases may seem intimidating – as they are in any new topic or activity. However, you’ll quickly find yourself asking more in-depth questions about the financial side of your business, and understand the impact of key decisions you make. It’s a continuous learning process.

To use some of these words in context, a potential conversation with your accountant is outlined in orange. We’ve also included links to relevant blogs for more information.

A-B

Account

Where transactions of a similar nature are recorded. When all Accounts are collected together they form the Trial Balance.

Account code

A number or abbreviated word for an Account.

“If you want to see the transactions for the year, go into Accounting / Reports / Account Transactions (if you're using Xero), and enter the date range and the account code.”

Account type

Where the Account is shown in the financial statements – Sales, Other Income, Cost of Goods Sold, Expenses, Current Asset, Non-current Liability, Current Liability, Fixed Asset, Equity

“When you create a new account code in Xero, make sure the account type is Current Liability and not Equity.”

Accounts

These show how your business performed in the past year (Profit and Loss Account), along with the assets owned and liabilities owed at the end of the year (Balance Sheet).

Also called Financial Statements, Annual Report or Annual Accounts.

“We’ll prepare your tax returns after we complete your accounts. After you review your accounts on Beany, don't forget to approve them!”

Accounts payable

Amounts you owe suppliers for goods and services you’ve purchased.

Also known as Creditors.

Adjustable value

The Adjustable Value is the purchase price of a Fixed Asset less all of its Depreciation claimed to date.

Also known as Carrying Value.

“Keep in mind - the adjustable value in your depreciation schedule doesn’t mean that you’ll get that amount when you sell.”

Accounts receivable

Amounts customers or clients owe you for goods and services you’ve sold.

Also known as Debtors.

Annual accounts/annual report

These show how your business performed in the past year (Profit and Loss Account), along with the assets owned and liabilities owed at the end of the year (Balance Sheet).

Also known as Financial Statements.

Assets

These are physical items you own and include motor vehicles, Accounts Receivable, Cash, and Fixed Assets.

We normally divide assets into two parts:

Current assets – those that are expected to be used or converted to cash within 12 months
Non-current assets (including Fixed Assets) – held for longer than 12 months and used to generate revenue for the business

Bad debts

If you’ve recorded the sale as income but later find out you’re unlikely to receive the (full) payment, the debtor should be written off as a Bad Debt expense in the Profit and Loss Account. We don’t want you paying tax on income you’ll never receive!

“Do you have any bad debts and if so, which debtors?”
“When you create the credit note, code the line to bad debts.”

Balance date

The last day of the period covered in your financial statements. For most businesses in Australia, this is the 30th of June.

Also known as Year-end.

“If you bought the printer and phone before the balance date we can include them in the current year’s financial statements.”

Balance sheet

This forms part of your accounts. It’s a snapshot in time where we list everything your business owns and everything that your business owes to others. The balance sheet tells you the financial value of your business on the last day of the year, all on one page.

Also known as Statement of Financial Position.

“Your bank will want to see the balance sheet, as well as the profit and loss account. They need to see the business assets and liabilities.”

Balancing adjustment

If you sell a Fixed Asset for more (or less) than its Adjustable Value, the business needs to consider whether this is an adjusting event and/or a capital gain.

Also called Gain on Sale of Asset.

“For instance, if you sell a sanding machine and receive more than its adjustable value, you’ll pay tax on the profit.”

Budget

Your expectation of (only) income and expenses over a specific period – usually a month or year. This is normally set out in the same format as a Profit and Loss Account.

Your budget differs from a Cash Flow Forecast, which looks at all cash transactions and not just those in the Profit and Loss Account. It includes payments for fixed assets and repaying loans.

“We can prepare a budget with you, and look at the differences between actual figures and the budget.”

Business expense

An expense that can be deducted from your taxable income, therefore reducing the tax to pay.

“Although a parking fine was issued during working hours, it’s still not a business expense. You can’t claim fines or penalties for tax purposes.”

C-D

Capital

The net balance of business assets that belongs to the owner(s). In other words, the amount that would be left over once all business assets have been sold and liabilities paid.

Also known as Equity and Owners’ Equity.

Capital expenditure

Money spent on something that will last longer than one year - such as a company vehicle, a computer or the development of a website.

For tax purposes, we can claim 100% of the cost as an instant asset write-off for most small and medium-sized businesses. It otherwise becomes a Fixed Asset and we use Depreciation to write off its cost over a number of years.

