LESSON 17: The few final things you must know if you ar Articles

LESSON 17: The few final things you must know if you are to ever truly comprehend your accounts, plans, budgets and forecasts

 We’ll now cover some fundamental concepts which most of your fellow business owners are completely unaware of. Yet what you are about to discover includes principles which are essential requirements for producing valid accounts, and which are therefore crucial to your understanding of your accounts. And what you learn here, you will call on again […]

17.1 If your accounts are to give you a true fix on your finances, TIMING is as important as MONEY

 You may be surprised to learn that when it comes to preparing accounting information, and particularly monthly management accounts, the reporting of transactions at the correct time is as important as reporting them at their correct value. It is easy to recognise the importance of reporting the correct values. For example, it would clearly be […]

17.2 How is it that even if your accounting records are wholly correct, your accounts can be way off the mark?

 It is perfectly normal for unadjusted Profit and Loss sales and cost figures from several months to be jumbled up as described above. Here’s how it happens. All accounting transactions (invoices, cheques etc.) bear dates which are recorded in your accounting system along with the transaction. But the date of the document  (invoice, cheque etc.) […]

17.3 When does a sale take place?

 The sales income reported in your Profit and Loss Account should measure the value of what you have earned during a period. That may or may not correspond with the value of invoices you have issued and recorded for that period. Sales income logically is earned as the business fulfils its commitments to the purchaser. […]

17.4 When is a cost incurred?

 Having determined what sales income ought to be reported for a period, you then need to determine what costs should be reported for that period. There are broadly three things which can determine when a cost should be included in your Profit and Loss Account. Many types of cost, and particularly direct costs, can be […]

17.5 The practical solution is to adjust your accounts so all sales and costs show up in their correct month and year

 The concept of sales, costs and other transactions belonging to specific time periods is perfectly logical. To determine the profit earned in a period you first have to determine what sales income you have earned in that period. Then you need to match against that income any costs directly related to making the sales or […]

17.6 The two most common types of timing adjustments are ‘Accruals’ and ‘Prepayments’

 We have seen that you need a process to enable you to move some sales and costs from the period in which they are recorded in your accounting system to either an earlier or later period for the purpose of reporting them correctly in a set of accounts. The most common types of adjustments, and […]

17.7 Complete accuracy in a set of accounts is a myth; don’t expect it and don’t waste time chasing it

 This next section may surprise you. There is a completely sensible and very practical concept in accounting called materiality. This concept basically says that if something is so small as not to have a material effect on a set of accounts, then don’t bother with it when preparing the accounts. This is actually the opposite […]

17.8 Minor errors in your accounting records won’t usually hurt you, but there are times when you should be completely accurate

 The above discussion was relevant to the computation of figures to be presented in a set of accounts, and for estimates which are required for preparing plans and forecasts. When it comes to actually recording transactions in the accounting records the errors that can occur may represent real money and for this reason much smaller […]

17.9 If you feel your accountant is overcautious, there is a rationale behind their attitude

 There is an accounting concept which explains why, as a generalisation, accountants often appear to be overcautious, especially when compared to entrepreneurs who in many cases are natural risk-takers. While caution and entrepreneurship rarely make natural bedfellows it would nonetheless be wise for you to adopt this concept in your everyday business life. The concept […]