(8) Bookkeeping

When you run a business, it is useful to know whether you are successful and how successful you are. If a business is not successful, it has to close down. A businessman watches his success and becomes aware of any trouble by keeping books. In one set of books he writes down what he owns and what he owes. What he owns is called his 'assets' and what he owes are called his 'liabilities'. The assets of a fish and chip shop may be a frying machine, a fridge, a sack of potatoes and several packets of frozen fish. The shop may also have some cash in the till and some money the bank account. These are shop's assets.

The shopkeeper may also owe £1000 to his father in law, £500 to the bank and £200 the company which sells him the potatoes. And there are £150 he owes to the printer for leaflets he distributed in your neighbourhood last week. These are his liabilities.

The shopkeeper writes these down on a paper called 'the balance sheet'. He writes his assets on the left and his liabilities on the right. Then he works out the difference between his assets and his liabilities. This difference is called his 'equity'. The bigger his equity, the better for the shopkeeper. 'Negative equity' is not a good thing to have. If the shopkeeper has only assets and no liabilities, he is in a very good position.

The owner of the fish and chip shop has income and expenses. He writes these down in a book called 'profit and loss account'. He gets income each time he sells a portion of fish and chips and a tin of Coca-Cola. He writes this down on the right-hand side of his profit and loss account.

He also has to spend money. He has to pay rent for his shop, business rates to the council, gas and electricity, cleaning materials, buy frying oil, potatoes and fish, etc. These are his expenses. He writes them down on the left-hand side of his profit and loss account.

He must sell enough fish and chips to make sure that his income is greater than his expenses, i.e. he must make a profit. At the end of the year, he pays tax on his profit. He can add the remainder of his profit to his assets. His assets will grow, and his business is doing well.

However, if the owner of the fish and chip shop does not have enough customers, if he can not sell enough fish and chips, and if his expenses go up (for example because the council demands higher business rates, and the cost of gas and electricity goes up), then his expenses will be greater than his income. That is an awful position to be in. The shopkeeper is making a loss. If the shopkeeper can not reduce his expenses or increase his income, if he makes a loss year after year, he will soon have no more assets and the business has to close down.

Good bookkeeping warns the businessman when there is trouble so that he can try do something about it.

Bookkeeping is also very useful for children and young people want to save money in order to become rich. They can keep a 'cash book', and I would advise you to do that if you want to go far in life. Write down all your income (pocket money, other cash presents, money earned by doing newspaper rounds, etc), and write down every penny that you spend (date, detail, amount received, amount spent). Count your money every evening before going to bed and make sure the money in your wallet agrees with the amount you should have according to your cash book. If you have too much cash or too little cash, it means that you have made a mistake during the day. There is something you have not written down properly. Record it as 'surplus' or 'deficit'. Then your cash book will again agree with your actual cash.

Doing this will stop you from spending money on stupid things when it would be much more profitable for you to save it. You will also be able to see after a week, a month, a year, were all your money went. If much of it was wasted, you can decide to waste less and save more in future. A cash book will also be an incentive for you to try to earn more money.

If you decide early in life to earn money and save money rather than borrow money and waste money, and if you work hard at school so that later you can get a good job or run a successful business, you have a good chance to be successful and happy in life.

 

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(28 Jan 2008)

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