Loss is the term used when business income is less than business expenses.

Many businesses make a loss in the first year of trading due to a number of factors.

Any start up costs and pre trade expenses are added to the first year of trading. This can date back up to 6 years for sole-traders.

This might include, marketing, stationary, tools, equipment, machinery, textiles, materials and more.

When a business starts it will likely already be at a loss.

HMRC advises to register self employed when more than £1,000 have earned.

However, registration can be done at any point and any loss carried forward, backward or offset against other taxable income.

Submitting a loss has its advantages.

• Reduce tax to pay from other income
• Reduce future tax payable on business income
• Can be carried back to offset against previous tax years
• Reports that the business is officially open for business, and a UTR is issued.

It might seem strange when a loss is made, but ensuring to record all expenses, will mean only tax due is paid and no more.

It takes time to grow a business. It doesn’t happen over night.

Nobody sets out to make a loss but everyone should understand it is part of the process.

Having a strategic business plan will help ensure that any losses during business operations are budgeted for.

A good bookkeeper or accountant can help business owners plan and prepare for every eventuality.

Liabilities are legal financial debts or commitments that occur during the course of business operations.

A few common examples of liabilities are:

• Accounts payable
• Accrued expenses
• Loans
• Mortgage
• Income taxes payable
• Wages & salaries payable

Details of liabilities are recorded within the Balance Sheet

Liabilities can be further categorised and split into short term and long term.

Short term liabilities refer to debts expected to be paid off within a year. Also known as current liabilities

Long term liabilities are expected to be paid over a few years. Also referred to as non-current liabilities

The most well known liability and the one most are aware of is accounts payables.

Accounts payables relates to goods or services purchased on credit that will be due for payment.

Knowing when payments are due is essential to managing business cash flow.

Making payments on time or early will ensure a business is able to be approved for extended or further credit in the future.

A journal entry is the recording of a business transaction in the accounting records.

The double entry system underpins the recording of journal entries, meaning an equal amount is recorded on both the debit and credit side of the accounts. 

In bookkeeping and accounting, when talking about journal entries they will usually be referring to a specific type of entry. Below are some examples.

Adjustment entry – this is usually a record to account for any prepayments made and accruals / debts at the end of an accounting period.

Reversal entry – similar to an adjustment entry but this is a reverse entry and is usually done at the start of the accounting period.

Compound entry – sometimes if processing a complex transaction a journal entry can be used to split the amount across various accounts. An example of this is payroll as it carries many elements.

Corrections of errors – if an error has been found that occured in a previous accounting period it might not be appropriate to delete it. Instead a journal entry would be made to offset and rectify the error.

Journal entries are those more complex transactions, often accompanied by detailed notes.

Utilising accounting software can make bookkeeping and recording of journal entries that little bit quicker and easier.

If you’re unsure, ask for help.

http://www.wallaceaccountancy.co.uk/contact

Firstly it is important to remember that invoices are both sent out and received.

An Invoice is a legal document also sometimes referred to as a bill.

Invoicing is the function of sending out invoices to someone for goods they have purchased or services that have been provided.

When contacting others about invoice queries, make sure to be clear whether calling about an invoice received or an invoice sent. It’s easy to end up speaking to the wrong department.

An invoice should contain the following information:

• Unique invoice number
• Company name and details
• Customer name and details
• Date
• Description
• Amount payable
• Payment terms
• How to pay the invoice

A receipt is similar, as it is a record of a payment received in relation to an invoice. This is however a different document.

Sometimes, to simplify the process, invoices and payment receipts are sent as the same document. Laid out like an invoice but noting that payment has been received.

Invoicing should be one of the most important tasks when it comes to running a business.

If invoices are not sent, money will not be received.

An efficient system is needed to ensure invoices are sent out quickly and chased up if not paid on time.

If outstanding payments are chased quickly they are more likely to be paid.

Keeping on top of credit control can be a job all in itself but it is vital to ensure that invoices get paid and on time.

Charges that are applied to money borrowed is referred to as Interest. This is usually calculated by percentage over a period of time.

Interest can also be charged as a ‘late fee‘ for not paying on time.

In contrast, interest can be an income from money held by another entity. It could be received from banks, savings and investments for example.

When borrowing funds it is essential to be aware of the interest charges.

Is it a variable interest rate, will it increase over time or is it fixed? Will the charges reduce if the loan is paid off before the term?

An interest expense is an allowable expense. The loan repayments are not.

It is important to calculate the interest payments each year, so this can be deducted from business income.

A loan provider will likely provide a breakdown of the amount repaid and interest charged over a given period.

A bookkeeper or an accountant can help business owners to assess their allowable expenses, to make sure all are accounted for.

As with many words, the term ‘Income’ carries a couple of meanings.

