The Essential Guide to Accounting
Learn the basics of accounting
Accounting: The Basics
1.1 What is accounting
Accounting is the systematic process of recording, categorising, summarising, analysing, and reporting financial transactions for a business or organisation.
Often called the "language of business," it transforms raw financial data into clear reports used to evaluate economic health.
1.2 What is bookkeeping
Bookkeeping is the process of recording a business's or other entity's financial transactions. Bookkeeping can also be called accounting.
The recording of a business's financial transactions used to be done in physical ledgers or 'books', hence the term bookkeeping. Nowadays, bookkeeping is done in software, such as Excel or bookkeeping and accounting software.
Bookkeeping is the process of recording changes in a business's sales, expenses, cost of sales, assets, liabilities, and equity. Bookkeeping is accounting. However, accounting is a blanket term covering more than bookkeeping. It includes financial management, analysis, and reporting.
1.3 What are assets?
Assets are items a business owns. They have resale value and are often tangible. However, intangible assets exist, such as copyrights, trademarks, and websites.
Common business assets are computers and computer equipment, motor vehicles, tools and machinery, office furniture, and property. Beginners often overlook cash, stock, and money customers owe the business as assets.
Assets are split into 2 categories: fixed assets and current assets:
Fixed assets are assets that change value once a year. They are not liquid. Fixed assets include computers and computer equipment, motor vehicles, tools and machinery, office furniture, and property.
Current assets are assets that often change value. They are liquid assets. Current assets are cash in bank accounts, stock, and trade debtors (money owed to the business).
Beginners often confuse assets and expenses. My rule of thumb is 'can the item be resold and does it have significant value?'. If the answer is 'yes', then the item is likely an asset. If not, it is an expense. For example, a box of pens does not have significant value, so it is an expense. However, the office printer does, so it is an asset.
1.4 What are liabilities?
Liabilities are items a business owes.
Common liabilities are mortgages, bank loans, finance, credit cards, and money owed to suppliers (trade creditors).
Liabilities fall into 2 categories: long-term and current.
Long-term liabilities are liabilities that are due to be paid in over 12 months. They include long-term business loans, mortgages, and financing.
Current liabilities are liabilities that are due to be paid in less than 12 months. They include credit card balances and trade creditors.
1.5 What is equity?
Equity is also the cash the business owes. However, the difference between liabilities and equity is that equity represents cash owed to the business's owners.
Equity includes shares purchased by shareholders, investments made by owners (capital), and retained profits.
1.6 What are sales?
Sales are the cash received by a business for the supply of goods or services.
Cash sales are sales generated by an instant trade of goods or services for cash, such as a customer buying goods at a retail outlet.
Credit sales are sales generated by a trade of goods or services for a commitment to pay later. Customers are sent an invoice with payment terms soon after the goods or services are supplied.
Sales are also called revenue, takings, and turnover.
1.7 What are expenses?
Expenses are the costs incurred by a business for the running of the business. They are usually items that cannot be resold; otherwise, they are considered assets.
Common business expenses are insurance costs, bank charges, rent, wages, stationery, commissions, travel expenses, power, heating, and electricity.
Expenses are also called overheads, administrative expenses, and outgoings.
1.8 What is cost of sales?
Cost of sales are expenses that have a direct relationship with providing a sale. Beginners often find it difficult to decide whether a cost is an expense or a cost of sale. I often ask myself, 'Is this expense a legal or administrative cost?' If it is, it is an expense. If not, it could be a cost of sale.
Examples of cost of sales are the cost of goods purchased for resale, the travelling costs for a delivery driver, the cost of materials for a tradesperson, and the website and delivery costs of an e-commerce business. These are the raw costs essential to making a sale.
Accounting: Roles & Qualifications
2.1 Introduction
Being in accounting doesn't mean you'll necessarily be a tax accountant, as there are numerous different jobs in the accounting industry. There are also many different types of accountants.
Accounting offers a variety of different jobs. Most are office-based, but not all are about number crunching!
The qualities that help you progress and build a rewarding accounting career are an understanding of numbers, a love for business, and attention to detail.
