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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
All the essential financial skills you need to grow a small business
Bookkeeping & Accounting All-in-One For Dummies, UK Edition, 2nd Edition simplifies every aspect of financial record keeping so you can manage your business expertly. You'll receive comprehensive guidance on balancing your books, speeding up data entry, and boosting performance by eliminating costly clerical errors.
Using popular accounting software Sage 50 as a guide, learn how to quickly run financial reports, manage payroll, track and analyse both revenue and expenditure and manage the assets and liabilities of your business. As a business owner or as an accountant, you can set business targets that encourage expansion and growth—all with the help of this incredibly useful and comprehensive resource.
- Grasp must-know concepts and skills of bookkeeping and accounting for small business.
- Learn from relatable example scenarios and access online bookkeeping forms and resources.
- Get up-to-date guidance on VAT reporting and end of year reporting including references to UK accounting standards.
This is a valuable resource for small-business employees tasked with bookkeeping and accounting, small business owners, and anyone who works with the money side of small enterprises. Understand it all with Bookkeeping & Accounting All-in-One For Dummies, UK Edition, 2nd Edition!
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Table of Contents
Cover
Title Page
Copyright
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Book 1: Basic Bookkeeping
Chapter 1: So You Want to Do the Books
Delving into Bookkeeping Basics
Defining and Maintaining a Ledger
Using Bookkeeping Tools to Manage Daily Finances
Running Tests for Accuracy
Chapter 2: Getting Down to Bookkeeping Basics
Bookkeeping: The Record-Keeping of the Business World
Wading through Basic Bookkeeping Lingo
Pedalling through the Accounting Cycle
Understanding Accounting Methods
Seeing Double with Double-Entry Bookkeeping
Have a Go
Answering the Have a Go Questions
Chapter 3: Outlining Your Financial Roadmap with a Chart of Accounts
Getting to Know the Chart of Accounts
Starting with the Balance Sheet Accounts
Keeping an Eye on the Profit and Loss Accounts
Setting Up Your Chart of Accounts
Have a Go
Answering the Have a Go Questions
Chapter 4: Looking at Ledgers
Developing Entries for the Ledger
Posting Sales Invoices
Posting Purchase Invoices
There’s an App for That!
Entering Items into the Nominal Ledger
Cashbook/Bank Transactions
Introducing Control Accounts
Understanding How the Ledgers Impact the Accounts
Adjusting for Nominal Ledger Errors
Have a Go
Answering the Have a Go Questions
Book 2: Bookkeeping Day to Day
Chapter 1: Planning and Controlling Your Workload
Introducing Checklists
Sorting Out Your Sales Invoices
Entering Your Purchases Invoices
Checking Cash Payments and Receipts
Using a Bank Feed to Reconcile Your Bank Account
Entering Your Journals
Controlling Your Books, Records, and Money
Have a Go
Answering the Have a Go Questions
Chapter 2: Counting Your Sales
Reviewing Your Sales
Recording Your Sales in the Books
Adjusting Your Sales
Monitoring Trade Debtors
Accepting Your Losses
Have a Go
Answering the Have a Go Questions
Chapter 3: Buying and Tracking Your Purchases
Identifying Different Types of Purchases
Keeping Track of Stock
Buying and Monitoring Supplies
Staying on Top of Your Bills
Have a Go
Answering the Have a Go Questions
Chapter 4: Doing Your Banking
Making Sure that the Closing Cash Is Right
Reconciling Bank Accounts
Have a Go
Answering the Have a Go Questions
Book 3: Undertaking Monthly and Quarterly Tasks
Chapter 1: Adding the Cost of Value-Added Tax (VAT)
Looking into VAT
Registering for VAT
VAT Returns in the Digital Age
Chapter 2: Employee Payroll and Benefits
Staffing Your Business
Running Your Payroll
Taxing Benefits
Posting Your Payroll Entries
Settling Up with HM Revenue & Customs
Handling Payroll Year-End
Have a Go
Answering the Have a Go Questions
Chapter 3: Adjusting Your Books
Adjusting All the Right Areas
Checking Your Trial Balance
Changing Your Chart of Accounts
Have a Go
Answering the Have a Go Questions
Book 4: Working to Prepare Financial Statements
Chapter 1: Producing a Profit and Loss Account
Lining Up the Profit and Loss account
Formatting the Profit and Loss Account
Preparing the Profit and Loss Account
Deciphering Gross Profit
Monitoring Expenses
Using the Profit and Loss Account to Make Business Decisions
Testing Profits
Branching Out with Profit and Loss Account Data
Have a Go
Answering the Have a Go Questions
Chapter 2: Developing a Balance Sheet
Breaking Down the Balance Sheet
Gathering Balance Sheet Ingredients
Presenting Your Balance Sheet
Putting Your Balance Sheet to Work
Have a Go
Answering the Have a Go Questions
Chapter 3: Cash Flows and the Cash Flow Statement
The Three Types of Cash Flow
Setting the Scene: Changes in Balance Sheet Accounts
Using the Indirect or Direct Method?
