This article gives a summary of the terminology you may encounter when maintaining the accounts of sole traders and partnerships, using an accounting system that has been created by software. Although, it is not definitive!
Let’s work through the accounting system, which, regardless of whether it is produced manually or using accounting software, will be made up of three ledgers.
The three ledgers
- The general ledger: which contains accounts classified into either income, expenses, assets, liabilities, or equity. (The general ledger is also known as the main ledger and in accounting software is often called the chart of accounts or nominal ledger).
- The sales ledger: which contains individual customer accounts. (The sales ledger is also referred to as the receivables ledger and the term is usually linked to the name of the control account in the general ledger).
- The purchases ledger: which contains individual supplier accounts. (The purchases ledger is also known as the payables ledger).
The five categories of accounts within the general ledger
The phraseology about the five categories of accounts within the ledger is also diverse.
- Income is a category of account and an account in itself. As a category, it includes accounts that relate to money coming into the business, such as sales, and money retained in the business like discounts received. Sale income is also referred to as revenue.
- Expenses, as a category, generally include far more accounts than the income category. Depending on what the expenses is for, it can also be termed an overhead, direct cost or referred to as part of the cost of sales or cost of goods sold.
- Assets are divided into those that are owned by a business for less than 12 months, and those that are owned for more than a year. The short-term assets are called current assets and include inventories, also referred to as stock. Long-term assets are called non-current or fixed. Some accounting software refers to non-current assets as tangible assets, even though most current assets are also tangible, in other words, physical assets.
- Liabilities are divided in the same way as assets, with current liabilities including a range of terms for VAT. This is especially so for accounting software that is available worldwide so uses international terminology such as sales tax. Liabilities that will be owed for more than 12 months are referred to as either non-current or long-term liabilities.
- Equity is a category of account and an account in itself. As a category, it includes the accounts that relate to the owner(s); equity or capital, profit or retained earnings* and drawings.
The sales ledger
If there is a sales ledger control account (SLCA) then this is matched by using the title sales ledger. A trade receivables account is more likely to be found when the ledger is called the receivables ledger. That said, lots of businesses still refer to customers that owe them money as debtors and there has been an increase in accounting software that has been written for business users which don’t use accounting terminology at all. For example, some software just refers to the sales/receivables ledger as ‘Customers’ and shows the balance on the control account under a heading like ‘Invoices owed to you’.
The purchases ledger
Likewise, the purchases ledger is also known as the payables ledger and again this is usually dependent on the name of the control account; purchase ledger control account (PLCA) or trade payables. You may come across the terms creditors, suppliers and vendors as well, which are also used to refer to those a business has credit agreements with, to pay for goods and services bought after they have been received. Some accounting software uses the word ‘bills’ to differentiate invoices received from suppliers to those that have been generated by the business for sales.
It is also common to see the purchases/payables ledger referred to simply as ‘Suppliers’ and the balance on the control account shown under a heading like ‘Bills you need to pay’.
The financial statements are the end result of the accounting system. The statement of profit or loss (SoPL) is the same as an income statement and the statement of financial position (SoFP) is another name for a balance sheet.**
Whilst, the range of accounting phraseology might seem confusing at first, if you understand accounting principles then you stand a good chance of relating an unfamiliar term with one you are more comfortable with.
It is likely that you will use both commercial and accounting terminology so if you know that the balance on the SLCA is the amount that is owed by debtors you will be able to show the correct amount under the heading of trade receivables on the SoFP.
* Different business types will also have an impact on terminology and retained earnings relates to limited companies but will usually be the default account name in accounting software as opposed to profit.
** The layout of financial statements may vary depending on which accounting standards they are prepared under.
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Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.