What do you need to know about finance?
Aprofit and loss account is really nothing more than a list of all revenues andcosts of a company. The outcome of this enumeration therefore directly indicatesthe financial situation of your company.
Haveyou calculated a certain profit percentage? Or do you want to compare yourfinancial situation with previous years? Your profit & loss account makesit clear.
Depreciation is incurred after an investment that lasts longer than a year and costs morethan €450. You do not charge the expense to your profit at once, but you spreadthe costs over the life of your investment.
Because business assets last for a number of years, you may not deduct all costs in they ear of purchase. Instead, you must depreciate. This means that you divide thecosts over the years in which you use the asset. Each year you can deduct aportion of the costs. Do you buy an asset for less than €450? Then you deduct theamount in one time as costs.
The easiest way to explain this is by means of an example. Suppose you buy a car, then of course you expect that it will last a number of years. We're talkingabout the lifetime of your purchase (or investment). This means that you will probably pay the expense at once, but that you can spread the costs over theyears of the expected life span. Distributing the costs incurred is called depreciation.
A balance sheet is part of your bookkeeping and a snapshot that shows thefinancial situation of your business. On your balance sheet you will find allyour assets, debts, and also your equity at a given moment. Your balance sheetconsists of two sides, namely the assets and liabilities, the most importantfeature of a balance sheet is that it must be balanced at all times.
The left side of the balance sheet is the asset side (also called the debit side).The assets side contains all your possessions, such as your business premises,stocks, means of transport, but also the money still to be received (debtors).
Fixed assets
Fixed assets are assets that are tied to yourbusiness for a long time, have a value higher than €450 and are used forbusiness operations. They should be included in the balance sheet of youraccounts. Fixed assets consist of three types, namely: intangible fixed assets,tangible fixed assets and financial fixed assets. In general, it can be saidthat fixed assets are possessions that are active in the business for more thanone year. Fixed assets are part of the balance sheet and are on the left(assets) side.
What exactly is covered by fixed assets?
Fixed assets are business assets that are notintended to be resold and are active in your business for more than one year.As mentioned, there are several types of fixed assets to define, namely:intangible fixed assets, tangible fixed assets and financial fixed assets. Weexplain the types below.
Tangible assets:
These are basically the tangible assets of abusiness. Examples include land and buildings, machinery and equipment, as wellas your company laptop. Your tangible assets also include your inventory,
Intangible fixed assets:
Intangible fixed assets are the non-tangible assetsthat are tied to your business. We are talking about licenses, patents or, forexample, development costs.
Financial fixed assets: These are holdings in othercompanies, shares or other financial receivables.
Note that all of the fixed assets we list are tiedto your business for more than one year. Is something active in your companyfor a shorter period of time? Then we are talking about current assets.
Current assets
Current assets are possessions in your company thatcan only be used during one production process. In other words, they are assetsthat can be "quickly" (within a year) disposed of or converted intocash. This actually puts current assets in direct opposition to fixed assetsthat are in your business for longer than a year (such as your company building).
Examples of current assets are: an inventory ofgoods, raw materials, but also accounts receivable.
What exactly is covered by these current assets?
You'll find your current assets on the assets sideof your balance sheet, but what does it all fall under? We put it in a row:
Stock
First of all, we talk about the stock. Thisincludes the goods needed to create your final product, but also those finalproducts that have not yet been sold. Packaging materials also fall under yourstock.
Accounts receivable are also included in currentassets. For example: you have sent an order to your customer and the invoicehas been sent along. The customer has received his package, but the invoice isstill outstanding. These are debtors (or receivables) for which you expectpayment to come your way within a short period of time.
Liquid assets such as the balance on your bankaccount(s) and suspense accounts but also your cash account (cash).
Do you send your invoices with an iDEAL paymentlink? Then the Mollie payments also fall under your current assets. Molliepayments will be converted "smoothly" into cash on your bank account.
Liabilities on the balance sheet
In most cases, every asset also has a cost. When weask ourselves the question how our possessions are paid for, we come to theliabilities side. You can pay for your possessions with your own capital, butalso with borrowed money. Those financial obligations (debts) are found on theright side of the balance sheet, the liabilities side.
Liabilities are all the resources with which thecompany is financed, in short, the debts of the company. The liabilities are onthe right side of the balance sheet and therefore contain mainly the debts ofyour company. This includes, for example, outstanding accounts (creditors) andthe VAT that still has to be paid. The liabilities are actually all financialobligations that you have, but also your equity is part of the liabilities.
Bank book
A bankbook is part of the accounting and consistsof all expenses and receipts that occur on your business bank account. In thebank book you find all transactions according to the bank statements of yourbank. The bank book is one of the so-called diaries that belong to anadministration and it also looks a bit like the cash book, except that thistime it concerns electronic payments.
Cash book
A cash book is part of your accounting. If you dobusiness with cash, you need to keep a cash book. A cash book contains all thecash transactions that are made in your business. The cash book consists ofboth cash expenses and income and provides an overview of the daily cash flows.
Equity
Equity is equal to all possessions minus all debts,or assets minus liabilities. Equity is part of the balance sheet of yourcompany's administration. The central question you can always ask here is,"What is my asset and what is borrowed from it?"
General ledger accounts
General ledger accounts are crucial in keeping youraccounting records organized. You'll find ledger accounts on your balancesheet, but also on your income statement. For example, you have "cash andcash equivalents" on your balance sheet, and "selling expenses"on your income statement.
General ledger accounts categorize, so to speak,your income and expenses, as well as your assets and liabilities.
Annual Accounts
In short, an annual account shows the financialsituation of your company per year.
What does an annual account consist of?
What your annual accounts should consist of dependson the size of your company, but generally speaking an annual account consistsof both your balance sheet and your profit & loss account, and possibly anexplanation of both.