Looking at Cash Flow from Operating Activities
Presenting the Cash Flow Statement
Sailing through the Rest of the Cash Flow Statement
Free Cash Flow: What on Earth Does That Mean?
Scrutinising the Cash Flow Statement
Book 5: Accountants: Managing the Business
Chapter 1: Discovering Different Business Types
Finding the Right Business Type
Tax Reporting for Sole Traders
Making Tax Digital — Income Tax Self-Assessment
Filing Tax Forms for Partnerships
Filing Returns for Limited Companies
Introducing Software-Only Filing
Have a Go
Answering the Have a Go Questions
Chapter 2: Choosing Accounting Methods
Decision-Making behind the Scenes in Profit and Loss Accounts
Calculating Cost of Goods Sold and Cost of Stock
Identifying Stock Losses: Net Realisable Value (NRV)
Managing Your Stock Position
Appreciating Depreciation Methods
Collecting or Writing Off Bad Debts
Reconciling Corporation Tax
Dealing with Foreign Exchange
Two Final Issues to Consider
Have a Go
Answering the Have a Go Questions
Chapter 3: Managing Profit Performance
Redesigning the External Profit and Loss Account
Basic Model for Management Profit and Loss Account
Travelling Two Trails to Profit
Have a Go
Answering the Have a Go Questions
Chapter 4: Cost Conundrums
Previewing What’s Coming Down the Road
What Makes Cost So Important?
Sharpening Your Sensitivity to Costs
Putting Together the Pieces of Product Cost for Manufacturers
Allocating Indirect Costs Is as Simple as ABC — Not!
Have a Go
Answering the Have a Go Questions
Chapter 5: Business Budgeting
The Reasons for Budgeting
Budgeting and Management Accounting
Budgeting in Action
Capital Budgeting
Reporting on Variances
Staying Flexible with Budgets
Have a Go
Answering the Have a Go Questions
Book 6: Accountants: Working with the Outside World
Chapter 1: Getting a Financial Report Ready for Prime Time
Considering the Purpose of Annual Reporting
Looking at the Contents of an Annual Report
Making Sure that Disclosure Is Adequate
Nudging the Numbers
Browsing versus Reading Financial Reports
Chapter 2: How Investors Read a Financial Report
Financial Reporting by Private versus Public Businesses
Analysing Financial Reports
Navigating the Notes
Checking for Warning Signs in the Audit Report
Finding Financial Facts
Have a Go
Answering the Have a Go Questions
Chapter 3: Professional Auditors and Advisers
Why Audit?
Who Can Audit Company Accounts?
What Happens during an Audit?
What’s in an Auditor’s Report
Do Audits Always Catch Fraud?
