In the UK, HMRC have said they will be introducing compulsory quarterly accounting periods for all businesses sometime in the not too distant future (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 (if implemented) will mean 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:
If you’d rather do this yourself, take a look at the Accounting for Everyone online bookkeeping course. It will help you understand the basics.
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.
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.
If you want to learn a much faster way to understand double-entry and get your debits and credits sorted properly, sign up for our bookkeeping course. It has helped thousands already.