But the reality is that it is really very simple.

But first we need to look at what it is, and why we need to do it.

The Value Of Assets

Everything you buy to use for your business is an asset. However, over time your assets generally lose value. A computer becomes obsolete, your vehicle’s mileage gets higher and higher and requires more and more spare parts. Something that you bought today, may be cheaper to buy a year from now.

There are many reasons of course. So why do we need to record the change in value to our assets? It is because we must always reflect a true picture of our business.

We may need to do that in order to get a loan, or to show our investors the value of the business as it stands today, or to value the business properly if we are going to sell it.

Depreciation and Tax Liability

There is one more important thing about depreciation. It is a book value item. That is, it has NOTHING whatsoever to do with tax and limiting your liability for it. This is a common misconception.

Inland Revenue services around the world deal with asset depreciation and claiming that depreciation against tax in different ways, but the most common is by giving business owners an allowance.

When you record depreciation, you are doing so only in your books. Never ever think of depreciation as some form of allowance or tax mitigating transaction. You are simply recording what you (or some valuer) really believes the loss (or gain) in value of an asset really is.

This is a good thing. You want your books to reflect reality. In fact you are legally obliged to do so. Before we get into the transactions, here’s one last reason why you must see depreciation and allowances as different things.

In many countries, if a business makes a loss, they can put off an allowance and carry it forward to a future year. So you can get the case where a business has bought, say, a computer for 500 and values it at the end of the year at 300 (if you bought a brand new computer today, how much could you sell it for tomorrow?).

The depreciation on that computer is 40% and that is what you must record in your books (don’t worry the actual transactions are coming shortly). However, your Inland Revenue service may only let your claim a 25% allowance, so you can see that the balances will already be skewed. But that is how it should be.

A worse case is where you make a loss and decide not to claim that year. In your books the computer will be worth 300 but your IR service will still have it valued at 500. The following year you will depreciate it down to, say, 200 and because you make a profit you will want to claim your 25% allowance of… 500! which is 125.

So now your book value is 200 and the IR have it as 375. The bottom line is, unless you are a tax specialist or you are submitting your own tax returns, you need not be concerned with the IR valuation. You are only concerned with recording a true and fair picture of the value of your business.

Depreciation Transactions

Your chart of accounts should be set up with a group called ‘Fixed Assets’. This is where you add accounts to hold the balance of assets you have bought. Each asset account should have a depreciation account associated with it. This will hold the accumulated depreciation of assets over the years (it is often called ‘Accumulated Depreciation’ for this reason).

To see the value of your assets, subtract the accumulated depreciation from the asset balance.

The reason for keeping both balances is so that you can see at a glance what your assets originally cost you (in case you need to replace them so you get a better idea of the investment needed).

There is one thing missing from this though. Where do we record the other side of the Accumulated Depreciation amount?

The answer is in the Profit and Loss account. You can set up a new group in there specially for it. Let’s call the account This Year’s Depreciation (or even P&L Depreciation to make it clear where it is going).

So make a journal Debiting This Year’s Depreciation and Crediting Accumulated Depreciation.

That’s it. That’s all there is to it.

Using the technique taught in the Accounting for Everyone course, you are simple transferring an amount From Accumulated Depreciation To P&L Depreciation.

If you want to try this out, download the trial of Business Accountz available on Accountz.com and give it a go. Use the Green books (‘transfers’) to do this or use the traditional journal. Remember you can flip between From/To and Credit/Debit in the menu option Tools > Language (choose English – Accountant for the latter).

And if you haven’t done already, sign up on the right for your free 12 week accounting course here at Accounting for Everyone. We go into depreciation in greater detail on the course, including standard ways to depreciate such as straight line depreciation and reducing balance.

Money laundering is a very recent change in statutory law around the world (although it has been going on since time immemorial) brought on by terrorist events over the last decade or so.

Money Laundering in the UK and elsewhere

In many countries including the UK you are required to record and keep proof of clients if you are a bookkeeper or accountant for money laundering purposes. This serves two purposes:

1. Due dilligence
2. Client Identity Proof

Due dilligence means you have taken the trouble to look at your client more closely by asking them to prove who they are. Client Identity Proof is just the evidence you can supply should something go awry with your client. That is, at some point, your client should become involved with money laundering (ML), terrorism, drug smuggling or any other criminal activity, which is why ML was brought in in the first place.