Auditors and the Rules
From Audits to Advising
Index
About the Author
Connect with Dummies
End User License Agreement
List of Tables
Book 1 Chapter 2
TABLE 2-1 How Credits and Debits Impact Your Accounts
Book 2 Chapter 3
TABLE 3-1 Comparison of Gross Profit
Book 2 Chapter 4
TABLE 4-1 An Example of a Bank Reconciliation
Book 3 Chapter 1
TABLE 1-1 Working Through a VAT Return
Book 3 Chapter 2
TABLE 2-1 Payroll Journal Entry for 26 May 2024
TABLE 2-2 Employer NIC Expenses for May 2024
TABLE 2-3 Recording PAYE Payments for May 2024
Book 4 Chapter 2
TABLE 2-1 Balance Sheet Accounts
Book 4 Chapter 3
TABLE 3-1 Computation of Cash Flow from Profit (in thousands of pounds)
Book 5 Chapter 1
TABLE 1-1 2024/25 Taxable Profits
Book 5 Chapter 2
TABLE 2-1 History of Stock Acquisitions during the First Year
TABLE 2-2 Cost of Goods Sold Expense Calculation Using the FIFO Method
TABLE 2-3 The Cost of the Remaining stock Unsold (FIFO Method)
Book 5 Chapter 3
TABLE 3-1 Internal Profit and Loss Account Highlighting Profit Drivers
TABLE 3-2 Operating Profit Result from 10% Sales Price Decrease in Exchange for ...
TABLE 3-3 Operating Profit Result — Complete
Book 5 Chapter 4
TABLE 4-1 Internal Profit and Loss Account for Company X
TABLE 4-2 Internal Profit and Loss Account for Company Y
TABLE 4-3 Internal Profit and Loss Account Company X
TABLE 4-4 Internal Profit and Loss Report for Company Y
Book 6 Chapter 2
TABLE 2-1 Difficult Comparisons
List of Illustrations
Book 1 Chapter 2
FIGURE 2-1: The accounting cycle.
Book 1 Chapter 3
FIGURE 3-1: The top portion of a sample Chart of Accounts showing overheads.
Book 1 Chapter 4
FIGURE 4-1: Showing how all ledgers are integrated in a computerised system.
FIGURE 4-2: Showing the Customer Transactions report having selected the Invoic...
FIGURE 4-3: Supplier Transactions selecting the Invoice option.
FIGURE 4-4: Showing the Nominal Day Books report for the Practice Company.
FIGURE 4-5: Bank Payments Day Book report.
FIGURE 4-6: Supplier Payment Day Book.
FIGURE 4-7: Bank Receipt Day Book report.
FIGURE 4-8: Customer Receipts Day Book.
FIGURE 4-9: Debtors Control account for the Practice Company.
FIGURE 4-10: An Aged Debtor report for the Practice Company for June 2024.
FIGURE 4-11: Creditors Control account for the Practice Company for June 2024.
FIGURE 4-12: Aged Creditor report for the Practice Company for June 2024.
FIGURE 4-13: The Sweet sales account for the Practice Company as shown in the N...
FIGURE 4-14: Showing a correcting journal entry.
FIGURE 4-15: Customer Transactions Day Book, choosing Invoices for July 2024.
FIGURE 4-16: The Supplier Transactions Day Book choosing Invoices for July 2024...
Book 2 Chapter 1
FIGURE 1-1: An extract of a monthly bookkeeping checklist.
FIGURE 1-2: Check your Purchase Day Book to see the last invoice entered.
FIGURE 1-3: Petty cash payment showing Pc05 and PC02 as batch references.
Book 2 Chapter 2
FIGURE 2-1: Example of a cash sale in Sage 50 Accounts.
FIGURE 2-2: Showing the Turn on Card Payments button to activate the payment pr...
FIGURE 2-3: A sales invoice from Simply Stationery.
FIGURE 2-4: Creating a sales invoice using Sage 50 Accounts for goods sold on c...
FIGURE 2-5: In Sage 50 Accounts, recording payments from customers who bought o...
FIGURE 2-6: A sales invoice from Handson’s Hardware showing a sales discount.
FIGURE 2-7: An example of a credit note raised.
FIGURE 2-8: An Aged Debtor report using Sage 50 software.
FIGURE 2-9: Sales invoice for Handson’s Hardware.
