MAKING SENSE OF ACCOUNTING JARGON: A SIMPLE GUIDE TO KEY TERMS

Let’s face it, accounting can feel like a different language, filled with confusing terms and phrases. This guide breaks down the key terms into bite-sized chunks, so you can easily understand the basics and feel more confident talking about money and finances, whether you’re in the UK, UAE, or anywhere else.

Big Picture: Financial Statements

Balance Sheet

A snapshot of what a company is owed or owes at a specific time.

Income Statement

Also called the Profit and Loss statement, this is the value a business generates from it’s trading.  This is different to cash as some items will be payable/paid in a different period such as tax. 

Cash Flow Statement

How cash moves in and out of the business.  The statement also shows how the Income Statement affects the bank balance.

Balance Sheet

Assets

This is what a company owns: cash, buildings, equipment, patents and trademarks. For example, cash in the bank, unpaid sales invoices, stock in hand, office lease or intellectual property rights.

Liabilities

Think of this as what the business owes such as loans, unpaid purchase invoices, or other debts.

Equity

All the initial startup capital of the business and the accumulated profits and losses.

Income Statement

Revenue

The value of business from selling products or services.  This can be a combination of of goods and services invoiced or to be invoiced.

Expenses

All the costs involved in running a business — like rent, salaries, or buying materials.  These costs relate to contracts in place for the period and may not yet have been paid (see Accrual vs. Cash accounting).

Taxes Made Simple

Corporation Tax

Your Income Statement re-calculated using government mandated accounting tax calculations for which tax is paid as a percentage of the Chargeable Profits.  The government may give special treatment to items to incentivize more use such as R&D tax relief. 

VAT (Value Added Tax)

A tax added at every stage of producing and selling goods or services. Each company will charge either 5% or 0% on their sales over a threshold.

Staying in Check: Auditing and Compliance

Audit

An independent opinion on your financial records to make sure compliance with local regulations and global accounting standards.  All companies in the UAE and UK should be
audited annually.  Some trade licences in the UAE require the submission of an audit report.

Internal Controls

Checks and balances to protect your assets, prevent fraud, and keep things running smoothly. Both UAE and UK businesses use these to comply with anti-money laundering regulations.

Compliance

Simply following the rules and regulations.  As more tax regulations have been implemented in the UAE in recent years, companies are needing to spend more on compliance resource to ensure they are following the rules.

How You Record It: Accounting Methods

Accrual Accounting

Records income and expenses when they’re earned or incurred—not necessarily when the cash changes hands. Both the UK and UAE encourage accrual accounting for VAT reporting for
all sizes of business.

Cash Basis Accounting

Keeps it simple by recording income and expenses only when cash is received or paid. This method is often preferred by smaller businesses in both regions.

GAAP (Generally Accepted Accounting Principles)

A set of rules and standards used to make accounting more consistent and transparent. In the UK, companies follow UK GAAP or IFRS, while in the UAE, IFRS is widely used, especially by larger businesses.

Investments and Value: Financial Buzzwords

ROI (Return on Investment)

A way to measure how much profit you’ve made compared to what you spent on an investment.

Depreciation & Amortization

Spreading the cost of tangible (depreciation) and intangible assets (amortisation) over a period of
time.

Goodwill

The difference between the sale price (of a purchase company) and the “fair value” of the acquired business’s assets.  The “fair value” is an attempt to value the asset,  if it were purchased on the open market.  Companies normally pay more or less than market value due to the acquired business’s reputation, brand, or customer base.