Search

Get to Grips With Book Keeping: Book-keeping principles

by Andy Lymer and Nick Rowbottom

In making book-keeping entries, we need to consider how each transaction has affected the business. In doing so, you may find it useful to think in terms of its sources and uses of funds.

For every business, there are three basic sources of funds:

1. Equity capital where the owners invest their own resources into the business
2. Liabilities - where people outside of the business lend funds to the business
3. Revenue - where the business generates funds itself from trading

For every business, there are two basic uses of funds:

1. Assets: where the business gains control of something which will provide it with future benefits.
2. Expenses: where a business buys some benefit which is consumed or used up.

In each transaction a business participates in there must always be an impact on the sources and uses of funds:

Uses of funds = Sources of funds
Assets + Expenses = Equity Capital + Liabilities + Revenue
Debits = Credits

Therefore -
A Debit Entry denotes: An increase in an Asset or an Expense. A decrease in Equity Capital, Liabilities or Revenue.
A Credit Entry denotes An increase in Equity Capital, Liabilities or Revenue. A decrease in an Asset or an Expense


<< Back to home
No books are available for this article.

Related Articles

Get Started in Franchising: What is a franchise? A business format franchise is a blueprint to business success with permanent back-up thrown in for good measure. Initially, the franchisor – the grantor of the franchise – offers individuals a ‘business in a box’.
Get Started in Franchising: Why become a franchisor? Entrepreneurs who have built up a business that is ready for expansion have several options available. Broadly speaking these range from setting up company-owned branches to appointing established businesses as agents or distributors.
Get Started in Franchising: Why become a franchisee? Even those people who used to think that serving the same employer for a lifetime was the way to go have come to realise that this is little more than a pipedream. Modern-day companies merge, down-size operations or even close down. As a result, people lose their jobs and with it their trust in the corporate system. Even those who can secure another job will feel frustrated and insecure.
Get Started in Franchising: About franchise opportunities Many people associate franchising with fast food but this is an outdated notion. It came about because the fast food sector was the first to expand through franchising but in the meantime, many different sectors have adapted franchising to their needs. This means that prospective franchisees have a host of available options waiting for them.
Get Started in Franchising: Financial aspects of franchising The financial aspects of franchising can be divided into two categories affecting franchisees and franchisors respectively. The focus of this article is on franchisees’ financial obligations but closes with a brief explanation of the investment new franchisors need to make.
Set Up a Successful Small Business: Marketing Marketing is about letting people know you exist and keeping your name in front of them. Do your marketing when you're busy, not when you're quiet. You're probably quiet because you didn’t do your marketing when you were busy! You may need a variety of marketing methods.
Set Up a Successful Small Business: Selling Each potential customer is different, so you need to find out as much about the person or the company as you can. Set yourself a target for every meeting. You will usually be entering your customer’s territory, so note the environment and adapt your approach to the circumstances.
Set Up a Successful Small Business: E-commerce You may decide to expand your business into e-commerce or sell online from the start. You won’t know who your customers are, but you might be selling worldwide. Look at your competitors’ websites and note the good and bad points.
Be Your Own Boss: Are you the next Richard Branson? Or perhaps you see yourself as more of a Donald Trump, an Anita Roddick or a Bill Gates? Or maybe you want to make your millions without building an empire, like Warren Buffett or John Carmack?
Be Your Own Boss: Attaining – and maintaining – the best work/life balance How many hours do you spend at work every week? How much of your time and energy are you devoting to your worklife and how much to those aspects of your life which matter to you most? Try this quick exercise to help you to see the current state of your work/life balance and the ways in which you would change it if you were able.
Be Your Own Boss: Working from home The majority of soloists begin their career as their own boss working from home, and indeed many choose to continue in the same fashion even when their businesses are well established and profitable. But how do you maximise the advantages of working from home while minimising the disadvantages?
Be Your Own Boss: Successful entrepreneurship You’ve probably seen popular television programmes about entrepreneurs such as ‘Dragons’ Den’ and ‘The Apprentice’ but what does it actually mean to be an entrepreneur?
