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Understanding the nuts and bolts of accounting: an engineering perspective

Understanding the nuts and bolts of accounting: an engineering perspective

I was a latecomer to accounting. I first completed a degree in engineering and only moved to accounting after that.  Almost everyone who heard what I was doing told me how difficult I would find it and that I would struggle to get to grips with it, never having done it before.

However, I actually found it find quite straightforward and not nearly as daunting as I was led to believe. While there’s a lot of jargon that can be off-putting to someone new to accounting, it becomes a bit easier if you try to think of it in terms of processes with inputs and outputs, as an engineering training would encourage.

Let’s start with the inputs.

Understanding your inputs

It’s useful to start by thinking of your accounts as a database of all the various transactions that happen within your business. So the first thing to do is ask what sort of transactions go on in your business – and, funnily enough, the types of transactions are relatively common across most businesses, regardless of industry and sector.

  • Sales – every business sells something to customers. This means that we need to record our sales and we need to have customer records to track what we’re doing for each customer.
  • Purchases – The business will also buy things from suppliers. This means we need to record purchases and we need to have supplier records to track our activity with each supplier.
  • Payment and receipts – Finally, we need to receive and spend money, so we need a way to record these as money in and money out to/from the business.

That gives us three main types of transactions – sales transactions, purchase transactions, and payment/receipt transactions.

Next, we need to think about how to capture and record those transactions – creating the financial records that, ultimately, will become your accounts.

There are a number of ways of setting up and maintaining those records. You can have paper records (traditional but on the decline in the digital age), you can use Excel spreadsheets or you can buy accounting software. Unless your business is very small, it’s better to use accounting software. Most accounting packages will do what we need fairly easily. However, if the software is well designed, it can also give you a lot of other useful information that would be impossible to collate with paper files or Excel files.

Understanding your outputs

Next, we should move to focus on the outputs for the business. What sort of information do we need our accounting records to provide?

  • Business health – we need a measure of how well the business is doing and whether were actually getting a return on our investment (both time and money).
  • Financial reporting – we need reports that will prompt us when actions are necessary; i.e. when to pay a supplier, or when to chase a slow-paying customer.
  • Business performance – finally, we need information that will help us to understand what’s going on in the business and why we’re getting the results we’re seeing.

To understand how well a business is doing we need to know the net worth of the business. The net worth is the difference between what a business has and what that business owes.  Accountants call “what a business has” the assets of the business and they call “what the business owes” the liabilities of the business. So the key report in accounting language is the balance sheet as this lists the assets and the liabilities of the business.

The other thing you will want to understand is where the business is getting money from and where it is spending money. You probably already know that this report is the profit and loss account (we’ll talk about this more in a future blog post). It’s the report that shows how money moves into, and out of, the business – a vital way of measuring performance.

The need for insightful information

So, we’ve explained the basic nuts and bolts of accounting for you. You now understand the importance of breaking your transactions down into the ‘inputs’ and ‘outputs’ that explain the flow of money through your business.

The next step is to start turning these financial transactions into insightful, useful business information – a topic we’ll cover in the next in this series of blogs.

If you’d like some help to understand your accounting basics, please do get in touch with us and we’ll be happy to help.

Get in touch to arrange a meeting with the AccountsPLUS team 

Improving Productivity with Smartphone Apps

On a number of occasions over the past few weeks, I have had discussions with friends and clients about how they use their smartphones. I am getting great use out of mine and would be lost without it. However, others are barely using the capabilities of their phone. So here are some of the features and apps that I find most useful. I am sure they won’t all be of interest to you but I suspect at least one or two will.

Scanning Documents to PDF

This is an app I use regularly. I have an Android phone and I use Camscanner. This essentially takes a photo of a document and converts it to a pdf which I can email or save to cloud storage (Dropbox or Drive). I use it for copying receipts, forms, identification documents and for capturing the flipcharts of meetings. Its a really useful app to have.

To Do Lists

To do lists are great for quickly capturing ideas when you are away from the desk or for reminding yourself about what else is on your list when you get very busy and are in danger of losing sight of your priorities. I was using Wunderlist until recently and I have moved to Trello now. Trello gives me more organisational features.

