Creative Cycle - Accounting (updated Tue 3 Mar 2015)

3 . I N T R O D U C T I O N T O

A C C O U N T I N G A N D

E X C E L

C R E A T I V E C Y C L E O N L I N E E N T R E P R E N E U R S H I P

P R O J E C T

“I didn’t get there

by wishing for it,

or hoping for it,

but by working for

it.”

- Estee Lauder,

of Estee Lauder

Companies.

R E T R I E V E D F R O M

New York World-Telegram and the Sun staff photographer: Sauro, Bill, photographer. - Library of Congress Prints and Photographs Division.

New York World-Telegram and the Sun Newspaper Photograph Collection

A. LEARN BASIC EXCEL

SKILLS

B. UNDERSTAND HOW

ACCOUNTING WORKS

C. LEARN KEYWORDS

USED IN EXCEL

SPREADSHEETS

D. MAKE MORE

INFORMED BUSINESS

DECISIONS USING

WHAT IS TAUGHT

T O D A Y ’ S

A G E N D A

"Apple, the Apple logo and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries."

4

• A computer program used to organise and manipulate

data.

• We will learn to use it for accounting purposes!

W H A T I S E X C E L ?

W H A T I S E X C E L ?

5

• You can enter data

in (such as revenue

from necklace

sales, PayPal fees),

or enter in

mathematical

formulas.

• It is very useful to check what happens when there are

changes in the data.

H O W D O I U S E

E X C E L ?

6

• Entering

data:

• For example, if you want to change PayPal fees, click

on the corresponding cell (E25 in this case), and enter

the new number.

H O W D O I U S E

E X C E L ?

7

• Entering a formula:

The cell G27, corresponding to total expenses. It has the formula:

=E22+E23+E24+E25+E26+E27

(don’t forget the equal sign at the start!)

That way if any of the expenses changes, total expenses changes

automatically.

ACCOUNTING

What is the first thing that comes to mind?

What is it?

What are your

experiences?

Why is it important?

W H A T I S

A C C O U N T I N G ?

9

• Accounting is the process of keeping financial

accounts.


S O U R C ES O F F I N A N C I N GStarting a business is difficult without financial support. Apart from using your own savings, you may be eligible for financial grants or loans to help finance

your business.

Grant

StartUpDonut: There are many different grants available according to what type of business you are running. Find more information about the common application

types here:

http://www.startupdonut.co.uk/startup/financing-a-business/start-up-

What are they? Funds given that do not have to be repaid

UK Government: Use the government search engine to filter and find the right grant for your business.

https://www.gov.uk/business-finance-support-finder

Application procedures will differ depending on the type of grant you are applying for. Check

the terms and conditions for their individual requirements.

S O U R C ES O F F I N A N C I N GStarting a business is difficult without financial support. Apart from using your own savings, you may be eligible for financial grants or loans to help finance

your business.

Loan

What are they? Funds given in which the borrower is legally obliged to repay, often with interest

UK Government: A government funded scheme to provide advice, business loans and mentoring to start-up businesses. http://www.startuploans.co.uk/

Banks: Many banks have [Small Business Loans] available. Do your research before committing. Book an appointment with a Business Relationship Manager through your situation. Shop around, check the payback terms, interest rates

costs.

M A N A G I N G F I N A N CESManaging your finances is an important part of your business.

For legal and tax purposes you are required to document all your financial transactions. Keeping a clear record will also prevent potential disputes with

your suppliers and customers.Here are a few tips to get help get you started!

•Create an accounting record – Excel or any other professional •Record each cash inflow and outflow – Make sure you also contain

the date of transaction, item and where the money came from for purposes

•Plan ahead! – If you have a major expense to pay out, plan and advance!

•Keep track! – Set aside a regular time to go over your transactions you recorded them correctly

Looking after your books!

M A N A G I N G F I N A N CESManaging your finances is an important part of your business.

For legal and tax purposes you are required to document all your financial transactions. Keeping a clear record will also prevent potential disputes with

your suppliers and customers.Here are a few tips to get help get you started!

•Legal Obligations! – Research into any legal procedures you may to when starting your own business (https://www.gov.uk/working-

•Open a business bank account – It is advised to keep your earnings separate from your private savings

•Keep evidence of all financial transactions! – e.g. receipts, bank payslips etc. These are required for tax and auditing purposes (https://www.gov.uk/self-employed-records/overview)

•Still unsure? – You can choose to employ an external accountant or to help you with any issues you may have

Financial

A C C O U N T I N G I S A L S O V A L U A B L E

T O …

14

Keep financial records, analyse them and

then make business decisions.

Build a good financial reputation.

