Is it as simple as it sounds?

Similar to the word ‘net’, profit is often referred to alongside another word.

Profit is income less expenses.

Here are some examples.

Gross Profit – income less cost of sales

Net Profit – income less all expenses

Profit Margin – net income divided by net sales

Profit Centre –  a team within the business  responsible for producing profit.

The opposite to profit, is loss.

This is where expenses are greater than income over a period.

Retained earning is profit that has been left in the business as a source of funds.

If someone talks about profit, make sure to check which profit they are referring to as they can all mean very different things.

The aim of running a business is to make profit.

Being aware of the numbers and watching profit grow is part of the fun.

What processes are in place?

Having a process written down allows it to be analysed and tailored to make processes more effective. 

A process describes how something is done. It is also a system.

Many don’t know that there is an accounting process.

The accounting process starts with the first transaction and ends with the closing of books and creation of year end reports.

The accounting process usually happens over a term so is also referred to as the accounting cycle.

It involves many tasks, including but not limited to the following:

• Capturing, recording & allocating transactions
• Checking the accounts balance, preparing a trial balance
• Correcting any errors
• Making adjustments for debts and credits outstanding
• Closing off accounts at the end of the financial year.

Having processes in place means business owners can ensure their businesses run smoothly and efficiently.

Get time back by reviewing processes regularly. There might be a better way!

In accounting, posting is when the total of a subsidiary ledger is transferred into the general ledger.

Ledger referring to; accounts, books or list of transactions.

It might be that all sales are recorded in a subsidiary sales ledger, then at the end of the day, week, month the total is moved into another record.

This is what is referred to, when talking about a daily, weekly or monthly sales report.

Posting is a transfer of a total balance from one record into another.

Moving a total balance is usually used when there are a large number of transactions.

If using accounting software it will likely only use one ledger, so posting won’t be required.

Accounting software allows for automatically grouping of transactions, providing a daily, weekly, monthly, annual reports and more.

If using a till or other recording method it might still be easier to input / post the total of the days or weeks sales instead of every transaction.

Knowing what to post and where, will ensure the books are accurately maintained ready for the end of the tax year.

What is petty cash, is it just cash?

It is cash funds held at the business premises.

Pretty cash is mainly used to make small purchases and for reimbursement to staff.

An amount taken from the business bank account and held on site.

A Petty Cash Receipt and accompanying receipts are put in place of any funds issued.

The sum of cash and receipts together should always amount to the agreed petty cash fund.

When the fund gets low the transactions will be entered into the accounts and further funds issued.

The amount of petty cash fund will be different for each business depending on it’s requirements.

Some businesses deal mainly with cash payments and so a cash float will be required.

Others use only electronic payment methods so would not require a petty cash fund.

Keeping an eye on the petty cash is essential to make sure receipts are recorded and the balance is maintained.

The term is abbreviated from Pay As You Earn.

It refers to the system used, whereby employers withhold a proportion of wages or pensions.

When too many deductions from wages or pension have been taken it is likely a refund will be received.

PAYE codes are made up of numbers followed by a letter.

The letter refers to the type of allowance we are receiving.

The numbers indicate the amount someone can earn before tax deductions are made. The amount of tax free allowance.

Deductions from income might include:

• Income Tax
• National Insurance (NI)
• CIS
• Pensions

The task of processing wages is often referred to as payroll or completing a pay run.

Details of PAYE, CIS, statutory pay etc must be reported to HMRC regularly, usually being at least monthly.

Many people are both employed and self-employed. It is helpful to know how they affect each other in regards to tax liability.

At the end of the tax year the employee should be provided with a P60 detailing payments and deductions made.

If a loss is made from self employed income this can be offset against PAYE income.

The tax year runs from 6th April to 5th April the following year.

The P60 is an important document that is proof of PAYE, earnings and contributions and often used when applying for credit.

To avoid having to pay for additional copies, payslips and P60s should be kept safe.

Formally known as accounts payables.

Money owed to suppliers for goods and services already supplied are payables.

Things that the business has to pay.

Payables represent a liability for a business and will be shown within the Balance Sheet.

Accounts receivables are the opposite, being money owed to the business. Money due to received.

At the end of each period it is essential to be aware of payables still outstanding.

This is to make accurate reporting to meet financial obligations.

Sometimes a bill is received that has not yet been paid.

It is the responsibility of an owner to calculate the amount likely to be payable.

An example of which are utility bills, as invoices are often received after services have been provided.

If costs are fixed this can be fairly easy to calculate, but if costs vary this can be more tricky.

This is where a little guidance comes in handy.

In accounting there are a few terms and accounts used that refer to movements of assets by the owner.

Assets, usually in the form of cash or goods are given to or taken from the business.

Let’s explore some examples.

Owners Investments and Contributions

These are assets or funds introduced to the business to start trading and keep it running.

At the end of each year the balance on this account is transferred to the owners capital account.

Owners Capital Account

Each time the owner gives more funds to the business the owners capital account will increase.

This can also be in the form of retained earnings.

If any profit is reinvested into the business this will increase the capital and therefore stake in the business.

Knowing the position of the capital account is essential in order to know how much can be withdrawn from the business each year.

Owners Drawings or Distributions

These work in the opposite way. When funds are taken out of the business this reduces the owners capital account.

If too much money is taken from the business it might result in paying higher taxes. 

Owners Equity or Net Assets

This is the owners claim on the business after all debts have been paid.

Owners can calculate this by adding up all capital, contributions and revenue and deduct withdrawals and expenses.

Knowing how financial movements affect a business is vital.

It will enable a business owner to ensure there are available assets to continue to operate, grow and be successful.

What are overheads?

Overheads are expenses that are not directly related to making a product or providing a service.

Having an awareness of possible overheads allows for effective pricing ensuring a profit is made.

Overheads might include, but are not limited to the following examples:

• Administrative costs
• Financial costs
• Rent & utilities
• Marketing
• Insurance
• Licences

An overhead must be paid for, regardless of whether many sales have been made or none.

Overhead costs are usually fixed meaning they do not change throughout the year.

Being fixed allows overhead expenses to be easily predicted.

Cashflow forecasts help to show overheads that are due over a given period.

Direct costs are costs that directly contribute toward the production of goods or services.

Whereas, overheads make up the remainder of expenses, those that are not direct.

The word ‘net’ is often seen in front of another word.

It indicates that the total of two or more amounts have been combined.

A net amount is used in conjunction with a gross figure.

The net is calculated by making deductions from the gross figure.

Let’s take a look at some examples:

Net Sales – total sales less sales returns, allowances and discounts.

Net Book Value – total value of goods less any accumulated depreciation.

Net Assets – total assets less total liabilities

Net Pay – wages less deductions for tax, NI, pensions etc.

Net Income – total income less all expenses.

Net Loss – if the result from net income is negative than this is referred to an a Net loss.

It is not always clear whether amounts are net or gross figures.

If unsure, don’t be afraid to ask for help.

Often people think of money as cash in the form of coins and notes.

In bookkeeping and accounting, money refers to:

• Coins and notes
• Money in the bank
• Receivables, funds owed to the business
• Payables, funds owed by the business

Generally anything of value will carry a monetary value.

Cash is considered to be a current asset and a tangible asset which can be easily used to purchase other assets.

The word money is also sometimes associated with currency.

Money is vital to a business, ensuring it is sustainable.

Managing money effectively will ensure a healthy cash flow, meaning more money coming in than going out of the business.