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 is really very simple provided you follow these rules.
For a Transaction to be true to the double-entry principle, two further rules must be obeyed:
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
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.
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.
And let’s look at the other side. Recording a sale of 500 paid into the bank.
The course has many brilliant snippets like this, so choose an option below and get started.More Info
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.
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:
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…
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.
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 LearnDoubleEntry.org. 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.
For 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).
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.
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.
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.
Your chart of accounts should be set up with a group called ‘Fixed Assets’. This is where you add accounts to hold the balance of assets you have bought. Each asset account should have a depreciation account associated with it. This will hold the accumulated depreciation of assets over the years (it is often called ‘Accumulated Depreciation’ for this reason).
To see the value of your assets, subtract the accumulated depreciation from the asset balance.
The reason for keeping both balances is so that you can see at a glance what your assets originally cost you (in case you need to replace them so you get a better idea of the investment needed).
There is one thing missing from this though. Where do we record the other side of the Accumulated Depreciation amount?
The answer is in the Profit and Loss account. You can set up a new group in there specially for it. Let’s call the account This Year’s Depreciation (or even P&L Depreciation to make it clear where it is going).
So make a journal Debiting This Year’s Depreciation and Crediting Accumulated Depreciation.
That’s it. That’s all there is to it.
Using the technique taught in the Accounting for Everyone course, you are simple transferring an amount From Accumulated Depreciation To P&L Depreciation.
If you want to try this out, download the trial of Business Accountz available on Accountz.com and give it a go. Use the Green books (‘transfers’) to do this or use the traditional journal. Remember you can flip between From/To and Credit/Debit in the menu option Tools > Language (choose English – Accountant for the latter).
And if you haven’t done 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=”https://legendary.simplero.com/page/3887-accounting-for-everyone-fast-track” target=”_self”]£29.99[/ez_btn][/ez_box]
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.
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.
PS. If you want to learn a little more about marketing your business go and sign up at http://QuentinPain.com
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 QuentinPain.com. 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.
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:
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:
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?
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:
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:
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.
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.
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).
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.
I just had to write a thank you note to all my loyal subscribers. Thank you so much for subscribing to Accounting for Everyone. Your comments have been fantastic, and the Facebook recommendations have also been overwhelming. Please do continue to recommend this course as I know it is helping a lot of people understand something that is core to the success of any business.
As global communication and information increases, so it empowers people to take action. This in turn not only drives economies, but gives people the responsibility needed to ensure their lives are, at the very least, interesting. By that I mean, running your own business or taking control of a particular area of a business. Of course, running a business does not necessarily make you immediately happy, but what it does do is give you the tools (and money) to achieve that end more easily.
I would like to find out what proportion of subscribers and visitors to this site are in business already, thinking of starting a business, wanting to help a friend, improving their career prospects, or are simply fascinated by double-entry. So please add your vote to the poll on the right (you can pick more than one answer if it applies). You can also see the results for yourself too.
Many business owners stick stubbornly to their policies, claiming that it confuses staff if you give them some room to talk more freely to customers. One of the things I found to win over customers is to listen. And I mean listen carefully. They are the ones with the problem, and for some reason they chose to contact you. That means:
So, if when they ring, you find yourself saying: “Er, no, we don’t do that”, then it’s time to learn that your marketing is sending the wrong message, or worse, you don’t really understand the problem you think you are solving (and without a problem to solve, there is usually no business). So, if you can change, do so, and start saying YES.
I am not a fan of Alan Sugar’s management, but as he once said: I am usually right, but when 10 people are telling you you are wrong, maybe they have a point.
WInning over customers is simple if you solve their problem.
SSAP2 Disclosure of accounting policies (see
FRS10 Goodwill and intangible assets
FRS 11 Impairment of fixed assets and goodwill
FRS 12 Provisions, contingent liabilities and contingent
FRS 13 Derivatives and other financial instruments: disclosures
FRS 14 Earnings per share
FRS 15 Tangible fixed assets
FRS 16 Current tax
FRS 17 Retirement Benefits
FRS 18 Accounting policies
FRS 19 Deferred tax
Extant at 1 January 2001
CORPORATE TRAINING GROUP LTD 2 Kingsway
Place, Sans Walk, London EC1R 0LS
Tel: +44 (0)20 7490 4770 Fax: +44 (0)20 7490 4772
We are on the last day of 2010 and for me this year has gone way too fast. I don’t know whether it is simply because I am older – and everyone I know is also a year older! but they all say the same thing. Fast, fast fast!
