One of the things that students often find challenging about starting their AAT studies is the range of terms that they have to become familiar with. There are two particular issues that you might encounter:
- Often the same item in an accounting system can have several different names
- Very different items can have names that sound very similar
Since some of this terminology if crucial throughout your AAT studies from level 2 to level 4, I thought I would give an overview of some of the terms that my students seem to find most confusing.
ITEMS WITH SEVERAL NAMES
Individual ‘ledger accounts’ that record increases and decreases in a particular item in the accounts are also called ‘T-accounts’ as the capital letter T is a nice visual representation of the shape of a ledger account. Most things that are described as being an ‘account’ such as the sales account or the cash account will be one of these individual ledger account (incidentally, ‘cash’ and ‘bank’ tend to be the same thing; the balance in the business current account. The actual notes and coins held in the office is ‘petty cash’).
The ‘nominal ledger’ is where all of the individual ledger accounts are gathered and is also sometimes called the ‘main ledger’ or the ‘general ledger’. The nominal ledger is not really a separate record, it just contains all of the individual T accounts. The nominal ledger is where we use our double entry bookkeeping system, so every transaction will impact on at least two ledger accounts.
At the top of your profit and loss account the first thing you see is the income generated by the business from selling to customers. The various names you sometimes see for this income are ‘revenue’, ‘turnover’ or even ‘sales’
Elsewhere on the P&L you see ‘costs’ or ‘expenses’ which are deducted from revenue and therefore reduce the profit being generated. Note that the word ‘purchases’ relates to the specific cost of items that you buy with the intention of selling on to customers. So whilst you can ‘purchase a till’ for your sandwich shop, this is not categorised as a ‘purchase’ in the same way that buying bread, cheese and ham would be.
On the statement of financial position (which is itself sometimes called the balance sheet) there are a few items that go under more than one name:
- Trade receivables are also referred to as ‘debtors’ and the ‘sales ledger control account (SLCA)’
- Trade payables are called ‘creditors’ by some people and the ‘purchase ledger control account (PLCA)’ by others
- Inventory is often referred to as ‘stock’ or ‘stores’
ITEMS THAT SOUND VERY SIMILAR
On the sales side of a business there are several records that can be easily confused:
- As mentioned above, the sales account will be one of the individual ledger accounts that is contained in the nominal ledger. It records the total of the sales income generated by the business in a period. The total of this will feature as revenue on the P&L.
- The sales ledger control account is the individual ledger account that records the total balance owed to the business by all credit customers. This figure will feature as an asset on the balance sheet.
Both the sales account and the sales ledger control account are contained in the nominal ledger and are therefore part of the double entry bookkeeping system.
- The sales ledger is a record that sits outside the double entry booking system. It has a similar job to the sales ledger control account in that it looks at the amount owed to the business by credit customers but the big difference is that whilst the control account gives the total of trade receivables as a single figure, the sales ledger lists the individual amounts owed by each customer. If you added up the list of balances on the sales ledger it should (in theory) give the same figure as the total on the sales ledger control account.
A very similar set of terminology is found on the purchases side of the business:
- As mentioned above, the purchases account will be the individual ledger account that records the total of the purchases expense suffered by the business in a period. The total of this will feature as a cost on the P&L.
- The purchases ledger control account is the individual ledger account that records the total owed by the business to all credit suppliers. This figure will feature as a liability on the balance sheet.
- The purchases ledger sits outside the double entry booking system and lists the individual amounts owed to each supplier. If you added up the list of balances on the purchases ledger it should (in theory) give the same figure as the total on the purchase ledger control account.
As with most things in life the more you use these terms in your studies and your workplace the more familiar you will become with them so try to make as much use of them as you can.