FIGURE 2-10: Sales invoice for Simply Stationery.
FIGURE 2-11: Credit Note for Simply Stationery.
Book 2 Chapter 3
FIGURE 3-1: Recording of the receipt of stock using Sage 50 Accounts.
FIGURE 3-2: Setting up a stock item using Sage 50 Accounts.
Book 2 Chapter 4
FIGURE 4-1: The first screen you see in Sage 50 when you want to start a bank r...
FIGURE 4-2: The second screen in Sage 50 where you match your bank transactions...
FIGURE 4-3: After reconciling your accounts, Sage 50 Accounts automatically pro...
Book 3 Chapter 1
FIGURE 1-1: The Sage 50 Accounts VAT return.
Book 3 Chapter 3
FIGURE 3-1: In Sage 50 Accounts, use the Write Off, Refund and Returns Wizard t...
FIGURE 3-2: Selecting the customer account in which you’re writing off debt in ...
FIGURE 3-3: Selecting and highlighting the invoices you’re writing off in Sage ...
FIGURE 3-4: Confirming the details of the write-off in Sage 50 Accounts.
FIGURE 3-5: Check that the write-off has been posted properly by viewing the Cu...
FIGURE 3-6: An example of a Trial Balance in Sage 50.
FIGURE 3-7: Showing a Nominal Activity report for Capital Introduced.
Book 4 Chapter 1
FIGURE 1-1: A sample Profit and Loss account.
FIGURE 1-2: Percentage breakdown of a Profit and Loss account.
Book 4 Chapter 2
FIGURE 2-1: A sample Balance Sheet using the horizontal format.
FIGURE 2-2: A sample Balance Sheet using the vertical format.
Book 4 Chapter 3
FIGURE 3-1: Changes in Balance Sheet assets and operating liabilities that affe...
FIGURE 3-2: Cash flow statement for the business in the example.
Book 5 Chapter 1
FIGURE 2-1: A Profit and Loss account including certain expenses that aren’t re...
Book 5 Chapter 3
FIGURE 3-1: Example of a business’s external Profit and Loss account.
FIGURE 3-2: Management Profit and Loss account model.
Book 5 Chapter 4
FIGURE 4-1: A break-even chart.
FIGURE 4-2: Example for determining product cost of a manufacturer.
FIGURE 4-3: Example in which production output greatly exceeds sales volume, th...
Book 5 Chapter 5
FIGURE 5-1: Management Profit and Loss account for year just ended.
FIGURE 5-2: Budgeted Profit and Loss account for coming year.
FIGURE 5-3: Budgeted cash flow from profit statement for coming year.
FIGURE 5-4: Calculating payback.
FIGURE 5-5: Comparing investments using payback.
FIGURE 5-6: Comparing cash with the net present value of that cash at 15% disco...
FIGURE 5-7: Fixed budget — note that figures rounded up and down to nearest tho...
FIGURE 5-8: Flexed budget — note that figures rounded up and down to the neares...
Book 6 Chapter 2
FIGURE 2-1: A sample Profit and Loss account.
FIGURE 2-2: A sample Balance Sheet.
Book 6 Chapter 3
FIGURE 3-1: Sample independent auditor’s unqualified opinion.
Guide
Cover
Table of Contents
Title Page
Copyright
Begin Reading
Index
About the Author
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Bookkeeping & Accounting All-In-One For Dummies®, 2nd UK Edition
Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com
Copyright © 2025 by John Wiley & Sons, Inc., Hoboken, New Jersey
Media and software compilation copyright © 2025 by John Wiley & Sons, Inc. All rights reserved.
Published simultaneously in Canada
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Library of Congress Control Number: 2025932747
ISBN 978-1-394-33061-4 (pbk); ISBN 978-1-394-33063-8 (ebk); ISBN 978-1-394-33062-1 (ebk)
Introduction
Welcome to Bookkeeping & Accounting All-in-One For Dummies! This book explains the different roles that both bookkeepers and accountants take on within a business. However, if you run this show on your own, don’t worry! Within these pages, you’ll also find out how to do the bookkeeping basics and see how an accountant can assist you further.