Important if you want to obtain funds and loans!

Prevent and discover fraud.

A P A R T F O R B E I N G U S E D T O C A L C U L A T E Y O U R

T A X E S …

A C C O U N T I N G A N D

T A X E S

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• Refer to HMRC’s website:

http://www.hmrc.gov.uk/guidance/selling/income.ht

m

• If you are trading, you may have to pay Income

Tax, National Insurance Contributions and VAT.

HM Revenue and Customers (HMRC) will treat

you as self-employed in that trade.

http://www.hmrc.gov.uk/guidance/selling/income.htm

A M I T R A D I N G ?

16

As an entrepreneur, you probably are!

Generally, you are considered to be trading if you are:

• Selling goods you bought for resale

• Making goods and selling them with the intention of gaining

profit

• Selling or buying goods on behalf of others for financial gain

(e.g. commission)

• Providing a service and receiving payments for it.

B E F O R E Y O U R

A C C O U N T I N G …

17

• In addition to using Excel, you also have to keep

track of your purchases, expenses and sales!

• This is known as Book-Keeping.


B O O K - K E E P I N G

18

• Book-keeping is simply keeping track

of your expenses and revenues.

• Keep them tidily in a folder so you can

track your flow of money.

B O O K - K E E P I N G

19

Expense

s Revenue from

online shop

Purchase

s

B O O K - K E E P I N G -

K E E P I N G A J O U R N A L

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• The journal, also known as the ledger, is

where you list all relevant transactions for

your business: Sales, Purchases and

Expenses.

• You can keep the journal entries recorded

in the spreadsheet we have provided for

you.

B O O K - K E E P I N G & L E D G E R

T R A C K I N G Y O U R S A L E S

21

• Use the “Sales” tab to list your sales properly: Put the date,

name of the item sold, price per unit and quantity sold.

• The spreadsheet will calculate the total income for you.

• We suggest that you separate the sales by month.

• Start a new “Sales” tab monthly.


T R A C K I N G Y O U R

P U R C H A S E S

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• Use the “Purchases” tab to list your purchases properly: Put the date,

name of the item bought, price per unit and quantity bought.

• The spreadsheet will calculate the total amount spent on purchases for

you.

• We suggest that you separate the purchases by month.

• Start a new “Purchase” tab monthly.


T R A C K I N G Y O U R E X P E N S E S

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• Use the “Expenses” tab to list your expenses properly: Put

the date, name of the expenses and the amount.

• The spreadsheet will calculate the total expenses for you.

• We suggest that you separate the expenses by month.

• Start a new “Expenses” tab monthly.

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I N C O M E S T A T E M E N T

Using this, we will calculate the net profit you have earned.

Normally, we calculate it once a year.

W H A T D O A C C O U N T I N G

R E C O R D S L O O K L I K E ?



25

C O M P O N E N T S O F T H E I N C O M E S T A T E M E N T

SALES. This is where

you record the

revenue you earned

from sales of your

goods.

This is where we enter expenses incurred in

purchasing materials or making our goods.

COST OF

GOODS

SOLD.

Other expenses incurred in selling your product.

This includes fees paid to PayPal, mailing fees,

packaging and even rent, electricity and wages!

EXPENSES.



26

S T A T E M E N T O F F I N A N C I A L P O S I T I O NProvides you with a snapshot of the state of your business - what assets

you have, how much do you owe people and where your revenues are

at.



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C O M P O N E N T S O F S T A T E M E N T O F F I N A N C I A L P O S I T I O N

Fixed assets are tangible assets you use for

production of your good. Examples include work

laptops, sewing machines and even a piece of

property!



28


Current assets are assets which can be turned into cash

easily. Examples will be cash itself (with you, in the bank or

in your PayPal account). Goods you are intending to sell for

cash is also a current asset.



29


Current liabilities are amounts due to be paid to creditors

within 12 months. It can include a bank overdraft, or small

payments you’ve yet to pay a supplier for their product or

service (e.g. pearls supplier, printing shop).



30


Non-current liabilities are amounts due to be paid to

creditors after a longer period of time (above 12 months). It

can be a 5-year bank loan, or long-term lease obligations

for your shop.



31


Capital is what you initially invested in the

company.

L E T ’ S L E A R N …

32

In the next few slides we will take a step-by-step approach

to gradually teach you the basics of accounting.

You will go through an example similar to

real life conditions!

A C C O U N T I N G &

E X C E L

33

You spend £50.00 on pearls to make

necklaces and managed to sell all of the

necklaces produced for £100.00.

