An introduction to FreeAgent terminology
This article provides an easy A-Z of accounting terms commonly used in FreeAgent. We've also explained how you might hear them referred to elsewhere.
Select the relevant term for more details:
- Accounting basis
- Accounting categories
- Bank transactions
- Bill credit notes
- Contra account
- Corporation Tax return
- End of Year reports
- Explain a bank transaction
- Final Accounts
- Flat Rate Scheme
- My Money area
- Opening balances
- Show Transactions report
- Transfers between bank accounts
The accounting basis is the method used to prepare your business’s accounts.
The main difference between accruals basis accounting and cash basis accounting is the date upon which you record your income and costs.
Under the accruals basis of accounting, businesses and landlords record their income at the date displayed on invoices issued and on bills received. Whereas under the cash basis of accounting, businesses and landlords record their income and costs at the date the money comes in or is paid out
When you’re setting up a FreeAgent account for a sole trader, partnership or unincorporated landlord, you can choose to prepare your accounts using the ‘Traditional (accruals) basis’ or ‘Cash basis’.
It’s not possible to use the cash accounting basis to prepare accounts in FreeAgent for a limited company or limited liability partnership, as this is not permitted by UK law, nor is the cash accounting basis available in FreeAgent for a non-UK-based business.
Accounting categories in FreeAgent are the categories in your business’s accounting records where transactions are posted, and are divided into accounts for:
Your accountant might also call these nominal accounts or nominal codes.
To see a list of the standard accounting categories available in FreeAgent, you can download a chart of accounts, which is a list of your business's nominal accounts without the transactions they contain. If you’d like to see the accounts with their transactions in, go to the Show Transactions report.
You can add new accounting categories if you need additional nominal accounts.
A bank transaction is a record of money that has come into or gone out of your bank account.
A bill in FreeAgent is an invoice that one of your suppliers will give you, which you’ll need to pay.
A bill can also sometimes be referred to as a 'purchase invoice' or a 'supplier invoice'.
Other software providers might call collective bills 'Creditors' or 'Accounts Payable'.
Bill credit notes
A bill credit note in FreeAgent is a credit note that one of your suppliers will give you if you no longer have to pay the full amount of a bill. A bill credit note is like a negative bill for all, or part of, a bill that has been previously sent to you.
A bill credit note might cancel out a bill completely if it’s for the same amount as the bill, or it might be for less than the bill.
Contacts are individual suppliers and customers who you need to add to FreeAgent in order to create invoices, estimates, bills and projects.
Find out more about contacts in FreeAgent.
The contra account is a holding account designed for situations where money comes into your bank account and then goes straight back out, or vice versa.
For example, if you receive a cheque that bounces you would explain both the incoming sum and the money going back out again to the contra account. Find out more about explaining bank transactions using the contra account.
Drawings are all the monies taken out of a business by a sole trader, partner, or unincorporated landlord.
Find out how to explain money taken out of a business by a sole trader or partner in FreeAgent and how to view drawings taken out of the business.
End of Year reports
Final Accounts report
The Final Accounts (FRS 105 micro-entity accounts) report in FreeAgent is prepared according to the financial reporting standard for companies that meet the official definition of a ‘micro-entity’
The report will display the company’s Income Statement and Balance Sheet figures and will be initially marked as ‘Draft’ until you've added the necessary notes to the accounts to finalise the report.
If your business meets the official definition of a micro-entity, you can use this report to submit your annual accounts to Companies House and HMRC. Please note that FreeAgent won’t indicate whether your company qualifies to prepare accounts under FRS 105 or not.
Corporation Tax return
A Corporation Tax return is the Company Tax Return with the financial information that most companies file with HMRC each year to report on their earnings, losses, loans and any other factors relevant to their tax liability.
If you need to report a year-end debit balance on your director’s loan account to HMRC - in other words, money that you owe to the company - you can enable the CT600A supplementary pages.
Please note that at the moment, there are certain Corporation Tax scenarios that are unsupported in FreeAgent.
The term ‘expenses’ is sometimes used to refer to all of a business’s day-to-day running costs, such as staff wages.
Expenses in FreeAgent are business costs that are paid for by an employee or business owner using personal funds, and later reimbursed by the business that they work for.
These are recorded as out-of-pocket expenses in FreeAgent, for example a train ticket for business travel paid for on a personal credit card.
However, if the cost was paid for directly using business funds, you should explain the bank transaction instead once it’s been imported into FreeAgent via a bank feed or bank statement upload. Alternatively, you can add a bill if the cost has been incurred but hasn’t yet been paid for, but will be paid for by the business.
Find out more about the difference between an expense, a bill and a bank payment.
Explain a bank transaction
Explaining a bank transaction is part of the bank reconciliation process of categorising the bank transactions that come into and out of your business bank accounts in FreeAgent.
Whether or not you have a bank feed enabled in FreeAgent, you’ll need to explain transactions both coming in and going out of your bank account. Find out how to explain a bank transaction in FreeAgent.
My Money area
The My Money tab in FreeAgent can be found along the navigation bar at the top of the screen and contains amounts due to, or from, each user on the account. It contains the following areas:
- Dividends (only seen by limited company account types)
Please note that if you have an unincorporated landlord account, or a sole trader account with no employees added as users, you will only see an Expenses tab.
Opening balances are the amounts that your business has in each of its accounts as at its FreeAgent start date.
If you’ve been trading for a while, you'll have some opening balances to enter when you start using FreeAgent. These are the figures in your accounts as they stood on your FreeAgent start date.
Find out more about opening balances in FreeAgent.
Show Transactions report
The Show Transactions report displays all your transactions in each of the different account categories in FreeAgent.
This report is also sometimes called the nominal ledger or general ledger. This ledger shows the transactions in all of a business’s accounts, including the amounts of its assets, liabilities, income, expenses and capital.
Transfers between bank accounts
When explaining bank transactions, there are several options you can select. The ‘Transfer to Another Account’ option from the transaction ‘Type’ drop-down menu should only be used when you want to explain bank transactions that relate to transfers to and from another bank account of yours in FreeAgent.
Please note that both bank accounts will need to have been added to your FreeAgent account in order for this function to work.
VAT cash accounting
Cash accounting for VAT means that you will pay VAT to HMRC when customers have paid you. Conversely, you can only reclaim VAT once you have paid your suppliers.
VAT invoice accounting
Invoice accounting for VAT is the standard way to add up your VAT for your VAT return. It means that you will pay VAT to HMRC when you've invoiced your customers, regardless of when your customers pay you.
When you are invoice accounting for VAT, you may have to pay HMRC the VAT on your invoices before your customers have paid you. Conversely, you may be able to reclaim the VAT on your bills before you pay your suppliers.
VAT Flat Rate Scheme
But when it comes to preparing your VAT return and paying VAT to HMRC you do things slightly differently. Instead of adding up all the VAT you charge and taking away the VAT you can reclaim, you add up all your sales - including any VAT you charged to your customers - and pay a percentage of those sales to HMRC. The percentage you pay depends on what your business’s trade is, unless you’re a limited cost trader.
With the Flat Rate Scheme, you can't claim back any of the VAT you made on purchases, unless you buy a capital asset that cost £2,000 or more including VAT.
If you’re interested in joining the VAT Flat Rate Scheme, you can apply to HMRC provided your business meets certain criteria.
This is the VAT you’ve paid on purchases and can reclaim from HMRC.
This is the VAT you’ve charged to your customers. You need to charge the correct rate of output VAT based on what you’re selling, and to make sure you’re producing compliant VAT invoices so that your customers can reclaim any input VAT they’re entitled to.