“If you buy rims and mags to make a car’s value higher than what you paid for it, we’ll need to capitalise these assets.”

Carrying value

The purchase price of a Fixed Asset less all of its Depreciation claimed to date.

Also known as Book Value.

“If you’ve sold a car for more than its carrying value, there’s depreciation recovered and you’ll need to pay tax on it.”

Cash flow forecast

An estimation of your cash transactions during the year. This will include not only income and expenses but also planned asset purchases, repayments of loans, and Drawings.

This differs from a Budget which only focuses on items in the Profit and Loss Account.

Cash flow statement

A report showing all cash transactions during the year, separated into categories – operating, financing (for example, loans), and investing activities (for example, Fixed Asset transactions).

Chart of accounts

A list of all Accounts and their Account Codes within the accounting system you use to record your transactions.

“You can add your own account and code to the chart of accounts - or we can do it for you.”

Cost of sales/cost of goods sold

Direct expenses related to making a sale of your product or providing services. These are usually purchases of goods to resell, materials used in construction, subcontractors, and wages for staff in the sale process.

Also known as Direct Costs or Direct Expenses.

“You can include freight in the cost of sales but can move it down to the normal operating expenses if you prefer.”

Creditors

Amounts you owe suppliers for goods and services you’ve purchased.

Also known as Accounts Payable.

Debtors

Amounts customers or clients owe you for goods and services you’ve sold.

Also known as Accounts Receivable.

Depreciation

Depreciation is a non-cash expense and applies to Fixed Assets. There are two ways to think of this:

Accounting for the normal wear-and-tear of the Fixed Asset as a Business Expense each year, which reduces the value (and future selling price).
Claiming the cost of the Fixed Asset over a number of years (Minor Assets can be fully claimed in the year it’s purchased).

The ATO provides accountants with the maximum Depreciation Rates claimable for tax purposes.

This spreads the cost of a Fixed Asset Purchase over its useful life and is an expense in the P&L, which means your tax bill is reduced.

“If you’ve bought a new fridge, it can be added to your depreciation schedule and depreciated.”

Depreciation rate

The rate at which the cost of a Fixed Asset can be spread over the expected useful life of the asset.

Should assets not be eligible for the Instant Tax Write-off, depreciation can be calculated using your myGov account.

Prime Cost (the same amount each year); and
Diminishing Value (a percentage applied to the Adjustable Value of the Fixed Asset)

Direct costs/direct expenses

The direct expenses related to making a sale of your product or providing services. They are usually purchases of goods to resell, materials used in construction, subcontractors, and wages for those in the sale process.

Also known as Cost of Sales or Cost of Goods Sold.

Dividends

One way to pay company profits to its shareholders.

“To fix the overdrawn shareholder current account, we can distribute a dividend.”

Drawings

Money or assets you physically take out of the business for personal expenses.

“As doctor fees are a personal expense, they can be put in drawings.”

E-I

Equity

The net balance of business assets that belong to the owner(s). In other words, equity is the amount that would be left over once all business assets have been sold and liabilities have been paid.

Also known as Net Assets and Capital.

Expenses

All business costs incurred during the year, with the exception of:

Personal expenses (these are Drawings)
Capital Expenditure such as motor vehicles, equipment, and office furniture
Penalties and fines

Financial position

This is a snapshot in time where we list everything your business owns as well as what it owes, and forms part of your accounts. It shows you the financial value of your business on the last day of the year, all summed up on one page.

Also known as a Balance Sheet.

Financial year

A twelve-month period - usually from the 1st of July to the 30th of June.

Fixed assets

Assets that are not eligible for the instant asset write-off. Examples include property, plant, equipment, motor vehicles, office furniture, and other ‘physical’ assets.

Small and medium-sized businesses can claim most assets as a deduction in the year of purchase by way of the Instant Asset Write-off. This expense is recorded in the Profit and Loss Account.

Financial statements

These show how your business performed in the past year (Profit and Loss Account), along with the assets owned and liabilities owed at the end of the year (Balance Sheet).

Also known as Annual Report or (Annual) Accounts.

“If you upload all your year-end information to your Beany page, we can start on your financial statements.”

Franking credit

A tax credit that a company receives for income tax that has been already paid to ATO. Franking credits are passed on to shareholders when a dividend is declared.

The shareholder’s dividend income is still taxable. However, the franking credit reduces the tax bill. The net effect here is the shareholder doesn’t pay tax on the dividend income (as the company has already paid the tax to ATO).

