Demystifying Taxes and Accounting: Answering 20 Common Questions about Financial Jargon

If you’ve ever found yourself lost in a maze of confusing terms of taxes and accounting? Well, navigating the complex world of finance often feel like deciphering a cryptic code, but don’t worry. In this blog, we will be demystifying taxes and accounting terms that have compelled you to scratch your head. Whether you’re a business owner trying to make sense of your company’s books or an individual attempting to navigate the tax landscape, we’re here to help you. So, let’s start. 

1. What is Tax Deduction?
   In the UK, the term “tax deduction” means you can subtract some expenses from the total money that you have earned before calculating the amount of tax that you have to pay. 
2. What are Assets?
   Assets are valuable resources owned by individuals or businesses to have future economic benefits. Assets can be of several types, like cash, inventory or non-current assets like property, investment in securities, patents, copyrights, etc. 
3. What do you mean by an Audit?
   An audit is an official examination of a company’s financial records and statements by tax authorities or sometimes by independent auditors. This is done to make sure that the financial records are credible and compliant with tax laws.

4 What is VAT?
Implemented in 1973 in the United Kingdom, VAT means Value Added Tax. It is currently a major revenue source of the government.

5. What is Gross Income?
   Gross income means the total earnings before any deductions, including income tax and National Insurance contributions. It encompasses wages, salary, rental income, and other sources of income.
6. What is a Balance Sheet?
   A balance sheet provides valuable information about a company’s current assets and long-term assets. It is one of the four major financial documents that are often prepared by accountants for businesses. 
7. What Does Depreciation Mean?
   Depreciation means a gradual reduction in the value of an asset over a time period. For example, suppose you have invested in an office building. Now, after a few years, there is significant damage to its roofing or structural element. In that case, its overall value will depreciate. 
8. What is a Tax Credit?
   It is a financial incentive by the UK government to reduce your tax liability. For example, there is Child Tax Credit, R&D expenditure credit, etc.  
9. What Does Bookkeeping involve?
   Bookkeeping involves recording and keeping the financial transactions organized. It also means tracking income and expenses, as well as, maintaining accurate financial records for individuals and businesses.
10. What are Capital Gains?
    When you sell an asset for more than its original purchase price, the difference between the sale price and the purchase price is considered a capital gain. These are subjected to Capital Gains Tax (CGT). 
11. What is Tax Evasion?
    Tax evasion is an illegal act in which an individual or a company chooses to underreport its income or inflate deductions to evade taxes. It is a criminal offence and can result in penalties and even imprisonment.
12. What is an Accrual Basis in Accounting?
    An accrual basis is actually a method of accounting in which transactions are recorded as they occur even if the payment is not made or received. This is considered more accurate in understanding the financial obligations of an individual or business. 
13. What is a Fiscal Year?
    It is a 12-month accounting period which may or may not align with the calendar year.
14. What is a bad debt? 
    When it becomes apparent that a specific amount due from an individual or business is no longer recoverable due to some other reason, it is removed from the account books and is termed a bad debt. 
15. What is a Tax Shelter?
    A tax shelter is a legitimate strategy or investment designed to reduce or avoid tax. 
16. What is a Tax Return?
    A tax return is a form submitted to HMRC. There are mainly two types of tax return forms in the UK-SA100 and SA800.  
17. What do you mean by Equity Financing?
    It means raising capital or funds by an entrepreneur by giving up a part of his company’s ownership to the investors to meet essential business needs.
18. What are liabilities?
    Liabilities are the opposite of assets. Some examples are bank debt, salaries of employees, money due to vendors, etc. 
19. What is a tax band in the UK?
    It is a range of income levels subject to a specific tax rate that may vary from one year to another year.
20. What does net profit mean?
    Net profit is the amount of money a business earns after deducting its expenses and taxes. It indicates the true profitability of a company.

Now that you have most likely understood these financial terms, you will feel empowered to make informed financial decisions and comply with UK tax laws and regulations.