BOOK-KEEPING
IntroductionBooks of First Entry - cash and
bank books
The
simplest form of cash/bank book
consists of four columns on the left hand page and four on the right.
The money moves in the
same direction as we
read - it comes in on the left (income) and it goes out on the
right
(expenditure).
CASH BOOK (page C4) |
date | transaction | ldgr | amount | date | transaction | ldgr | amount | |
1 mar 06 | cash from end Feb | b/d | 200.00 | 8 mar 06 | purchases | P2 | 80.00 | |
8 mar 06 | sales week 1 | S3 | 150.00 | 15 mar 06 | purchases | P2 | 120.00 | |
15 mar 06 | sales week 2 | S3 | 140.00 | 24 mar 06 | petrol | P2 | 50.00 | |
22 mar 06 | sales week 3 | S3 | 160.00 | 15 mar 06 | wages | W2 | 200.00 | |
29 mar 06 | sales week 4 | S3 | 180.00 | |||||
30 mar 06 | deposit interest | I1 | 20.00 | 15 mar 06 | cash left (balance) | c/d | 400.00 | |
total for March | 850.00 | total for March | 850.00 | |||||
1 apr 06 | cash from end Mar | b/d | 400.00 |
Looking at the above, you started March with £200 'brought down' (b/d) from the previous month (February), five lots of money came in, totalling £650, giving you £850 in all, and four lots went out totalling £450, leaving you with £400 cash left (called the ‘balance’). This is ‘carried down’ (c/d) to begin your next (April) book-keeping session, (The terms c/f and b/f ‘carried forward’ and ‘brought forward’ are also used).
In
practice your cash book may have
more than one income or expenditure column (see ledgers, below) but the
principle remains the same - what you started with plus what comes in
less what
goes out should be what you have left at the end.
If you keep this simple track of your finances, typically with one book for cash transactions and one for bank transactions, then you will be safe from at least one form of self-inflicted financial harm - stupidity. The other thing you need to do, even more importantly, is adopt the Micawber principle of never spending more than you earn, but that has nothing to do with book-keeping.
Ledgers
While
a good cash/bank book system
forms the essential basis to your financial house-keeping, in business
you also
need to know not only how much money is coming in and going out, but
also where
it is coming from and
going to - how much has come from
sales, how much spent on wages etc.
You
can, of course, piece this together out of the cash book by scribbling
lists on
pieces of paper, but a more effective way is to keep ‘ledgers’ as you
go
along. That is why
you need the third
column, headed ‘ldgr’. The
entries, S3, I1,
P2, etc are simply the pages of the ledgers to which you are ‘posting’
the
figure written in the ‘amount’ column.
A ledger is laid out like the cash book but entries in it refer only to one kind of transaction, for example it might be rent paid, or monies received from sales. Each page has a unique title - the wages ledger might have pages W1, W2, W3 etc. You can have as many ledgers as you wish.
Double Entry Book-keeping
Any
entry made in the cash book has
to be ‘posted to’ - entered in - its appropriate ledger. The name/number of the
ledger page is written
in the ‘ldgr’ column of the cash book.
For example, the first four entries in the above example
have been posted
to a ‘Sales’ ledger, page S3. Also,
the
name/number of the cash book page (C4 in this example) is written in
the equivalent
column in the ledger. This
is to enable
you to track down particular entries fairly quickly if you need to -
and you
will!
A
very good habit to develop is to
‘post’ transactions as soon as you enter them in the cash book. Do it carefully - a
favourite mistake is to
transpose figures, e.g. £3.75 comes out of the cash book but appears as
£3.57
in the ledger, leaving you eventually with an interesting 18p error
somewhere -
and a teeth-gnashing headache!
You may find it useful to have extra columns in your cash book to reduce the amount of posting you have to do. For example you may make weekly payments for wages and several payments for petrol while only closing your cash book at the end of the month. If you enter the wages and petrol expenses in separate columns in your cash book you can add them up at the end of the month, transfer the totals to your main expenditure column and then post just these two figures to the ‘wages’ and ‘petrol’ ledgers - one posting instead of several. This saves time and is much less ‘accident-prone’.
Wrong
side? What’s the
right side? You
might find it useful at this point to
think of ledgers as being cash books belonging to someone else - Mr
Wages, Mr
Sales etc. Money
coming out of
your cash book (right
hand side)
goes into theirs (left hand
side). Similarly,
money coming into
your cash book
(left hand side) has
come out
of theirs (right hand
side) i.e. entries
are always posted to
the opposite side of the ledger.
While you might well want to keep an eye on certain ledgers regularly, they are normally formally closed only at the end of your financial year.
SALES LEDGER (page S3) |
date | transaction | ldgr | amount | date | transaction | ldgr | amount | |
sales so far (say) | 5000.00 | |||||||
8 mar 06 | week
1 |
C4 | 150.00 | |||||
15 mar 06 | week 2 | C4 | 140.00 | |||||
22 mar 06 | week 3 | C4 | 160.00 | |||||
31 mar 06 | total to P & L a/c | 5630.00 | 29 mar 06 | week 4 | C4 | 180.00 | ||
5630.00 | 5630.00 |
The ‘balance’ in a ledger is thus not an amount of cash lying about in a tin box or a bank account somewhere, but the total spent on (or received from) that particular item during your financial year. This figure is posted in its turn to your ‘Profit and Loss’ account
Profit and Loss Account
Also
known as an Income and
Expenditure Account.
