Understanding Business Accounting For Dummies - UK

Colin Barrow, John A. Tracy

• Publisher: For Dummies
• Year: 2017
• ISBN:
  9781119413615
• Edition: 4
• Topic: Business
• Subtopic: Accounting
• Index: Business

The easy way to get your head around company finance

Having an understanding of your company's finances is crucial for both small business owners and corporate managers with budget responsibilities. Understanding Business Accounting For Dummies simplifies the key elements of UK business accounting, covering everything from evaluating profit margins to writing financial reports.

Fully updated to cover the emergence of IFRS and dealing with foreign exchange, this new edition thoroughly outlines the essentials of business accounting. With comprehensive guidance and helpful strategies, this book makes light work of the financial fundamentals you need to move up the corporate ladder

• Use the latest technology to manage the bottom line
• Control profit and cash flow
• Budget with confidence
• Make sense of financial statements
• Survive an audit

If you're ready to balance your budget, boost your profit margin and enhance your career profile, this hands-on guide has everything you need to get started.

Part 1

Accounting Basics

IN THIS PART …

Discover the ways that an understanding of business accounting can help your business.

Understand the differences between bookkeeping and accounting.

Work out how to pay taxes as an employer and a property owner.

Make sense of your financial position as an individual who is also a taxpayer, an investor, a borrower and a retirement planner.

Chapter 1

Introducing Accounting to Non-Accountants

IN THIS CHAPTER

Understanding the different needs for accounting

Making and enforcing accounting rules

Peering into the back office: The accounting department in action

Transactions: The heartbeat of a business

Taking a closer look at the key financial statements

Should you let your toddler grow up to be an accountant?

Most medium to large businesses employ one or more accountants. Even a very small business could find value in having at least a part-time accountant. Have you ever wondered why? Probably what you think of first is that accountants keep the books and the records of the financial activities of the business. This is true, of course. But accountants perform other very critical but less well-known functions in a business:

• Accountants carry out vital back-office operating functions that keep the business running smoothly and effectively including payroll, cash receipts and cash payments, purchases and stock, and property records.
• Accountants prepare tax returns, including VAT (value-added tax) returns for the business, as well as payroll. They also file reports at Companies House, which stores all the information companies are legally required to supply. And here’s the good bit – Companies House makes that information available for anyone to view (see www.gov.uk/government/organisations/companies-house).
• Accountants determine how to measure and record the costs of products and how to allocate shared costs among different departments and other organisational units of the business.
• Accountants are the professional profit scorekeepers of the business world, meaning that they are the ones who determine exactly how much profit was earned, or just how much loss the business suffered, during the period. Accountants prepare reports for business managers, keeping them informed about costs and expenses, how sales are going, whether the cash balance is adequate and what the stock situation is.
• Accountants prepare financial statements that help the owners and shareholders of a business understand where the business stands financially. Shareholders wouldn’t invest in a business without a clear understanding of the financial health of the business, which regular financial reports (sometimes just called the financials) provide.

In short, accountants are much more than bookkeepers – they provide the numbers that are so critical in helping business managers make the informed decisions that keep a business on course toward its strategic objectives.

Business managers, investors and others who depend on financial statements should be willing to meet accountants halfway. People who use accounting information, like spectators at a football game, should know the basic rules of play and how the score is kept. The purpose of this book is to make you a knowledgeable spectator of the accounting game and – who knows – perhaps even an amateur player.

Accounting Everywhere You Look

Accounting extends into virtually every walk of life. You’re doing accounting when you make entries in your cheque book and fill out your income tax return. When you sign a mortgage on your home, you should understand the accounting method the lender uses to calculate the interest amount charged on your loan each period. Individual investors need to understand some accounting in order to figure the return on capital invested. And every organisation, profit-motivated or not, needs to know how it stands financially. Accounting supplies all that information.

Many different kinds of accounting are done by many different kinds of persons or entities for many different purposes:

• Accounting for organisations and accounting for individuals
• Accounting for profit-motivated businesses and accounting for non-profit organisations (such as hospitals, housing associations, churches, schools and colleges)
• Income tax accounting while you’re living and estate tax accounting after you die
• Accounting for businesses and professional firms that sell services rather than products, such as the entertainment, transportation and healthcare industries
• Past-historical-based accounting and future-forecast-oriented accounting (that is, budgeting and financial planning)
• Accounting that adheres to cost (most businesses) and accounting that records changes in market value (investment funds, for example)
• Accounting in the private sector of the economy and accounting in the public (government) sector

Accounting is necessary in any economic system. The more developed the economic system, the more the system depends on information. Much of the information comes from the accounting systems used by the businesses, individuals and other institutions in the economic system.

The Basic Elements of Accounting

Accounting involves bookkeeping, which refers to the painstaking and detailed recording of economic activity and business transactions. But accounting is a much broader term than bookkeeping because accounting refers to the design of the bookkeeping system. It addresses the many problems in measuring the financial effects of economic activity. Furthermore, accounting includes the financial reporting of these values and performance measures to non-accountants in a clear and concise manner.

Accountants plan the internal controls in an accounting system, which serve to minimise errors in recording the large number of activities that a business engages in over the period. The internal controls that accountants design can detect and deter theft, embezzlement, fraud and dishonest behaviour of all kinds. In accounting, internal controls are the gram of prevention that is worth a kilo of cure.

Financial statements

An accountant rarely prepares a complete listing of all the details of the activities that took place during a period. Instead, he or she prepares a summary financial statement, which shows totals, not a complete listing of all the individual activities making up the total. Mostly, managers just want summary financial statements for the period – if they want to drill down into the details making up a total amount for the period, they ask the accountant for this more detailed backup information. Also, outside investors usually only see summary-level financial statements. For example, they see the total amount of sales revenue for the period but not how much was sold to each and every customer. Because a company’s accounts are available to the public at Companies House, businesses only reveal what they absolutely have to by law.

Financial statements are prepared at the end of each accounting period. A period may be one month, one quarter (three calendar months), or one year. One basic type of accounting report prepared at the end of the period is a ‘Where do we stand at the end of the period?’ type of report. This is called the balance sheet. The date of preparation is given in the header (or title), above this financial statement. A balance sheet shows two aspects of the business.

One aspect is the assets, or economic resources, of the business. The other aspect of the balance sheet is a breakdown of where the assets came from, or the sources of the assets. The asset values reported in the balance sheet are the amounts recorded when the assets were originally acquired. For many assets, these values are recent – only a few weeks or a few months old. For some assets, the values as reported in the balance sheet are the costs of the assets when they were acquired many years ago.

Assets are not like manna from heaven. They come from borrowing money in the form of loans that have to be paid back at a later date and from owners’ investment of capital (usually money) in the business. Also, making profit increases the assets of the business; profit retained in the business is the third basic source of assets. If a business has, say, £2.5 million in total assets (without knowing which particular assets the business holds), you know that the total of its liabilities, plus the capital invested by its owners, plus its retained profit, adds up to £2.5 million.

In this particular e...

Table of contents

• Cover
• Title Page
• Table of Contents
• Introduction
• Part 1: Accounting Basics
• Part 2: Getting a Grip on Financial Statements
• Part 3: Accounting in Managing a Business
• Part 4: Financial Reports in the Outside World
• Part 5: The Part of Tens
• Appendix: Glossary: Slashing through the Accounting Jargon Jungle
• About the Authors
• Advertisement Page
• Connect with Dummies
• End User License Agreement