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The Definitive Guide To Bookkeeping

The Definitive Guide To Bookkeeping

Guide to Bookkeeping last updated 24th December 2017 by Quentin Pain

gross profit vs net profit from guide to bookkeeping

Introduction And Guide To Bookkeeping as a Business, Career or Skill

Whether you want to be a self-employed bookkeeper, do the bookkeeping for your small business, or be employed as a bookkeeper, this simple guide to bookkeeping will point you in the right direction.

And it will not waste one minute of your valuable time. I want to stress that right at the start so you know that everything you see below is worth your time reading (please do sign up at the foot of this page to be notified as I expand and update this guide).

This guide is aimed at 3 groups of people:

  1. People who want to be self-employed bookkeepers by starting their own bookkeeping business.
  2. People who are in business doing something other than bookkeeping, but want to save costs by doing it themselves.
  3. People who are seeking employment in the bookkeeping and accounting industry.

There are many things shared in common with these three groups, so I will only point out differences where absolutely necessary.

For example, if you want to start a career as a bookkeeper, it’s a good idea to know what sort of salary you can expect (if you’re in the UK, the UK Government reckons it’s about £17-£25k, and if you’re in the USA, the last figure I have is $36k from the Bureau of Labor Statistics).

Whereas if you want to start your own bookkeeping business, you will also want to know what the current salary levels are in case you want to grow your business and take on qualified bookkeepers.

And if you want to learn bookkeeping as a business owner, then knowing what it would cost if you were to hire someone instead will help you make the decision of whether it is really worth your time.

On that last point, all businesses depend on marketing for survival. And marketing is all about time and budgets. If no budget is set for marketing a business (including bookkeeping businesses!) then it is very unlikely a new business will thrive.

Established businesses often get by with word of mouth marketing, but eventually they will decline as other rivals with a marketing plan and budget to match will move into their market.

And understanding what that budget might be just also happens to be a part of the bookkeepers set of skills. We’ll get to that later on, but for now, you will be able to see just how important the work of a bookkeeper really is.

It’s not just about adding up numbers and deciding where a particular transaction needs to be recorded in the books, it’s all about knowing how much money in the business can be used in other areas that need it.

Since the bookkeeper is the one person with their finger on the financial pulse of the business at all times, the amount of power a good bookkeeper really has becomes apparent.

This skill set has been overlooked for years by the accountancy profession as a whole, and even more so by business leaders. This is because larger businesses rely on a financial director (usually a qualified accountant) who in turn relies on bookkeepers to come up with the figures.

So it’s the bookkeepers who really know what’s going on. Welcome to the Bookkeeping Industry.

Starting Your Own Bookkeeping Business

I’ve written a 5 part mini guide on this topic as part of the Accounting for Everyone Certified Online Course, which you can find here, but I’m going to include lots of tips in this article that I know will help you anyway.

These are based on my actual experience of setting up a real bookkeeping business in the UK.

Starting your own bookkeeping service is probably one of the safest lifetime businesses you can start.

The entire world is going freelance. The number of small businesses starting up is and has been increasing for a considerable amount of time, but right now it’s increasing faster than ever because everyone known ‘jobs are no longer for life’.

A university degree no longer has the benefits it used to have, and as a self-employed bookkeeper there’s no one you need to impress – your clients certainly won’t care. In fact, the debt that university students get into whilst studying has never been higher. And that is a real burden not just on themselves but on the world’s economy as a whole.

Learning bookkeeping has as a result become super important for any business owner, but since the last thing most business owners want to do is their own bookkeeping, it ends up being done by untrained volunteers (usually a family member), and that adds even more risk to the burden small business owners have to face.

And so it doesn’t take long for them to realise they need professional help.

One answer to that is finding themselves an accountant. But the problem with that solution is the increased cost. Accountants train for years, and so expect a healthy return for all that training.

A bookkeeper can become quite competent in less than a year – even though it’s the most important part of the finance side of all businesses.

This is because the tax legislation of every country far outweighs the amount of knowledge needed to operate a double-entry bookkeeping system.

There is one caveat to that: a bookkeeper must learn where transactions go in the books. They need to know the difference between a capital purchase and an expense.

They need to know the difference between selling a service and selling goods. They need to understand VAT (Europe and much of the rest of the world) and Sales Tax (USA).

But what they don’t need to know are all the tax avoidance schemes and other forms of tax accounting that reduce or avoid the tax burden. That is strictly in the focus of accountants.

And here’s the rub. The world’s Inland Revenue services are changing fast. It is no longer publicly acceptable for large corporations to use tax avoidance schemes.

It’s not just politicians who want to change things, it’s the public as well. So it won’t be long before the crackdown comes not just for all schemes, but also for smaller businesses too.

The good news, is that it falls right into the domain of the bookkeeper. A professional bookkeeper is there not just to enter the figures and make sure they go into the right boxes, they’re there to protect business owners from making costly mistakes.

At some point in the future, the average business owner will not need an accountant at all. Governments and Inland Revenue Services around the world will make online submission so easy, and the rules so hard to break, anyone will be able to file their figures online without needing a complicated manual.

But the point is, those figures will still need to be generated in the first place, and the people most qualified to do that, are professionally trained bookkeepers.

As I say, it’s one of the safest professions you can ever choose to enter, and more so now than at any other time – hence the need for this depth guide.

Getting Started With A Bookkeeping Business

Starting a bookkeeping business is just like any other business. You need to register with your Inland Revenue service to let them know.

You may also need to register with them for Anti Money Laundering supervision. This all depends on your country of course. In the UK, you can do this directly, or through a professional body such as the IAB – International Association of Bookkeepers (who also operate in 60 countries at the time of writing).

It will also help you gain trust by getting professional qualifications. The IAB can help in this respect too. They also cover distance learning as well as formal college courses.

You can start your business direct from home. There is no need to increase your costs by renting an office unless a) you can afford it, and b) you or your family has a problem with you working at home.

Another benefit of offering bookkeeping as a service is you will have very few other costs other than your time. Software comes into it, but these days you will find plenty of free software for micro business books, and fairly low cost solutions for small to medium size businesses.

You will also find the larger the business you target as potential clients, the more likely they are to want you to do your work on their premises. This has ups and downs, especially when it comes to charging for your work. They will want to pay you an hourly fee. Typical hourly charges for experienced bookkeepers in the UK vary from £20 to £35.

That rate is very similar for most countries but has to be pro-rated in for that countries economy.

If your clients are happy for you to work remotely on their account, then you can change to monthly or project charging.

Another vitally important part of any small business, but extremely important for professional services such as bookkeepers, is Professional Indemnity Insurance (PII). This will cover you should something bad happen to your clients and they end up suing you for some reason.

That brings us on to contracts and terms and conditions. Many bookkeepers take on clients without setting up any formal agreements. Don’t do it. Even if your terms and conditions are simple, make sure you have some, and get a signature that they agree to them. In fact, the simpler the better.

This means setting up expectations around responsibilities. Make sure everyone involved understands who is responsible for what, and what to expect of each person BEFORE you start.

This will ensure that should you accidentally take on bad clients, you will find it very easy to exit without any impossible problems.

How To Market Your New Bookkeeping Service

Naming Your Service

What are you going to call your new bookkeeping service? Names are always hard (every parent knows this only too well of course – and if this is your first business, it’s going to feel a lot like your baby – you will get very precious about it, so the name matters).

The absolute simplest name to use is your own – but if you don’t much like your name – or you want to remain anonymous, you can always use a made up name. It’s what many of the most respected authors on the planet do – so you will be in good company (it’s not weird – and you get the chance to give your baby bookkeeping service the name you always wanted).

Alternatively, you can go for a brand style name. I originally named my bookkeeping service AccountsCheap. I did it because the service helped micro businesses, and so was right at the bottom end of the market. My clients (mostly) could not afford an expensive service, so their expectation was matched to the name.

And here’s the thing about names, the perception of the name happens slowly as you build your business. The meaning of the name will be built from the reputation you establish. In other words, names don’t actually matter that much (but see my one warning below!). It’s your service that matters. This is why Google (a completely meaningless name) now has its own brand value and perception.

It’s why Apple is more associated with a computer company than a fruit in business terms.

But avoid names that are hard to pronounce or misspellings of existing words. I founded a software company in 1999 and named it Accountz. Every time I picked up the phone and gave someone my email address I had to explain “that’s accountz with a z not an s”.

You can also use your town as the name if you want to stay local. One choice of name I had was Wisbech Bookkeeping Services, which I set up anyway to increase the likelihood of being found online.

Warning On Business Names!

One last point on names. Sometimes they can backfire. The AccountsCheap service had an achilles heel that I hadn’t thought through properly. Given enough time, I would have stuck with it, because I know reputations take time to build, but we didn’t want to wait that long.

We discovered that clients who wanted to recommend us, had a problem with being associated with the word ‘cheap’. They wanted cheap, but not its association to their own business. So we changed it to A4Accountants, and just like that, we were now seen as professional.

SEO Your Local Bookkeeping Service

I quickly got that site to No 1 in Google searches for local bookkeeping practices by putting up great content based on the fact it was a bookkeeping service and operated in my local area. You can do this too (or get help by joining my group.

The first thing to do is get your site listed on Google for Business. This is fine whether you are working from home or an office. Search for ‘Google my Business’ and follow the instructions to get your business listed.

Next, put up a page with relevant content to not just your bookkeeping practice, but also your local town. Include images of local landmarks. This builds trust (even if you are a national service).

