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Why do a Bank Reconciliation

The point of carrying out a bank reconciliation is to check that nothing has been missed from the business’s records and also to ensure that there have been no bank errors.

A business’s cash book will rarely agree to the bank statement and it can be easy to miss transactions, such as direct debit payments if a bank reconciliation is not done.  Similarly, banks sometimes make errors too which may otherwise go unnoticed.

Bank reconciliation is a standard part of bookkeeping.  If you have not done a bank reconciliation as part of your bookkeeping, your accountant’s fees will almost certainly be much higher.  Many accountants will insist on a bank reconciliation having been done prior to their doing your statutory accounts.

Following the Trail of Journals

In doing a journal, it is important that it is cross referenced properly so that later, if you or your accountant needs to, you can follow the original “logic” for having done the journal.  Accountants refer to this as being able to follow the audit trail.  This applies whether or not you actually have your accounts formally audited (the majority of small businesses are, in fact, well under the statutory audit threshold)

For example, you might keep a “hard copy” file of journals and supporting documentation, filed in some sort of order!

If a journal is being done to correct an error, you might also file a copy of the paperwork showing the original error.

It’s good practice to number each journal sequentially and use this unique number as a reference.  When using a computerised accounting package, this number will be the cross reference to your “hard copy” file of journals and documentation.

Correction of Errors using a Journal.

A journal is usually used to correct errors that have been made.  The errors must be able to be corrected by means of a double entry, to be able to put it right by journalling.

So, if £500 of sales of square widgets had been incorrectly posted to sales of round widgets, the correcting journal would be as follows:

DEBIT     Sales of Round Widgets    £500
CREDIT  Sales of Square Widgets                   £500

Thus, the overall effect would be that the sales of square widgets ledger account would have a correct credit of £500 and sales of round widgets ledger account would have both a credit entry of £500 and a debit entry of £500 which would cancel eachother out.

Accountants’ Jokes

Who says accountants are no fun?  Accountants jokes and fun is a blog collection of jokes for and about accountants, blogged by Mark Lee, an accountant himself (although no longer in practice).

T Accounts

 T accounts are what ledger accounts might look like if they were kept on paper (as opposed to using computer software). 

They are nothing mysterious, drawn on paper, a T account is quite literally a large T!  The title of the ledger (for example, “motor expenses” is written across the top), debit entries against that account are written on the left hand side of the vertical line and credit entries are written on the right hand side.

At the end of an accounting period, a balance is calculated for each T account.  All this means is that all the debit entries are added up and the total recorded at the bottom (on the left, as that’s where all the debit entries are) and all the credit entries are similarly totalled on the right hand side.

If the total debits exceed the total credits, then there is said to be a debit balance on that account. 

T accounts are the building blocks of accounting and sometimes, it’s helpful to consider going back to basics and professional bookkeepers and accountants sometimes do go back to drawing up T Accounts if things don’t balance as they should.

However, if you use an accounting software package and/or an accountant, it’s perfectly possible that you will never come across a T account.  Some accouting software does make reference to T accounts, particularly those aimed for use by accountants and specialised accounts departments.

No Apology

I have been at the PUB (not that pub), the PowerUpBlog of Ingenuity Marketing (thanks to Michelle Golden at Golden Marketing for bringing this one to my attention) reading their what’s your story post and I’ve realised that I am guilty of giving off negative vibes about my profession.

I am apologetic at times, when I mention what I do and I’m not exactly sure why.  May be it’s because there are so many of us about and the list is growing.  CIMA, alone, celebrated its 70,000th member back in February 2007. 

Anyway, also take a look at PUB’s Elevator Speeches, which would also be quite relevent for networking, particularly speed networking, where there isn’t that much time to make an impression.

Nominal Ledger

The nominal ledger summarises the finances of a business.  It contains details of assets, liabilities and capital, income and expentiure and therefore profit and loss.

It is made up of a large number of different accounts (and are frequently subdivided for convenience, ease, confidentiality or security).

The nominal ledger is often referrered to as the general ledger.

Back Again

Well, the VAT returns have been done and it’s back to the blog, which has been sorely neglected of late.

I have also been reminded of how handy Excel is as a fallback, even though it isn’t necessarily the best tool for the job, it’s relatively painless, reasonably straightforward and fairly easy to follow the “audit trail”.

Disadvantages of Double Entry Bookkeeping

• Double entry bookkeeping is harder to understand (worringly, there are fully qualified accountants who don’t “get it”, although they are in a minority – I hope)
• It follows, then that, if you don’t already have the accounting know-how, you’ll either have to learn or hire/outsource someone to do it for you.
• If you don’t know what you are doing, but plough through anyway, things can get a bit messy when trying to correct errors with journals.  (How messy partly depends on whether you have a manual or computerised system and if the latter, which package you are using.  But I digress…)
• It is a bit more time-consuming, not least because by it’s very definition, every transaction is entered twice.

Simple Purchase Ledger in Excel IV

To use the purchase ledger spreadsheet is easy.  Just record all purchase invoices, receipts and other payments on the spreadsheet.  Allow one row per invoice/receipt.

Enter the total amounts in columns D/E/F (allowing for the VAT split if VAT registered) and then allocate the relevent amounts in the appropriate analysis columns (column I to N in my example).

The description is just a space to record extra detail, such as a date range of a magazine subscription or more specific description of the goods or services you have bought.  The notes column is more of an accounting note, for example, note if you have a query with the invoice.  If you have an accountant, you might use this column to flag a query with them – for example, if you are not sure whether the item is a tax-deductible business expense.

For example, you wish to record an invoice from Office Bods, for £117.50 including VAT.  £40 relates to new files, paper, envelopes, £40 is for pay-as-you go mobile phone top ups and £20 is for stamps.  This would be recorded as:

• column A (Date):the date of purchase
• column B (Supplier): Office Bods
• column C (Invoice number): (the sequential number that you allocate to this purchase, so start the year at no.1)
• column D (net amount): 100
• column E (VAT): 17.50
• column D (Gross): 117.50 (automatically filled in)
• column I (Stationery): 40
• column J (Postage): 20
• column K (Telephone): 40

Afterwards, you check that there is a zero in column H, the check zero column, to make sure that you have allocated the entire invoice cost to a particular type of expenditure.

Always keep your receipts and invoices and write the ref/invoice number on it so that you can cross reference the original source document to your spreadsheet record.  Not only will this will also help to cut down your accounting fees if you use an accountant, it will also help in the event of having a tax enquiry or investigation.

Suitability

The spreadsheet described this week is particularly suitable for a sole trader, a consultant trading through a limited company or a start up enterprise.

Star Struck

Completely off-topic, this one, but hey ho, it’s Friday!

I was recently incredibly honoured to listen to a CD pre-release from a brand new artist.  This sort of thing doesn’t happen every day, especially to an accountant.

Well, I’m pleased to see that the artist in question, Tori Beaumont, now has a MySpace page at www.myspace.com/toribeaumont