Understanding Accounts Made Easy sample chapter

1 Understanding Accounts made Easyby David Rouse 2011 David RouseThe right of David Rouse to be identified as the author of this work hasbeen asserted by him in accordance with the Copyright, Designs andPatents Act Publishing Limited76 89 Alscot RoadLondon SE1 rights reservedPrinted in Great BritainISBN: 978-1-907765-95-7 Exclusion of Liability and DisclaimerWhile every effort has been made to ensure that this Lawpack publicationprovides accurate and expert guidance, it is impossible to predict all thecircumstances in which it may be used.

2 Accordingly, neither the publisher,author, retailer, nor any other suppliers shall be liable to any person orentity with respect to any loss or damage caused or alleged to be caused bythe information contained in or omitted from this Lawpack convenience (and for no other reason) him , he and his have beenused throughout and should be read to include her , she and her .This is an excerpt from Lawpack s book Understanding Accounts find out more business accounting secrets and expert guidanceon Understanding Accounts .

3 Click the authorviiIntroductionix1 The Trading and Profit and Loss Account1 Overview1 Sales2 Goods for own use3 Cost of sales3 Gross profit5 Expenses5 Net profit/loss14 Examples of Trading and Profit and Loss Accounts14 Income and Expenditure Account15 Receipts and Payments Account162 The Balance Sheet19 Overview19 Fixed assets21 Current assets21 Current liabilities24 Liabilities due after more than one year25 Provisions25 Capital26 Revaluations28 Going concern31 Examples of Balance Sheets353 The Cash Flow Statement37 Receipts and Payments Account38 Cash Flow Statement for smaller entities39 Cash Flow Statement for larger companies45iv| Understanding Accounts made Easy4 Company accounts47 The limited company47 Limited by guarantee49 Company accounts49 Signing and filing59 The annual audit60 Group accounts63 Prior year adjustments64 Statement of Total Recognised Gains and Losses65 Note of Historical Cost Profits and Losses66 Ratios for companies66 Future developments695 Reviewing the

4 Accounts71 General points72 Sales73 Cost of sales and gross profit74 Expenses76 Net profit or loss79 Net assets86 Fixed assets88 Ratios88 Case study946 Management accounts107 Budgets108 Cash flow forecast109 Computerised management accounts110 Management and annual accounts1137 Creative accounting115 Art or science?115 Comparing figures115 Accounting considerations when buying a business116 Group transactions120 Window dressing122 Off-Balance Sheet financing123 Revenue recognition126 Conclusion130 Contents | trader Profit and Loss trader Balance trader Notes to the Partnership Profit and Loss Partnership Balance Partnership Notes to the company directors report company statutory Profit and Loss Accountformat company Balance Sheet format company Notes to the company detailed Profit and Loss

5 Account148 DSmall company Profit and Loss account format 2150 EMedium company Cash Flow Statement151 FSmall company Cash Flow Statement and Payments account (vertical) and Payments account (horizontal)156 HChecklist for reviewing accounts157 ITroubleshooting checklist161 JStocktaking and stock valuation checklist165 KThe treatment of Value Added Tax (VAT ) in the accounts170 Index173 About the authorDavid Rouse is a chartered accountant with many years experienceadvising businesses and other organisations on accountancy and relatedfinancial matters.

6 He has worked for major national and internationalaccountancy firms and he has also run his own small practice. He nowprovides technical consultancy services and writes in-house manuals forother accountants in are Accounts ?Before trying to understand Accounts , the term needs to be explained. Inthis context, the Accounts of a business or other organisation are financialstatements showing: what has happened for a given period in the past; and the position at the end of that statement showing what has happened in the past is usually called theProfit and Loss account (see chapter 1).

7 A club, or an organisation that isnot operating a business, may call the statement an Income andExpenditure account . A Profit and Loss account and an Income andExpenditure account show the sales and other income of the organisationfrom which the expenses are deducted. When the income is in excess of theexpenses the result is called a profit in a Profit and Loss account , or a surplus in an Income and Expenditure account . When the expenses aregreater than the income the result is called a loss in a Profit and LossAccount, or a deficit in an Income and Expenditure statement showing the position at the end of the period is called theBalance Sheet (see chapter 2).

8 This shows what is owned by theorganisation, the money owing to and by the organisation, and the moneyinvested in the organisation by its proprietors or | Understanding Accounts made EasyIn addition to the Profit and Loss account and Balance Sheet there willusually be notes to explain some of the figures in more detail. In somecases there may also be a Cash Flow Statement (see chapter 3), whichshows where the cash has come from and where it has full set of Accounts consisting of a Profit and Loss account , BalanceSheet, Notes to the Accounts (see chapter 4) and, in some cases, a CashFlow Statement, may be referred to as financial statements.

9 Notes to theAccounts provide further details about figures shown in the Profit andLoss account , Balance Sheet and Cash Flow Statement, as well asadditional information to help the reader understand the chapters in this book explain each part of the Accounts in moredetail and they take a critical look at example Accounts so that you canobtain a better needs to understand Accounts ? Accounts are prepared by accountants, but there are many more peoplewho can benefit from an Understanding of them, including anyone: owning and running a business as a sole trader or partner; working in a company as a director; employed in the management of a business in any capacity; owning shares in a company; interested in buying a business; interested in selling a business; involved in the management of a club, charity or other organisation; employed in a job that involves looking at Accounts .

10 Investing in the stock market; wishing to improve their knowledge of some people, an Understanding of Accounts is essential. In most casesa trained accountant will actually prepare the Accounts of a business, butthe proprietors or directors have the responsibility for approving thoseIntroduction | xiaccounts. This does not mean that they are expected to have theknowledge needed to prepare the Accounts , but they are expected tounderstand and approve the figures included in those who is self-employed has full responsibility for the figures enteredon their tax returns, no matter who actually prepares the directors are assumed to be aware of the financial position oftheir companies, even though they may employ someone else to preparethe Accounts .