Then schedule in a series of pages, each devoted to the different areas your business covers (both geographically as well as from a services offered perspective).

If you offer accountancy services as well as bookkeeping services, make sure you mention that. And make sure that you use those keywords enough times to ensure Google and other search engines understand what you do. But VERY IMPORTANT, don’t overuse those keywords. 2% is a safe maximum (that is, 2 in every hundred words can include those keywords).

What matters more than anything else, is the length of the articles you include. The longer the article, the more opportunities you have to influence search engines that the article is important to your industry.

Make sure you include HTML meta tags for the page title and description. This is what Google and other search engines are most likely to use when displaying your page in the search results – and of course, they are the first thing potential clients will read – so they matter more than anything else (this sort of thing is all covered in depth for complete beginners in

Essential Paperwork For Bookkeepers

There is more to ‘paperwork’ than you may think! But the most obvious paperwork is (of course!) Receipts.

That’s what we’re look at next in our definitive guide to bookkeeping. Read on.

Your Inland Revenue service (no matter where you live) demand one thing more than anything else – proof of expenses and purchases.

Since that affects bookkeepers of every kind as well as their clients (and every business in the world come to that), it makes sense to start here.

After this mini-section, we’re going to take a look at the legal side of paperwork, but let’s get back to what matters most – receipts.

For a receipt to be of value it must include the following:

  1. Date of purchase (without the date, no one can tell which accounting year this belongs to – in other words, no date = potential fine for having no proof of purchase and trying to claim for it)
  2. Amount (whatever the amount is must match exactly with your books – otherwise there’s no proof this is the receipt you’ve accounted for)
  3. Seller (you need details of who this receipt was from – no seller = no proof at all – you may as well have just made up the receipt yourself – which is kind of how ponzi scheme work!)
  4. Invoice number (this is the ultimate proof that what’s on this receipt/invoice will match the seller’s own record of the sale)
  5. Description (what was this receipt for?)
  6. Tax details (if you’re able to claim back any sales tax, VAT, GST etc., then you’re going to need proof that it was charged in the first place – some receipts will break down the actual amount, some won’t depending on how much the total amount was and the legal laws of the country)

Talk to any bookkeeper or accountant about missing receipts, and the most common expression you will find is ‘read them the riot act’. Which means when a client wants the professional bookkeeper to enter a receipt to claim against tax, and supplies no evidence for the purchase, it’s time to read them ‘the riot act’ so they understand that the risk is not just to them, but also to the professional.

So the golden rule in accounting is KEEP ALL RECEIPTS.

The good news though (in many countries) is that your paperwork can be kept electronically. Hard copies (ie. paper copies) are no longer needed in many jurisdictions provided a legible electronic copy exists (check with your Inland Revenue service for the law in your own country).

Some countries, such as the UK, operate this policy, but still have exceptions, one of which is the legal requirement to keep paper copies of tax related charges from HMRC (the UK’s Inland Revenue service quaintly known as Her Majesties Revenue and Customs).

And most cloud accounting software now available lets you upload electronic copies of your paperwork and attach them to the actual transactions in the bookkeeping system.

This is an excellent way to keep all your accounts in one place (make sure you keep backups though – without physical paper, you are far more vulnerable to loss).

Invoices issued out are of course where receipts originate from, and most of the same rules above apply here too.

Inland Revenue services need to see copies of invoices just as much as they need to see receipts (ie. where those invoices ultimately end up). This completes the invoice cycle, so under investigation, an auditing company or inland revenue service will be able to track the complete cycle by matching invoice to receipt.

Interestingly though, revenue services are far more interested in receipts, since these are prime documents that reduce tax. It’s helpful to remind ourselves that a receipt and an invoice are the exact same thing (the only difference being that an invoice may be unpaid, whereas a receipt is always paid).

Professional Bookkeeper Client Contracts

Every professional bookkeeper (or accountant) needs certain documents in place – and for many reason including legal ones.

Here’s a list of the most important:

  1. Client contract (between the bookkeeper and client detailing the type and level of services offered as well as contingency plans should something happen to the bookkeeper).
  2. Professional Indemnity Insurance (you need to have insurance in place should you make a serious mistake in your clients books – that might even cost the client their business – this is not just for your protection, this is also a courtesy to your clients – they will feel a lot safer knowing that if you mess up their accounts, they can sue you and get compensation – however daunting a proposition that may feel to you right now, don’t start up in business without it).
  3. Proof of client identity (Anti Money Laundering laws are global – in almost all jurisdictions, you will need to prove that you took cautionary measures in ensuring your clients are not criminals, and that means getting photo ID proof as well as domicile proof – a utility bill with their name and address on is usually good enough, or a personal bank statement or other legally provable document – again, always check your countries requirements on all these items).

There are plenty more documents you might want to use in your bookkeeping or accountancy business including employer’s liability insurance if you have staff or deal with members of the public face to face, but the above 3 are essential.

Client Attraction

Without clients for your bookkeeping business, you don’t have a business. So let’s take a look at some proven ways of doing this most important of all marketing tasks.

The fastest way to get clients is to contact every accountancy practice in your area and let them know about your bookkeeping service.

If there’s one thing accountants are not keen on, it’s doing the every day tasks of tracking down receipts, tying them up with transactions, and entering those transactions into whatever bookkeeping system the client has chosen.

Accountants are far more fond of figuring out how best to save tax or make the business look great to investors. That’s what they’re trained to do, and that’s what earn them large fees.

So if you can take away some of the burden of bookkeeping, they will thank you for it.

The only downside is the fees you will be able to charge them. But, you don’t necessarily have to be the cheapest in town, provided you can show them these three attributes:

  1. You are qualified as a bookkeeper
  2. You work fast
  3. You are pin point accurate

The most important thing to an accountant is your accuracy. A badly prepared set of books will cost them in potential litigation (and you your job), so accuracy and detail is imperative.

If you can also prove you work fast – because you know what you’re doing, then you’re most definitely worth paying more for.

And finally, getting qualified is simply due diligence as far as the accountant is concerned. Even if you’ve been a bookkeeper for years and know what you’re doing, but have never bothered getting the certificates that prove it, definitely go after them now. Especially if you’re going to contact accountants as your first port of call.

The second easiest way to get clients is to do a flyer drop. This will take considerably longer. This is because at any one time, there will only ever be a handful of people in your neighborhood who need a bookkeeper – and when I say neighborhood, I mean 10,000 houses!

Look for houses that show the owners are not the poorest in town. So pick the more well off looking streets and if you’re going to deliver the flyers yourself, here’s what to look out for:

  1. Dogs behind letterboxes. They exist, and they hurt! Take a ruler with you so you can poke your flyers through the box.
  2. Make sure you print your flyers on the thickest paper you can afford – some of those letterboxes are VERY stiff to open and get any through – plus many have draft excluders to make it even tougher to get anything in!
  3. Never walk on the grass if there’s a path. This of course is the polite thing to do – but more importantly it shows you respect peoples property.
  4. Smile everywhere. Prospects WILL see you coming, and this is your first chance to shine even if you never say hello.
  5. Put a picture of yourself on the flyer. A friendly face always attracts more attention.
  6. Always talk to everyone you meet. Be interested in them. And only mention what you do if they ask.
  7. Do it in small bursts everyday. I found an hour a day over 3 months produces wonders.

The third way is actually the best of all, but it’s also the toughest, so few do it. It’s using the telephone (yep, we all hate it). But it works. Here’s what we do:

  1. Use Google to make a list of every business in your area for a particular industry you fancy helping.
  2. Write a simple short letter to let them know you can help them. Because you’re selecting just one industry, this makes writing the letter a little easier.
  3. Hand deliver the letters (or post them if you have the budget). If posting, use a normal postage stamp, and above all AVOID putting any type of advertising on the envelope – the purpose of the envelope is to get the letter opened – not put straight in the bin.
  4. Follow up with a phone call a couple of days later. This gives you a lever to use, so it’s not strictly a ‘cold call’. Start by saying “Hello, I sent you a letter a couple of days ago about my service, did you get it?” – they will be forced to give you an answer, and with any luck they will ask you what it was about. Write yourself a script and practice it beforehand to make this easier.
  5. The point of the phone call is to test is there’s any interest. If there’s any at all, ask them how they would like to proceed. This gives them the power, and they will respect you for it.

The fourth way is join your local business networking groups, but I can tell you from experience, this can take a very long time to work. People have to get to know, like and trust you before they will recommend you.

But once you get a client or two from a group, those recommendations will come thick and fast. My own bookkeeping business exploded this way, but it took a year for that to happen.

The fifth way is to offer yourself up as a speaker to local business groups. This is also a supreme way of getting your message spread. Remember that for talks like this you are NEVER selling your service, you are selling yourself as a person who knows what they’re doing and can be trusted.

The sixth (and perhaps most important method of all) is via your website. If you haven’t got one, get one. You can set one up yourself these days for free using WordPress.

But simply putting up the site won’t do anything at all. You need to promote it, and the best way to do that is through Google My Business by adding your site as a business, so Google can start displaying it to anyone searching for a specific business in a particular area.

Don’t be frightened of doing this yourself if you’re not a techie. It’s easy and Google give you complete guidance.

The last method I would recommend here for now is to use local advertising. You MUST have a good budget for this to work.

The ad does not need to be large, just the smallest display ad – or even a simple text ad will do.

But what matters most is continuity. Be prepared to advertise for 6 months. It will take that long for your ad to become familiar to the papers readers.

The more they see your ad, the more they trust you – even though they have no idea who you are.