About This Book
This book aims to help you understand the bookkeeping tasks that need to be done within your business and to demonstrate how an accountant can help your business to set targets that will hopefully expand and grow.
Bookkeeping & Accounting All-in-One For Dummies is divided into six separate books. Each book is split into several chapters that tackle key aspects of bookkeeping and accounting functions. The Table of Contents gives you more detail of what is contained within each chapter. Every chapter presents information in a modular fashion so that you get all the knowledge that you need to accomplish a task in one place. You don’t need to remember things from different parts of the book; if another chapter contains details relevant to the discussion at hand, you’ll find a cross reference telling you where you can locate it. That way, you don’t have to read the chapters in order, you can simply pick and choose the parts of the book that interest you, whenever it suits you!
Foolish Assumptions
Bookkeeping & Accounting All-in-One For Dummies makes some key assumptions about who you are and why you picked up this book, and assumes that you fall into one of the following categories:
You’re a member of staff in a small business who’s been employed to undertake the bookkeeping and accounting function.
You’re a small business owner who currently doesn’t have the funds to employ an individual. Therefore, you need to understand the basics of bookkeeping to enable you to deal with the day-to-day paperwork, with a view to perhaps using an accountant at year-end.
You’re a small-business owner who is thinking of employing a bookkeeper but wants to know the differences between what a bookkeeper can do for your business and what an accountant can offer.
If any — or all — of these assumptions accurately describes you, then you’ve come to the right book!
Icons Used in This Book
Every For Dummies book uses icons to highlight especially important, interesting or useful information. The icons used in this book are:
Look at this icon for practical information that you can use straight away to help you to run your bookkeeping and accounting systems in the most effective way.
This icon indicates any information, techniques, or jargon you need to remember after reading the book — and sometimes throughout it.
This icon calls your attention to examples of specific tasks that you can undertake to help you perform the bookkeeping or accounting skills explained in this book.
The paragraphs next to this icon contain information that is, er, slightly technical in nature. You don’t need to know the information here to get by, but it helps.
This bombshell alerts you to potential problems you may create for yourself without realising it. Don’t ignore this icon!
Beyond the Book
At www.dummies.com/extras/bookkeepingaccountingaio you can access some online extras, just in case you need a bit more help and guidance! You can also find the handy cheat sheet at www.dummies.com/cheatsheet/bookkeepingaccountingaio.
Where to Go from Here
You’re now ready to enter the world of bookkeeping and accounting. If you’re a complete beginner, starting at the beginning and gradually working through from there is probably the best approach. If you have some experience but are a little rusty in certain areas, you can pick and choose the chapters that are most relevant to you. After all, this book is designed for you to dip in and out of as you like. I hope that you find it a useful tool for developing and managing your business.
If you’re just starting out and need to understand the fundamentals of a bookkeeping system, then begin with Book 1.
Maybe you’re already familiar with the basics but keen to expand your knowledge and tackle a wider range of bookkeeping tasks. If so, then Book 2 is for you.
Perhaps you’re already confident at entering invoices, recording bank transactions and preparing bank reconciliations but want to take your skills to the next level — check out Book 3.
If you’re interested in understanding the mechanics of the Profit and Loss account, Balance Sheet and Cash Flow Statement then head across to Book 4.
You might want to dive into the details of different business types and gain insight into how the accounts are prepared and used as tools to help aid management decision-making. If so, then check out Book 5.
Perhaps you’ve always wanted to know how to interpret an Annual Report and accounts with confidence and truly understand what the numbers mean? Or are you bursting to know what an auditor does? Either way, have a look at Book 6.