Many practitioners, and the vast majority of ordinary people see this as a typical example of beaurocracy, and I agree, however it is something you must do with every client you take on board, by law.

Money Laundering Proof

You will need photographic proof (driving licence or passport is acceptable) and proof of name and permanent address. The best source for that is a utility bill (gas, electric, water or telephone). Records should be retained for a minimum of five years, but retain them permanently to be safe.

When photocopying documents make sure you do not photocopy parts that are not relevant (eg. travel pages in a passport). In the UK you cannot use colour photocopies, they must be black and white. We are not sure what the requirements are for the USA, but I suspect they are similar.

Money Laundering and Inland Revenue

Finally remember that you must register with your Inland Revenue service (HMRC in the UK, where there is also a fee to pay). HMRC have a useful section on Money Laundering on their website.

Have you read our guide to running a bookkeeping business, money laundering is just another aspect you need to know about? Bookkeeping Business From Home

Image by Getty Images via Daylife

Bookkeeping is the art of tracking money; where it came from and where it went to. That is all there is to it. A simple transaction involves 2 accounts. The ‘from’ account and the ‘to’ account. This is what the concept of double-entry is all about. Trained bookkeepers and accountants use the term ‘credit’ and ‘debit’. That is, a transaction credits one account and debits another. A double-entry. By transposing ‘from’ with ‘credit’ and ‘to’ with ‘debit’, business people not trained in accountancy can get a simple handle on how accounting works. But enough of the theory, lets get back on track!

This article explains some common transactions the self-employed need to make plus some of the differences and common pitfalls experienced in bookkeeping tasks between a limited company and the self-employed.

In a limited company, all workers including the directors are employees. Their pay and salaries are direct expenses of the company. A company, for example, could account for its payroll with just a few transactions. The accounts affected would be the bank (the ‘from’ account, ie. where the money is coming from to pay the wages) and some expense accounts to track how much is going to the employees and how much is going to the Revenue for tax etc. (these are the ‘to’ accounts).

For the self-employed, it is an entirely different story. Their ‘salaries’ are not expenses. As a self-employed person, when you take money from the business, it is usually only as a result of the business making a profit. These transactions are typically called ‘Drawings’. You are ‘withdrawing’ money from the business, hence the name.

So, for the self-employed, you will need a ‘Drawings’ account. This should be set up in the ‘Equity’ section of your chart of accounts. Whenever you take money out of the business, create a transaction From Bank To Drawings. In a traditional double-entry system you could credit the bank and debit drawings (so remember the from=credit and to=debit rule if you want to make sense of it).

Another common transaction is where you have bought something using personal money or a personal credit card. The simplest way is to treat it as cash. Create a cash account in your ‘Current Assets’ section of your Chart of Accounts (you will probably have one already). All payments will be From Cash To [some expense account]. When you decide to pay yourself back from the business make a transfer From Bank To Cash. A better way, from an auditing perspective would be to set up a ‘Loan’ account in Current Liabilities. This is important if you make use and need to track cash separately. The transactions are exactly the same as described except you will use Loans instead of Cash.

Finally, opening balances. For a limited company, the opening balances will involve the shares bought by the shareholders. A typical transaction for this would be From Shareholders To Bank. For the self-employed, you would have an account called ‘Capital’ and make a transaction From Capital To Bank.

If you want to look up any accounting jargon, visit the glossary on this site.

Image via Wikipedia

There are many ways of keeping your accounts (including a shoe-box!), but the preferred method, used by every trained book-keeper and accountant throughout the world, is double-entry.

Many books and courses are already available. However, most are taught from an academic view point. They tend to throw you in at the deep end and assume you will not be overcome by the tidal wave of jargon.

This guide takes an entirely different approach. By using just a few transactions and some simple guidelines you will understand the logic of double-entry, and by the use of a few key words the jargon will fall into place.

Words like nominal, general ledger and trial balance will become second nature. You will have no problem with your debits and credits. In short, you will be able to post a journal just as easily as you can now post a letter!

By the end, you will be able to talk, and understand, the same language as the professionals - and that includes your bank manager, accountant and tax inspector.

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