Pick any one of the above and master it before moving to another. One (or many of them) will work for you. How do I know? Because all of them have worked for me (and when you think about it, there’s not many other ways left that businesses use to get more customers).

How To Sell Your Bookkeeping Service

You’ve attracted the clients, now how do you sell your service to them?

Every professional telesales consultant I’ve talked to says the same thing: “use a script”. But experience has shown me there is no way to write that script until you have had many conversations with your target audience.

This is why it matters hugely that you pick a specific industry to talk to and not go for ‘everyone’.

If your service can be used by everyone, great, but so can everyone else’s, and that means you won’t stand out.

So pick one specific industry and get to know it as well as you can – and the best way I know of doing that is to actually go and talk with people actively engaged in it.

People are always happy to help those looking for knowledge (and not trying to sell themselves!), so your questions will be welcomed.

And from that you will soon learn what matters most to them.

And from there, it becomes easier to start new conversations with prospects about their real needs.

For A4Accountants, we chose the hairdressing and beauty market to start with. I met someone who ran a beauty and hairdressing boutique at a local network meeting and arranged to have a coffee with her (which is normal practice in network meetings).

I was able to find out not only the problems of running such a business, but also how she dealt with the individual sub-contract/self-employed hairdressers that worked in her shop.

And from there, we were able to start figuring out a marketing plan.

We started by scraping the internet for local firms in that industry. There was a surprisingly large number of them. I knew that just one contact could yield 6 more who all worked in the same place (all would be sole-traders).

Then we sent letters to each contact we got. After a few hundred letters, we realised this was not going to work for this industry (we tried two different forms of letter – long and short).

So we went straight to telesales. This was always a part of the plan, but we’d looked upon telesales as the 2nd step.

It turned out that phoning cold was the absolute best thing to do. At first we had the excuse of the letter we had just sent: “Hello, I’m wondering if you got my letter about our new bookkeeping service? No?, OK, we offer a service that starts at just £xxx for someone in your profession. Would that be of interest?”

After a while, we changed the script slightly, so we didn’t need to mention the letter at all – because now we weren’t sending one.

We got a conversion rate of 10% from cold call to interested to hear more. And from that we converted around 20%.

So for every 100 people we contacted, we got 2 new clients. If we had just sent the letter, it would have been 1/10% (1 in a thousand) – with a massively higher cost overhead.

It could be argued that we didn’t test enough letter combinations out, and I’m sure with enough time and money we could have improved things, but we hit upon a better method quickly, and that’s what we wanted.

Cold calling costs nothing but time if you have a free call plan. And follow up letters to interested parties is then far more cost effective. We followed up the letters with another call (having already got permission to do this after the first call).

You can easily bring in a new client a week if you’re just on your own using this method. So in a year, you will have a very viable practice. And once you hit a certain number of clients, you will find referrals coming in faster, so you can start cutting down on cold calling (unless you want to expand of course).

The next step is meeting (or calling) your prospective client.

What’s The First Thing To Say To A Prospective Bookkeeping Client?

It’s all about trust. They must trust you 100% because if they become a client, they are going to need to reveal everything about their financial affairs to you.

Put yourself in their position. How much of your own affairs would you be willing to tell a stranger?

Now let’s put that into perspective. By the time it comes to a conversation like this, they will already know what you do – and what they want. So the ice is broken to some extent.

But, you will still need to probe deeply into their financial affairs – as well as their business affairs, so put yourself in that position, and think about what sort of questions you would be willing to ask if the roles were reversed.

Of course, you are very different from your clients (as is everyone – we’re all different really), so you need to think about how empathetic you are. How easy is it for you to see another person’s point of view?

When you’re watching a film, do you often side with the hero (or villain)? Or are you largely agnostic to the feelings generated by the script?

If you’re a very empathetic person, you will find aligning with people easy, and winning trust is simple for you.

If you’re not, then that’s fine too. You must just ensure you keep your own values to yourself or you run the risk of alienating your prospect before you have even found out what they want.

And finding out what they want is your top priority. This is VERY different from what they need.

You can weave in their needs to their wants once you know what it is they are after.

And that leads us to the most important point of all about selling.

It’s all about the future.

Everything that drives humans forward is about the future. Hope is what we have to keep up motivated.

Think about those two points carefully. Future and Hope.

We will also do things because of the consequences that would happen if we don’t – but either way, it’s about the future. Is it painful or pleasurable?

This is what wants are all about.

To discover someone’s wants, you need to start with asking where they are right now in life.

Do they hate bookkeeping. Do they hate submitting year ends accounts. Are they ignoring the things they must do, and if so, why?

Once you’ve defined their current position – using their own words – which means you must listen carefully to what they have to say, then you’re ready to help them reveal their future.

Speaking of which, we’ll get to that in the next episode, which you can find here:

The Definitive Guide To Bookkeeping Part 2

Click below to receive updates to The Definitive Guide To Bookkeeping.

The Definitive Guide To Bookkeeping Part 2

This is part 2 of The Definitive Guide To Bookkeeping.

If you’ve not read the first part, click below:

The Definitive Guide to Bookkeeping Part 1

In part 1 we touched on the 3 reasons people want to learn bookkeeping:

  1. Become a self-employed bookkeeper
  2. Do your own bookkeeping for your business
  3. Take up bookkeeping as a career

So far we’re concentrating on the first option – becoming a self-employed or sole trader bookkeeper.

Once your bookkeeping business starts to grow, there will come a time when you will have a choice to expand and take on employees.

But to make that happen, you first need to successfully market your bookkeeping business.

And in part 1, we’d just got to the point where you were having a conversation with a prospect, and how to handle that so your prospective client learns to trust you.

Showing Your Prospects The Future

We’d come to the point where you’d discovered where they were right now in life, and the next part is to start to paint a picture of how their life would change in a good way were they to pick you to become their professional trusted adviser.

In every aspect of selling, this is the most crucial. That’s because our vision of the future is always based on hope (since no one can successfully predict what will happen).

We hope we can get all we want to get. We hope we can help our families, friends, and those less fortunate than ourselves.

We hope we will have successful relationships and live a long and happy life.

We hope that we will have enough money so we never fall seriously into debt or are forced to struggle to make ends meet.

We hope that we will be secure both now and especially in the future.

These are the basic hopes 99% of all humans live by.

So if you can demonstrate that even some of the above is likely to happen should your prospect become a client, then you are more than half way there.

There are of course no guarantees, and all reasonable human being understand this, but nevertheless, you can still make promises you can keep that will also impress your prospects.

A Successful Accountancy Business

A friend of mine runs an accountancy business in Peterborough, United Kingdom.

He has an outrageous guarantee. He says that if you are not 100% satisfied in the work that his firm does, he invites you to pay only what you believe the work is worth – even if that turns out to be zero.

He started with absolutely nothing. Took on a mortgage to buy his house turned office once he had generated enough income, and some 7 years later drives around in a top spec. Range Rover (and I mean top spec. – it cost over £138,000).

Although it is an accountancy firm, like all accountants, he started with bookkeeping and first principles. You can do exactly the same thing if that’s what you want.

If you take apart what I’ve just written, you will realise I’ve just given you a perfect example of spelling out a possible future.

And best of all, I’ve backed it with a true story.

Following a simple blueprint like this will help you convert more clients than anyone who does not understand the sales process (and that in my experience is most people).

But you need to know that there is no way you can help people uncover a good future for themselves if you don’t first know what it is they are after.

That’s why you always need to be listening as deeply as you can, followed up by relevant questions about where they want to be (NOT where you want them to be).

In the next section I want to talk about systems and how to take on new clients with the minimum possible problems.

If you’d like to hear more about that, please subscribe below and I’ll let you know when it’s published.

How To Become A Bookkeeper

The simplest way to become a bookkeeper is to pass a basic bookkeeping certification, such as the Accounting for Everything online course available on this site, or to step up to the highest level through the International Association of Bookkeepers (IAB).

Whatever you choose to do, get some basic bookkeeping tuition first before you start the bookkeeper’s journey.

Another way to do that is to buy a self-study book. Once again, the IAB is excellent for this. They offer text books to buy online for all three levels you will need to become a registered bookkeeper.

The alternative to all the above is to apply as an accounts junior or apprentice in a firm who are willing to help you train. And if you do choose to go down that path, then having a basic knowledge of the following topics will help you pass the interview with ease:

  1. Double-entry principles
  2. Debit and credit system
  3. Day books
  4. Nominal ledger
  5. Accounts receivable
  6. Accounts payable
  7. Journal entries
  8. Trial balance
  9. Profit and Loss statement
  10. Balance sheet

You don’t need to know all these accounting terms and processes inside out (that can take years of training), but an overall knowledge of what they mean will certainly help.

You can use the Accounting Glossary here on the Accounting for Everyone website to get up to speed with that (click any of the terms above to discover what they mean – you will need to scroll around though as the links only take you to the sections in which the accounting terms appear – a new tab will open for each term so you don’t lose your place here).

Another great resource is our FREE Definitive Guide To Bookkeeping, also on this site. This will give you a deeper look into most aspects of becoming a bookkeeping, especially if you are thinking of opening your own bookkeeping business.

After you have taken your basic training, the next thing is to decide if you want to become a bookkeeper as a career, or if you want to become a self-employed bookkeeper in business.

Taking up bookkeeping as a career will always be a smart move as this is the one thing ALL businesses require.

Smaller businesses usually attempt to do it themselves, and almost always come unstuck because the legislation (no matter which country you are in) is rarely simple. As a result, very few business owners know how to keep their accounting books properly.