Inventory
Inventory on your balance sheet is a fixed assetaccount that consists of investments of business assets used to run yourbusiness. Inventory examples are your desk, laptop or other tools. So they arepossessions of a company, this means that you find them back on the assets sideof your balance sheet.
The main item under your Inventory account areinvestments in business assets.
These are purchases you have made so you can doyour job well. Think of a laptop or desk. What you can keep as a standard hereis that it concerns assets that last longer than one year, that are notintended for sale, and that at purchase amount to more than €450, - excl.
- Inventory examples:
- Computer / laptop
- Furniture such as a desk or other officefurnishings
- Power tools
Accounts Receivable
Accounts receivable are your customers that youhave yet to receive money from. You find your debtors on the assets side ofyour balance sheet. On this side are all your assets, including the money youare yet to receive. For example: you have delivered a service and sent theinvoice to your customer. If the invoice has not yet been paid, the customer(the buyer) has an outstanding debt with you. We call this customer the debtorin the story
Creditors
Creditors are the suppliers who you have notimmediately paid. They have provided you with goods or a service, but the bill(or debt) is still open. In that case you are actually called the debtor in thestory, and the creditors (the suppliers) are your creditors. This is where youshould look on your balance sheet.
Receivables
In accounting, receivables are equivalent to aclaim for money. There are short-term receivables and long-term receivables.Receivables are on the balance sheet of your bookkeeping. In this article, weexplain further what receivables entail.
Short-term receivables on the balance sheet
Current receivables are receivables that you expectto be paid within a year. They fall under current assets on your balance sheet.Examples of current receivables are your debtors, but also the VAT to bereceived back, receivables from shareholders or participants or participations.
Receivables from debtors
Suppose you have sent out an invoice, but it hasnot yet been paid. This means that you have a claim on someone else. This makesyou the creditor and the customer the debtor. The customer owes you money.Would you like to have insight into your debtors? Then look at the assets sideof your balance sheet, where you will find the debtors under your currentassets.
Claim by creditors
Who is claiming what from whom? It could be thatyou still owe money. This means that someone else has a claim on you, and thismakes you the creditor. You will find this on the liabilities side of yourbalance sheet under accounts payable.
Long-term receivables on the balance sheet
Long-term receivables are receivables that youexpect to be repaid later than one year. They fall under fixed assets.
Stock
A stock consists of goods that are available forproduction, sale or delivery. These goods all have a value and must bereflected in your books and processed on your balance sheet. Also goods thatare already in use for production are part of your stock. On your balancesheet, you will see inventory under your current assets. So basically thismeans that stock consists of goods that are "smoothly" gone again, orcan be converted into money.
Cash and cash equivalents
Cash and cash equivalents are money available inthe company. This is the business bank account, cash account, credit cardaccount, but also accounts of payment providers such as Mollie, Paypal, etc.The literal translation of "Liquid" is liquid, referring to the factthat money is always in "motion".
Current Liabilities
Current liabilities are payment obligations (debts)with a term of less than one year. In your accounting, current liabilities arealso called short-term debt. A short-term debt must be placed on the balancesheet when there is a contractual payment obligation of less than 1 year.
The reason that a distinction is made between thesetwo categories is that you as an entrepreneur have a better understanding ofhow your business is doing and whether it can meet its payment obligations.
Current liabilities on the balance sheet
On the balance sheet, current liabilities are onthe right-hand side (Liabilities). At Current liabilities you can think oftaxes to be paid (VAT), wages, but also short-term loans. Besides currentliabilities, there are also long-term debts where the term of an obligation islonger than one year.
Examples of current liabilities
First of all, your current liabilities include theaccount payable VAT. When you sell something, you receive VAT on it, which youthen have to pay, this is seen as a short-term debt.
Long-term debts
Long-term debts are debts with a payment obligationof more than one year. In accounting, non-current liabilities are also referredto as long-term debt. It often concerns repayments of loans.
The reason that a distinction is made between thesetwo categories is so that you as an entrepreneur have a better understanding ofhow your business is doing and whether it can meet its payment obligations.
Long-term debts on the balance sheet
On the balance sheet, long-term debts are listed onthe right-hand side (Liabilities). In addition to long-term debts, there arealso short-term debts where the term of an obligation does not exceed one year.
Examples of non-current liabilities
The most obvious example is loans, for example amortgage loan. Such a loan is usually taken out with the bank, and there shouldbe a fixed asset against it as security. In this case, this "fixedasset" is the property for which the loan has been granted. As soon as youare no longer able to repay the loan, the bank can claim this property forsale.
Another way of providing security is through stocksand debtors. If the loan can't be repaid, the creditor can sell your stocks andclaim the profits, or go after your debtors to get money.
Other examples of long-term debt are:
- Lease contracts, for example, for leasing a car.
- A startup loan for your business.
- A loan through a lender.
- Loan for the purchase of a stock of products.
Difference between costs and expenses
Costs and expenses are closely related, yet thereare differences. For example, costs end up on your profit and loss account, andexpenses can also appear as stock on your balance sheet, for example. It istherefore important to be able to distinguish between both concepts for youradministration.
No expense yet, but already costs
It may be the case that you already have expenses,while you have not yet incurred any. For example: you make a purchase andreceive an invoice. You have not yet paid it, so you have not yet created anexpense. You then have, as it were, a short-term debt on your balance sheet. Onthe other hand, your purchase already belongs to the expenses on your profit &loss account.
No costs, but an expense
Eventually you pay your outstanding invoice. Nowyou do incur an expense, and so the debt on your balance sheet is cancelled. Onyour profit & loss account nothing changes. You do not incur any expenses,but these have of course already been processed in your profit & lossaccount.
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