“You’ve only got enough franking credits to pay a dividend of $45,000.”

Fringe benefit tax

A tax on benefits that employees receive as a result of their employment, such as a company car. The employer pays Fringe benefit tax, rather than the employee.

For example: Mary is provided with a company car, which is available for private use as part of her salary package. The private use component of the car would be subject to FBT, which the employer pays.

Funds introduced

Money or assets you put into your business to start or support it.

"Yes, we can bring your personal tools into the business by funds introduced."

General Interest Charge (GIC)

GIC is the interest charged by the ATO if you fail to pay the required amount of tax by its due date(s).

General ledger

A list of all transactions that took place during the financial period, typically showing the date, description, and amount of each transaction. The summarised form of a General Ledger is a Trial Balance.

Also known as GL.

“We’ve printed the full GL and highlighted the expenses that can’t be claimed for tax purposes.”

Goodwill

An Intangible Asset that doesn’t physically exist, yet still adds value to a business. This is usually the reputation of the business and its customer/client base.

As a rough guide, Goodwill is usually the price you pay for a business less the value of its Assets.

Gross profit

Sales (revenue) less Cost of Sales.

Income

The amount that your customers pay you in return for products or services you supply.

Also known as Revenue or Sales.

Instant asset write-off

Small businesses (those with a turnover of less than $10m) can apply simplified depreciation rules. This means most business assets can be depreciated at 100% in the first year – effectively being claimed as a tax-deductible expense immediately.

The asset is classified as Capital Expenditure and recorded as a Fixed Asset if it does not meet the eligibility criteria.

“If the purchase price of your new computers qualifies for the Instant Asset Write-off, we can claim this as an expense.”

Intangible assets

An Asset that cannot be physically touched. The most common examples of this are Goodwill, trademarks, and patents.

J-S

Manual journal

A transaction that doesn’t go through your bank account. This is usually prepared by the accountant for year-end (tax) adjustments.

“We’ll put through a manual journal to correct that.”

Net profit

The net profit is usually the last line of the profit and loss account, representing Sales less all Business Expenses.

Owners’ equity

The net balance of business assets which belong to the owner(s) of a company. In other words, owner’s equity is the amount left over once all business assets have been sold, and liabilities paid.

Also known as Capital or Equity.

Profit and loss account

This forms part of your Financial Statements and gives an overall picture of how well your business has performed. Your profit and loss account details all income and expenditures for the financial period.

“You can see the motor vehicle reimbursement as other revenue in your profit and loss account.”

Pay-as-you-go instalments

With PAYG instalments, you spread your tax bill over three payments and a wash-up, instead of paying one lump sum. This applies to taxpayers with Residual Income Tax higher than $5,000.

“The next provisional tax payment is coming up. We’ll send you an email reminder for this.”

Reconciliation

Reconciliation is the process of making sure information in your accounting system aligns with other documents. For example, your bank account in Xero should align with your bank statement, and your wage expense should be similar to the amount filed with the ATO.

Reconciliation (Xero)

Allocates each bank transaction to an Account Code.

“We haven’t prepared your Business Activity Statement yet, as you haven’t reconciled Xero.”

Retained earnings

The Net Profit from all past years added together, less any Dividends paid to shareholders.

Revenue

The amount your customers pay you in return for products or services you supply.

Also known as Income or Sales.

Sales

The amount your customers pay you in return for products or services you supply.

Also known as Income or Revenue.

Share capital

The (usually) nominal amount paid by shareholders to start a company. In the Financial Statements we prepare, this is normally the number of issued shares at $1 each.

Shareholder loan account

A record of a shareholder’s transactions with the company. It includes Funds Introduced, Drawings, Motor Vehicle Reimbursement, and Shareholder Salary.

“If you look at your shareholder current account, you’ll see it’s in negative – we call that an overdrawn current account.”

Statement of cash flows

A report showing all cash transactions during the year, separated into categories: operating, financing (such as loans), and investing activities (such as Fixed Asset transactions).
Read more:
A guide to income tax for business owners

T-Z

Year-end

The last day of the period covered in your financial statements. For most Australian businesses, this is the 30th of June.

Also known as the Balance Date.

“Don’t worry about making the adjustment yourself – we’ll do it at year-end.”

Xero

Xero is an online accounting software platform that keeps track of your bank transactions, helps you record expenses, provides up-to-date reports, and so much more.

We use it to prepare Financial Statements.

Who are Beany?

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant world.

We have a dedicated team of certified accountants and a support team to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.