When it comes to financial terms, sometimes it can feel like you are immersed in a foreign language.
What is gross profit? How many different taxes are there? And why are there SO many acronyms?
You’d be forgiven if you felt slightly confused by it all.
Luckily, your friendly neighborhood bookkeeping experts are here to wage war on financial confusion.
We are demystifying all those acronyms and explaining the bookkeeping lingo you need to know to master your business finances.
Let’s dive in!
What Is Gross Profit: And Other Bookkeeping Lingo Explained
Bookkeeper
A bookkeeper is a numbers expert that is responsible for maintaining accurate and up to date financial records for your business. They will ensure your financial transactions are properly recorded so that you have an accurate picture of how your business is tracking, and know that the end of year figures are correct and ready to be submitted to your accountant.
We’d love to say that ‘bookkeeper’ is the only financial term that you should know as a business owner, but that’s simply not true. While a bookkeeper is a vital part of your business’ financial success, it is important to have a basic understanding of the terms used in finance so that you can check the health of your business and make informed decisions.
Accounting Software
Accounting software is an essential tool for accurate bookkeeping. Cloud-based programmes like Xero or MYOB keep track of your day-to-day transactions, allow you to generate quotes and invoices, plus reconcile all your incomings and outgoings. That info can then be compiled into handy reports that let you know how your business is tracking.
You can give both your bookkeeper and your accountant access to your accounting software so that they have real time info on your business. The most popular software options are Xero and MYOB, both are excellent for NZ small businesses.
IRD (Inland Revenue Department)
The IRD is the public service department responsible for collecting revenue on behalf of the NZ government. That means they administer taxes like GST, income tax, and PAYE. You will lodge tax returns with the IRD and make tax payments to them. Your bookkeeper may interact with the IRD on your behalf for tax-related matters.
GST (Goods and Services Tax)
GST is a 15% tax added to most goods and services in New Zealand. If you are registered for GST, you add GST to your prices and collect this tax on behalf of the government. You are able to claim back the GST you pay on business related costs and offset that against what you owe the IRD.
You are required to submit a GST return to the IRD which details the GST you have spent and the GST you have collected during a certain period. The balance is then due for payment to the IRD by a specified date. You can choose to lodge your GST returns monthly, two-monthly or six-monthly.
Income Tax
In NZ, every business needs to pay tax on the income they earn. The amount of tax you need to pay is based on the amount of profit your business makes. Most businesses are taxed at a rate of 28%.
After your first year of business, you are required to file a tax return and pay your tax in a lump sum. In the years that follow (once your business earns over a certain threshold), you will be required to pay provisional tax. This helps you to manage your tax obligations by paying in instalments throughout the year, rather than as a lump sum at the end of the year.
PAYE
If your business employs people, you are required to deduct and pay PAYE on behalf of your employees. PAYE stands for Pay As You Earn and is a system for paying income tax to IRD. Each pay run, a certain amount of tax needs to be deducted from your employees’ earnings and a report filed with the IRD. The tax rate will depend on the total earnings of the employee. An accounting system can help you to calculate and pay the correct PAYE figures.
Financial Year
The financial year is different to a calendar year. It is the 12-month period used for accounting and tax purposes. In New Zealand, the financial year typically runs from 1 April to 31st March.
Chart of Accounts
The Chart of Accounts is a list of ‘accounts’ that your business uses to record financial transactions. The chart will include certain accounts (or codes) for categories like assets, liabilities, revenue and expenses. Common codes include cost centres for things like insurance, office expenses, specific services you offer, or product categories.
The chart is a great way to categorize your financial transactions and to see your incomings and outgoings for specific areas of the business.
Accounts Payable
Accounts Payable refers to the money your business owes for goods and services. This could be money you need to pay to suppliers, bills due, or subscription services. These outstanding amounts are considered business liabilities until they are paid.
Accounts Receivable
Accounts Receivable refers to the funds that are owed to your business. When you raise an invoice and send it to a customer, it becomes part of your Accounts Receivable until it is paid. Accounts receivable transactions are considered as an asset in your business reporting.
Reconciliation
Reconciling or reconciliation is the process of comparing and matching the records in your accounting system to the transaction lines on your bank statement. As a rule, the amounts in Xero or MYOB should match exactly what is in your bank accounts. If they don’t match, you will have discrepancies or errors that need correcting.
Depreciation
Over time, assets like vehicles or equipment will decrease in value. This needs to be recorded in your financial records. Depreciation is calculated and recorded to spread the cost of your assets over their useful life and reflect their gradual decrease in value. This is a complex calculation, so it is often best to eve this to your bookkeeper or accountant.
Accruals
Accrual accounting is a method of accounting that recognizes revenue and expenses when they are earned or incurred, regardless of when the cash is received or paid. Accrual accounting helps to provide a more accurate and comprehensive picture of a business’s financial position.
Cash Flow
Cash flow describes the movement of money in and out of your business. That includes the funds you earn, expenses you have to pay, and any other transactions. Having good cash flow is a critical part of small business finance as it impacts your ability to pay bills, meet financial obligations, and invest in growth.
Monthly Reports
Funnily enough, monthly reports are the financial reports you should be running for your business on a monthly basis. They include your Balance Sheet, Profit and Loss Report and Cash Flow Statement. These reports give you an indication of the financial health of your business and highlight areas where you can make improvements.
For more detailed information on monthly reports, check out our recent blog here.
CAPEX
CAPEX stands for Capital Expenditure and refers to what you spend on large assets like equipment, machinery or property. They are considered long term investments for your business, expected to generate benefits over multiple accounting periods. Due to their expense, CAPEX purchases require significant financial planning and budgeting.
Profit
Profit is the money that your business keeps after your expenses have been paid.
There are two kinds of business profit – gross and net. So, what is gross profit? Well, gross profit is the money your business has after paying for the goods and services you’ve sold. Unfortunately, not all of that money is yours! That’s where net profit comes in.
Net profit is the money you get to keep after all of your expenses and taxes are paid. Net profit can be taken as drawings or reinvested back into your business. Fun fact: net profit is often referred to as the ‘bottom line’ as it appears as the last line of your P&L statement.
Need Some Help?
While you don’t need to ask ‘what is gross profit’ any more, you may be feeling a little overwhelmed by all the financial terms you have just learnt about.
Luckily, if you are not feeling number savvy, help is available! Here at Admin Army, our expert bookkeepers wage war on badly kept financial records. Yep, it’s our job to make sure your numbers are recorded and categorized with military precision!
So, reach out to our savvy bookkeepers today for help with your books.