An expense is something that has been purchased or paid for that can be offset against taxable income.

Income & expenses are what makes up our financial records.

The word ‘Expenses’ can be used as a general term for all outgoings. It is however helpful to split expenses into a couple or multiple categories.

As a minimum, expenses should be split into expenses related to operating expenses/overheads, and expenses related directly to sales, more formally known as ‘cost of goods sold’ or COGS for short.

Cost of Goods Sold – Direct Expenses, a few examples could be:

• Purchases
• Materials & Supplies
• Cost of turning materials into finished product
• Direct labour costs

Sales – Cost of goods sold = Gross Profit

Gross Profit is used to establish how much money is made on each sale. This figure is then used to cover business operating expenses.

Operating Expenses – Indirect Expenses, Costs that might be included:

• Rent & rates
• Utilities
• Insurance & licences
• Financial costs
• Administrative costs

Once operating expenses are calculated, this is deducted from gross profit to give net profit for a given period.

Income – All Expenses = Net profit. This is the money left as PROFIT. For sole traders this is the income that is taxable.

Having an understanding of the expenses that are required to produce sales is important as it helps to guide how to price products and services.

In order to budget effectively, it is helpful to have an estimate of what business operating expenses might be and when they are due for payment.

Reach out to a Bookkeeper or an Accountant if unsure of what counts as business expenses or how to budget effectively.

We are here to support you and your business.

Accounting for all business expenses will ensure business owners only pay the amount of tax due and not a penny more.

What is it?

Double entry in bookkeeping, is when corresponding entries are entered as a debit and credit into the accounts.

This system of bookkeeping is underpinned by the accounting equation.

Assets = Capital + Liabilities

When allocating transactions, the double-entry method is as follows:

• ASSETS
  • to increase – Debit
  • to decrease – Credit
• CAPITAL
  • to increase – Credit
  • to decrease – Debit
• LIABILITIES
  • to increase – Credit
  • to decrease – Debit

A helpful way to remember the double entry system when bookkeeping is to debit the receiver and credit the provider.

An example of this is if goods are purchased, this would show as a debit in the purchase account and credit in the bank account.

Double-entry bookkeeping is essential for financial reporting.

When thinking about the reports, the double entry system is best reflected within the Balance Sheet or now more commonly known as a statement of financial position.

If using accounting software the double entry process is automated often resulting in less accounting errors.

Double-Entry helps create balance in your business accounts.

Credits and debits are often seen as income and expenses but this is not the case.

In bookkeeping a credit either increases a liability or equity account, or decreases an asset or expense account.

Debit entries have the opposite effect, decreasing liability or equity and increasing asset and expense accounts.

They work in partnership with each other to create a double entry system. This creates a balance within the accounts.

For each debit entry there will be a corresponding credit entry.

An example of this might be if you purchase goods. The bookkeeping entry could be to debit purchase account and credit bank account.

Bookkeeping is about processing debits and credits to provide a balance of accounts. This then makes up financial reports and statements.

In addition to the above, as with many terms explained, the term ‘credit‘ can also be used to describe an agreement with a customer, to obtain goods or services and to make payment at a later date in the future.

Debits and credits should be tracked and accounts balanced.

Using accounting software can make this processes a little bit easier, and will help to keep track of credits and debits.

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Cash flow refers to the money going in and out of the business over a given period.

The aim is to have more money coming into the business than going out, thus having a positive cash flow.

Cash that comes in to the business might include:

• Sales of products and services
• Money owed from clients and customers provided with products and services on credit
• Late payments received from customers

Cash going out for expenses and purchases might include the following examples:

• Rent
• Utilities (electric, water etc)
• Office supplies
• Payment for taxes

Having a good cash flow, means being prepared and able to meet any outgoings expenses in the given period.

Running out of money is one of the main reasons businesses fail.

In order to sustain a healthy cash flow,  some larger purchases may need additional funding.

Examples might include the purchase of a vehicle or machinery for the business.

Usually this is financed by drawing money from the business funds or from an external source.

Keeping track of our finances and maintaining a positive cash flow will ensure a business runs smoothly.

A ‘cash book’ is an essential part of the business financial records.  It contains a log of money coming in and going out.

