Accounting Jargon Demystified

It’s the start of a new year, which feels like a good time to clear a few things out. Old emails, half-finished to-do lists and while we’re at it, some of the accounting jargon that gets thrown around as if everyone automatically understands it.

If you’ve ever nodded along while your accountant mentioned accruals, trial balances, or DLA, then quietly wondered if you should Google it later, this blog is for you. You don’t need to become an accountant. You just need enough understanding to know what’s being talked about and to ask the right questions. So here’s a plain-English glossary of some of the most common accounting terms you’ll hear, with examples to make them feel a bit more real.

A Helpful Glossary Of Accounting Jargon

Accruals

What it sounds like: Something technical that probably involves spreadsheets and stress.

What it actually means: Costs or income that belong to a period, even if the money hasn’t left or arrived yet.

Plain English: If it relates to this month, it counts, even if it’s not been paid.

Example: You receive your electricity bill in January, but it covers December usage. The cost is “accrued” into December, because that’s when the electricity was actually used.

Prepayments

What it sounds like: Accruals’ more confusing cousin.

What it actually means: Money you’ve paid in advance for something that relates to a future period.

Plain English: Paid now, but it belongs to later.

Example: You pay your business insurance for the whole year in January. Most of that cost relates to future months, so it’s spread out rather than all counted at once.

Debtors

What it sounds like: Something slightly ominous.

What it actually means: People who owe you money.

Plain English: Unpaid invoices.

Example: You’ve sent a client an invoice for £1,200 and they haven’t paid yet. Until they do, they sit on your books as a debtor.

Creditors

What it sounds like: The opposite of debtors (because it is).

What it actually means: People you owe money to.

Plain English: Bills waiting to be paid.

Example: Your software subscription invoice is due next week. Until it’s paid, that supplier is a creditor.

Profit

What it sounds like: Money sitting nicely in your bank account.

What it actually means: Income minus expenses.

Plain English: What the numbers say you’ve made, not always what’s in the bank.

Example: Your business made £10,000 in sales and had £6,000 of costs. On paper, your profit is £4,000, even if customers haven’t paid yet.

Cash Flow

What it sounds like: Something you only worry about when it goes wrong.

What it actually means: Money moving in and out of your bank account.

Plain English: Whether you can actually pay the bills.

Example: You’ve made a profit this month, but three big invoices are still unpaid. Your cash flow feels tight, even though the business is technically doing well.

Drawings

What it sounds like: Something creative involving pencils.

What it actually means: Money taken out of the business by a sole trader or partner.

Plain English: Paying yourself from your business.

Example: You transfer £1,000 from your business account to your personal account for living costs. That’s drawings, not a wage.

Salary

What it sounds like: Normal pay.

What it actually means: Pay processed through payroll.

Plain English: A structured, taxed wage.

Example: A limited company director pays themselves £1,047 per month through PAYE. That amount is their salary.

Dividend

What it sounds like: Something only big companies do.

What it actually means: A payment to shareholders from company profits.

Plain English: Taking money out of a limited company after profit is made.

Example: At the end of the year, the company has spare profits, so the director/shareholder takes £5,000 as a dividend.

DLA (Director’s Loan Account)

What it sounds like: Definitely something you should already understand.

What it actually means: A record of money moving between a director and their company that isn’t salary or dividends.

Plain English: The running total between you and your company.

Example: You pay a personal expense from the company account. Until it’s repaid or cleared properly, it sits on your Director’s Loan Account.

Balance Sheet

What it sounds like: Something best left to accountants.

What it actually means: A snapshot of what the business owns, owes, and what’s left at a specific date.

Plain English: Where the business stands right now.

Example: On 31 December, your balance sheet shows money in the bank, unpaid invoices, outstanding bills, and any loans all in one place.

Profit & Loss (P&L)

What it sounds like: Self-explanatory, but somehow still confusing.

What it actually means: A summary of income and expenses over a period.

Plain English: How the business has performed over time.

Example: Your P&L for the year shows total sales, costs, and whether you made a profit overall.

Trial Balance

What it sounds like: A test you didn’t revise for.

What it actually means: A list of all balances in the accounting system.

Plain English: A sense check that everything adds up.

Example: Before preparing accounts, your bookkeeper runs a trial balance to make sure the numbers behave themselves.

Journals

What it sounds like: A notebook and a cup of tea.

What it actually means: Accounting adjustments made behind the scenes.

Plain English: Tidying up numbers so reports are accurate.

Example: Your accountant adjusts expenses at year-end so costs appear in the correct month. Those adjustments are journals.

Depreciation

What it sounds like: Something going downhill.

What it actually means: Spreading the cost of an asset over its useful life.

Plain English: Big purchases are written off gradually.

Example: You buy a laptop for £1,200. Instead of claiming it all at once, the cost is spread over several years.

Input VAT

What it sounds like: VAT jargon bingo.

What it actually means: VAT you pay on purchases.

Plain English: VAT you might be able to reclaim.

Example: You buy office supplies for £120 including VAT. The VAT element may be reclaimed as input VAT.

Output VAT

What it sounds like: More VAT jargon.

What it actually means: VAT you charge on sales.

Plain English: VAT you collect for HMRC.

Example: You invoice a client £1,000 plus VAT. That VAT is output VAT and belongs to HMRC.

MTD (Making Tax Digital)

What it sounds like: A government initiative (because it is).

What it actually means: HMRC’s requirement for digital records and submissions.

Plain English: HMRC wants things done online.

Example: Instead of paper VAT returns, you submit them directly from your accounting software.

Why this jargon exists (and why it’s okay not to know it)

Most accounting terms aren’t designed to confuse. They’re shortcuts accountants use to be precise. The problem is that those shortcuts don’t always get translated.

Not understanding the language doesn’t mean you’re bad at business. It usually just means no one has explained it clearly yet.

Final thoughts

You don’t need to memorise accounting terminology to run a successful business. What does help is understanding enough to feel confident, informed, and comfortable asking questions.

If this blog helps you stop nodding politely and start saying, “Can you explain that in plain English?” then it’s done exactly what it set out to do. Here’s to a new year with fewer buzzwords and a lot more clarity.