Be Your Own Boss: Working 5-9 What is working 5 to 9? It is a rapidly growing trend, appealing to people from all walks of life and with all manner of business interests; it is becoming your own boss in a safe and secure manner; it is a lucrative hobby or the first step to full-time self-employment.
Be Your Own Boss: Pros & cons of self-employment Before taking the leap to being your own boss it is important to gain a realistic understanding of both the upsides and the downsides of self-employment. Try compiling two lists cataloguing all the things you think will be positive and negative elements to quitting your job and becoming your own boss.
Be Your Own Boss: Do you have what it takes to go solo? Are you cut out to be your own boss, a natural ‘go it alone’ person or is the truth that you need the support of fellow colleagues around you and an established workplace infrastructure in order to be able to thrive?
Be Your Own Boss: Are you ready to be your own boss? Walt Disney once said that “the way to get started is to quit talking and begin doing.” But before you take the leap to becoming your own boss are you sure you really know what is involved?
Be Your Own Boss: eBay trading for soloists eBay has surely changed the face of trading for ever, and for many people they made it possible to trade where previously the opportunity simply hadn’t existed. For some people this has meant the ability to turn a hobby into a lucrative hobby while for others it has enabled them to quit work and trade full-time.
Be Your Own Boss: IT for going solo In order to be your own boss successfully you will need to get yourself equipped with the necessary IT infrastructure. But what does this entail?
Make Your Small Business a Winner: Managing cash flow for survival Does your heart sink when you hear the words cash flow? Sink at the thought of managing cash, and also because you know it can be a serious problem and you ought to be on top of it....
Make Your Small Business a Winner: Grow your sales If anyone in business searches for a magic bullet, it will be most often for the secret of successful selling. Of course, there is no single bullet, but there are a number of critical pieces of ammunition!
Make Your Small Business a Winner: Increase your profits Every business would like to make more profit, and usually the barriers are internal, not external, though we often blame others: “I can’t charge any more because people will go to the shop down the road.” “My supplier has put his prices up and I can’t change mine.”
Make Your Small Business a Winner: The secrets of marketing • The first secret is that marketing is not a magic wand, but more of a useful set of tools.
• The second is that marketing does not have to be expensive, but it can be hard work.
• The third is that you need to be ruthless in finding out what works for you, and do only that.
Make Your Small Business a Winner: Credit – staying ahead of the game Credit is about three things:
• Where can you borrow money from, if you need it?
• Can your customers pay you on time?
• Can you pay your bills on time?
Make Your Small Business a Winner: Sales cycles: feast or famine! If you’ve experienced feast and famine, you will know that a feast is more like a treadmill, whereas famine is more like famine! This phrase is applied most often to service organisations, but it can happen to any business.
Make Your Small Business a Winner: Quality of service Ask yourself what you most value about a purchase you have made. Of course it may be the features of a new mobile phone, or the performance of a new car – pure product characteristics. Almost invariably, though, this impression will be greatly enhanced if you received good service in the buying process. When it comes to obtaining services rather than products, such as good plumbing or financial advice, then quality is the very thing you are buying, and it becomes critical.
Make Your Small Business a Winner: Keeping your ‘edge’ Are you steering your business exactly where you want it to go, or is it going its own way, with you frantically busy in the back seat, nowhere near the wheel....
Make Your Small Business a Winner: Advice and advisors Running a small business can be lonely. You may have a number of staff, but no one to talk to. You may be an IT expert, with not a clue about marketing. You may worry there’s not much money in the bank, and keep hoping for the best.
Make Your Small Business a Winner: What is your winning formula? This is a good test of your business resilience: what do you offer that is special, that stands out from the competition, and meets the market needs? In other words, how do your strengths match your opportunities?
Be a Great Entrepreneur: What type of entrepreneur are you? You can learn, work hard, bounce back from failure, have a product that is quality and has a market and still fail in your own business. You need that extra ingredient that I call the Entrepreneur DNA. Yes, I literally mean DNA.
Be a Great Entrepreneur: The power of negative thinking - "Never, Never, Never give up." The title is a quote from Winston Churchill.
The idea of Nazis arriving at Dover boosted British motivation to its highest ever point. The thoughts of what would happen if we failed were just too horrible. We must not rest, wallow in pity parties or let near impossible odds weaken us. We must put every resource fully, everything else secondary, to stopping them, otherwise all, everything we value is lost. That is the power of negative thinking. Don't hide your worst fears let them empower you to move as far away from them as possible. To help sharpen your focus so much that you can achieve whatever you intend to. Goals and achievements will be the same thing.