Which means, if your decision is to start a bookkeeping practice, then you’re also in a large market due to the sheer number of businesses already established, but also an ever increasing number of new businesses that are appearing in every industry and walk of life.

If you’ve been reading along this far, you will know the steps:

a) Get a solid understanding of double-entry bookkeeping skills

b) Make a decision on bookkeeping as a career or as a business

Next up, you need to consider your country’s legislation regarding how you can legally operate as a bookkeeper.

If your choice was bookkeeping as a career, this should be taken care of by the firm who employs you, since they must also operate legally and ultimately, it’s the owners of the firm who are responsible for their books and accounting statements.

But if your choice was to set up in business, then things do get more complicated. There are far too many countries around the world for me to keep track of for the purposes of this guide on how to become a bookkeeper, but generally there are two types:

  1. Certification mandatory
  2. No certification required

In the UK, it is the latter. You do not need to prove anything at all about your knowledge of bookkeeping. BUT, you will need to register with the UK’s tax office, called HMRC if you want to practice as a commercial bookkeeper. And there is a cost to that.

This is why I also recommend joining a professional bookkeeping organisation such as the IAB, who will cover you. Note also, that in most countries you will also need insurance to operate.

This can be on many different levels including:

  1. Public Liability Insurance
  2. Professional Indemnity Insurance
  3. Employers Liability Insurance

Following this, the key to becoming a proficient bookkeeper is simply practice. As much of it as you can get.

Which is why becoming an accounts clerk is always the best way to start. You will usually get free training as well as a paid job, and you will get to work on a large number of different client accounts.

On top of that, your CV will start to shine over the years, thus giving you greater chances of promotion, as well as the opportunity to go into business yourself.

I wish you very good luck in your new career and hope it serves you well.

Quentin Pain FIAB FIoEE
United Kingdom

Turnover, Gross Profit, Net Profit, EBITDA and EBIT

Knowing the difference between gross profit and net profit matters for 2 main reasons:

  1. You buy things to resell
  2. Your costs increase every time you make a sale

And that’s because it records the difference between your sales and what is costs you directly to make those sales. That difference represents your sales margin or markup. It is the first indicator of profitability in a business.

A while back I was watching an episode of Dragons Den (called Shark Tank in the USA) that reminded me of the confusion that abounds around the words: turnover, gross profit, net profit, profit margin, EBITDA and a bunch of other terms that have everything to do with how you view the profitability of a business.

Contestants on that show almost always fail when they get their numbers wrong (or worse – they don’t know what they mean). But luckily it’s easy. Read on…

Turnover or T/O (Total Sales)

This is your total sales figure. Literally, in money terms, how much you sold during a particular period (usually your financial year). Add up every bit of money that comes into the business with the exception of Sales Tax/VAT, loans, sale of capital items, and interest received and that is your turnover.

The reason loans, capital items and other money is not included is because they are usually not a core part of a business. So whatever it is a business sells as a normal part of its trading activities represents its turnover.

Turnover To Date means the turnover so far this financial year. From this you can start to make a prediction of your total turnover for the year. For example, if you’re 9 months into your year and your turnover to date is 75,000, then you can predict with some degree of certainty that your total turnover for the year will be 100,000.

If you have professional indemnity insurance you will need to have an idea of your forecast turnover for the current year. Most policies allow a degree of error of 50% (to make up for the uncertainty factor), but check your insurance small print.

Never confuse turnover with profit. Always quote turnover excluding VAT (or Sales Tax in the USA). If you quote turnover including tax, any potential investors will run a mile (they will see you as someone who likes to inflate figures). Sales Tax and VAT is not your money (you are just collecting it on behalf of the government) so it should never be included.

Gross Profit

If all you sell is a service. And there are no costs directly involved in supplying that service, then your gross profit is the same as your turnover.

However, if you resell goods or services, manufacture things for resale or have costs directly involved with selling what you do, then you need to remove those costs from your sales in order to arrive at your gross profit.

Typically these costs will be held in an account called Cost of Goods Sold (aka COGS). If you sell mainly services, this is often shortened to simply Cost of Sales (COS).

Here’s a simple example: You buy a widget at a cost of 100 and you resell it for 200. If you sell just one of these, your turnover will be 200. However, your gross profit will be 100 (because you must subtract the cost of the goods sold).

Other direct costs include shipping or postal costs (as these will not be incurred if nothing is sold). They will also include packaging of those goods, and if you manufacture them yourself, all the costs involved in that process (we know they are direct because unless you manufacture them, you won’t have anything to sell, plus everything you manufacture is for resale).

Compare this to the costs of renting your office and heating and lighting it. You have to pay all those costs whether or not you sell a thing. These costs are termed overhead costs. Salaries and wages are also part of your overhead so are not included in your gross profit calculation. These items are included later to determine your net profit (see below).

Gross Margin

Gross margin measures the gap between what it cost you to produce a product (or buy it for resale) and how much you got for it when you sold it.

Using the previous example, the gross margin is 50%. Gross Margin = (Selling Price less Cost Price) divided by Selling Price multiplied by 100.

As another example, if you sold a product for 200 which cost you 160 to buy or manufacture, your gross margin would be 20%. Here’s the filled in gross margin equation of that last example: (200 – 160) / 200 x 100 = 20

Like gross profit, knowing your gross margin is vital. And that means knowing with a good deal of accuracy your cost of goods or cost of sales. If you don’t know what it costs you to buy, manufacture and ship something, then you cannot set a price that you know will return a profit (and this is why so many contestants in Dragon’s Den and Shark Tank get eaten alive!).


Markup is another way of talking about margin. If you buy a product for 100 and you resell it for 200, you have marked it up 100%. If you bought something for 100 and wanted to mark it up by 25%, the selling price would be 125.

Most retailers operate on a markup of at least 100%. The exception is for commodities where the competition is usually so fierce, everyone is forced to compete on price.

Certain luxury goods also have the same problem, but in a different way. For example, Apple sell both online and in retail stores. They fix their own prices and ensure those prices remain high everywhere by selling on goods to other retailers with only a small discount. Note that price fixing in any other way (eg. trying to force your resellers to sell at a certain price) is illegal in most countries.

Net Profit

Be warned. There are multiple versions of Net Profit. The bottom line is your turnover less all costs. Your costs are not only Cogs and overheads but also depreciation of your assets, any amortisation of loans and just as importantly the tax liability on any profit made.

Accountants use different abbreviations to show exactly what degree of profit they are reporting. The most common is EBITDA.


EBITDA is an acronym for Earnings Before Interest, Taxation, Depreciation and Amortisation. In other words your turnover less COGS, overheads and other expenses. EBITDA is the most common way to report Net Profit.

You can quote on any subset of this. For example: EBIT = Earnings Before Interest and Taxation (so here we are including depreciation and amortisation).

Learn the above and you will impress any investor (and bank manager).

NOTE: Find out more about profit, loss and other accounting and bookkeeping jargon with our free Definitive Guide to Bookkeeping below

Continue With The Definitive Guide To Bookkeeping Here


Depreciation and Capital Allowances

Depreciation is the amount an asset has reduced depending on age, wear and tear, and current market value. It is a core part of  bookkeeping, and usually applied at year end (for larger businesses it is often calculated every month as part of management reporting).

When you record the purchase of an asset such as equipment or buildings for use in a business, you place it in the Fixed Asset section of your Chart of Accounts. Whenever you look at this section, you can see at a glance how much your assets originally cost.

However, in order to account correctly for your business, you need to record the change in value of those assets. This can be because the item is no longer new, and is therefore worth less than originally paid. It can also be due to wear and tear or damage.

On top of that, an asset could also be stolen, exchanged for another or simply sold. All of this needs recording.

It can be recorded directly in the asset’s account itself, so a check on the transactions and the balance in that account will show its original value followed by its reduction in value over the years, or, more usually, a separate account will be opened to record those changes. This extra account is called an Accumulated Depreciation account (because the amount the asset reduces by over time is added together to give a total balance).

This continues until the Asset’s account its corresponding depreciation account cancel each other out. Whilst the asset still has a value, we can look at the two accounts together to show the current value of the asset.

Usually, assets are classified into general groups (eg. Office Equipment, Motor Vehicles) to keep the number of accounts as small as necessary to accommodate reporting requirements for both the Inland Revenue and management.

Strictly, any asset should be valued at its actual market price when the depreciation needs to be reported. In reality, that can often be hard to do, so there are a few conventional ways to make this easier. The two most used forms of depreciation are:

  • Straight Line
  • Reducing Balance

Straight line means reducing the asset by a fixed value until the asset balance is zero. For example, at 25% per year, it will take 4 years to reduce the asset to zero. This is the most common way to depreciate assets.

A reducing balance means the asset never gets to zero. Using the same 25% rate, the reduction is applied to the last known value. So if an asset starts at 400, then after 1 year at 25% it will be worth 300. At this point it is the same as the Straight Line method. However, in year 2, it will be  25% of 300 (slightly less than 100 taken in year 1).

The reducing balance method is more accurate since it could be argued that whilst you still have the asset it will always have a value, however small.

Depreciation is a bookkeeping exercise. It has nothing to do with tax liability. Instead inland revenue services around the world offer tax benefits, an example of which is Capital Allowances (UK). You can choose to take the allowance or not depending on whether you have made a profit. That means the allowance will often be completely out of kilter with the book value.

From a business perspective, it is the book value that is important. It tells the business owner how much it would cost to replace those assets should it become necessary to do so.

