Bookkeeping is the art of tracking money; where it came from and where it went to. That is all there is to it. A simple transaction involves 2 accounts. The ‘from’ account and the ‘to’ account. This is what the concept of double-entry is all about. Trained bookkeepers and accountants use the term ‘credit’ and ‘debit’. That is, a transaction credits one account and debits another. A double-entry. By transposing ‘from’ with ‘credit’ and ‘to’ with ‘debit’, business people not trained in accountancy can get a simple handle on how accounting works. But enough of the theory, lets get back on track!
This article explains some common transactions the self-employed need to make plus some of the differences and common pitfalls experienced in bookkeeping tasks between a limited company and the self-employed.
In a limited company, all workers including the directors are employees. Their pay and salaries are direct expenses of the company. A company, for example, could account for its payroll with just a few transactions. The accounts affected would be the bank (the ‘from’ account, ie. where the money is coming from to pay the wages) and some expense accounts to track how much is going to the employees and how much is going to the Revenue for tax etc. (these are the ‘to’ accounts).
For the self-employed, it is an entirely different story. Their ’salaries’ are not expenses. As a self-employed person, when you take money from the business, it is usually only as a result of the business making a profit. These transactions are typically called ‘Drawings’. You are ‘withdrawing’ money from the business, hence the name.
So, for the self-employed, you will need a ‘Drawings’ account. This should be set up in the ‘Equity’ section of your chart of accounts. Whenever you take money out of the business, create a transaction From Bank To Drawings. In a traditional double-entry system you could credit the bank and debit drawings (so remember the from=credit and to=debit rule if you want to make sense of it).
Another common transaction is where you have bought something using personal money or a personal credit card. The simplest way is to treat it as cash. Create a cash account in your ‘Current Assets’ section of your Chart of Accounts (you will probably have one already). All payments will be From Cash To [some expense account]. When you decide to pay yourself back from the business make a transfer From Bank To Cash. A better way, from an auditing perspective would be to set up a ‘Loan’ account in Current Liabilities. This is important if you make use and need to track cash separately. The transactions are exactly the same as described except you will use Loans instead of Cash.
Finally, opening balances. For a limited company, the opening balances will involve the shares bought by the shareholders. A typical transaction for this would be From Shareholders To Bank. For the self-employed, you would have an account called ‘Capital’ and make a transaction From Capital To Bank.
If you want to look up any accounting jargon, visit the glossary on http://www.accountz.com/glossary.html and also watch out for more articles from Quentin Pain on accounting and bookkeeping for everyone.
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August 23rd, 2010 by InfoMan | No Comments »
InfoMan