How 4 Wise Men Can Help Your Business
What? Who? Why? When?
Posted on: 01/03/2012 By: Maureen Windridge
My school teachers told me, a long time ago, that these were among the most important words in the English language. Using these words regularly would lead to knowledge, and wisdom. Today I am going to apply them to accounts ...
what? who? why? when? using these words regularly will bring you wisdom
There is a lot of mystery surrounding accounts. The ordinary man in the street wouldn't know their profit and loss from a nominal ledger and a lot of business people are not much better off, happy only to know the bare minimum and leave all the accounting magic to their bookkeeper.
The Accounts of a business are financial statements showing:
The statement that shows what has happened in the past is usually called the Profit and Loss account. Non profit making organisations, clubs, societies and charities may call it and Income and Expenditure Account.
The Profit and Loss account and an Income Expenditure account show the sales and other income of the business or organisation. The expenses of the business are deducted from this. When the income exceeds the expenses it is called a profit in the Profit and Loss account and a surplus in an income and expenditure account. When expenses are greater than the income the result is a loss in the Profit and Loss account and a deficit in a Income and Expenditure account.
The statement showing the financial position at the end of the period is called the Balance Sheet. This shows what is owned by the business or organisation (fixed assets), money owed to and by the business or organisation as well as the money invested by the proprietors or members.
A full set of accounts will usually have some notes attached to the accounts giving explanations of some of the figures, and sometimes there will be a Cash Flow Statement. This shows where cash has come from and how it has been utilised.
Accounts are not just for accountants and tax inspectors. Many people can benefit from understanding them including anyone:
owning or running a business as a sole trader or a partnership
working as a company director
employed in the management of a business
interested in buying a business
interested in selling a business
who is on the management committee of a club
who is the trustee of a charity
For some people understanding accounts is an essential skill. That does not means they have to have the skills to be able to prepare them. They are however expected to understand and approve the figures in the accounts.
Anyone self employed has full responsibility for the figures entered on their tax return. Company directors are assumed to be aware of the financial situation of their companies. A director who continues trading when he knows or should have known that the company cannot pay its debts may be required to pay compensation and could be barred from being a director in the future.
Why Are Accounts Necessary?
It has already been said that accounts are needed by anyone involved in the running of a business or organisation. This is because there is a mountain of important and useful knowledge contained in the accounts:
Business owners, committee members, trustees and sole proprietors have a legal obligation to ensure that the business or organisation can meet its liabilities
Statutory returns have to be made to HM Revenue and Customs about profits or losses made and if the organisation is VAT registered accounts enable the calculation of the VAT Liability
Returns have to be made to Companies House for all Limited companies. Unlimited companies need to make returns to Companies House if they are a subsidiary or parent of a limited company. Unlimited companies are extremely rare
If the business or organisation needs to borrow money the lenders will probably want to see accounts to verify that the business is a stable investment and can afford the repayments. They often request a cash flow forecast and projected accounts as well
Charities have a legal requirement to make returns including accounts to the Charities Commission
Other people interested in accounts could be trade organisations or bodies providing grants
When Are Accounts needed?
Accounts are required to meet statutory deadlines. Tax returns and Companies House returns need to be made annually. VAT returns need to be made quarterly. However every business owner, director, committee member and trustee needs to ask the question is this often enough to provide the necessary knowledge and information needed in order to properly manage the business or organisation. In most cases the answer is no. Many organisations have monthly accounts prepared in order to make sure they stay in control.
Over the next few weeks I will be going into more detail about the various parts of the accounts and how to read and interpret accounts. Next week's blog is going to be called Cutting through the Gobbledy Gook.
In the meantime, if you think you may need the services of a professional bookkeeper then it certainly makes a lot of sense to call me on +44 (0) 1908 692378 and see how I can help, doesn't it?
Until next time ...
I consider myself to be incredibly lucky because I am a bookkeeper. At the age of thirteen I did a three year course in three months and passed with distinction. Many years have gone by since then and I am still fascinated by the process of double entry bookkeeping. A process developed over 500 years ago by a venetian monk called Luca Pacioli.
Many people would like a machine that they could put all their paper work into at one end and it would come out the other end all sorted totalled and balanced. I'm glad it hasn't been invented because it would take all the fun out of my work!