Be a Great Entrepreneur: Beating the competition Good marketing is about low cost, no cost or receiving an income for your marketing. It becomes, ‘Street Wise Marketing’ when it is producing leads that will buy off you.
Be a Great Entrepreneur: Cash is King! Whatever it is that you do, stop giving credit right now. If Lehman, Ford, MFI, Woolworths, Iceland, etc can default on their bills so can anyone, even the public sector.
Be a Great Entrepreneur: What makes a happy entrepreneur? Live your future happiness today being who you want to be
You know the way the mind works; we have previously programmed ourselves to direct us to where we are today. So if today you have some goals and dreams for say a couple of years’ time I say, why wait?
Be a Great Entrepreneur: Work–life balance When was the last time you:
had a fantastic night out with your partner?
spent some quality time with your family?
visited a gym?
Be a Great Entrepreneur: Business start-up A start up is the hardest way to make money as an entrepreneur. It is also the hardest to finance, the hardest to raise first sales. A start-up, by definition is unproven and very high risk.
Be a Great Entrepreneur: Networking Do any of the following apply to you?
Uncomfortable asking for money.
Hate prospecting or cold calling
Avoid selling if I can
Can get people excited about my offer but they never seem to buy from me.
Be a Great Entrepreneur: Finance for business - finance raising the better way If I said that you have to sell whatever it is that you do and make £10,000 and be paid in cash in the next four weeks, is it possible?
Be a Great Entrepreneur: Managing risk as an entrepreneur Property does go down.
Household name companies go bust.
Banks can and do run out of money
Base interest rates change (We have ranged from 17% to 0.5%).
Be a Great Entrepreneur: Selling your business Register with a reputable business transfer agent and let them sell it for you. They will have a portfolio of current purchasers and those that are perhaps more passive that they can approach.
Get to Grips With Book Keeping: What is cash flow? Cash flow is the simplest concept of all those that the person running a business has to cope with. It is simple to understand, if not to improve. Cash flow is the change in the cash position – effectively the bank account – that takes place as a result of decisions that are made in the course of a business day.
Improve Your Cash flow: Managing cash flow Managing cash flow is the responsibility of everyone involved in running a business. Cash flow is the difference between the money in the bank account at the end of an accounting period compared to the beginning, and there are a few key drivers of this number.
Improve Your Cash flow: Cash flow analysis Companies go bust because cash flow is not planned and managed effectively but this is frequently because there is no ANALYSIS of the factors that can drive an adverse cash flow position. This is particularly so when – as often happens – a company goes bust despite the fact that it is trading at a profit.
Improve Your Cash flow: Cash flow forecast A cash flow forecast is a cash flow statement that is planned ahead. It is most likely to be accurate if it is prepared in conjunction with an annual business plan and the other two financial statements – Profit & Loss Account (P&L) and Balance Sheet.
Improve Your Cash flow: Cash flow forecasting template There are a number of ways in which a cash flow forecast can be structured and much depends on the nature of the business and the format of the information available. The following is a typical format for a manufacturing business using typical terminology:
Improve Your Cash flow: Debt collection Debt collection is not the most attractive task for those running a business to carry out. It can be embarrassing, frustrating and often fruitless, but it is often the task that makes the difference between survival and bankruptcy. It is also a task that is often ignored or given to someone who has neither the skills nor the motivation to succeed.
Improve Your Cash flow: Investment Political spats over the years have shown that much depends on the definition of money spent; one person’s cost is another person’s investment and the impact of cuts is seen as different in each case.
Improve Your Cash flow: Discounted Cash Flow Discounted Cash Flow (DCF) is a technique that supports decisions to invest in projects that will provide long-term benefit. It is by far the most valid technique though it is relatively complex compared to other more simple methods, for instance the Payback technique which asks the key question – how long before we get our money back?
Set Up a Successful Small Business: Starting up What are the initial things to do when setting up your small business? First, write a profile of your likely customers, including their age range, spending power, location and how your product or service would match their needs. Then consider your competitors and decide where you differ from them and your own unique selling points (USPs).
