Tweak Your Biz » Finance » Accounting For Dummies: Part 1

Accounting For Dummies: Part 1



OK it’s not the most exciting subject in the world but this is a quick and easy layman’s guide on the big picture of accounting and some of the principles that every business person should be aware of.

The accounting system is made up of two parts, the Profit and Loss Account (P&L) and the Balance Sheet (BS). It operates a double entry system so that each transaction creates 2 equal but opposite entries which then balance each other out i.e. the sum of the P&L and BS is always zero.

Accounting is the ultimate zero sum game

Whenever you make a sale, incur an expense, pay wages or undertake any other business transaction you send information to either the P&L or BS or both. This binary system makes accounting exceedingly logical and straightforward. Therefore don’t listen to Accountants who tell you they have still to balance the books, it’s already done for them but their expertise comes in ensuring
The mindmap below outlines the key things about your P&L and Balance Sheet.

Basically the P&L covers a period of time between two balance sheets e.g. the year ended December 2009 is described by the balance sheet at 31 Decembers 2008 and 2009

  • The P&L outlines the financial performance of the business. It describes the activities that the business undertook and how successful (profit /loss) they were in financial terms. It is more meaningful if it is used with comparative information e.g. last year’s, budget, competitor’s.
  • The P&L answers questions about how much your sales have increased on last year, what gross margin are you making before overheads, what is your profit that the taxman will take a chunk out of, how is my wage bill against what I budgeted and so on.
  • The Balance sheet outlines the financial position of the business at a given date. It describes the assets and liabilities and boils down to the net worth or net assets. Also more meaningful if used with comparative information to provide context.
  • The Balance sheet answers questions about how much cash is in the bank, what are your aged debtors and debtor days, what do you owe in VAT, what is the net worth of the business and much more besides.

So that’s a quick lesson on the basics of accounting. I will follow up with articles to show you how you can practically use some of the information on these two documents to improve your business and benchmark against your competitors.



Sponsored Content

The Author:

Accountant with 17 years business experience. Principal of Bradán Consulting based in Galway. The firm provides accounting, business planning and governance services. Member of Fáilte Ireland Business Mentors panel. Chairman of SpunOut.ie. Board member at COPE Galway. http://www.bradanconsulting.ie

Add Your Comment

  • http://blog.myprojecttracker.com Barney Austen

    Point well made Elaine. If you are an individual consultant – then fine, the business dies gracefully when you stop. But those with a product or a business that delivers services then the owner needs to ensure he/she has a get-out strategy that facilitates the business continuing without them.

  • http://twitter.com/fredchannel Fred

    Thanks for sharing Aonghus. GReat post and again, the mindmap helped a lot, making the topic more interesting and simpler to understand. It’d be great if people could download your midmaps and print them out. Many will stick them up on the wall as reminders :)

  • http://www.michaelgholmes.com Mike Holmes

    To be honest, I wish you had given more detail. In my mind, this is neither quick or easy…but more complicated. I do understand accounting…but if I didn’t…this would not have helped at all.

    Just being honest

  • http://www.sianphillips.ie Sian Phillips

    Great post Aonghus. I always struggle to explain Accounting simply to people who may not understand it – or maybe it’s just when their eyes glaze over that I give up. Will point people towards this post in future. Looking forward to part 2

  • Aonghus Sammin

    Hi Fred, Sian and MIke

    Thanks for the comments and honesty.
    MIke – was hoping to make things simpler rather than complicating matters. Its a fine line between giving more detail and sending people into eye glaze territory as Sian says. What kind of detail do you think would have made the post more helpful?

    Regards
    Aonghus

  • http://twitter.com/peopledev Barry Walsh

    Good work Gus. I think a lot of people will be interested in this.
    barry

  • http://www.quantumbuyers.com/peachtree-quantum-2011-software.aspx Darcy Grubaugh

    I totally agree about your reason as to why you didn’t explain too much detail regarding the minorities of basic accounting. After all, accounting is pretty hard to explain with just words, as it is. One should rely on basic knowledge regarding accounting. All that basic accounting stuff that you learned from high school and college will be of use here.nnGood job, Aonghus.nn

  • http://twitter.com/Taxationservice Alvinjoe

    Annual accounts are necessary to meet your business’s
    statutory obligations, but if they are prepared in a timely
    and economical way, they can also provide valuable information
    for decision-making.

    We will actively manage the timing of the accounts production
    process to make sure that you meet your statutory responsibilities.
    Through this information, we can also help you to take advantage
    of early tax planning opportunities.

    0844 669 7715