Income in accounting, generally refers to the Net Profit. Money left over after all expenses have been accounted for.

The term ‘Income’ can also be used to describe money coming in, to the business or entity and money being paid to a person.

Business Income is money or (cash equivalent) received, for goods or services provided. It could also be in the form of investments or grants for example.

Income is used to cover the expenses of the business and any money left over is considered as profit.

The amount of income along with expenses, are what makes up the Statement of Profit or Loss.

Personal Income is usually received in the form of a salary or wages. Some other examples might include income through investments, pensions and property.

Income is also sometimes referred to as revenue or earnings.

A Statement of Income will provide information around how the business is performing and whether it is sustainable.

An Income Statement can be easily obtained if using online accounting software.

Having an understanding of income is vital to managing cash flow effectively.

This method is used to calculate fixed, semi-variable and variable costs using limited data. 

FIXED COST is a cost that stays the same regardless of activity levels.

Rent is an example of a fixed cost. The payments may stay consistent throughout the year regardless if 10,000 products are made or none.

SEMI VARIABLE or stepped costs change at a particular activity level.

This could be costs of storing goods for example where by each time 1000 units of stock are added to the stores additional space is required at an additional cost.

VARIABLE COST are costs that change depending on activities levels.

An example might be that 10g of material is needed to make each product. And this costs 5p for 10g. Costs would vary depending on how many products are produced. 1000 products would need 10,000g at a cost of £50

Here is how the High-Low Method might be used:

• 100 units – cost £186
• 150 units – cost £261
• 200 units – cost £336
• 350 units – cost £561

To calculate fixed and variable costs take the highest and lowest activities levels. The High- Low Method

• Highest – Lowest
• 350 units – 100 units = 250 units
• £561 – £186 = £375

£375 divided by 250 = £1.50 per unit. The variable cost.

So if 100 units cost 1.50 per unit why does it not cost £150?

Total Cost = Fixed Cost + Variable Cost

The difference between the variable cost and the actual cost is the fixed element being £36 in this example.

Why is this useful?

It might not be profitable to make 1001 products if having that extra 1 product means an additional store, staff member, or bulk buy of materials for example.

Knowing the fixed and variable costs of a business means costs and production levels can be budgeted for among other things.

If you want to know more, reach out as we specialise in helping business owners to better understand their numbers.

Some have heard of profit, but gross profit? What is it?

Profit is the difference between income and expenses and can be split into Gross Profit and Net Profit.

Gross Profit is the money made after all costs directly attributable to sales have been deducted.

Income – Cost of Goods = Gross Profit

Also referred to as Gross Income or Sales Income

Gross Profit is the sum available to contribute towards business operating expenses.

Net Profit is the money left over after all expenses have been deducted from income.

Net Profit = Gross Profit – Overheads

For a sole-trader, the Net Profit is the sum used to calculate any tax that might be due.

The figures for both gross profit and net profit are detailed within the Statement of Profit or Loss which are drawn up a minimum of once a year.

Ensuring to have an understanding of Gross Profit will help with budgeting for estimated operating expenses and supports the continuation of a business.

Financial reports and statements are detailed records of the financial activities and position of a business.

There are 4 main statements:

Statement of Profit or Loss details the income and expenses of the business which are then used to calculate the money made or lost during a period. The profit or loss.

This is the most popular statement and contains the information needed to submit to HMRC through self assessment.

Statement of Finance Position also known as a Balance Sheet. This reports the assets, liabilities and capital of the business.

If registered with companies house they may require a copy of this statement depending on the size and turnover of your business.

Cash Flow Statements detail the cash and cash equivalents coming in and going out of the business.

These are often used to budget for costs during a given period and are usually produced weekly or monthly if required.

Statement of changes of Equity or statement of retained earnings. This report details any changes of equity/capital over a period of time. This is calculated as assets less liabilities.

Each statement is drawn from a period in time, perhaps a week, month, quarter or year.

Statements can be produced as frequently as required and are often reviewed alongside previous periods to show changes to the business activities.

If using accounting software, reports can be drawn up quickly and easily and shared with others.

Some may think this is not important, but having a filling system in place ensures organisation, efficiency and clarity.

Filing refers to the organisation and arrangement of files and documents in both paper and electronic format. 

With data protection and GDPR guidance business owners are all required to keep information in a safe place, taking measures to protect confidential data.

Many waste time looking for one bit of information because there is no filing system.

Being able to find files easily and quickly will save time and money.

When hiring or outsourcing, one of the first things they might ask is what filing system is in place.

How should files be organised? alphabetical, numerical, date, group etc.

If information is shared with others they should be able to find the information required in minimal time.

As society moves into a more digital era, many businesses have now become paperless and utilize the various online document management systems.

Many online filing systems are free and they make managing and sharing information even simpler and quicker.

Have fun filing!