Accounting – the practice of recording income and expenditure, keeping accurate records of payments and receipts and reporting those records in standard formats.

Accrual – A cost or expense that has been incurred during the period, but not invoiced or paid as at the period end.  An accrual is shown as a liability in the balance sheet.

Amortisation – the cost of using an intangible fixed asset.  Similar to depreciation,  it is a calculated value which reduces the value of the asset over its useful economic life. Amortisation is reported as a cost in the profit and loss account.

Annual Return – a form filed each year by limited liability companies.  The form includes details of directors, shareholders, the company’s registered address, SIC code and information on the types and numbers of shares.  It is filed independently of the company’s accounts, and does not contain any accounting information other than share capital.

Assets –  these provide the potential for monetary or economic gain, or enable the company to carry out its core business.

• Tangible Fixed Assets – Property, equipment, plant, machinery, fixtures and fittings or vehicles that are owned, or in some cases leased, by the business for the purpose of carrying out work, providing services, manufacturing goods or generating profit. Fixed assets have a useful life of over one year.
• Intangible Fixed Assets – these are long-term beneficial assets that do not have physical form, they include goodwill and patents.
• Current Assets – items that the company expects to use or sell within a year. They include stock for resale, money in bank accounts and money owed by trade debtors.

Audit – the independent checking of a company’s accounts by external auditors. Not legally required for small companies.

Balance Sheet – this shows the company’s assets (what it owns and is owed), liabilities (how much it owes to others), and how it is funded.

Bookkeeping – the process of recording income and expenditure.

Capital Expenditure (Capex) – the amount spent on purchasing, building or manufacturing fixed assets for the company’s own use.

Company Secretary – the person responsible for ensuring that an incorporated company meets its legal requirements.  Small companies no longer need to appoint a company secretary, in which case someone else must carry out the company secretarial obligations.

Cost of Sales – the direct costs associated with purchasing stock, manufacturing stock or providing the services sold by the company.

Credit – A bookkeeping entry which represents income in the profit and loss account, and a liability in the balance sheet.

Debit – A bookkeeping entry which represents payments in the profit and loss account, and assets in the balance sheet.

Deferred Tax Charge – An amount of tax that will become payable in future, but relates to revenue earned in the current period.

Deferred Tax Credit – An amount of tax that will become due to the company in a future period, but relates to activity in the current period.

Depreciation – the cost of using a tangible fixed asset, spread over its estimated useful life. Depreciation reduces profit and the value of the asset.

Direct Cost – a cost which directly relates to the manufacture of a product, or provision of a service.  Direct costs usually vary with activity.

Distributable profits – the amount of profit that is available to be paid to shareholders.  The company must be able to meet its obligations to pay creditors and tax before distributing profits.

Dividend – an amount of money paid from distributable profits to shareholders of limited companies.

Liabilities – Current liabilities are amounts that the company will need to pay within one year. Long-term liabilities are those that will be payable after one year.

Profit and Loss Account (P&L) – a periodic report showing the company’s sales, costs, taxation and profit or loss generated.

Prepayment – an amount paid at the period end, but relating to the following period. A prepayment is shown on the balance sheet as a current asset.

Revenue – Transactions relating to running the company’s core business activities.  Often taken to mean sales, this term can also be used to distinguish costs of running the business from capital expenditure.

Share Capital – a balance sheet amount showing the value of shares issued and paid, as part of the funding of the business.

Tax – A amount of money payable to the government which is always seen by business owners as too high.

Transaction – a sale, purchase, payment, receipt or bookkeeping entry.

Turnover – the value of sales.  Does not include any other income such as grants, income relating to anything other than the company’s core business activity, sales of assets, or interest earned.

Working Capital – the amount of money a company has tied up in its day-to-day activities.

Simple Bookkeeping

Bookkeeping for self-employed traders, contractors and professionals, and for those who are sole directors of limited companies should be easy and quick.

Unfortunately, it’s also a chore.  The easy option is often to pile receipts in a corner, put bank statements to one side and shuffle it all off to the accountant at the end of the year.   The problems with this approach are:

1. your accountant will charge more to sort out the paperwork at the end of the year,
2. you don’t have confidence in your finances, and find it difficult to keep track of money,
3. receipts, invoices and other documents are easily lost,
4. if you lose paperwork you could end up paying more tax than you should,

There is an easy solution, with just a little commitment from you.  Make it part of your working routine and get on top of your business finances for good.

Daily tasks

1. Put ALL receipts, bills and invoices in an envelope as soon as you get them.  Keep an envelope, or bulldog clip in your van, car or desk drawer so that you always know where it is.
2. Keep records of business mileage, the date of the trip, destination, mileage and reason for the journey.
3. Keep all business related documents such as bank statements, insurance documents, rental and loan agreements in a safe place.  Use document wallets or envelopes to organise them.

Recipe for monthly bookkeeping  

Set a time to do this, such as the last day of each month, and stick to it.

Ingredients

1 bank statement

1  spreadsheet, or analysis book (eg. Cathedral Analysis Book)

1 pen or pencil

Several purchase receipts, bills and sales invoices

A pinch of patience

A little time

 

Method

Separate sales invoices (income) from receipts and bills (outgoings).   Sort each pile into date order.

Write in Analysis Book (or spreadsheet) as below;

Income
Date	Ref	Payer/Customer Name		Description		Amount Received	Sales	Loan Received		Bank Interest Received
28/4/10	1	Sample Ltd		300 Gadgets		600.00	600.00
30/4/10	2	My Bank Plc		Interest earned		3.00				3.00
Totals						603.00	600			3.00
Costs
Date	Ref	Supplier Name	Description		Amount Paid		Raw Materials		Rent & Rates		Stationery & Postage
19/4/10	17	EG Supplies	1,000 brackets		200.00		200.00
25/4/10	18	CC Printers	Business cards		95.00						95.00
Totals					295.00		200.00				95.00

Add columns as required to analyse your income and costs.  Total up each column for the month.

Check each item against your bank statement.  It there’s anything missing, and you know it’s correct write it onto your page or spreadsheet and add it into the total (then go and look for the receipt – you did get one didn’t you?).

There could be some items on the bank statement from last month, and some that have not yet appeared on the bank statement.  These are your unreconciled items.  Check any other differences, as these could be errors on your part, or bank errors.

Carry the totals forward to the top of next month’s columns:  this helps you keep a running total so that for your year-end accounts and tax return half the work is already done.

Alternatives:

Omit the analysis book, and use a software package.  These automate the calculations for you, and make it easy to reconcile the bank statement.

Use the same principal for credit card statements, cash withdrawals and payments.