⇒ Increase Purchases to £50

⇒ Increase Sales to £100

⇒ Increase Cash at Hand to 100-50=£50

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However, instead of buying the pearls with

cash earlier, you bought them on credit.

You also haven’t yet received the

money for a quarter of the necklaces.

⇒ Increase Creditors to £50

⇒ Increase Debtor to 100*(¼)= £25

⇒ Increase Cash at hand to 50+50-25=£75


E X C E L

35

Unfortunately, instead of selling all of the necklaces

made this year, you are left with unsold pearls worth

£10.

As a result your sales are only £80 this year, and of

these £80 you are owed £15 .

⇒ Increase Closing Inventory to £10

⇒ Decrease Sales to £80

⇒ Change Cash in hand to 80-15= £65

⇒ Change Debtors to £15

⇒ Change Inventory and Materials to £10


E X C E L

36

You realise that you forgot to account for pendants

that you bought last year for £20 but didn’t manage

to sell.

Fortunately you managed to get rid of them at their

face value (£20).

⇒ Sales increase by £20 to £100.

⇒ Opening inventory increases by £20.


E X C E L

37

On the $100 sale there’s a PayPal fee. The

PayPal fee is 20p +3.4% of the amount

received. Assume that there were two

transactions and that the fee affects cash.

⇒Increase PayPal expense to 0.2*2+0.034*100 = £3.6

⇒Decrease cash by £3.6


E X C E L

38

Last year you made the acquisition of a

machine that allows the making of necklaces

faster.

It cost £500 which you paid for entirely by

borrowing for 10 years.

⇒ Increase machine to £500

⇒ Increase loans to £500


E X C E L

39

You have to pay interest on your loan. The rate

is 4% per year, which is £20. You pay it using the

bank as an intermediary.

You also decide to transfer £30 of your cash at

hand to your bank account.

⇒Increase Interest Expense by 0.04*500=£20

⇒Cash at hand: 61.4-30= £31.40

⇒Cash at bank: 30-20= £10


E X C E L

A P P E N D I X -

D E F I N I T I O N S

40

Assets: Anything of value that you own.

Bank overdraft: when the cash at bank is negative.

Capital: amount invested in the business.

Cost of transport IN: Cost of transporting the purchases.

Closing inventory: Value of goods, supplies and materials held at

end of year.

Creditor: Purchases that we have not paid for yet.

Current assets: Assets that can be converted easily into cash.

Current liabilities: Liabilities that have to be paid back in the near

future.

Debtor: Money owed by customers.

Expenses: Costs not directly related to the production of goods.

Final Value Fees: Fees paid to Etsy and eBay for a sale (commission),

as well as PayPal.

A P P E N D I X -

D E F I N I T I O N S

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Fixed assets: Assets that cannot easily be sold for cash.

Gross profit: Sales minus cost of goods sold.

Interest fee: Cost of having a loan.

Liabilities: Anything that you owe to someone else.

Net profit: Gross profit add income minus expenses minus taxes minus

interest fees.

Non-current liabilities: Liabilities that do not need to be settled in the

near future.

Purchases: Amount paid for supplies and materials this year.

Opening inventory: Value of goods, supplies and materials held at

beginning of year.

Overhead costs: Grouped expenses (rent, gas, electricity) necessary for

the business but not immediately linked to the good sold.

Sales: Income received from sale of goods.

A D D I T I O N A L

R E S O U R C E S

42

Accounting Coach:

http://www.accountingcoach.com

An online website with extensive resources. They

have a search function on their website which allows

you to search for answers to any queries you might

have.

O N L I N E A C C O U N T I N G R E S O U R C E S

http://www.accountingcoach.com

A D D I T I O N A L

R E S O U R C E S

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Entrepreneur Education - Accounting 101:

https://www.youtube.com/watch?v=hRCdKlJnNkI

An optional video. While it relates to US laws, it

provides a good starting point with relevant

examples to help you better understand how you can

incorporate accounting for your own business.

A C C O U N T I N G F O R E N T R E P R E N E U R S

https://www.youtube.com/watch?v=hRCdKlJnNkI

A D D I T I O N A L

R E S O U R C E S

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YouTube videos with tax information for UK

businesses: https://www.youtube.com/user/HMRCgovuk

Guidelines on how to pay your taxes when starting

your business:

http://www.hmrc.gov.uk/startingup/index.htm

T A X I N F O R M A T I O N - H M R C

G U I D E L I N E S

https://www.youtube.com/user/HMRCgovuk

http://www.hmrc.gov.uk/startingup/index.htm

Creative Cycle - Accounting (updated Tue 3 Mar 2015)

Business

Transcript of Creative Cycle - Accounting (updated Tue 3 Mar 2015)