Set Up a Successful Small Business: Small business advice Many organizations are eager to advise small businesses, including:
banks
the Department for Work and Pensions (DWP): www.dwp.gov.uk
the Department for Business, Innovation and Skills (BIS): www.bis.gov.uk
local authorities
local colleges.
Set Up a Successful Small Business: Funding If you need funding, first assess how much funding you can contribute yourself, perhaps through redundancy or from savings, without re-mortgaging your house. If friends and family lend you money, make sure the agreement between you is written up in a clear and business-like manner.
Set Up a Successful Small Business: Methods of trading Sole trader: This is for a one-person business. You do not need to register with any official body, but you do need stationery with your name and business address. You must inform the DWP that you are self-employed. You are personally liable for all your business transactions and debts.
Set Up a Successful Small Business: Law for small businesses Most small business law applies if you employ other people. However, there are some laws you must obey as a small business entrepreneur. The Trades Description Act requires you to offer for sale products or services which are fit for purpose. The Data Protection Act might apply if you maintain a database containing more then just names and addresses. The Health and Safety at Work etc Act 1974 must be followed if you work on other people’s premises.
Set Up a Successful Small Business: Book-keeping and accounting Book-keeping and accounting are two different and distinct aspects of financial transactions. Book-keeping is about ‘doing the books’, keeping strict and accurate records of all day-to-day transactions, doing VAT returns (if your turnover is £68,000 or more – 2009 figures) and paying wages if you employ others.
Set Up a Successful Small Business: Tax for small businesses Let your accountant handle your tax returns and all correspondence with HM Revenue and Customs; it will save you a great deal of time and, probably, money. The tax year runs from 6 April one year to 5 April the following year, irrespective of your company’s financial year. Your self-assessment returns must be in by 30 September if you want HM Revenue and Customs to calculate how much you owe. In any case your return must be in the following 31 January, or penalties will apply. Be honest with your accountant.
Get to Grips With Book Keeping: Trial balance The purpose of the trial balance is to help find any errors that need to be amended in order to be able to then go on to prepare the final financial statements, i.e. the balance sheet and the profit and loss account.
Get to Grips With Book Keeping: The trading, profit and loss account The preparation of the trading, profit and loss account is carried out from the details listed in the trial balance, i.e. specifically the amounts which relate to the operating expenditure and operating revenues of the business
Basic Accounting: Balance sheets The purpose of the balance sheet is to set out the financial position of a business at a particular moment in time. It identifies the different forms in which the wealth of the business is held. The assets of the business are often listed first followed by the liabilities (i.e. financial obligations) of the business.
Get to Grips With Book Keeping: Ledgers In a small business all the double-entry accounts can be kept in one book, called a ledger. As a business gets larger more books would be required, entering similar types of transactions together. There would be a different book for each type, keeping dissimilar transactions separate. Sales would be entered in one book, purchases in another and cash in another.
Get to Grips With Book Keeping: Types of small business There are three main categories of business; sole trader, partnership and limited liability companies. Any of these three categories can however, be a small business.
Get to Grips With Book Keeping: Value added tax Many countries levy a sales tax which requires businesses to add a fixed percentage to the selling price of their goods and services on behalf of the tax authorities. In the UK, this is known as Value Added Tax (VAT) and the appropriate percentage (currently 17.5% for most goods and services) has to be accounted for to Her Majesty’s Revenue & Customs (HMRC).
Get to Grips With Book Keeping: Book-keeping for clubs, societies and charities In smaller ‘not-for-profit’ organizations, the basic objective will be to provide a record of the money that has been received and account for the way in which it has been spent – often nothing more than this is required so the accounting principles that are used can be fairly simple.
Get to Grips With Book Keeping: Cash flow Cash flow is often described as the blood of business, due to its importance in ensuring commercial survival.
Get to Grips With Book Keeping: Book-keeping history From approximately 4000 BC , the growth of trade led to a need for record keeping in the Mesopotamian river valleys. Findings dating from about 3300 BC indicate that Sumerian temple officials used wet clay tablets to record stocks and transactions. For example, landowners would record the number of livestock placed under the care of farmers with special clay symbols.
