What is Accounting and Accountancy ?
Accounting (and Accountancy) is the process of recording
business or private transactions and reporting
the results over a period of time.
Accounting starts with the basic bookkeeping, then includes some further adjustments.
The extra adjustments are so that businesses can be compared on a like for like basis, especially Limited Companies
, and also for Tax
It is not necessary for a small business owner to understand these principles fully, you can always ask an accountant to keep your books and prepare your accounts. However, if you want to know more, please read on.
If you are reading no further, you may find that our webpage What do I need to record?
What is Bookkeeping ?
Bookkeeping is the day-to-day recording of business transactions, including purchase and sales invoices, payments made and received. This will give you a record of what money is in your bank account, who owes you money, and who you owe money to. All this is essential to running a successful business.
However, whilst this basic bookkeeping is essential, it will not give you the full picture of your business performance. Basic bookkeeping is not sufficient to produce a reliable Profit and Loss Account
or Balance Sheet
. Also, it will not enable you to accurately calculate the Tax
Accountancy takes Bookkeeping a few steps further, particularly for Management Accounts, on a month by month basis, and then the Year End Accounts.
Why Accounting takes more steps than Bookkeeping
Please consider these common business transactions which have more complications than first appearances:
Purchases for Resale:
If you buy goods in May, and record the purchase in May, and sell them in June and record the sale in June, they will not match, you will not have recorded the profit correctly in either month.
Say you order some stationery in January, it's delivered in February, invoice dated March, paid for in April, and used in May. If you were preparing monthly Management Accounts, which month would you expect to carry the cost of the stationery?
The annual insurance bill might be paid over 9 months. Do we charge the insurance over the 9 payments, or find a way of charging the insurance over the full 12 months?
The bill arrives in March for April to the following March, and is paid in two installments in April and October. The cost should be spread equally over April to March, but ordinary bookkeeping will not achieve this.
All these are typical Management Accounts
issues, and these transactions also inevitably overlap an Annual Accounts Year End
, so your Accountant will need to deal with them according to standard accounting and tax rules and regulations.
Accruals Basis of Accounting
The Accruals Basis of Accounting is both the international and tax standard for the preparation of financial accounts. For all businesses it means dealing with transactions in a way that spreads costs over the period to which they relate.
The Accruals basis also ensures that when products are bought for resale the cost of the products and the sale proceeds are matched against each other in the same accounting period.
Here are some of the adjustments and techniques used by accountants:
Accruals and Prepayments
are the accounting techniques for ensuring that income and costs appear in the correct accounting periods. Normally this is done through a series of adjustments using Journals
(also known as General Journals).
spreads the cost of a Fixed Asset
over its useful life.
Loans and Loan Interest
need additional accounting treatment. When loans are repaid, the interest is not evenly spread over the loan period, instead, interest is much more 'front loaded' towards the beginning of the loan repayment period.