File Sharing

We all know about Dropbox and Google Drive. I keep some key documents in Dropbox and if I need to send such a document to someone, I can send it straight from the phone. This has come in very handy for me a couple of times. For example, once I was away from the office and got a call from a prospect asking for a copy of a document I had mentioned to them previously. I was able to access the document in the cloud and send it immediately, without having to go back to the office.

Managing Passwords

We all know how important it is to manage passwords for the various programmes, systems and websites that we access now. There are several password managers. I use Keepass on my computer and I save the file to a Dropbox folder. I then use Keepassdroid on my phone to access the same file so I always have my passwords available. Keepass can generate random passwords and can hold the various verification questions that some sites need. Keepass itself is password protected and thats the one password that you do need to remember.
As an aside, you would be amazed at the number of companies that have no passwords or else have the password written on a post it note and stuck to the computer screen. You should have a separate secure password for each key service you use.

Capturing Notes

I use Evernote to capture notes. I have a copy on my computer and on my tablet and on my phone. Once I record my note on any of those, it syncs to the cloud and is available to all the others. I now use this for taking notes at meetings and for lectures/talks. I can attach files or photos and email the note with attachments to any of my contacts. I can also record speech to Evernote (like a dictaphone) and attach the recording to a note. I can search all my notes by keyword which is a huge benefit as this means I no longer have the problem of trying to remember what notepad I wrote a note in. Notes can be organised into folders or by assigning tags to them.

Foreign Exchange Rates

There are a number of apps that will provide you with up to date FX rates. The one I use is XE currency but there are loads of them.

Voice Recording

Another very useful, but easy to forget, app is the Voice Recorder app which is usually standard on the phone. It can be used to record meetings or random thoughts that you might have where you don’t have access to a note pad or you want to participate without having to worry about note-taking.

Cloud Accounting

If you use a Cloud Accounting package like Kashflow or Xero they both have apps for the phone that let you access the data. You will not do your accounts on the app but you will be able to check balances etc.I am not going to mention email or calendar. If you are not using those, you won’t be interested in anything else.In summary, there are two apps that I wouldn’t be without – Evernote and Camscanner.

As always, if you have thoughts or questions on anything in this article, let me know.

Working with VAT on Kashflow

I have had a couple of questions recently about how Kashflow handles VAT. Users do not seem to fully understand the use of the “submit VAT” button. So here is a brief overview of what needs to be done to have accurate VAT reporting.

When you first submit a VAT report, it is important that you make sure that your submission agrees with the relevant VAT management report in Kashflow. If your VAT submission for Jan Feb 10 says VAT on sales 5000, VAT on purchases 3000 then these numbers should agree to the relevant figures on the VAT Management Report for the same period. If they don’t agree, you need to understand why. Either the VAT submission is wrong or Kashflow is wrong. I recommend that you check the Kashflow report, making any amendments necessary, and make a submission that ties back to Kashflow.

Once you have the submission made you run the VAT management report which agrees with the submission and hit “Submit VAT” button. This does not actually submit anything. It effectively tells Kashflow that all the transactions on the report have been reported to the VAT authorities.

When you run the VAT Management report for the following period, it will pick up all transactions for that period but it will also pick up any transactions in earlier periods that have not been reported (submitted) to the VAT authorities. For example, if in late April, a Purchase invoice dated February comes in with VAT of € 1000, we cannot add it to the Jan Feb return which was already submitted. Kashflow knows that it was not submitted because it was not on the report which you marked submitted. Therefore, it will be brought forward and added to the Mar Apr report. When you download the detail for the report you will see a transaction in there with a February date.

It is important then that when making a vat return the return should agree with the VAT Management report for the same period and that you hit the “Submit VAT” button to let the system know that all transactions on that report have been submitted.

If you have any questions on this, or any other aspect of Kashflow, feel free to give me a call or email me on jim (at) accountsplus (dot) ie.

Recent Changes to Kashflow

Our online Accounting Software, Kashflow, is constantly being improved.

Sometimes the improvements are obvious like the recent changes to the entry screens for sales and purchase invoices. Other times the changes are in the background and you may not realise that there’s a new option that might be useful for you.

Kashflow publish the changelog here – http://www.kashflow.co.uk/changelog.asp. You can also sign up to receive notifications of changes via email, rss feeds or twitter.