Close More Sales: Keep price breakdown information to yourself In a selling situation, a professional buyer will ALWAYS push you for price breakdown information, and the more you give them, the more they’ll use it against you! That’s why you should always keep price breakdown information to yourself.
Get to Grips With Book Keeping: Ask for a referral with every customer you meet After every sales visit, regardless of the outcome, if you can acquire the habit of asking a simple question just before you leave, you will be able to maintain a constant flow of high quality sales leads.
Close More Sales: Confirm every sales appointment with a PS letter or email Have you ever gone to an appointment that you had originally made by telephone, only to find that when you get there, the prospect is unavailable because they had forgotten about it? If so, then you’ll already know how frustrating it is - not to mention a complete waste of your valuable time! That’s why it’s always a good idea to make a point of confirming every sales appointment by letter or email, straight away.
Close More Sales: Make good use of the customer’s name People enjoy hearing the sound of their own name because it is distinctly personal. Indeed, in an increasingly impersonal world, perhaps it’s true to say that, in business these days, using someone’s name, remembering it and getting it right is more important than ever before.
Close More Sales: Use the ‘try before you buy’ close In a face-to-face selling situation, it usually proves to be an irresistible offer to let your prospects ‘try before they buy’ and enjoy the benefits of your product during a free trial period. Providing your product lends itself to his idea, it’s a great way to reduce sales resistance, and give your product the chance to sell itself.
Close More Sales: Exercise your expertise power As an experienced professional salesperson, the chances are you know more about your industry, your market, your competitors and your products and services than just about any other person alive – and don’t forget, that includes your buyers! The fact is, you are an expert, and let’s make no mistake about it, during the course of a sale that expertise is a powerful persuasive force.
Close More Sales: Harness print power The fact that something is printed tends to enhance its believability. It has a kind of built-in authority that the spoken word or handwritten materials just cannot match.
Close More Sales: Pay unexpected attentions Giving ‘unexpected attentions’ is the simple idea of delighting your customers by sending them a little something from time to time – something that’s totally unexpected.
Close More Sales: Use pre-printed telephone inquiry pads There are a number of benefits to using telephone inquiry pads. Quite apart from ensuring that you always come across as highly professional whenever answering the telephone to a new prospective customer, over time it provides a source of information that is crucial to your ability to evaluate the effectiveness of your promotional activities.
Close More Sales: Explore the buyer’s personal interests Always go beyond just finding out what buyers need and want and try to uncover any underlying personal motivations too. In effect, the personal interests of the buyer often represent a ‘hidden agenda’ which is potentially the most powerful of all information for the salesperson.
Get Started in Franchising: Legal aspects of franchising Franchising is a complex arrangement and the franchise agreement needs to reflect that. Many prospective franchisees are shocked to find that it runs into 70 pages or more but this is necessary. Unlike most other agreements, the franchise agreement covers a myriad of different transactions that are closely interlinked.
Get Started in Franchising: Financing a franchise Investing in a franchise is probably the largest financial transaction you will ever undertake, and you will have to borrow money. In most instances, this money will come from a commercial bank but other sources of funding exist. Let’s look at these first.
Get Started in Franchising: Who owns what in a franchise? Questions asked frequently at franchise seminars indicate that this topic is surrounded by confusion. It’s quite simple: The franchisor owns the intellectual property while the franchisee owns the business infrastructure. What does this mean?
Get Started in Franchising: What is the best franchise? People ask me this question all the time but unfortunately, I don’t have the answer. The best I can hope to do is to tell you how it works in practice.
There is no such thing as ‘the best franchise’. If it would exist, everyone would invest in it, the market would become oversaturated and it wouldn’t stay the best franchise for very long. The human factor comes into play as well.
Get Started in Franchising: International franchises People go on holiday, see some exciting concept and want to take a franchise back home. Unfortunately, it’s not quite as straightforward as that. Franchisees are entitled to receive a business package that has been tried, tested and proven to work – in their market! Unless the foreign company has representation in your home country, granting you a franchise would be outright irresponsible.
Site produced by MMT Digital