Luckily in terms of bookkeeping, nothing has changed at all, apart from the fact that ‘modern’ double-entry bookkeeping is now one year older of course. But looked at in the perspective of around 600 years, that is very little indeed.
The recession continues, and pretty much everywhere in the world we are all in the so called ‘austerity’ era! For the poor, it has never gone away. For the rich, it means one less mince pie. For the rest of us, if we have a job, there is not much change really. So my advice for all those weary of the 9-5 working lifestyle… change it starting in 2011.
Start your own business. You will be working much longer hours, but the big difference is that you will be doing it because you want to do it. Once you start you will find it difficult to stop. Be warned about that. As soon as you taste the freedom of running your own business, it becomes an obsession. And that is a good thing.
One vitally important thing you must do is to ensure you surround yourself with enthusiastic and optimistic people. As Tim Smit, the founder of the Eden project in the UK says, get rid of anyone who tells you what you are doing is a waste of time (actually he encourages you to do something much worse with them!). What you are doing is you are doing something for yourself. It is by far the best way to do things. If you get it right, others will follow you. You wont be able to stop them. But you must stay focused. And you must take action.
I have read a number of great books this year. The two I absolutely recommend to anyone are:
1. Dale Carnegie: How to Win Friends and Influence People. If everyone followed his advice, we would all be so much happier with our lives.
2. Drew Whitman: Ca$hvertising. As Lord Sugar said once on The Apprentice: “I have written many books on advertising – most of them cheque books.”. This book explodes the myth of advertising. If you ever need the answer to whether advertising is any good, read this book. Did you know that the only place worth paying a premium for in print advertising is the inside front cover? Forget right hand facing, near content, inside back cover, back cover, they are all pretty much of a muchness. The front inside cover however shows an average 30% increase in response rates. And even that is not great when you think about how much extra you have to pay. As the book says, if what you are selling is not of interest to the audience, you are wasting your money.
So, Market, Media, Message. That is all you need to know. Of all the multiple letter abbreviations (the 7 p’s, the 3 R’s the 101 Z’s etc), this is the only one that really matters.
And finally, for the message itself. Read Dan S Kennedy’s book: The Ultimate Sales Letter.
Good luck and Happy New Year.
Quentin Pain FIAB
Any accounting course will take you through the basics, but to really get ahead quickly you should sign up for our 12 week accounting and bookkeeping course.
Armed with this, you will get the fundamentals of accounting firmly fixed in your memory. From simple transactions right through to the balance sheet, this accounting course and bookkeeping guide shows you what you really need to know to tackle those difficult exam questions.
Most people new to accounting struggle with their debits and their credits, most commonly getting them the wrong way round. I know this from the many seminars I give where my first question is always “if I take money from my bank, do I record it as a debit or a credit?”. All those who have never studied accounting before get this the wrong way round.
Find out how to ensure you NEVER get it wrong with our beautiful and wonderfully simple memory tricks. Pure logic you will love.
After you have completed the course you can then go on to take further courses and qualifications so you can become a qualified bookkeeper or accountant the fastest possible way.
Click here to find out more.
Quentin Pain FIAB
Any accounting course should start at the very beginning. That is, with a single transaction. This is so you can follow it through the whole accounting process easily.
Unfortunately, that’s not how most accounting courses are structured.
Instead you are thrown in at the deep end with jargon and difficult concepts.
Not least of those is that most courses talk about increases and decreases, yet in the real world, we only talk about what’s in the bank, and how much we’ve spent on expenses.
So the Accounting for Everyone Course was designed in an entirely different way.
But the most important thing of all to understand about accounting and bookkeeping is that all you are doing is tracking the flow of money.
Get that, and you will start to understand why we do this work in the first place.
Click the link below to find out more about this accounting course for beginners:Find Out More…
If you have not signed up to my 12 week bookkeeping course yet, it will give you the grounding for your bookkeeping career in a way you will not have seen anywhere else.
For the first time you will be able to really understand debits and credits by learning a wonderfully simple concept that ensures you get them the correct way round! (and for those new to bookkeeping, I can tell you right now, everyone gets them the wrong way round at first).
