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BUSINESS MENTOR WHAT ON EARTH DO MY ACCOUNTS MEAN? BY CHRIS ELPHICK A ll small business owners have to deal with money. Many of us like to have it to spend, but run away from trying to understand the jargon that goes with it! It is not smart business to pay an accountant to provide us with figures then not have a clue what she/he is talking about! We might lack confidence when talking with our bank manager if we do not understand the terminology. Here are some key phrases we must understand: • Profit and Loss Report or: income statement, or, profit and loss statement. Shows the month's activity, income and expenses, and tells you whether you had a profitable month, or a loss month. This report should also show year to date figures. • Revenue, Income or Sales. Are what the business earns for the goods or services that are sold. • A direct cost, or cost of sales. This is the cost of the materials required to make a product. The costs MUST be less than what you sell your services/products for, otherwise you will make a loss each time. • Cash. Money available in the bank to spend. • Gross Profit. Is the amount of money you made from the sales, less the costs of the items you sold, before you factor in your fixed and variable costs • A fixed cost. Is a set amount that you will need to pay each month regardless of how well your business is doing. Such as rent costs of your premises, electricity, repayment of a bank loan, wages to yourself or an employee, insurance, telephone, depreciation, website and email hosting, bank interest. • A variable cost. Is something that you can defer, or cut back on if business is not going so well. Such as cleaning costs which you could do yourself instead of employing someone, or stationery, cellphone use, travel costs, marketing. • Net profit. Is the amount of money you made or lost, once you have deducted all of your expenses/costs from your gross profit • Break even. The point at which the income in business covers all its costs, neither making nor losing money. For example in a plumbing business, tally up all of the costs of actually making an item, be it a new bathroom or toilet repair, including the person's time. That's the break even cost of manufacturing an item or selling a service. If you sell it for more than that, that's your gross profit. • Balance Sheet. This report lists your assets, e.g. money in the bank, fixed assets, accounts receivable, any stock on hand, plus your liabilities e.g. bank loan or overdraft, amounts owing to other parties e.g. accounts payable, tax payable and your equity. • Assets. Are things that the business owns, or has paid for, or is owed. e.g. cash in the bank, accounts receivable, stock on hand, prepayments. • Accounts Receivable. This is money that is owed to you by other parties, for whom you have supplied goods or services. It includes a debtors ledger, and may include a sundry debtors account • Debtors Ledger. If you issue invoices to customers that are due for payment in say 10, 21, or 30 days time, these customers are called debtors and the amount that is owed to you is shown on the balance sheet as the debtors ledger. You have sold the goods/items, but as yet have not been paid for 62 Professional Skipper November/December 2012 them. They are an asset until such time as you have been paid. • Sundry debtors. Are not regular customers for whom you would automatically issue an invoice. You would very rarely need a sundry debtors account. • Fixed assets. Are the large items that you own and are required for your business but are not a direct cost in the sale or manufacture of your product. • Liabilities. Are what the business owes to others, e.g. overdraft at the bank, bank loan, accounts payable, taxes payable. • Accounts Payable. This is money that is owed to suppliers who have provided you with goods and services and have issued you an invoice. It includes a creditors ledger, and may also include a sundry creditors account. • Creditors ledger. If you purchase goods from your suppliers and they issue you an invoice for payment in say 30 days time, you are called a creditor. You owe this money but have not yet paid it out of your account and so it becomes a liability on your balance sheet until it is paid. • Equity. Is the total amount of any money that you invested in the business when you started it, plus any retained profits from previous years plus the year to date profit, or loss, from the current financial year. It helps to understand your figures better and enter into a more meaningful conversation with your accountant. • Retained profits, or Retained earnings. Means that at the end of the year you have left some profit in the business, e.g. you have not taken all of the profit out as shareholder salary. This is usual when you are trying to build a business for future sale, or when you need to retain some cash in the bank for future large purchases, or if you have a large tax bill. • Financial Statements. Are the end-of-year reports produced by your accountant showing your overall income, expenditure, and profit or loss, and your closing balance sheet balances. • A General Ledger. Is the main accounting record of a business which uses double-entry bookkeeping. It will include accounts for revenue or income, and expense items, current assets, fixed assets, liabilities. • A Chart of Accounts. Is a created list of the accounts used by a business to define each class of items for which money is spent or received. It is used to organise the finances of the entity and to separate revenue, expenditure, assets and liabilities. • A cashbook. A book or spreadsheet that records all cash into and out of the business. • Management accounts. Is the name referring to the monthly reports that are produced when you have entered all of the month's transactions into your accounting software. They include a profit and loss report and a balance sheet and report