2.2 Accounting Qualifications
Despite there being many career paths in accounting, there are only a handful of accounting qualifications:
Basic Bookkeeping Qualification:
The Institute of Certified Bookkeepers (ICB) is the most globally recognised qualification. Alternatives are the IAB, AIPB, and NACPB.
Bookkeeping and Foundational Tax and Accounting Qualification:
The Association of Accounting Technicians (AAT) is the most globally recognised qualification.
Tax Accounting & Auditing:
The Association of Chartered Certified Accountants (ACCA) is the most globally recognised qualification. The alternative is CPA.
Tax, Cost and Management Accounting:
The Chartered Institute of Management Accountants (CIMA) is the most globally recognised qualification.
2.3 Accounting Roles
Bookkeeper
A bookkeeper records the day-to-day financial transactions of a business. They are typically very hands-on. Bookkeepers are sometimes called accountants.
In large organisations, bookkeeping is split into different departments, usually the purchase ledger (costs and suppliers) and the sales ledger (sales and customers). Bookkeepers will have responsibility for single tasks within departments rather than the whole accounting process.
Credit Controller
A credit controller manages debts owed to the business by its customers. This can involve raising and sending invoices and chasing customers for payment.
Finance Manager/Director
Finance managers oversee the bookkeeping and accounting, including credit control. Finance directors hold similar responsibilities but are typically directors of the company rather than standard employees.
Management Accountant
A management accountant deals with the compiling and reporting of a businesses financial reports. These includes profit and loss statements, balance sheets, sales, expense, and growth reports.
Tax Accountant
Tax accountants typically don't do bookkeeping. They are tax experts who advise businesses and calculate their taxes. A good tax accountant will advise a business on how to save tax and ensure the company's tax returns are filed on time.
Tax Inspector
A tax inspector is employed in the public sector to inspect and audit businesses accounts and tax returns.
Auditor
An auditor reviews the bookkeeping and accounting of a business to ensure they are accurate.
Chief Financial Officer (CFO)
The CFO is a senior executive of a large organisation who manages the financial actions, strategy, and overall health of the organisation.
Forensic Accountant
A forensic accountant is a financial detective who combines accounting, auditing, and investigative skills to uncover financial fraud, trace hidden assets, and analyze data for legal proceedings.
Cost Accountant
A cost accountant is a financial professional who records, analyzes, and reports the expenses associated with producing goods or providing services to help a business control costs and improve profitability.
Accounting: Single and Double-Entry
3.1 Double-Entry
Single- and double-entry are bookkeeping and accounting methods. These methods are used to record the financial transactions of a business or other entity.
Double-entry is the best accounting method. It is globally recognised and comprehensive.
I have an Essentials Guide to Double-Entry Bookkeeping if you would like to learn more.
3.2 Single-Entry
Single-entry bookkeeping is as simple as it gets. It is usually done in Excel or by hand.
Single-entry is simply listing a business's sales and expenses.
3.3 Accounting Software
All established bookkeeping and accounting software uses double-entry bookkeeping. The software does a lot of the work for you, making the double-entry process much easier.
My recommended accounting software is Xero. I have a link for 90% off and Free Xero Courses.
Accounting: Financial Statements
4.1 The Profit and Loss Statement
The profit and loss statement details the business's sales and expenses for a specified period. Ultimately, it shows whether the entity made a profit or a loss for the period, and by how much.
The profit and loss statement (P&L) is also called the Statement of Comprehensive Income.
The P&L shows sales, cost of sales, gross profit, expenses, and net profit figures. Below are key calculations for the P&L:
Sales minus cost of sales equals gross profit.
Gross profit minus expenses equals net profit.
The gross profit is the total sales minus the cost of sales. Net profit is gross profit minus expenses, i.e., total revenue minus total costs.
Below is an example of a standard profit and loss statement:
4.2 Balance Sheet
The balance sheet lists the assets, liabilities, and equity of a company. Basically, the report displays what the business owns and what it owes.
A balance sheet always balances according to the accounting equation, meaning that total assets equal total liabilities and equity.
The balance sheet is also called the statement of financial position.
Below is an example of a balance sheet:
