Information on Loughborough

Bookkeeping - Terminology Made Simple

Accountants

Bookkeeping - Terminology Made SimpleBy Vikki Allen

There is no mystery to the basis of bookkeeping ie: for every debit there must be corresponding credits, however which is what and where does it go?

Lets first un-mystify some of the terminology and in future articles we can get down to practicalities.

INCOME -

This can be broken down into 2 groups,

1. Sales - This is the money generated from the sale of goods or services before taking anything off for costs or discounts etc.2. Other Income - This is any other money received into the business by way of interest, discounts or anything not directly related to the product or service of the enterprise.

EXPENDITURE (Expenses) -

Again this can be broken down into 2 groups,

1. Cost of Sales - anything directly purchased, including labour (wages), to produce the stuff you sell.2. Expenses - everything else you have to pay for to run the business.Example: Say the business makes wooden boxes, the wood you buy and the carpenters wages are direct costs however the electricity used and the paper used for invoices are not. They are more like support services and therefore expenses.

PROFIT & LOSS -

Gross profit (or loss) is the difference between the sales and cost of sales.

Net profit (or Loss) is what's left after taking the expenses off the Gross profit and adding any Other Income.

Note: Profit does not necessarily equal money in the bank, your profit is a number on a page that could be represented by stock on the shelf, material in the factory, half completed projects or fixed assets. It is ironic however the business could be in heavy overdraft however still be profitable - this is called a cash flow problem (or 'the cheque is in the mail').

ASSETS -

These are also broken down into 2 groups.

1. Fixed Assets - owned by the business, such as buildings, plant & equipment, vehicles etc. Things that are necessary to create the income and run the business that are going to be kept for a long time and cannot be easily converted to cash.2. Current Assets - Things of a short term nature (under 12 months) easily converted to cash and of course cash itself, bank account, short term investments, debtors.

LIABILITIES -

Also broken down into 2 groups.

1. Long term liabilities - any loans, bonds, HP etc to be paid off over a period longer than 12 months.2. Current liabilities - anything that needs to be paid out withinthe current financial year (12 months) such as creditors, short term loans and not forgetting the bank account if it is in overdraft.

OWNERS EQUITY -

The first thing to get our head around is that the owner of the business and the business itself must be seen as two separate individual entities, so even if you are the sole owner of your business - you are not the business itself.

Once this is understood it is easy to see that Owners Equity is the difference between the Assets and Liabilities and depending which way it swings could either be owed TO the owner or owed BY the owner to the business.

DEBTORS -

Those that owe the business money.

CREDITORS -

Those that the business owes money to.

INCOME STATEMENT -

A record of the day to day income and expenses of the business during the financial year. At the end of each financial year the values on the income statement are brought to zero for the start of the new year and only the profit or loss are carried over to the balance sheet.

BALANCE SHEET -

A snapshot of the status of a company or business at any point in time made up of the Assets, Liabilities and Owners Equity. These values which change according to movements in the business are carried forward from year to year.

DEBITS & CREDITS -

Note: Not the same as Debtors and Creditors (see above)

When recording your transactions you would divide your page into two columns - Debits on the left and Credits on the right (just remember Dogs first, Cats second). Now comes the 'which goes where'

Costs & Expenses - DebitIncome - CreditAssets - DebitLiabilities - Credit

TRIAL BALANCE -

Once you have sorted everything into your two columns, add each one up and they should balance with each other (if not you have boobed somewhere) - this is your trial balance and it is from here that all information and details is gathered to make up the Financial Statements of the business.

Vikki Allen is a Financial Manager with 15 years bookkeeping experience, an Advanced Diploma in accounting and a Post Graduate Diploma in Forensic Auditing & Criminal Justice from the University of KwaZulu Natal.

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Understanding Double Entry Accounting

Accountants

Understanding Double Entry AccountingBy Glenda Lange

Sir Isaac Newton's third Law of Motion, the law of reciprocal actions, states that for every action there is an equal and opposite reaction. The same can be said for accounting. For every financial transaction, there are two sides. There is a debit side and a credit side. For every transaction, these sides must be equal for your books to balance.

To understand double entry accounting, you must first understand what a debit is and what a credit is. Put simply, a debit is something you own or money that is owed to you and a credit is money that you owe to someone else. Let's look at this in terms of the different types of account that a company or business has.

Assets - these are debit items as they are items that are owned by the company. An increase in assets is a debit and a decrease in assets is a credit. Liabilities - these are credit items as they are items that the business owes to someone else. An increase in liabilities is a credit and a decrease in liabilities is a debit. Owners Equity - this is a credit account because the balance of the owner's equity account is the money that is owed by the business to the owner of the business. An increase in owner's equity is a credit and a decrease in owner's equity is a debit. Expenses - These are debit items because the purchase of an expense item decreases an asset item (eg. Cash at bank) which is the credit site of the transaction. Revenue - These are credit items because the receipt of revenue increases an asset item (eg. Cash at bank) which is the debit side of the transaction.

Let's look at a simple example:

Let's say you want to go to the shop to buy a bottle of milk, which costs $3. Your purchase of the milk is a financial transaction. Before you go into the shop, you own $3 so this is a debit item, which is balanced by owner's equity.

When you go into the shop and pick up the bottle of milk, you now have a bottle of milk, which is worth $3, and you owe $3 to the shop owner. Therefore, the bottle of milk is a debit and the $3 you owe is a credit.

When you pay the shop owner for the bottle of milk you are reducing the amount of money that you own (debit itemwill be credited) as well as reducing the amount of money you owe (credit item will be debited).