Book 1
Basic Bookkeeping
Contents at a Glance
Chapter 1: So You Want to Do the Books
Delving into Bookkeeping Basics
Defining and Maintaining a Ledger
Using Bookkeeping Tools to Manage Daily Finances
Running Tests for Accuracy
Chapter 2: Getting Down to Bookkeeping Basics
Bookkeeping: The Record-Keeping of the Business World
Wading through Basic Bookkeeping Lingo
Pedalling through the Accounting Cycle
Understanding Accounting Methods
Seeing Double with Double-Entry Bookkeeping
Have a Go
Answering the Have a Go Questions
Chapter 3: Outlining Your Financial Roadmap with a Chart of Accounts
Getting to Know the Chart of Accounts
Starting with the Balance Sheet Accounts
Keeping an Eye on the Profit and Loss Accounts
Setting Up Your Chart of Accounts
Have a Go
Answering the Have a Go Questions
Chapter 4: Looking at Ledgers
Developing Entries for the Ledger
Posting Sales Invoices
Posting Purchase Invoices
There’s an App for That!
Entering Items into the Nominal Ledger
Cashbook/Bank Transactions
Introducing Control Accounts
Understanding How the Ledgers Impact the Accounts
Adjusting for Nominal Ledger Errors
Have a Go
Answering the Have a Go Questions
Chapter 2
Getting Down to Bookkeeping Basics
IN THIS CHAPTER
Keeping business records and navigating the lingo
Understanding accrual and cash-basis accounting
Making sense of double-entry bookkeeping
All businesses must keep track of their financial transactions, which is why bookkeeping and bookkeepers are so important. Without accurate records, how can you tell whether your business is making a profit or incurring a loss?
In this chapter, we cover the key aspects of bookkeeping: We introduce you to the language of bookkeeping, familiarise you with how bookkeepers manage the accounting cycle, and show you how to understand the more complex type of bookkeeping — double-entry bookkeeping.
Bookkeeping: The Record-Keeping of the Business World
Bookkeeping, the methodical way in which businesses track their financial transactions, is rooted in accounting. Accounting is the total structure of records and procedures used to record, classify, and report information about a business’s financial transactions. Bookkeeping involves the recording of that financial information into the accounting system while maintaining adherence to solid accounting principles.
As a bookkeeper, your job is to ensure that you record transactions accurately. Since you’re dealing with numbers and accounts all day long, it helps if you’re detail-oriented and love working with numbers.
Bookkeepers don’t need to belong to any recognised professional body, but you can join one, such as The Institute of Certified Bookkeepers (ICB) or The International Association of Bookkeepers (IAB). These associations are based in London and offer support and advice as well as help with Continuing Professional Development (CPD).
The Association of Accounting Technicians offers bookkeeping qualifications (AAT Level 1 through 3) that provide a good grounding in this subject. However, many bookkeepers are often qualified by experience.
Accountants can join the Institute of Chartered Accountants of England and Wales. You can recognise a chartered accountant by the letters ACA after their name, which indicates that they are an Associate of the Institute of Chartered Accountants. If they’ve been qualified for more than 10 years, they can apply to use the letters FCA, which indicate that the accountant is a Fellow of the Institute of Chartered Accountants.
Of course, both Scotland and Ireland have their own chartered accountancy bodies with their own designations. Other accounting qualifications exist, offered by the Institute of Chartered Management Accountants, which has formed a joint venture with the Association of International Certified Professional Accountants (AICPA; for ACMA, CGMA, and FCMA certifications), the Association of Chartered Certified Accountants (ACCA for FCCA certification) and the Chartered Institute of Public Finance Accountants (CPFA for FCPFA certification).
On starting up their businesses, many small-business owners serve as their own bookkeepers until the business is large enough to hire a dedicated person to keep the books. Few small businesses have accountants on the payroll to check the books and prepare official financial reports; instead, they have bookkeepers (on the payroll or hired on a self-employed basis) who serve as the outside accountants’ eyes and ears. Most businesses do seek out an accountant, usually a chartered accountant (ACA or FCA), but they do so typically to help them submit annual accounts to HM Revenue & Customs (HMRC) and Companies House if it’s a Limited Company.
In many small businesses today, a bookkeeper enters business transactions daily while working inside the business. At the end of each month, quarter, or even annually, the bookkeeper sends summary reports to the accountant, who then checks the transactions for accuracy and prepares financial statements such as the Profit and Loss (see Book 4, Chapter 1) and Balance Sheet (see Book 4, Chapter 2) statements.
