BOOK-KEEPING

Introduction
I have met quite a few individuals of an enthusiastic and entrepreneurial bent who, on inquiry, have revealed that they ‘had a great little business’, but ‘the accountant let me down’.  Any business can, of course, bite the dust for a variety of reasons, but one of these is rarely being ‘let down’ by an accountant.  Claiming that is simply another way of saying ‘I had a great little business but I couldn’t be bothered keeping a check on my income and expenditure, ’ i.e. ‘I’m a complete plonker’.  This also applies to domestic and personal finances.  
The irony is that book-keeping is blissfully simple.  It is not even particularly difficult when you are tilting towards ‘accountancy’ by recording debtors and creditors, as you will see.
A darker irony is that, be it your business or your home, if you do not record your finances routinely and accurately, then you are venturing into a realm of mouth-foaming rage - one that will eventually have you banging your head against the wall in despair.  Be warned!
Also, if you keep a decent set of books, it means that your accountant can spend his expensive time on accountancy and tax matters rather than mundane jobs well within your own ability, thereby making his job easier, quicker and a lot cheaper!

Books 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).

If you do not have 400 left, stop the world until you find out what has happened!  This is very important.  Depending on the nature of your business/domestic finances you can ‘close’ the cash book - i.e. add up both columns and check that the cash balance is correct, as above - as often as suits you - it might be every month, every week, or every day.  But you must make sure everything is in order when you do, so that when you cock it up next month (or week, or day) - as you will - you will know that you do not have to look back further than the last ‘totals’ line.  I cannot over-emphasize the importance of this. 

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’. 

Another common mistake is to post entries to the wrong side of the ledger. 

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

In practice, of course, the Profit and Loss Account can be a little more complex.  Allowance has to be made for people who owe you money at the year-end (debtors) and people to whom you owe money (creditors), but I will deal with those later.  Also, not all expenses are classed as expenses for tax purposes - typically money spent on expensive equipment or property (capital expenditure) is treated differently from routine business expenses such as wages, insurance etc.  Here, however, we are into accountancy proper where the object of the exercise appears to be to make everything as complex and obscure as possible.

Balance Sheet
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

 Your income from sales (and your overall profit) has been increased by 50 even though you have not received the actual money.  This is then carried down to the left hand side of the ledger for the beginning of the next trading year - 1st April in this example.  When Mr Jones pays his bill (on the 10th April), it  appears on the right hand side of the sales ledger.  This makes the difference between the two sides zero i.e. the transaction does not affect this new year’s trading. 

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.

Debtors and Creditors make one last appearance - in the Balance Sheet.  Using the figures above, your profit will have increased by 50 from 1670 to 1720 and Mr Jones’s 50, which you have not received by the year end, is nevertheless one of your assets, hence:

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

 
Any creditors at the end of the year would appear on the left hand side, the liabilities side, of the balance sheet.

 
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.