Bookkeeping for Depreciation

There are 3 main sections in any set of books for any business. They are:

  1. Assets
  2. Liabilities
  3. Equity

Assets is where we store the value of all equipment, vehicles or other purchases of substantial value that we intend to use in the business. Assets represent the things the business owns. Some of those things may be items we buy with the intention of selling them for a profit. This is our stock (also known as inventory). However, those are not the assets we use to report depreciation on.

Whilst they too (stock bought fo resale) decrease in value if they’re not sold, they are accounted for in a slight different way, which will be covered in another article.

What we’re interested in right now are those things the business buys that will last longer than 1 year and that are used either in the business, or to add value to the business.

Office Equipment is the most common, since this is one thing every business (that has an office) is likely to buy – even if it’s on hire purchase or lease-buy type contracts.

If the business is the legal owner of that equipment (regardless of whether it has been paid of in full) then it will be recorded on the balance sheet as an asset, and it will also have a separate account created for it that shows by how much its value has decreased since it was purchased.

In other words we will be using 2 accounts in our bookkeeping system to record its total current value. For something like office equipment, these are usually called:

  1. Office Equipment
  2. Office Equipment Depreciation

When we purchase office equipment we credit the bank (assuming that’s how we paid for it) and we debit Office Equipment. If we value of our equipment was, say, 1000, then the balance of the Office Equipment account at that point in time would be 1000.

If we decided to depreciate office equipment using the straight line method by 25%, we would add a new transaction crediting Office Equipment Depreciation by 250 (1000 x 25%).

Since every credit must be balanced by a debit, the other side of this double entry would be a debit to Office Equipment Depreciation Expense. This will affect our profitability, which is what we want – the company has in effect lost 250 of its value during that period of time, which is now reflected in the P&L account.

To get the current value of our asset we add the balances of the 2 accounts together: 1000 – 250 = 750. We are saying that the value of that office equipment (were we to try to sell it at the time we depreciated it) would be 750. This is typically done at the end of each financial year.

In year 2, we would add the same depreciation transactions, and so the combined balances of the 2 accounts would drop to 500. In year 3 the balance would be 250. And in year 4 it would be zero.

That fall is also recorded in the profit and loss account as explained, which ultimately ends up in the Equity section of our balance sheet. The equity section represents what the business owes its owners, so if you’re following along, you can see how that happens from the entries we have been making.

In reality that never happens because we will very likely have bought more office equipment in the meantime. Plus any equipment that has depreciated to zero (ie. that has been on the books for 4 or more years) will either have been thrown or given away, or sold.

The last thing we need to do to complete an asset that has no value in the books is to remove its original cost from, in this example, the Office Equipment account, and its total depreciation in the Office Equipment Depreciation account. We do that by crediting Office Equipment for the assets full value and debiting Office Equipment Depreciation by the same amount.

If an asset is sold, and the price we got for it is worth more than the book value (the ‘book value’ is literally the total balance in our books of the asset using those 2 accounts introduced earlier) then we must also report a gain. We have in effect made a profit on the sale of our assets. So that gain will be recorded in our profit and loss account under a new account named something like: “Gain On Sale Of Assets”.

If we sold it at a loss, it would also be recorded in the profit and loss account, but this time in an account named something like: “Loss On Disposal Of Assets”.

The other side of this transaction will debit the account that received the money from the sale (eg. a bank account).

And once that was done, we would then Credit Office Equipment and Debit Office Equipment Depreciation to zero out the value of the original asset and its total depreciation (leaving the rest of the Office Equipment assets and depreciation as they are to reflect the current values).

Sale Of An Asset With No Loss Or Gain Example

Suppose we bought an asset for 1000 with cash, depreciated it at the end of the year 1 by 250, and then sold it for 750 for cash. Since the value of the asset at the end of year 1 was 750, and we sold it at that point for 750, no loss or gain has been made. Here’s all the transactions you would have made to account for everything including the original purchase:

  1. Credit Cash, Debit Office Equipment for 1000 (buying the equipment).
  2. Credit Office Equipment Depreciation, Debit Office Equipment Depreciation Expense  for 250 (value lost in year 1 through depreciation).
  3. Credit Office Equipment Depreciation, Debit Cash for 750 (the cash we got for selling the asset).
  4. Credit Office Equipment, Debit Office Equipment Depreciation for 1000 (to zero the asset and its total depreciation value).

If these were the only transactions in our bookkeeping system, we would have the following final balances in our 4 accounts:

  1. -250 Cash (Assets)
  2. 250 Office Equipment Depreciation Expense (Equity)
  3. 0 Office Equipment (Assets)
  4. 0 Office Equipment Depreciation (Assets)

Since the -250 cancels the +250 we know the books balance. And that is how it always must be.

Capital Allowances

In the UK and most countries in the world, you cannot claim capital purchases as a direct expense of the business. This is simply because assets like these usually last more than a year (so you still have the asset and it’s still worth something, so you cannot write its full value off against tax – that’s what it all boils down to – does the thing you bought still have some value and do you still own it at year end).

However, as it depreciates in value over time, you must still record that in your books – as explained above, and it would be wrong that you could not claim that depreciation against tax. But rather than doing the obvious – which is just to respect its value in the profit and loss account, governments over the years have chosen to make it a special case.

And so with a special case you need a special tax, and in the UK its called a Capital Allowance. None of this is recorded in your books. It’s purely a tax thing, not a business value. As a result, if you make a loss one year, you won’t want to claim the depreciation against tax – you can do that next year instead if you make a profit. Because of this discrepancy, your books can show one value for your assets, and the Inland Revenue another.

In the USA different names are used. As it’s also complicated, take a look at the Wikipedia entry for it here.

Learn Bookkeeping

If you want to know more about depreciation and capital allowances, join the Accounting for Everyone online bookkeeping course today:

Find Out More…

UK National Minimum Wage

From October 2016 the UK national minimum wage thresholds are as follows:

  1. Apprentices £3.40
  2. Under 18 £4.00
  3. 18 – 20 years old £5.55
  4. 21-24 years old £6.95
  5. 25 and over £7.20

Who can get the minimum wage?

Most adult workers who:

  • are working legally in the UK
  • are not genuinely self-employed
  • have a written, oral or implied contract

Why Should I Take Control Of My Business Accounts?

In the UK, HMRC are introducing compulsory quarterly accounting periods for all businesses by 2020 (if you’re in any other country and you don’t already have this, be warned, it will be coming to a place near you soon – just as VAT will eventually replace Sales Tax in the USA – it’s just a matter of time).

The new legislation means every 3 months you will need to know exactly where you are in your business from a financial perspective.

Anyone who keeps their accounts up to date will have no problem. But those (which is by far the majority now) will find it impossible.

And that’s because they have no idea how to account for their business.

The upside for HMRC is that they will rake in a lot of penalties. The downside for us as business owners is they will have plenty more reasons to go after us.

So how can we learn to take responsibility for our finances as business owners?

And (more importantly!) why would we do that?

What’s the benefit?

I drew up a list of 10 ideas to help:

10 reasons for getting to grips with your accounts on a regular basis.

  1. You will know if you’re making a profit (and so have the opportunity to revise the way you do business).
  2. You will know if you have the cashflow to continue next month (and have enough time to do something about it).
  3. You will know how much you owe and when you need to pay it (and so make contingencies in advance as you will now also have the answer to #2 above).
  4. You will know who owes you money and whether it’s overdue (and so put in place a plan to collect that money a.s.a.p. if you need to having done #3).
  5. You will know if you have enough money to take your business up a notch (of all of the above).
  6. You will be able to negotiate a better deal with the bank if you need extra cash to grow your business (because of all of the above).
  7. You will know the value of your business should you wish to sell it (because of all of the above).
  8. You will be able to take longer holidays because the business will run better when you’re not there (because of the above).
  9. You will be able to hire more staff to do the things you hate doing (because of the above).
  10. You will be able to retire earlier or sell the business or do something else. And all because you took the small amount of time it needs to take control of your finances.

The alternative is you find yourself a trained bookkeeper. The best international institution I know of is called The International Association of Bookkeepers.

In fact I respect them so much I joined and became a fellow. They are run by their members, so everyone gets a vote in what happens – including who is elected on the council.

You can find out more about the IAB here:

If you’re in the UK and want someone else to do your bookkeeping for you, they have a list of registered bookkeepers on their UK site.

That includes my own accountancy company right here:

Of you can just learn and do it all yourself by joining the Accounting for Everyone online bookkeeping course. Link is on the right hand side.

A Bunch Of Bookkeeping Questions On Debits And Credits

I hope I will learn something from this having never been involved in anything like it before but hubby is setting up his own business and wants me to do the admin and book keeping and accounts so have to learn quick. So thank you for this, wish me luck think I’m going to need it.

Thank you so much for providing us such a wonderful platform for distance learning. I am so eager to attend for next session and I am so hungry to know where does the Equity group fit into.Thanks so much for this course, it has been so useful and engaging!!!

I completed the course a couple of months ago, and have just come back to get certified. I passed! Just a note that I’ve had real difficulties with the certificate – had to save the background image as a jpg then copy and paste the text and combine it all in Word. A pdf download would be so much easier!

Anyway, all sorted now, and thanks again. Thank you for this course I need it to brush up on my accounting skills. When you forget the basic you forget the most important part.Hi, I am currently working in a school as Acting Bursar and even though I have a strong finance background I do need to brush up my book keeping skills, I am so glad I came across this course as I feel this will help me immensely and also help boost my confidence in the long run.I’m really glad there is a course structure like this online – – I’m looking forward to learning and getting to work in the next 12 weeks. Will there be a certification given at the end of the 12 weeks?

