20 common tax and accounting terms that sole traders should understand

Although you’ll no doubt have an expert knowledge of your trade or profession, your understanding of tax and accounting could be fairly limited. That’s common among sole traders. And although you may often read or hear…

5 Minute Read

Last Updated: 7th June 2024

Although you’ll no doubt have an expert knowledge of your trade or profession, your understanding of tax and accounting could be fairly limited. That’s common among sole traders. And although you may often read or hear certain tax and accounting terms, you may not know what some mean.

Time to put that right, because understanding their meaning could enable you to better understand and manage the accounting and financial side of your business. Here are the answers to 20 common tax and accounting term questions.   

1. What is an accounting period?

Accounting period means the period of time your sole trader accounts (ie financial records) refer to. The accounting term could be a month, two months, a quarter, six months or a year.

2. What are accounts payable?

Accounts payable is a record of money your sole trader business owes to its suppliers, which is normally shown on a balance sheet (see 4).

3. What are accounts receivable?

Accounts receivable is a record of money your sole trader business is owed by its customers, which, again, is normally shown on a balance sheet (see 4).

4. What is a balance sheet?

A balance sheet is a report that shows your sole trader business’s assets (see 6) and its liabilities (see 7) at that moment in time.

Need to know! Looking at your balance sheet can give you a more accurate understanding of your sole-trader business’s financial health, as well as its value should you want to sell it.

5. What is the bottom line?

Your bottom line is the last line in your sole trader business accounts (ie financial records). Your bottom line is crucial because it shows your sole trader business’s total profit or total loss.

6. What are business assets?

Business assets are things of value that your business owns, creates or gains from. Business assets can include cash, raw materials, stock, equipment, tools, vehicles, buildings, goodwill (ie your reputation) and intellectual property. Business assets are itemised and valued on balance sheets.

7. What are business liabilities?

Business liabilities are debts or amounts that your sole trader business owes to its suppliers and other creditors, which can include HMRC (the UK tax authority). 

8. What is cash basis accounting?

Most small businesses use cash basis accounting, which is where you only record your sole trader income or expenses in your financial records when you’re paid or when you pay money out. That means you don’t pay Income Tax on money you’ve not yet received in your reported accounting period.

9. What is cash flow?

Cash flow is the term used to describe the relationship between cash entering and

leaving your sole trader business. A cash flow crisis happens when your outgoings exceed your income or when you’re waiting for money you’re owed and don’t have enough available cash to pay your short-term debts, which can kill your business.

Top tip! Keeping your cash flow healthy, so that you always have enough cash to pay your bills on demand, must be a key priority for your sole trader business if it is to survive and grow.

10. What is cost of sale?

Cost of sale (COS) is the individual cost or expense involved in producing a product or service that your sole trader business sells. Alternatively, it’s referred to as cost of goods sold (COGS).

11. What is credit control?

Your sole trader business needs an effective credit control system, to ensure that you only grant credit to customers who can afford to pay you and that they pay you on time. Your credit-control system should also notify you when money you’re owed is overdue.

Top tip! To help keep your cash flow healthy, don’t grant too much credit or give customers an overly generous length of time to pay you. For big value contracts ask for part payment upfront or staged payments for longer-term service projects.

12. What is a debtor?

A debtor is a person, business or organisation that owes your business money. If they don’t pay when required, you can use a statutory demand to formally request payment. In many cases, you also have the right to charge interest for late payment (ie 8% plus the Bank of England base rate for business-to-business transactions).

13. What is gross profit?

Your gross profit is your sale price minus the cost of sale. Gross profit can also be your turnover minus your total cost of sale.

  • Your gross profit percentage = gross profit/turnover x 100.

14. What is net profit?

Your net profit is your sale price/sales/revenue/total income minus all direct and indirect costs. So, net profit is your actual profit once all costs have been accounted for.

  • Net profit percentage = net profit/turnover x 100.

15. What is margin?

Margin is the difference between sale price and cost of bringing a product or service to market. Margin is usually expressed as a percentage. Some businesses apply a standard margin when setting prices or quoting for jobs (eg costs plus 20%).

16. What are overheads?

Overheads are alternatively called your fixed costs or invariable costs, because they stay the same regardless of how much you make or sell. Your overheads are costs you need to pay to run your business. Common overhead examples include rent, utility bills, insurance, wages, etc. 

17. What are sundry expenses?

Sundry expenses are miscellaneous, low-value items that you occasionally buy, for example, postage stamps, office supplies and stationery, minor repairs, one-off fees, etc. Separate to your more usual general expenses, sundry expenses must also be entered into your accounts, with receipts retained for proof.

18. What is traditional accounting?

Traditional accounting is where you record income and expenses in your accounts by the date you invoiced or were billed, regardless of when you actually received payment or paid money out. Traditional accounting is alternatively called accrual basis accounting.

19. What is turnover?

Turnover is simply another name for the total value of sales made by a business within a period, whether that’s a day, week, month, quarter or (most commonly) a year. Alternative names include gross revenue or gross income.

20. What is VAT?

VAT (Value Added Tax) is a transaction tax that’s levied on the sale of most goods and services. VAT-registered businesses must charge VAT on VAT-able sales and they can reclaim VAT they’ve paid. They must maintain detailed VAT records and report VAT data digitally each quarter to HMRC and then pay their VAT bill if they’ve charged more VAT than they’ve paid out.

Need to know! You must register for VAT if your total VAT-taxable turnover for the last 12 months was more than £90,000 (the VAT threshold – 2024/25) or you expect your VAT-taxable turnover to go over £90,000 in the next 30 days.

Watch our video to find out whether cash or traditional accounting will be best for you.

Trusted by over 20,000 subscribers

You don't need to be an expert to complete your self assessment tax return.

Find Out More

Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.

5 Excellent Reasons to Choose Us

Discover how to make tax returns a doddle...

Find out more

Do summer businesses pay tax?

07 Jun 2024

Summer’s here and the time is right for – making hay while the sun (hopefully) shines. This year perhaps you’re among the very many…
READ MORE >

Top ten vehicle-related expenses sole traders can claim

05 Jun 2024

Many sole traders couldn’t run their business without having a vehicle. Tradespeople couldn’t travel to customers’ homes or premises, many businesses couldn’t pick up…
READ MORE >

Non-domicile tax rules: what will change from April 2025?

02 May 2024

In March 2024, Jeremy Hunt announced in his spring budget speech that the government would scrap the UK’s current non-dom tax regime and replace…
READ MORE >

How GoSimpleTax Works

01.
Register

Simply register for free with your full name and email address.

02.
Select Your Income

Select the income you receive and follow the hints and tips for potential tax savings.

03.
Validate Your Information

Validate your personal information and submit directly to HMRC to get confirmation in just seconds.

ipad

Work Anywhere, With Any Device

Gone are the days of fretting over a calculator surrounded by scraps of paper at the eleventh hour.

GoSimpleTax’s tax return software uses the information you upload in real time to calculate your income and expenditure, working out the tax you owe and sending you helpful notifications when there’s the possibility of a mistake.

Start your free trial

"The software is intuitive and proved very easy to navigate. I found the whole process refreshingly simple. I saved a lot of money too!"

Steve J.

Ordained Presbyter

"Easy to use and value for money. Everything you need to do your tax."

Gordon J.

Self Employed

"It fills in all the forms and sends them to the Inland Revenue. Not expensive either. Takes the stress out of doing your tax return online."

Ross G.

Team Rector

5 reasons to use GoSimpleTax >