Note that in each step of the transaction, the debit and credit side of the transaction are equal and the balance of all accounts has equal debit and credit sides.

So what happens when you drink the bottle of milk? You no longer have a $3 bottle of milk; you have an empty bottle that is worth nothing! This is why we have expense accounts. Assets, which are debit items, are things that the business owns for a long period. Expenses, which are also debit items, are things that the business owns for a short period before they are used up.

This is why we have two separate major reports for a business. The balance sheet is used for those items that are constant in a business. The profit & loss Statement (or Statement of Income & Expenditure) is used for those items that flow in and out of a company or business on a frequent and regular basis. The resulting balance of the profit & loss statement is put into the capital section of the balance sheet to balance things out.

Another report you may have heard of is the trial balance. This is used to make sure you haven't made a mistake before preparing the balance sheet and profit & loss statement. At the end of an accounting period, the closing balance of all your accounts (assets, liabilities, owner's equity, expenses, and revenue) are put into this report to make sure that your debits equal your credits. If they don't, you know you have made a mistake somewhere and you will need to find your mistake before you prepare the major reports. The total of the debit column should equal the total of the debit column.

Glenda Lange is a bookkeeper with 21 years experience and a Certificate in Commerce from USQ. She is the auther of Beginners Guide to Basic Bookkeeping for Small Business and the owner of http://www.glendasfreesite.com.au

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Accounting For Beginners

Accountants

Accounting For BeginnersBy Mary Jo Clancy

So, you have started this new and very exciting business opportunity. How do you keep track of it on paper? Like it or not, every April 15th, we have to account for our actions the year before to our friends (or foes depending upon your mindset) at the Internal Revenue Service, or the IRS. Even if you have already started your business, I am going to write this as though it were day one for you. For the purposes of this article, I am also assuming that you are starting a simple, sole proprietorship business. In order for the IRS to consider your business legitimate, you need to treat it like a business and not a hobby. The very first thing that you should do is to open a separate checking account just for your business, and keep all business finances separate from your personal finances. This is the #1 cardinal rule that I follow religiously in all of my businesses. I NEVER take money out of the cash drawer to buy a soda. And if I use personal finances to make business purchases, I save the receipts and record them in the books for my business as an increase to my owner's investment account.

Most of you are probably not accountants, and the word "accounting" sends you screaming into the streets. The word "taxes" also causes many of you to tremble. But really, they shouldn't, they are just words, and both accounting and taxes can be very simple. As your business grows and diversifies, you may need to get a small more complex, however for now, you can keep your books on a simple excel spreadsheet, or one of the many accounting software packages out there. I personally like QuickBooks Pro because it is very user friendly and very forgiving when you make mistakes. For a beginner, it works well. Accounting is really simple: there are three basic financial statements that you need to understand to run your business. Once you get that, filing a schedule C for your taxes is easy.

The first of these forms is the Balance Sheet. It is a comparison of your assets (things that make you money) on the left, and liabilities (things that you owe) and equity (the net worth of your business). Assets include current assets like: cash in bank, savings, inventory, prepaid expenses (like insurance), accounts receivable (money owed to you) and fixed assets. Fixed assets are the more expensive, usually tangible items that you purchase for your business (like computers, desks, equipment, etc.) As a rule anything that costs you more than $1,000 should be capitalized and depreciated over time. (I will cover in another article.) Liabilities are: the bills that you owe, any loans and credit cards for your business. Equity is the money that you have personally invested in your business and the retained earnings from your business. When you add up your assets, the total must equal the total of liabilities + equity.

The second and probably most important financial statement is the IncomeStatement. It is a snapshot of your business activity at a current point in time. I encourage you to prepare one at least once a month to keep up on where you stand profit-wise. The following is a simple Income Statement:

Sales

Cost of Goods Sold (what the supplies or products you sold cost you to purchase or manufacture) Direct Selling Expenses (related just to the sale of your product or service) Gross Profit (Sales - Cost of Goods Sold - Direct Selling Expenses = Gross Profit)

Expenses:

Office Supplies Telephone Utilities Rent Repairs & Maintenance Travel (separate Travel Meals from all other travel expenses) Anything else you needed for your business

Total Expenses:

Net Income (Gross Profit - Total Expenses = Net Income)

The third financial form that you should prepare on a regular basis, at least weekly, is a cash flow statement. I have seen many forms of these over the years, and they can be very complicated, however simply put, you want to see where your cash position is. It is just like balancing your check book. Beginning Cash+Sources of Funds (like sales and collection of accounts receivable) - Uses of Funds (expenses paid for, assets purchased, and payment of accounts payable) = Ending Cash. Not difficult, however very important.

Many new businesses fail simply because they do not keep track of the activity of their businesses on paper. Stuffing money in your pocket that later goes to pay for the pizza and beer is not the way to go. Every action you take creates an action in your books. Keep track of them. Be organized. If you keep these three financial statements up to date for your business, not only will you have everything at your finger tips at tax time, however you will have a monitor of how you are doing. While it is normal to lose money for a small while when you start a new business, it is not normal to continually lose money. The idea of having your own business is to MAKE money, and gain wealth and financial freedom. With simple financial statements, you can monitor your business and make corrections when things aren't going well. You can also see when you are making money, and know what capital is available to you to grow your business, or invest elsewhere.

I hope that my simple explanation has been helpful to you. Best wishes for your continued success!

Mary Jo Clancy is the owner of Dream Builders, a company dedicated to helping others gain wealth and financial freedom. http://www.NewDreamBuilders.com