Hi! I love this as it’s all coming back. Thank you for this free course as it’s a great refresher course. I wonder if you can help me understand and know where I go from here after the free 12 week course. I graduated with BS in Accountancy in the Philippines about 19 years ago. I never work in accounting in this country ever since I came here for family reasons and the thought that my qualification wasn’t recognized here. But at the moment, I’m really interested to work again while I’m helping my friend doing her bookkeeping. Is it really not recognized here? Do I have to study again to work in the accounting field?

Hi! The money will be under asset as cash in the bank, right! Then either way that is equity whatever kind of business but do you mean that if I have a limited company it will be shareholders account but a different account name if different kind of business? Thank you.

Hi! Looking forward to finish the whole 12 week course to hopefully refresh my knowledge in accounting and learn new or different terms e.g. From where I studied accounting, we used Capital instead of Equity. I really wanted to go back in this career but don’t know where to start. I suppose I have to start from the beginning as it was more than 19 years ago and from a different country. So, thank you for this free course.

Hello,I studied ACCA -Association of certified chartered accounting 6 years ago in Ireland and came to Canada after. couldn’t find same rate pay here so I left the career. I didn’t really study keepkeeping or payroll at all but I figure out it is not difficult to do it base on qualification,now I am bookkeeping my husband restaurant from last 2 and half years with excel sheet only without anybody help, except for search from google. I love the way you teach online and I will take few more weeks courses before I decide whether I will go for fast track. am I able to change by the end of course? do you have some payroll course too?

Enjoyed Lesson 1. It is so easy to follow. How do I register for the free week 2 .. Thanks

Ah, thank you for clarifying that… I was really scratching my head trying to work it out!

I’m really enjoying the course and am managing to follow all the explanations and tasks, but a small thing in this week’s lesson has confused me.

You said: ” The date will be the date you compiled this.” Wouldn’t the date for each transaction be the date it took place, rather than the date the accounts were written up? Hope you can clarify this for me, please.

Of course! Thank you for spelling it out for me! I’m enjoying the course so far, but am having trouble discerning Liabilities from Equity in some instances. Why is it that a mortgage is a Liability, but rent comes under PL and is therefore Equity? Surely repayments on a mortgage are part of PL too?

I’m able to understand working the problems and am getting them done without too much struggle. I’m having a terrible time understanding the instructions. When they say take last week’s P&L and add these two entries to it, I look for the P&L, look for the answers to see what it’s supposed to look like and it often doesn’t look like what we had (from what I’m finding, anyhow.) Then the new entries or last week’s data that we’re starting with will be above or below where I expect to see it. I know you can’t tell exactly what I’m talking about when I can’t tell you more precisely and I’m feeling so confused, I can’t explain it. I’m spending far more time trying to figure out the instructions than I am working the problems. The biggest problem seem to be when it refers to work already done. I find the use of the terms “Debtor” and “Creditor” extremely confusing because their use depends on which way the transaction is going.

Are we paying or receiving? I originally learned in my first classes in bookkeeping by using the terms “Accounts Receivable” and “Accounts Payable” and this was far easier to keep straight. If Debtors and Creditors are common industry use, we’ve got to use these terms. I’ve been looking for links or shortcuts to keep them straight but I’ve been wrestling with these terms for several days and still making as many errors in their use as when I started. Got any suggestions?

Many thanks for your reply, I can confirm I have now gone down the fast tract route and am now hooked, this course is great. thank you also for the link I shall have a look at that. I am really enjoying this course,

Can I confirm that I can switch to the fast tracked course if I wish. Also this is a new area for me and I was thinking , do you do other courses that continue on from this one to enable us to become fully qualified bookkeepers etc.Thanks for your encouragement and your answer.

Not following. I’ve been over the entries several times from where we balanced, let’s say the Sales Account. Balance was 2500. Then you added two additional entries, one for 100 and one for 40. But the original sales account had not had any additional entries made to it. But now it has a balance of 150. What changed the balance or is this a different account? Expense accounts had the same thing. I’m missing something.

Thank you for wanting to teach me about bookkeeping/accounting. I really do have a genuine love for accounting, and trying to seek a career in accounting. Right now I’m a college student majoring Business Administration starting out on my associates degree. As you can see, I’m moving in the right direction at this point. I do hope to get something out of your course.
Again, Thanks.

Thanks for getting back to me so soon. I started this course on Monday and have already finished task for week 6. I find it really easy to understand but I’m now struggling to remember everything I have learnt so have to keep going through my notes. I got the last task correct but I think I need To go through this chapter once more to get my head round P&L and to practice a little more. Thanks again for your support and I am sure I will be asking some more questions in the next few days.

Could you please explain me the reasons behind transaction 5 on the task for last week? I did it the other way around: stationery a credit and accounts payable a debit. I understood it as coming from the stationery to accounts payable/creditors (credit – debit).

I got the final answer correct (4400 on both columns) but there was obviously a mistake. Is there a way I could pick this error when doing it for my business?First of all, thanks for introducing this System. I did Accounting far back in 1975 in which I took RSA (Royal Society of Arts) Stages 1 & 2 Bookkeeping and Accounting, but unfortunately never work with it. I’m at the moment a Truck Driver which involve a lot of physical. And due my age I wonder how long I’m going to hang in there, and therefore, need something to backup in case I’ve a change of profession. Once again I say thanks.

I looked for the answer and didn’t see it. May have missed. What is the difference between the b/d (brought down) and c/d (carried down)? I’m having a very hard time finding things: probably spend an hour looking for stuff for every 5 minutes I spend studying. Right now I’m looking for the workbook. I’ve already been in it several times but can’t find it now. Is there a map or some way to find things?I’m spending an hour looking for things for every 5 minutes I spend studying. Right now I’m looking for the workbook. I’ve been in it several times in the past, but now I’ve lost it again.

Is there a map or some structure to how these are arranged? OK, got it,

Thanks. I had not gotten to the workbook.I’m having a hard time getting the picture on this assignment. What is the data we are to work with? You say it’s at the beginning of this lesson and there are 5 answers.

Where are they? Where is the ledger we post to? We draw up a table. What does a table look like? This doesn’t look like what I’ve seen before? Please comment. Thanks.I do not reside in the UK, and my tax authority is US. I like your class it is very straight forward and precise. I am presently thinking about full time bookkeeping and wondered if the class is recognized by US jurisdictions?I just wanted to say how great this course was and how easy it was to learn with your explanations. However i have just paid for the test but it wont appear on my account for me to take it?

I’ve just started this course I’m a stay at home mum with 3 boys 3 and under and want to get a career under my belt before the youngest (23weeks) is in school (so I have a while yet) this is going to sound like a dumb question but I want to make sure I have the correct understand for task 1, I have the understanding that everything that either costs or pays is an account ie: groceries, nursery fees, rent, electric, work(wages) am I on the right line of understanding?

I seem to progress along through a task fine until it includes figures from the previous weeks then it all goes a bit pear shaped. I think the main problem is the continuation of the totals added to the P&L account, back to the drawing board!

I have been working as a bookkeeper for the last 6 years; I am taking your course now because I just want to make sure I’m not missing something, somewhere. I suppose I’m doing it more as an edification that I DO actually know what I’m doing and because I’m tired of losing jobs because I’m not a CPA (yet.)

In short, I’m doing this because #1) I want to go step by step, #2) I want to use it as a ‘refresher’ course, and #3) I want to learn! Thank you for offering this course. What happens if I want to go from free to option #3? Can I change horses in the middle of the stream easily? Please let me know.

Having looked at other books in an attempt to self teach myself this field, I’ve noticed that most textbooks tend to be intimidating by throwing all sorts of technical jargon at you (like “contra-accounts). without explaining their meaning or the reasoning behind it. Here in some very simple lessons you’ve managed to explain what 100?s of pages of reading only seemed to make even more confusing. I’m very glad that I’ve stumbled across your course and even if some of the rules might be slightly different here in the US, at the very least, you’ve given me a much clearer understanding of the principles and philosophies involved. Thank You.

Is there an easy way to remember which way the transaction goes when its ‘a sale on credit of 1500?? It’s these ones I keep getting the wrong way round Just what I needed all this years. Very Interesting. I am enjoying starting to learn about this but im not sure about how to do the task.. I dont suppose there is someone who can point me in the right direction? Do we just need the names of the accounts, or the actual lists. for example: for ‘Bank’ would the account be the bank statements? or everything that appears on the statements? Can you tell i have NEVER done this before haha

I have done some sort of bookkeeping for years at the various jobs I have held, and have used a few different software programs. It has been a long, long time since I took a basic accounting class in school, and I really want to have a working knowledge of what current bookkeeping software is doing, so that I can really be able to confirm the reports. All the calculations are no longer with paper and pencil, yet I do not like to just assume that the program is correct. Although, this is not a software class, per se, I will learn things that I have either forgotten or never really knew. And I will be able to understand what the reports are saying, and correct any errors. Thanks so much for this information.

I’ve just started working from home and I’m struggling to get my head around the bookkeeping I need to do. I’ve a young son so not a lot of time each week to spend learning a new skill on top of trying to keep the business going. I thought I had it worked out but then realised half the information I’d need for a tax return was missing from my files. I’m really hoping this course helps.

