Ainsworth Accountants

This section is designed to help business start ups and students to understand the basics of accounting and bookkeeping.  Please email us if you require further help and explanations.  If you get lost or bored in the next 30 seconds, skip to the good news.

An Everyday Business

A business makes sales and purchases almost every day.  Money goes into and out of Bank Accounts.  Bills come in from suppliers and get paid.  Bills are sent to customers and usually get paid. 

Sometimes products are bought to sell, but they are not sold immediately, and become classed as stock.  Consequently some products are sold which could have been bought some time ago.

The business owner needs to keep records of all this coming and going for quite a few reasons.  Firstly to keep track of profit, which is very important, then to inform the tax authorities.  Other people who are interested will be anyone who has lent money to the business – especially a bank.

There are two types of reports to deal with:

• Where do you stand today?

• How have you done over a period of time?

From these two questions you can see that different answers are required.  One question requires a fixed position, the other requires a report which covers a period of time.

There are two popular ways to describe this:

• A picture (frozen image) compared to a video (covers a period of time)

• A race finishing line (snapshot) compared to the coverage of the race itself

So how does this translate into Accounting reports?

Balance Sheet and Profit & Loss Account - what are they?

The Profit and Loss Account is the summary of the 'Ins and Outs'.  The Balance Sheet is what's left after the 'Ins and Outs'

Balance Sheet

The Balance Sheet is a summary of balances on a specific date.  It usually is a monthly or yearly snapshot of the assets and liabilities of the business.

So what is a balance?

A balance is a snapshot in time, for example: of money in the bank, the value of the stock, money owed to a business, money the business owes and the value of any high cost items like property, vehicles and machinery.

A published Balance Sheet has some similar balances added together to make it a simpler summary of the balances.

Profit and Loss Account

A Profit and Loss Account covers Sales, Purchases and Expenses over a period of time.  If the value of your sales is greater than your purchases and expenses then the business has made a profit.  If purchases expenses are bigger than sales then the business has made a loss.