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1. Why do we have accountants?
3. A whirlwind tour of accounting
4. An example
Example
| Description | Balance Sheet | Profit & Loss | Cashflow |
| A company buys (on credit) some raw materials for £1,000. It is put into stock, so there is no affect on Profit and you haven't paid anything, so there is no effect on Cash. On the Balance Sheet, you increase the value of Stock and Creditors (people to whom the company owes money) |
Assets Stock £1,000 (dr) Liabilities Creditors (1,000) (cr) |
Nil | Nil |
| The company pays its staff £500 (in cash) to do some work to the materials to make them saleable. You have paid out £500 in cash and increased the value of stock, but there is still no effect on Profit. |
Assets Stock £1,500 (dr) Liabilities Overdraft (500) (cr) Creditors (1,000) (cr) |
Nil | £500 negative |
| The company pays for the materials. You have paid out more cash and wiped out the Creditor, but there is still no effect on Profit. |
Assets Stock £1,500 (dr) Liabilities Overdraft (1,500) (cr) |
Nil | £1,500 negative |
| The company, finally, sells the finished goods to 10 different customers for £200 each. There is no effect on cash, but on the Profit & Loss account the income is recognised, as is the value of the stock that has been sold. On the Balance Sheet, the value of the stock has gone, but we now have some Debtors (people who owe the company money). |
Assets Debtors £2,000 (dr) Liabilities Overdraft (1,500) (cr) |
Income Sales £(2,000) (cr) Cost Cost of Sales 1,500 (dr) Therefore Profit (500) (cr) |
£1,500 negative |
| The company receives money from 9 of its customers, leaving one that is bad. Cashflow is now positive and Debtors have reduced, but there is no effect on Profit. This leaves Profit adrift from Cashflow by the value of the bad debt. |
Assets Debtors £200 (dr) Bank 300 (dr) |
Income Sales £(2,000) (cr) Cost Cost of Sales 1,500 (dr) Therefore Profit (500) (cr) |
£300 positive |
| The company decides that there is no hope of recovering the outstanding debt, so it writes it off. The Debtor disappears from the Balance Sheet and is written off against Profit. The transaction is now finished and Profit and Cashflow are in line. |
Assets Bank 300 (dr) |
Income Sales £(2,000) (cr) Cost Cost of Sales 1,500 (dr) Bad Debts 200 (dr) Therefore Profit (300) (cr) |
£300 positive |
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