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FINANCE8


In Table 2 we have three sample transactions to show in summary how this works:


1 The business owner puts £1,000 cash directly into the business


2 The business makes sales of £1,200 and allows the customer to pay on account


3 The business takes £300 out of the bank to pay expenses in cash


From the closing balances, your accounting software is able to produce two key reports – the Profit & Loss (P&L) that sets out sales and expenses for the period and the Balance Sheet that sets out the assets and liabilities at the date of the Balance Sheet.


So in our limited example the P&L would look like this:


Profit & Loss for the period Sales . . . . . . . . . . . . . . . . . . . . . .£1200 Expenses . . . . . . . . . . . . . . . . . . .£300 Profit . . . . . . . . . . . . . . . . . . . . . . .£900


Table 2 ENTRIES INTO THE ACCOUNTS Debits


Assets Bank


Debtors Liabilities Income Expenses Total +Expenses £300 £2,500 £2,500 £2,500 £2,500


+ Owner £1,000 +Sales £1,200


+ Bank £1,000 + Debtors £1,200 Credits – Bank £300


CLOSING BALANCES Debit balance Credit balance


£700 £1,200


£1,000 £1,200


And the Balance Sheet would be as follows:


Balance Sheet at xy date Assets Debtors . . . . . . . . . . . . . . . . . . .£1200 Money at Bank . . . . . . . . . . . . . . .£700 Total . . . . . . . . . . . . . . . . . .£1900


Liabilities


Retained Profit (owed to owners) . . . . . . . . . . . .£900 Capital put in by owners . . . . . .£1000 Total . . . . . . . . . . . . . . . . . .£1900


The balance sheet is a useful tool for analysing financial risk. Does your business have the necessary assets to meet short-term payments? Has the business borrowed too much? Have the shareholders left enough cash in the business or taken too much out in dividends? As the bank will always want to see


your balance sheet in any loan application, it makes sense to understand why so you can keep one step ahead! So now you know: Debtors is money


owed to your business and creditors what is owed by your business to your suppliers. The Balance Sheet lists the assets (what’s owned) and liabilities (what’s owed) at a point in time and hence helps to clarify the financial health of a business. And double entry comes from the dual entity principle, which explains why the balance sheet balances!❖


Johnny Martin


British Library Business & IP Centre Partner johnny@johnnymartin.co.uk www.johnnymartin.co.uk


Better Business No 189


www.better-business.co.uk


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