In most cases, the accounting system is initially set up with the help of an accountant. The aim is to ensure that the system uses solid accounting principles and that the analysis it provides is in line with that required by the business, the accountant, and HM Revenue & Customs. That accountant may periodically review the system’s use to make sure that staff are handling transactions properly.
Accurate financial reports are the only way to ensure that you know how your business is doing. Your business develops these reports using the information that you, as the bookkeeper, enter into your accounting system. If that information isn’t accurate, your financial reports are meaningless: Remember, “garbage in, garbage out.”
Wading through Basic Bookkeeping Lingo
Before you can take on bookkeeping and start keeping the books, you first need to get a handle on the key accounting terms. This section describes the main terms that all bookkeepers use on a daily basis.
Accounts for the Balance Sheet
Here are a few terms that you need to know:
Balance Sheet: The financial statement that presents a snapshot of the business’s financial position (assets, liabilities, and capital) as of a particular date in time. The Balance Sheet is so-called because the things owned by the business (assets) must equal the claims against those assets (liabilities and capital).
On a Balance Sheet, the total assets need to equal the total liabilities plus the total capital. If your numbers fit this formula, the business’s books are in balance. (We discuss the Balance Sheet in greater detail in Book 4, Chapter 2.)
Assets:
All the items a business owns to run successfully, such as cash, stock, debtors, buildings, land, tools, equipment, vehicles, and furniture.
Liabilities:
All the debts the business owes, such as mortgages, loans, and supplier invoices.
Capital: All the money the business owners invest in the business. When one person (sole trader) or a group of people (partnership) own a small business, the owners’ capital is shown in a Capital account. In an incorporated business (limited company), the owners’ capital is shown as shares.
Another key Capital account is Retained Earnings, which shows all business profits that have been reinvested in the business rather than paid out to the owners by way of dividends. Unincorporated businesses show money paid out to the owners in a Drawings account (or individual Drawings accounts in the case of a partnership), whereas incorporated businesses distribute money to the owners by paying dividends (a portion of the business’s profits paid out to the ordinary shareholders, typically for the year).
Accounts for the Profit and Loss account
Following are a few terms related to the Profit and Loss account that you need to know:
Profit and Loss account:
The financial statement that presents a summary of the business’s financial activity over a certain period of time, such as a month, quarter, or year. The statement starts with Sales made, subtracts out the Cost of Sales and the Expenses, and ends with the bottom line — Net Profit or Loss. (We show you how to develop a Profit and Loss account in Book 4,
Chapter 1
.)
Sales/Income:
This includes all sales (also known as revenue or turnover) made by selling the business’s goods and services. Some businesses also generate other income through additional sources. (We discuss how to track income in Book 2,
Chapter 2
.)
Cost of Sales:
All costs incurred in purchasing or making the products or services a business plans to sell to its customers. (We talk about purchasing goods for sale to customers in Book 2,
Chapter 3
. We also talk about how the accountant would use different accounting methods to determine the Cost of Sales in Book 5,
Chapter 2
.)
Expenses:
All costs incurred to operate the business that aren’t directly related to the sale of individual goods or services. (We review common types of expenses in Book 1,
Chapter 3
.)
In the UK and Ireland, a Profit and Loss account can also be referred to as an Income Statement. Under both UK and Ireland accounting standards and international standards (International Financial Reporting Standards [IFRS]) the terms can be used interchangeably. It very much depends on which reporting framework the company is using. Under FRS 102, which applies to private businesses in the UK and the Republic of Ireland (those not listed on the Stock Exchange), both the Profit and Loss account and Income Statement are acceptable terms. With the IFRS, which is used by much larger, often global companies, the term Income Statement or Statement of Profit and Loss are more usual terms.
Under International Financial Reporting Standards, the Balance Sheet is referred to as a “Statement of Financial Position.” It provides more detailed information than the Balance Sheet required by FRS 102.