Once you have completed the course, or even after you have finished the first few weeks, if you want to become professionally qualified with a recognised global institute, I highly recommend the International Association of Bookkeepers. You can find more details on them over on their website here.
Businesses in the UK can claim fuel or usage as an expense when using a private vehicle for business. There are three choices:
1. Record every business trip and reclaim the mileage allowance. You can also claim back a small amount of VAT from the business mileage. Make sure you have receipts (although HMRC accept that just about all fuel companies are VAT registered!). The amount of VAT you can reclaim varies depending on engine size. VAT 700/64. Here are the published fuel prices: http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm
2. Claim back all the VAT and pay the scale charge. This is the most common method since it requires no mileage records to be kept, just a fixed amount to pay each quarter. If hardly any business miles are done, then method 1 may be more beneficial. Add up the total VAT and see if it is more than the scale charge.
3. Keep detailed records of all trips (date, from, to mileage, reason for trip) and figure out the business percentage. Only enter that percentage of fuel receipts and claim back only the same percentage of VAT.
There is a lot of FUD spread by (many) software companies about filing online and that you must have some kind of (ie. their) special software. They are using the oldest marketing trick in the book, fear.
Here’s the reality. There is no law that says you must use software. Until there is, neither HMRC or any other Inland Revenue service can force you to use software to file (or even do) your accounts using a computer. In the UK the majority of accounts are still done on a spreadsheet (last time we did a survey it was around 50%, but as software gets easier that figure will be declining). So, will Microsoft (et al) suddenly release a UK specific HMRC uploader for Excel? Not anytime this side of the next millenium!
When HMRC and other Revenue services say you MUST file online by such and such a date, all they are saying is that you need a computer (your library has one if you don’t) to log in and enter your data via a computer by hand. What they are stopping is the paper format, that is all.
Does anyone remember when HMRC said you could have a tax refund if you filed your PAYE online a few years ago? What happened, some software companies started claiming that if you bought their software you would get a massive rebate (as though it was courtesy of them). They pushed the same FUD that you needed special software to file online too! What a cheek.
Maybe I am cynical, but if there is one thing I have learnt about corporates it is that their marketing departments are kept as far away as possible from development (and reality).
Every business will suffer from a bad debt at some point in its life and this short guide will show you how to account for them in your business.
A bad debt is where a customer does not pay you for work done. That could be for many reasons:
The question is, at what point does an invoice become a bad debt? If you had agreed terms with your customer of, say, 30 days. Then is it a bad debt on day 31? No. It just means you are suffering the same problem as countless businesses around the world: and that is a bad paying customer.
So is it after, say, 60 days. No again. The time is actually irrelevant. It tells you nothing about your customer’s ability or willingness to pay. And that brings me to a subject 90% of small businesses don’t bother to do: Terms and Conditions.
It is imperative that you set out your terms and conditions and ensure your customer agrees to them. Don’t be tempted to copy someone elses. If it contains ‘legalese’ any judge worth his salt will throw it out of court. Terms and Conditions represent a contract between you and your customer. Make it plain and simple.
Spell out very clearly that all invoices are due within 30 days of the invoice date (or whatever your terms are). Say specifically that if the invoice is not paid by 30 days you will charge interest at the rate of 5% a month (or whatever percentage and period you feel comfortable with). Explain that if the invoice is not paid within 60 days you will persue them in the courts. I realise this can seem off putting to a customer, but we are talking about your time and money versus the possibility of not being paid at all.
There is nothing wrong with writing the above in a pleasant style. That is just good business, but you must spell it out and mean what you say. You will get respect for it. And if you don’t, ask yourself if that customer is really worth the gamble.
OK. So at what point does an unpaid invoice become a bad debt? The simplest way to tell is when you get a letter from an administrator explaining that the customer has gone into receivership or administration. You now have proof that something is amiss. It is still not a bad debt though. That is because there is still a chance the business could be saved.
But what if you don’t get a letter? Well, most countries have conditions set by their Inland Revenue services to protect you and let you write off a bad debt after a certain time period. At the time of writing in the UK for example, I believe it is 6 months. Just check with your Inland Revenue service.
Right, so you now have proof or can legally write off the debt. What do you do? Simple. Open a new expense account called ‘Bad Debts’. Enter a journal From Debtors To Bad Debts. In double-entry you Debit Bad Debts and Credit Debtors.
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