Thank you for this free information. I have actually done bookkeeping in an accountants office a few years ago, but I moved. I am now at a point in my life where I need to supplement my single income and have decided to do Freelance Bookkeeping in the evenings and on weekends. I am over half way through the Accounting/Bookkeeping Course with ICS Learning (on line/at home). I just need a little more confidence to get started. I am currently an Administrative Assistant (doing mainly accounts receivables and posting accounts payables. I think this is the just boost to give me more confidence as I know once I get that first job I will feel great. I know I can do the work. Right now I am only comfortable doing the A/R, A/P, Bank Recs and GST here in Alberta. I am able to print out and read the reports from Simply/Sage Accounting also. Thank you again. I know I will benefit. Trish

Is it only me that is still confused? Thank very much. your course is easy to understand and I am very glad that i have started.

No problem, i don’t think it was because I was clever, just that it confused me, and up to then, your course had been very understandable!

As the accounts mentioned were ‘Sales’ and Cash’ (which i used in my answer), your answer used ‘Sales’ and ‘Bank’.

I expect I haven’t fully got it, but as all the other answers, 2-5 (which i got right 🙂 used the same accounts as the question, I thought Task 1 should? Thank you for your quick replay.
I’m studying for an exam at the end of a bookkeeping module as part of an accountancy training (so this is only the beginning for me). Your course is very good, and I thank you very muck for it! I wanted some more information about the imprest system because I need to write about it (and my book doesn’t explain it very well) I was surprised I couldn’t find any mention of it. Another thing that I thought would be part of this is bank reconciliation … would be nice to have, even a short reference would do… or did I miss it? many thanks again!

Top Reasons To Be A Bookkeeper From The IAB

This is a simple infographic from the International Association of Bookkeepers (IAB) explaining the benefits of becoming a bookkeeper.

Being a bookkeeper could be to learn the trade and gain employment in the industry, or to more fully and perhaps do the books for your business if you own one, or to set up your own bookkeeping business.

Whatever the reason you want to become a bookkeeper, the “Top Reasons to be a Bookkeeper” infographic below will give you plenty of ideas and insights into the profession, especially if you are new to the bookkeeping and accounting industry.

The IAB helps people gain professional qualifications in all aspects of bookkeeping including payroll and has branches in 60 countries around the world as well as distance learning opportunities and home study bookkeeping courses.

Top Reasons To Be A Bookkeeper


One of the most common accounting areas people want to know about is Accounting Ratios.

With just a little math you can quickly discover a lot about a business.

All you need is some basic statistics and figures such as turnover, sales and expenses tracked over time and you can figure out pretty much anything.

We have set up an Accounting Ratio page over here:

Also, another massive area of interest is our Accounting Glossary, which unusually is actually written so people can understand the terms. How good is that!

You can find that over here:

Finally, you may want to learn all about Double-Entry bookkeeping and how to understand Debits from Credits.

That is covered in great detail in the Accounting for Everyone Fast Track Online Course. Here’s how to find out more:

Accounting for Everyone Certified Course

Double-entry Accounting Explained In Simple Terms

Double-entry accounting is really very simple provided you follow these rules.

  1. Everything starts with a Source Document. That is usually an invoice for something you have sold or a receipt for something you have bought.
  2. Each Source Document is copied into your double-entry system by creating Transactions.
  3. A Source Document always contains at least one complete transaction, and depending on your accounting system sometimes more.
  4. A double-entry transaction consists of a minimum of two Entries.
  5. That is, each transaction you create must have at least two entries.
  6. Each entry contains either a Debit or a Credit.
  7. Debits and Credits are amounts of money.

For a Transaction to be true to the double-entry principle, two further rules must be obeyed:

  1. The entries involved must contain at least one Debit and at least one Credit.
  2. The value of all the Debits must equal the value of all the Credits for a transaction to be considered complete.

Furthermore, each entry must consist of a minimum of four pieces of information as follows:

1. Date (the date on which the transaction occurred)
2. Reference (so it can be identified with a source document)
3. Amount (known as a Debit or a Credit in any currency)
4. Account (whose balance will be increased or decreased by the amount depending on whether it is a Debit or a Credit)

Every transaction tracks an amount of money from one account to one or more other accounts.

As long as the Debit amounts equal the Credit amounts, then we know that all the money has been accounted for.

The idea that we are doubling the amount of data by making two entries is a myth.

The two (or more) entries merely record the flow of money from one account to another. That is its sole purpose.

It is called Double-entry because two entries are the minimum required to record the two accounts involved in every transaction.

For example, buying a computer for your business involves your Bank and your Equipment accounts.

Once the transaction has been entered, a look at your books will show how much you have left in your bank and how much you have spent on equipment.

If you don’t know these things, it is unlikely your business will stay profitable as you will have no idea what is going on.

This is why double-entry accounting is used universally around the world and has been in existence for many thousands of years.

NOTE: If you want to learn more about double-entry, take an online exam and get a certificate to prove you know what you’re talking about, consider joining the Accounting for Everyone Certified Online Bookkeeping Course. It is the longest running online course and has had well over 12,000 successful students.

All the above and more is explained step by step with tasks and answers in the Accounting for Everyone online certified bookkeeping course. Click below to find out more.

Join The Accounting for Everyone Online Course

Bookkeeping Certificate Online Classes

If you are new to bookkeeping and accounting then you should optin to the Accounting for Everyone 12 week online course.

Put together by Quentin Pain in 1998 the course has been available for many years and has recently been updated, although the principles of double-entry have not changed in 600 years.

But what has changed is the way you can think about the logic behind double-entry.

And that is what makes Accounting for Everyone so unique in the world of accounting and bookkeeping courses.

Here’s some fundamentals you will want to remember if you ever get stuck either in day to day bookkeeping or if you find yourself taking an accounting exam.

  1. Credit = From
  2. Debit = To

Next time you try to figure out which is the credit and which the debit apply the From/To principle and you will get it.

For example, entering an expense of 100 for travel paid for in cash.

  1. The money came FROM Cash so that is the Credit.
  2. The money went TO Travel Expenses so that is the Debit.

And let’s look at the other side. Recording a sale  of 500 paid into the bank.

  1. The money came FROM Sales so that is the Credit.
  2. The money went TO the Bank so that is the Debit.

The course has many brilliant snippets like this, so choose an option below and get started.

[ez_box title=”FastTrack+” color=”orange”] Includes full FastTrack instant access plus online certification
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Accounting Courses Online With Certificate

The number of online accounting courses is quite limited, and of those not many are particularly good, but Accounting for Everyone is one of the diamonds in the pack.

It was put together from over 12 years of research into the double-entry model and how it can be explained in a logical way (and trust me, it is not easy to condense 1,000+ page hard to understand text books into something ordinary humans can grasp).

So in 1998 the first edition of the book that transformed double-entry hit the shelves of Amazon: Accounting for Everyone.

Now in its sixth edition, Accounting for Everyone has helped over 12,000 students get to grips with the fundamentals in a way no other course on accounting and bookkeeping ever has.

And you can now get the whole 12 week online Accounting for Everyone course for an extremely low cost.

When you finish, there is an optional Basic Bookkeeping Certificate online exam you can take to show other people you know the basics.

How Does The Accounting for Everyone Fast Track Course Work?

You get access to all the modules immediately as well as the downloadable PDF version of the workbook and access to the online exam.

This includes the following modules:

  1. Accounts (and what they really are – explained in detail)
  2. Transactions in detail, but starting with the simplest so you get to grips immediately with how double-entry accounting works
  3. Posting (it’s good to know what’s behind double-entry even if you never actually get to see it in software)
  4. Ledgers (in the UK we have the Nominal Ledger in the USA it’s called the General Ledger – become a global expert with Accounting for Everyone)
  5. Traditional methods (so you can pass exams with ease – the logic explained)
  6. The Trial Balance (another one of those often overlooked miracles that you need to understand in order to pass your bookkeeping exam)
  7. The Profit and Loss Account (most people think the P&L is a report, we show you exactly why it is and has always been an Account – very new stuff here that really shows the logic every other book on the subject misses)
  8. The Balance Sheet (this is a break-through week – we unravel the part most bookkeepers rarely go near)
  9. Stock and Inventory (you need to know this as the majority of businesses buy and sell things and you will need to know how to account for it, and how that actually works – explained so simply anyone can get it)
  10. Depreciation and Amortization (never before has depreciation been explained so efficiently – you won’t forget how to handle it once you have been through this week’s training and tasks)
  11. VAT (for UK, Europe and many other countries) and Sales TAX (USA) taken apart and put back together so you will understand how it works.
  12. The Wrap Up – are you ready for Certification? Absolutely you are.

You get to access the whole course immediately, so you can work as fast or slow as you like.

Plus you also get a downloadable version of the course workbook (150+ pages) including all the question and answer grids that enhance the Accounting for Everyone course.

And on top of that you get full access to our online Basic Bookkeeping Certification exam.

You can take this as many times as you like until you pass (unlike other courses!), but if you go through every week diligently you will have no problem passing the exam.

We show you simple memory methods not explained anywhere else on how to remember how to cope with debits and credits and getting them in the right order.

This one simple method alone has helped literally thousands of people pass their bookkeeping and accountancy exams.

So all you need to do now is decide when you want to start.

Find Out More…

Learn Double-Entry Bookkeeping

Here’s a great resource from Loris Tissino. He has developed a site to step you through double-entry including transactions and posting. I think you will find this another very useful tool.

Loris has written a piece for Accounting for Everyone describing it. Here we go:

If you are a student and want to practice bookkeeping and accounting, what can you do? If you look for explanations on the web, you’ll find lots of tutorials that teach you the basic concepts, like what an account is, how double entry works, how to prepare a trial balance or a financial statement, and so on. That’s fine, but what do you have to do to practice?