For today, I have copied the change notices from the Kashflow changelog for some of the most recent changes.

Recent Changes

Improvements to Customer and Supplier pages 2nd August, 2010

General Look and Feel Improvements 2nd August, 2010

Defaulting Purchases to Paid 2nd August, 2010

Custom Fields for Customers 2nd August, 2010

Email Templates for Statements 2nd August, 2010

Lesser Known Kashflow Features

As I work with clients who are using Kashflow, I realise that there are several features in Kashflow that clients often don’t know about. I am going to highlight some of these in posts over the next period. Some of them may be useful to you.

Repeat Invoicing.

If you have a customer where you have an agreement to invoice regularly over a period, you can set up a repeat invoice. For example, I have a client where I provide a monthly management accounting service. I have a repeat invoice set up that is created monthly. The system sends me a reminder to let me know that it has created the invoice and I just hit the email button to send the invoice out.

To set up a repeat invoice, go into Sales, then into repeat billing – one of the four buttons above the list of sales invoices.

Projects

Kashflow has a projects feature that allows you to assign sales invoices and costs to projects. Some businesses are project based and this allows them to track profitability by project. Even if you are not project based you could use this for departments or you could use it to track costs by vehicle or by individual.

I have a client who produces tv programmes and uses this feature to track costs by programme. I have another client who carries out consultancy projects for clients and uses the feature to track outlay costs (eg. travel) by project for reinvoicing.

Bulk Payments.

Typically, most businesses will receive a payment for each invoice they issue or they will make a payment for each bill (receipt) that they receive. However, some businesses might have a number or smaller invoices or bills (receipts) that are paid together. In this case, instead of going into each invoice and adding a payment, you can use the Kashflow Bulk Payment options. On the Sales or Purchases tab, choose the Bulk Payment button on top of the page. This lets you mark multiple invoices as being paid with one payment.

That’s enough for today. Over the next while I will highlight some other features that you may not know about. If you have any questions, be sure to let me know by emailing me at jim (at) accountsplus (dot) ie.

Are you slack about IT security

Yesterday www.boards.ie was hacked and the passwords of the users may be compromised. If users use the same username and passwords on multiple sites, then the hackers may now have access to those other sites. Could they have access to online banking passwords? Possibly.

A couple of months ago I was reading a blog, and the follow-on animated exchange, about the importance of security in accounting software. While I agree with the importance of security, I felt at the time, that the dev elopers had little understanding of how careless users actually are when it comes to security, passwords and backups.

I have often commented on the amount of companies with no password protection on their accounts software, or common words as passwords, or use the pc users name as password, or have the password visible on a post-it stuck up beside the screen.

Well, recent research has shown just how loose password security is.

It seems that in Dec 09, social networking services and customized widget company, Rockyou.com, suffered a data breach. The breach included millions of people’s email addresses and passwords for Rockyou.com (and in many cases passwords and login details for associated social networking sites). The hacker responsible for the attack subsequently posted the full list of passwords on the internet.

You will end up with a lot of passwords and you will need something to help you manage them. I use a piece of software to store all of my different passwords. It’s a password manager called eWallet. Another free package is keepass. And remember you need to be careful how you use these!

So now, what passwords are you using for the various software and websites you use. Are they secure enough? Do you need to change them. Go on – do it now!

The compromised password and login data was examined by US-based security company, Imperva Application Defense Center (ADC). The data provides valuable insights into the way that users select passwords and an opportunity to evaluate the true strength of these as a security mechanism. What’s good about this is the number of real-world passwords the analysts were able to examine .

There report is available here – http://www.imperva.com/ld/password_report.asp

A full analysis of the 32 million Rockyou.com passwords show the most commonly used passwords are:
1. 123456
2. 12345
3. 123456789
4. Password
5. iloveyou
6. princess
7. rockyou
8. 1234567
9. 12345678
10. abc123

Its amazing, isn’t it. And to think of all of the effort the IT developer puts in to improve security and then see users undermine all that by careless selection of passwords.

So what should you be doing? To keep your accounts safe, NASA recommends adhering to the following steps when creating a password:

1. It should contain at least eight characters.