Although
this is teetering
dangerously near accountancy, if you have the wit to keep a set of cash
books
and ledgers, (and if you haven’t - don’t be in business!), you can
certainly
prepare a rudimentary Profit and Loss Account.
Simply, it is two lists of figures - the year end balances from your ledgers. One shows the income you have received from various sources during your financial year, the other shows expenses. The difference between the two is your profit.
PROFIT AND LOSS ACCOUNT FOR 1 APRIL 2005 TO 31 MARCH 2006 |
Income | Expenditure | |||
from sales | 5630.00 | on purchasing stock | 3200.00 | |
from deposit interest | 540.00 | on wages | 1800.00 | |
from property rents | 700.00 | on motoring expenses | 200.00 | |
profit | 1670.00 | |||
totals | 6870.00 | 6870.00 |
The
Profit and Loss Account sets
out your full year’s trading in all its glory - what you have earned,
what you
have spent, what profit/loss you have made.
The Balance Sheet is a statement of your assets and
liabilities on a
particular day, usually the last day of your financial year. Basically it says that the
money you started
with at the beginning of the year plus your profit for the year equals
the
money you now have. Like
the Profit and
Loss Account, it’s not cutting edge thinking, although it has to be
admitted
again that, like the P & L a/c, accountants seem to have a
flare for
rendering them totally opaque!
Anyway
here is a simple, practical example.
BALANCE SHEET AT 31 MARCH 2006 |
Liabilities | Assets | |||
Cash held at 1 April 2005 | 2000.00 | Cash held at 31 March 2006 | 400.00 | |
Cash at bank at 1 April 2005 | 3000.00 | Cash at bank at 31 March 2006 | 6270.00 | |
Profit from P & L a/c | 1670.00 |
|
||
totals | 6670.00 | 6670.00 |
It
is not particularly important
but the cash held at the beginning of the year and the profit are known
as
liabilities to the company because they are owed to the company’s
owners. Assets are
simply what the company has in its
possession at the moment. The
value of
any properties and equipment owned by the company would be included as
assets.
Debtors and Creditors
As
we have come this far, we may as
well take one small step further towards the dark realm of accountancy
by dealing
with good souls to whom you owe you money at the year end (creditors)
and the
bastards who owe you money (debtors).
These
appear in the ledgers just
before they are closed off at the year end and do not affect your cash
books.
Basically
if someone owes you money
at the end of the year, that money counts as part of your income for
that year,
even though you have not received it - and yes, you will
pay tax on it.
Similarly if you owe someone money that counts as part of
your
expenditure for that year, even though you have not parted with it.
If, for example, you have supplied £50 worth of goods to Mr Jones but he has not yet paid - he is a debtor - then it will appear in the ledger like this.
SALES LEDGER (page S3) |
date | transaction | ldgr | amount | date | transaction | ldgr | amount | |
sales so far (say) | 5000.00 | |||||||
8 mar 06 | week
1 |
C4 | 150.00 | |||||
15 mar 06 | week 2 | C4 | 140.00 | |||||
22 mar 06 | week 3 | C4 | 160.00 | |||||
29 mar 06 | week 4 | C4 | 180.00 | |||||
31 mar 06 | total to P & L a/c | 5680.00 | 31 mar 06 | owed by Mr Jones | c/d | 50.00 | ||
5680.00 | 5680.00 | |||||||
1 apr 06 | debtors (Jones) | b/d | 50.00 | 10 apr 06 | from Mr Jones | C4 | 50.00 |
Creditors,
people
who have supplied you with goods or services which you have not yet
paid for (shame
on
you!), are treated similarly but they will be on the other side of the
ledger.
BALANCE SHEET AT 31 MARCH 2006 |
Liabilities | Assets | |||
Cash held at 1 April 2005 | 2000.00 | Cash held at 31 March 2006 | 400.00 | |
Cash at bank at 1 April 2005 | 3000.00 | Cash at bank at 31 March 2006 | 6270.00 | |
Profit from P & L a/c | 1720.00 | Debtors at 31 March 2006 | 50.00 |
|
totals | 6720.00 | 6720.00 |
End Notes
Keeping
a simple and accurate set
of account books is not difficult.
All
that is required is the developing of good book-keeping habits -
generally
speaking, do it now not later. Well kept books will
enable you to assess
your trading position any time quite quickly and will save you a lot on
accountant’s bills.
Pay
your bills on receipt -
particularly those from small businesses.
It will help build up a good reputation for you – always
worth having!
Keep
your invoices filed in the
order in which they appear in the books.
Beware computers. Do not attempt to computerize your accounts until you have a tried and tested paper system. In any event always have written books of first entry, even if you duplicate these on the computer. When things go wrong with your written books, it can be a grisly problem - when they go wrong on a computer it can be a nightmare.