Basic Principles
Every movement of cash, every invoice, sale and purchase, and every movement of stock needs to be recorded in your accounting system so that at the end of the month/quarter/year you can see exactly how much profit you have made and how much tax you need to pay. Each transaction records the movement of money using nominal codes. These codes represent different pots of money, for example, the value of stock or the money in your bank account. All the nominal codes makes up what is known as the Chart of Accounts, which is broken down into categories:
- Assets (Current and Long-term)
- Liabilities (Current and Long-term)
- Sales (Income)
- Expenses (Direct and Overheads)
- Cost of Sales (Purchases)
- Owner's equity (Capital)
An asset account is one that stores information about what your company owns. This may be, for example, stock on the shelves, cash in a till, money in a bank account or also the list of invoices that your customers owe you. Asset accounts are split into current assets (such as stock; assets that will be turned into cash within a year) and long-term assets; such as property, vehicles and so on.
A liability account is one that stores information about what your company owes to others. This may be an outstanding loan, a list of invoices due to suppliers, VAT due to the Inland revenue and so on. Liability accounts are split into current liabilities (generally where you need to pay them within a year) and long-term liabilities.
As you enter transactions, you choose the date on which the transaction occurred. If at any time you need to see the balance of an account or nominal code, then Brightpearl will add up all the transactions from the start of your financial year to the date required for the balance. The balance itself is never stored in the system, and in this way you can enter transactions retrospectively while maintaining accurate figures.
Brightpearl accounting provides a book-keeping tool to allow you to keep on top of your customers, suppliers and assets. It does not perform the actual transactions (it will not make the payment), it is a way to record that a payment has occurred, the date of the payment, the method, the supplier and so on. Depending on the customer payment methods you have set up, Brightpearl can be configured to take credit card payments from your customers.
Every time your bank statement arrives, you should reconcile (match) your paper records with your Brightpearl records. This ensures that transactions are not missed, and that data has been entered correctly.
If you are VAT registered, then at the end of each VAT quarter Brightpearl will tell you quickly and simply how much tax is due.
Journals, Debits & Credits
Every accounting entry made into Brightpearl is called a journal and has a unique numerical reference - the journal ID. This reference should be written on the paperwork for the transaction, and each piece of paperwork should be stored consecutively in a folder, allowing you to reference the original document later.
Every journal in a double entry accounting system, such as Brightpearl, requires information to be recorded in two columns (a debit and a credit), for example when you buy stock, your stock value increases (the debit), and your bank account decreases (the credit). The total value of debits and credits in any one journal must match.
Depending on what the transaction is, a debit can either increase or decrease the balance of an account. Brightpearl manages this all for you, but it good to be aware of what is going on behind the scenes. An INCREASE to an ASSET account (such as a bank account) is a DEBIT, an INCREASE to a LIABILITY account (such as loans) is a CREDIT. Use this table to help you remember:
| Account Type | Debit | Credit |
| Assets Cost of Sales (Purchases) Expenses |
Increase + |
Decrease - |
| Liabilities Owner's Equity (Capital) Sales |
Decrease - |
Increase + |
These account types make up the accounting equation: Assets + Cost of Sales + Expenses = Liabilities + Owner's Equity + Sales
Each journal in Brightpearl is given an ID code to indicate how the journal occurred, for example, from a sales invoice or purchase invoice:
| SI | Sales Invoice |
| PI | Purchase Invoice |
| SR | Sales Receipt |
| PP | Purchase Payment |
| BR | Bank Receipt |
| BP | Bank Payment |
| JJ | Journal |
Profit and Loss (P&L)
The Profit and Loss report tells you about your financial performance over a particular period of time. These accounts are temporary; they are reset to zero at the beginning of each financial year (the profit or loss at the end of the year is transferred into retained profits). This allows you to begin counting how well you do over each individual financial period so that you can make comparisons on your performance year on year. Brightpearl will also allow you to request a Profit & Loss report by date, department, project, lead source or months.
When you look at a Profit and Loss report, Brightpearl will check all the transactions in the Sales and Expense accounts to see how much profit has been made.
| Nominal Code Range | ||
| Sales | (4000 to 4999) | |
| less |
Purchases (Cost of Sales) | (5000 to 5999) |
| = | Gross profit | |
| less |
Direct costs (Expenses) | (6000 to 6999) |
| less |
Overheads | (7000 to 7999) |
| = | Net profit |
Note how the Profit and Loss report does not include any asset information.
To view your profit and loss report in Brightpearl go to Reports > Profit and Loss
If you sell stock, then you will need to make sure that any change in the cost value of your stock is included in any Profit & Loss report otherwise the figures will not be correct. Talk to your accountant or book-keeper for more information on stock valuation.
Balance Sheet
The balance sheet tells you the financial position of your business at a specific point in time. These accounts are permanent; they are never reset to zero, they keep a record of how your business value changes over time. This allows you to view the report for any given time and make a comparison with prior years.
When you generate a Balance Sheet, Brightpearl will look at all your Asset and Liability accounts and give you a net balance.
| Nominal Code Range | ||
| Assets | (0000 to 1999) | |
| (e.g. stock, customer invoices, bank accounts) | ||
| less | Liabilities | (2000 to 2999) |
| (e.g. loans, credit card, supplier invoices) | ||
| = | Capital | (3000 to 3999) |
| (e.g. share capital, profit account) | ||
To view your balance sheet in Brightpearl go to Reports > Balance Sheet.
Tax and VAT
If you are VAT registered you can claim back any VAT paid on purchases (input tax), and must pay a proportion of your sales as VAT (output tax). Brightpearl will track the tax on your sales and purchases to provide a VAT return every quarter which is the sum of your output tax less the sum of your input tax.
Tax payable = Output tax - Input tax
Brightpearl is set up with a number of default tax codes that should be used for each transaction:
- T0 – Zero rated
- T2 – Tax Exempt
- T4 – Sales to VAT registered EU customers
- T7 – Zero rated purchases from EU suppliers
- T8 – Standard rated purchases from EU suppliers
- T9 – Transactions not involving VAT (such as bank transfers or staff wages)
- T20 - Standard rate: 20% VAT
Every sale and purchase made affects your Asset accounts, but also affects other accounts.
For example, selling 1 hour of labour at £10 cash including VAT (a standard VAT sale) will generate the following accounting journal entry in Brightpearl. Note how the debit in the asset account (the bank account) is an increase.
| Debit | Credit | Tax code | |
| Bank account (1200) | £10.00 | T9 | |
| Sales (4000) | £8.51 | T1 | |
| Sales Tax (2200) | £1.49 | T1 << this is your Output Tax |
Buying some stationery for £5.00 cash (a standard T1 purchase) will generate the following journal entry;
| Debit | Credit | Tax code | |
| Bank account (1200) | £5.00 | T9 | |
| Purchases (5000) | £4.25 |
T1 | |
| Purchase Tax (2201) | £0.75 |
T1 << this is your Input Tax |
When you generate a VAT Return, Brightpearl will add up all the output tax for the period and subtract the input tax from it, giving the total tax due.
| Output tax | £1.49 |
| - Input tax | £0.75 |
| = Tax due | £0.74 |
Note how the debits always equal the credits in any journal, and how transfers in or out of asset accounts (such as bank accounts) are always T9 (not involving VAT).
VAT Schemes
Brightpearl can be set up for cash based, standard VAT or the flat rate VAT scheme in the UK.
The only information that this will affect is the production of the quarterly VAT return. Data is stored in the same way for both the cash based and standard VAT schemes. Read more about the flat rate scheme and your VAT return here.
