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FINANCIAL LITERACY •  22 JULY 2021 • 16 MIN READ

What's your accountant talking about?

What's your accountant talking about?

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

Our aim is to help business owners interpret the information we provide. We realise that certain words and phrases may seem intimidating – as with any new topic or activity. Once they become familiar, you’ll 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 put some of the words into context, there'll be an example of the word in use. We’ve also included links to relevant blogs if you’d like more information.

A-B

Account

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

e.g. What account did you use when you reconciled Xero? or I’ve created a new account in your chart of accounts

Account code

A number or abbreviated word for an Account

e.g. In Xero if you want to see the transactions for the year, go into Accounting / Reports / Account Transactions, enter the date range and the account code

Account type

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

e.g. When you create a new account code in Xero, make sure the account type is Current Liability 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

e.g. We'll prepare your tax returns after we complete your accounts.

Accounts payable

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

Also called Creditors.

Accounts receivable

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

Also called 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 called Financial Statements.

Assets

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

We normally divide assets into two parts:

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

Assets less than $1000

Assets costing less than $1,000 which can be claimed fully as an expense in the year of purchase.

If the asset costs more than $1,000, it is classified as Capital Expenditure and recorded as a Fixed Asset.

More commonly called Minor Assets.

Bad debts

If you’ve recorded the sale as income but later find out you’re unlikely to receive (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.

e.g. Do you have any bad debts and if so, which debtors? or 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, this is 31 March. 

Also called Year-end.

e.g. If you bought the printer and phone before balance date, we can include it in the current year’s financial statements.

Balance sheet

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

Also called Statement of Financial Position.

e.g. Yes, the 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.

Book value

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

Also called Carrying Value.

e.g. The book value in your depreciation schedule doesn’t mean you’ll get that amount when you sell it.

Brightline

A capital gains tax in disguise on properties that aren’t your main home. This is very complicated, so please contact your accountant before buying or selling property.

e.g. You sold the property four years after you bought it? Give me the exact dates and I’ll see if it’s caught under Brightline.

Budget

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

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

e.g. 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, reducing the tax to pay.

e.g. Although the parking fine was 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 called 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 even the development of your website. 

For tax purposes, we can claim 100% of the cost as a Minor Asset if it’s less than $1,000. Otherwise, it becomes a Fixed Asset and we use Depreciation to write off its cost over a number of years).

e.g. The rims and mags you bought make the car’s value higher than what you paid for it. We need to capitalise these assets. 

Carrying value

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

Also called Book Value.

e.g. You’ve sold the car for more than its carrying value, so there’s depreciation recovered and you need to pay tax on that.

Cash flow forecast

An estimation of your cash transactions during the year. This will income income and expenses, but also planned asset purchases, repayments of loans, and Drawings.

Budget is different – it focuses only 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.

e.g. 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. They are usually purchases of goods to resell, materials used in construction, subcontractors, wages for those in the sale process.

Also called Direct Costs or Direct Expenses.

e.g. We’ve included freight in cost of sales, but we 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 called Accounts Payable.

Debtors

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

Also called Accounts Receivable.

Depreciation

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

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

Inland Revenue provides accountants with the maximum Depreciation Rates claimable for tax purposes.

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

e.g. We’ve added the fridge as an added to your depreciation schedule, and depreciated it.

Depreciation rate

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

Inland Revenue provides accountants with maximum Depreciation Rates that can be used for tax purposes, using one of two methods:

  1. Straight Line (the same amount each year); and
  2. Diminishing Value (a percentage applied to the Book Value of the Fixed Asset)

Depreciation recovered

If you sell a Fixed Asset for more than its Book Value, making a profit, the business must pay tax on that profit.

It means you’ve overclaimed Depreciation in previous years and paid lower tax as a result. Inland Revenue wants to ‘recover’ the overclaimed portion by making you to pay tax on profit made from the sale of the asset.

Also called Gain on Sale of Asset.

e.g. When you sold the sanding machine, you got more than its carrying value, so you pay tax on the profit.

Direct costs / Direct expenses

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, wages for those in the sale process.

Also called Cost of Sales or Cost of Goods Sold.

Dividends

One way to pay company profits to its shareholders.

Another way is by Shareholder Remuneration.

e.g. 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.

Take a look at our blog How do I pay myself?

e.g. We had to recode the doctor’s fees because it’s personal – it’s now in drawings.

E-I

Equity

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 called Net Assets and Capital.

Expenses

All business costs incurred during the year, except:

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

FBT reimbursement

When a shareholder uses a company vehicle for personal use, the shareholder reimburses the company for this privilege by an accountant’s adjustment (it’s not a cash transaction). The company records this as taxable income.

Also called Motor Vehicle Reimbursement.

Financial position

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

Also called Balance Sheet.

Financial year

A twelve month period usually from 1 April to 31 March.

Fixed assets

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

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 called Annual Report or (Annual) Accounts.

e.g. Could you please upload all of your year-end information to your Beany page? Then we can start on your financial statements.

Fixed assets

Property, plant, equipment, motor vehicles, office furniture, and other ‘physical’ assets that cost more than $1,000.

Assets costing less than $1,000 can be claimed fully as an expense in the year of purchase. You will usually see this in the Profit and Loss Account as Minor Assets, or Assets less than $1,000.

Fringe Benefit Tax

A tax on benefits that employees receive as a result of their employment. An example is the use of a company car.