Probably you need to actually write down your journal entries, preparing a paper with some T-accounts, and manually copy the amounts from the journal to the T-accounts. To prepare the statements, you have to make dozens of (boring) sums, putting it all together in a nice paper.

learn double entry

Click the image to visit

If you are a bit more evoluted, you can open up a spreadsheet, and do your journal entries there. Some sorting, some filtering, some subtotals computing, and you are almost done. Better than using pen and paper, but a bit complicated, though (and things tend to get messy if you don’t pay attention to some details).

Of course, you could use some software to accomplish your task. You can find programs that are actually used by companies to do the job. The problem with this approach is that these kind of programs are not much flexible (they don’t have to). You cannot easily adapt the chart of accounts to your needs, you have to fill tons of information that are very important for the business’ life but irrelevant for what concerns your exercise, and sometimes you cannot even edit what you have previously done.

If you are a student and faced this kind of problems, you’ll be glad to know about a new web site aimed to allow you practice bookkeeping keeping everything easy. It’s The usage is completely free, and the source code is available as free software. The good news is that you don’t have to install anything on your computer, since it is web-based. Just login, create a firm, and start bookkeeping. As you proceed, you can check the Ledger, the Trial Balance and the Financial Statement. If you make errors, you can easily correct them. You can have your transactions analysed, and you are warned if some of the results don’t look normal (like having cash with a negative balance). You can use a standard chart of accounts or prepare a new one. You can share your firm with another student, so that you can work together. And you can send a link to your teacher, if you want him/her to check it.

how to learn double entry bookkeeping imageFor those with a passion for languages and internationalization, there is also the possibility to prepare a multilanguage chart of accounts. The application is under development, but already usable enough. Of course, it is open to improvements (you can help by sending comments and reporting bugs).

Accounting for Depreciation

Depreciation is really important yet few bother to do it. Why? because it seems so hard to do.

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 (IR) 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 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 so already, sign up below to start the Accounting for Everyone Online Certified Bookkeeping Course. We go into depreciation in greater detail on the course, including standard ways to depreciate such as straight line depreciation and reducing balance.

[ez_box title=”Start The Certified Accounting for Everyone Online Bookkeeping Course Today” color=”orange”]Instant access to the whole course plus online certification plus 150 page downloadable workbook with answers [ez_btn color=”grey” url=”” target=”_self”]£29.99[/ez_btn][/ez_box]

Quentin Pain’s Legendary Business Owners Program

legendary business owners image of Quentin Pain

Quentin Pain Business Mentor Award 2013

The Legendary Business Owners Program is a new service from Small Business Mentor of the Year and founder of Accounting for Everyone, Quentin Pain.

Whilst only a few people ever qualify as being a well known celebrity, every business owner can become legendary for what they do either in their industry or in their locality.

That can happen in a number of ways including being featured in your local newspaper via press releases, guest articles or even advertising if you have the budget.

But Quentin’s Legendary Business Owners program ads a massive amount more to this very basic idea.

It starts with mentoring and training, goes into the technical side of things (think internet here) and then goes on to creating your message and how to broadcast and market that super effectively.

The thing is, all of us are legendary in one way or another, it’s just how we choose to use that that makes the difference between success and failure in business.

For a more detailed breakdown and contact details please visit Quentin’s Legendary Business Owners page.

Welcome Bookkeepers and Business Owners to 2013

I have been passionate about accounting ever since I started my first business back in 1979 in the UK. It grew quickly and became successful, and I developed a computer program during that time to run the accounts of the business.

So here we are 33 years later and a LOT wiser, plus a few more successful businesses under my belt, but you know, the best thing about it all has been the businesses I have helped. And especially, the people who run those businesses.

2013 is going to be an incredible year for small businesses and those who want to become bookkeepers. So I would just like to wish you all a super journey and a really prosperous year in your ventures.

My best,
Quentin Pain

Quentin Pain image

PS. If you want to learn a little more about marketing your business go and sign up at

2012 And All That

Another year is upon us and at a time of world recession, you can not do better than being a bookkeeper. The number of new startup businesses is increasing globally because of redundancies and people unwilling to work for others.

The one thing they all have in common is that they don’t want to learn or do bookkeeping. How do I know? Simple, I have trained tens of thousands of people since I first published ‘Accounting For Everyone’ in 1998, and this site is now in the top ten of bookkeeping tuition sites. yet out of a global population approaching 7 billion, only a very very small fraction are interested in the subject.

One of my missions has been to teach people how to make their businesses more successful through understanding accounting and I know from the feedback that it is greatly appreciated, but I also know that most businesses would prefer to pay someone for doing this task. And that is where you come in.

Now, how do you take advantage of this?

The simple answer is to understand marketing. I know from the many business owners I have talked to over the past 32 years that most spend less than 20% of their resources on marketing. And yet, statistics show that the most successful businesses spend upwards of 50%.

So the answer must be to either devote more time or spend more of your resources on marketing. The great thing about bookkeeping though is that once you have a full roster of clients (ie. enough to give you a full time business) then your marketing spend can come down considerably (unless of course your plans are to expand and take on additional bookkeepers).

This is great news for bookkeepers. But it means at the start you must get a grip on how to sell your business and yourself.

So let me introduce you to my other blog at Everything I have ever learnt about running a business is being added to that site. Take a look and leave a comment if you can. I would love your feedback.

Advanced Balance Sheet Theory

If you are not familiar with balance sheets you should take my bookkeeping course first as I don’t want to put anyone off with this article. OK, with the warning out of the way, let’s press on…

With most accounting systems, things like balance sheets are considered as reports. That is, something you need to compile on such and such a date. The same convention also applies to the profit and loss account etc. What very few people realise is that they can all be expressed as accounts. Radical thinking eh!

Balance Sheet as an Account

A balance sheet usually consists of three items:

  1. Assets
  2. Liabilities
  3. Equity

It represents the accounting equation: Assets = Liabilities + Equity (or ALE to help you remember – imagine yourself drinking an ice cold beer on a hot summer’s day whilst entering a journal or two).

The system of double-entry is based (at its simplest level) on two things:

  • Debits
  • Credits

Your debits must equal your credits for everything to balance, hence the name balance sheet. But wait a minute, we are looking at three things on most balance sheets (ALE). How does that work?

  • Assets = Debits
  • Liabilities = Credits
  • Equity = Credits

Hence the accounting equation shown above. This is also why a horizontal balance sheet only shows two sides (you wont see this pattern in a vertically oriented balance sheet).

Profit and Loss as an Account

Let’s take a look at an extended Profit and Loss report:

  • Sales
  • Costs of Sales
  • Expenses
  • Depreciation
  • Taxes

It contains a whole bunch of account groups. But each group consists of accounts with either a debit or a credit balance. When you consolidate those accounts in each group you end up with either a debit or credit balance. Here we go:

  • Sales = Credit
  • Costs of Sales = Debit
  • Expenses = Debit
  • Depreciation = Debit
  • Taxes = Debit

The final balance of the Profit and Loss ‘account’ will be placed in the Equity section of the balance sheet. All your individual liability accounts will be summarised and placed into the Liability section, and all your assets (Bank, Cash, Debtors, Stock etc.) end up being summarised or consolidated into the Assets section.

The pattern is very simple and clear. Whether an account is some individual thing (like Stationery or Bank) or consists of a group of accounts (like Cost of Goods) you can look at them all as examples of ‘accounts’. Go that one step further and consolidate their balances into balance sheet ‘categories’ and you can see the same pattern.

So the result is quite simply that a balance sheet and a profit and loss report is at its core just another account. That is why I talk about the first rule of accounting as ‘everything is an account, and there are  no special cases’. It is wonderfully elegant.

On Journals And Ledgers

It’s been an incredibly busy month here on Accounting for Everyone, with many wonderful new comments on the various weeks course material.

It took me many years to really understand double-entry. I did it by reading all the books I could get my hands on, and talking to thousands of business owners, oh, and the odd accountant here and there 😉

There are so many idiosyncrasies in the jargon of double-entry bookkeeping, and of course different countries are bound to use slightly different terms for the same thing. Let’s take a look at a couple of those.

The Journal

This is a great one. Journal = book = diary = log. I.e. a place to write something down. That’s all. But it used most commonly to describe a specific type of transaction. That is where the confusion comes in. There are no ‘special’ transactions. In just the same way there are no special accounts. All a transaction does is move money around. Period. So a transaction consists of a number of ‘entries’. Each entry affects one account. If an accountant or trained bookkeeper needs to make some correction, they say ‘just journal it’ (or something similar). This raises the ‘journal’ on a pedestal to some new height, but it is not like that. In short, you can ‘journalise’ everything and anything.

It is really understanding terms like this that will make you confident in bookkeeping, and that of course is where my bookkeeping course really hits the target (according to all the comments).

Nominal Ledger

Another great one. In the UK we call it the ‘nominal’ ledger. Everywhere else it is called the ‘general’ ledger. What does it mean? Nothing. A ledger is where you place your accounts. That is all any ledger is. If you group all your customer accounts into one place, then you could name it your ‘Sales  Ledger’. If you are in the US you may want to call it ‘Accounts Receivable’. Whatever you want to label it, they are all the same. A place to store accounts and look up their balances.

There are of course a number of different alternative names used around the world, but the most fundamental are covered in the course. What is important is that whatever something may be called, it does not differ in terms of how it is used in accounting and bookkeeping.

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