Starting your own business can be daunting enough, on top of this you need to get your head around a whole new language “Accounting Jargon”. Assets, liabilities, accruals, overheads, costs of sales; the list goes on and on. So where to start?
For me the first thing is to think about the ins and outs of your bank account. Money into the bank is a Debit and money out of the bank is a Credit.
This now leads us onto Customers and Suppliers.
Customers & Suppliers
Customers – owe you money and pay this into your bank account – they are a Debtor
Reports to show what your customers owe you:
❊ Aged Debtors Report
❊ Aged Receivable Deport
❊ Accounts Receivable Report
Suppliers – you owe them money and pay this out of your bank account – they are a Creditor
Reports to show what you owe your suppliers:
❊ Aged Creditors Report
❊ Aged Payable Report
❊ Accounts Payable Report
Income & Profit
Sales – aka Revenue / Turnover
Sales income before expenses or taxes
Gross Profit = Sales – Cost of Sales
This is the profit made on your sales once you have deducted the costs directly involved in making the product or services available for sale.
Cost of Sale
This is the costs of expenditure directly linked to producing the goods or services that you sell. It includes costs of the product(s) you sell, manufacturing costs and the costs of hiring people to deliver your services. It does not include overheads.
The costs of running the business which are not directly related to the product or service you sell. Costs you need to pay to keep the business running, including the costs for rent, power, marketing, administrative costs and costs of management staff.
Net Profit = Sales – Costs of Sales – Overheads
This is the profit made after deducting all the expenses incurred.
Gross Profit Margin = Gross Profit / Sales x 100%
Gross Profit Margin is Gross Profit expressed as a percentage of sales. You can monitor your gross profit margin against budget figures, previous periods or against the gross profit margin of other products or services you sell.
Net Profit Margin = Net Profit / Sales x 100%
This is net profit expressed as a percentage of sales.
I hope this has helped to demystify some of the accounting jargon you will come across. Check back for Part 2 which will cover assets, liabilities, profit & loss and the balance sheet.
In the meantime if you require help and assistance please do not hesitate to contact me via https://www.cactusbookkeeping.uk/contact-us/