Consider two employees’ salary packages. Mary has $50,000 plus a company vehicle worth $15,000. Bob has a salary of $65,000 and no company vehicle. Their packages have the same value, but if there was no FBT, Mary would pay tax on $50,000 but Bob would pay tax on $65,000.

Funds introduced

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

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

Gain on sale of asset

If you sell a Fixed Asset for more than its Book Value, making a profit, the business must pay tax on that profit.

It means you’ve overclaimed Depreciation in previous years and paid lower tax as a result. Inland Revenue wants to ‘recover’ the overclaimed portion by making you to pay tax on profit made from the sale of the asset.

Also called Depreciation Recovered.

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 called GL.

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

Goodwill

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

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

Goods and services tax (GST)

You may be required to collect this on behalf of the IRD, so is not a tax on your business. You charge 15% GST on to your customers and when you buy goods and services your suppliers charge you GST. The difference between what you have charged and what you have paid is then paid to, or refunded by, the Inland Revenue.

Gross profit

Sales (revenue) less Cost of Sales.

Imputation credit

A tax credit that a company receives for income tax it’s already paid to Inland Revenue. The imputation credits are passed on to shareholders when a dividend is declared.

The shareholder’s dividend income is still taxable but the imputation credit reduces the tax bill. The net effect is that the shareholder doesn’t pay tax on the dividend income. (the company has already paid the tax to Inland Revenue).

Also called ICs.

e.g. You’ve only got enough ICs to pay a dividend of $45,000.

Income

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

Also called Revenue and Sales.

Intangible assets

AnAsset that cannot be physically touched. The most common examples areGoodwill, trademarks, and patents.

J-S

Manual journal

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

e.g. We’ll put through a manual journal to correct that.

Minor assets

Assets costing less than $1,000 can be claimed fully as an expense in the year of purchase.

If the asset costs more than $1,000, it is classified as Capital Expenditure and recorded as a Fixed Asset.

Also called Assets less than $1,000.

e.g. We’ve removed the iPhone from your assets – it cost less than $1,000 so we can claim as a minor asset.

Motor vehicle reimbursement

When a shareholder uses a company vehicle for personal use, the shareholder reimburses the company for this privilege by an accountant’s adjustment (it’s not a cash transaction). The company records this as taxable income.

Also called FBT Reimbursement.

e.g. So, the car spent three days in the workshop being repaired? OK – we’ll take that into account when we calculate the motor vehicle reimbursement.

Net profit

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

Owner's equity

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 called Capital and Equity.

Profit and loss account

This forms part of your Financial Statements and gives an overall picture of how well your business has performed. It details all income and expenditure for the period.

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

Provisional tax

Spreading your tax bill over three payments and a wash-up, instead of one lump sum. Applies to taxpayers with Residual Income Tax higher than $5,000.

e.g. The next provisional tax payment is coming up. We’ll send you an email reminder and you can also see the due date and amount on Tax-iQ in your Beany page.

Reconciliation

Making sure information in your accounting system agrees with other documents. For example, your bank account in Xero should agree with your bank statement, and your wage expense should be similar to the amount filed with Inland Revenue.

Reconciliation (Xero)

Allocates each bank transaction to an Account Code.

e.g. We haven’t prepared your GST return yet, because you haven’t reconciled Xero.

Resident withholding tax

Tax that is deducted directly from investment income such as interest.

May also be called simply Withholding Tax.

Residual income tax (RIT)

Tax on your gross income LESS tax paid before you received the money.

Taxable income – $55,000

Tax on taxable income – $9,500
Less PAYE paid – $7,800
Less RWT paid – $400
Less Imputation Credits on dividends – $20

Residual Income Tax – $1,280

e.g. Because your RIT is more than $60,000, you’ll probably end up paying interest to Inland Revenue.

Retained earnings

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

Revenue

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

Also called Income and Sales.

Sales

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

Also called Income and Revenue.

Schedular payments

Payments made to contractors who perform certain activities. Withholding Tax is deducted from these payments but they’re different to salary or wage payments.

Examples of these activities can be found on the Inland Revenue website.

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 current account

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

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

Shareholder salary / shareholder remuneration

An amount allocated to a shareholder as a salary once the profit for the year is known. The shareholder includes this as taxable income in the individual tax returns.

e.g. We’ve given you a shareholder salary of $65,000 and your husband $25,000 as he didn’t work as much in the business as you.

Standard uplift method

Standard uplift is one of the way provisional tax is calculated. If (say) your 2021 tax return is filed with $8,000 Residual Income  Tax, the IRD will expect you to pay $8,400 for the 2022 year. This is your 2021 bill plus 5%.

If your 2021 tax return hasn’t been filed, Inland Revenue will still expect you to pay provisional tax, but won’t put an actual number to it. Instead, they’re happy if you pay your 2020 tax bill plus 10%. If you pay the amounts in full and on time, Inland Revenue won’t charge penalties or interest (except if you’re out of Safe Harbour).

Statement of cash flows

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).

T-Z

Use of Money Interest

Interest Inland Revenue charges if you don’t pay the required amount of tax on the due dates.

Withholding tax (on schedular payments)

Tax deducted by your customers and paid directly to the IRD on your behalf. This is usually only applies to contractors who receiveSchedular Payments.

Year end

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

Also called Balance Date.

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

Xero

Xero is an online accounting software platform, which keeps track of your bank transactions, helps you record expenses via electronic devices, provides useful 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.

Tess, Problem Solver

Got any questions about Beany?

Chat to one of our friendly problem solvers today to get clarity.

Kim

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