As the name ‘cash‘ suggested it refers to cash transactions as opposed to electronic/bank transactions.

The word ‘book’ is used, as prior to technological advances, all records were kept in the form of handwritten ledgers or books.

The two main types of cash book are:

General cash book, which details all cash transactions. All cash received and all spent.

Petty cash book, which is a log of a small amount of cash kept on site, also referred to as the ‘float’. This is often used to buy small items such as stamps and stationary.

Both cash books can be kept or record all information within the general cash book to keep things simple.

It is a legal requirement to keep a record of receipts and payments of money.

A cash book helps to identify what is ‘cash in hand’ and can be used to help identify errors.

They can be designed to suit specific needs, being simple or more complex, with multiple subheadings.

If the cash book is not giving the results or if it seems overly complex, speak to a bookkeeper or accountant about how to tailor a cash book to work best.

The term ‘capital’ refers to assets or resources owned by the business that will aid in generating income and be used for further development of the business.

Both cash funds, and money in the bank are considered as ‘capital’. Some other examples include:

• Buildings
• Land
• Vehicles
• Machinery
• Equipment

Capital is also referred to as assets less liabilities. The amount of resources of value less any debts and money owed.

Lastly the term is also used to identify any owner investments, stock or shares in a company.

With so many ways to interpret the word ‘capital’, things can easily become confusing.

If unsure, bookkeepers and accountants are always on hand to help.

Monitoring capital is vital to understanding business finances, knowing what funds and resources are available, thus ensuring a business can continue to grow and develop.

Here is a simple one, what are bills?

Bills are documents detailing money owed for goods or services provided.

A bill is also an invoice.

The term bill, is interchangeable with invoice.

Managing the bills issued is vital to ensuring a business has a steady stream of income.

If bills are not sent out, invoices will not get paid!

Paying bills received on time, will likely improve availability of credit in the future.

A list of bills is usually referred to as payables and receivables. If using software, a list of bills can usually be easily obtained.

Bills are essential. They make up the majority of the financial records of the business.

Keep track of bills to effectively create and maintain a healthy cash flow, ensuring the success of a business.

Be aware of bills!

The word balance is used more frequently than most, and carries many meanings.

In order to have balance, there needs to be equality, neither side can have too much or too little.

Balance is the sum. The total amount when all debits and credits have been accounted for in a given period.

An example of this is when looking at a supplier statement. The total amount due when all invoices and credit notes have been tallied, would be referred to as the overall balance, balance outstanding or balance on the account.

When figures do not balance this is likely due to errors. Some errors create an imbalance and some do not.

If bookkeeping is kept up to date, errors that result in an imbalance can usually be quickly located.

Errors that are found, need to be investigated, rectified or adjusted to ensure accounts are accurate and balance.

The term ‘Trial Balance’ or ‘Balance Sheet’, now more commonly known as a Statement of Financial Position.

Both of these are financial reports that again reply on everything balancing. They detail how the accounts interconnect and the sum of both debits and credits are equal.

Having balance is key, both in business and in life.

Assets can be categorised into tangible and intangible assets. Things we can touch and things we cannot.

They represent a value to the business, something that could be available to help meet debts & commitments if needed.

Tangible assets are things we can touch and things that can easily be turned into cash. Below are a few examples.

• Property
• Cash on hand
• Tools, Equipment & Materials
• Inventory
• Land

Intangible assets are things we cannot touch. They cannot necessarily be transferred into available funds, but represent value to the business.

• Goodwill
• Accounts receivable
• Copyright
• Licences
• Patents

It is important to make note of what represents an asset to a business.

Having knowledge of the business assets is vital when exploring funding options or if choosing to value or sell a business.

If unsure, get advice. Make sure to get it right. Your business could be worth more than you realise!

The terms alphabetical and alphanumeric are very similar and both refer to putting things in order.

• ALPHABETICAL – means in order from A to Z
• ALPHANUMERIC – means in order of both letters and numbers

Organising information by letter, number or by some other categorising method is essential to having order and understanding of your records.

What method of sorting do you use?

Being able to find a bill because it is filed by supplier name or number makes life that little bit simpler.

Be productive and get organised.

When working within teams, having groups of information together, and records that are in alphabetical or alphanumerical order will save everyone time.

Organisation is key!