Note: This is not a replacement for real accounts training. You should always consult your accountant if you are not sure what you are doing.
Every movement of cash, every invoice, sale and purchase, and every movement of inventory 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. You can also use the accounting figures to help you understand your business and make important decisions.
Each transaction records the movement of money by using nominal codes. These codes represent different pots of money, for example, the value of inventory or the money in your bank account. All the nominal codes makes up what is known as the Chart of Accounts. The nominal codes are divided into several categories (e.g. assets, liabilities...), which denotes the way the account is handled, it's therefore very important that you add new codes into the correct category.
You can create numerous nominal codes to help with reporting and decision making, for example, your assets might total $40,000, but how much of that is inventory? How much is invoices to be paid by customers? You will need to record each of these separately within the assets category. This will allow you to see if too much of your cash is tied up in inventory, or if it's unpaid from customers. You accountant will be able to help you with what different accounts you'll need and which category they should be in.
Brightpearl uses the double-entry accounting principle. This means that every accounting entry has an equal and opposite effect; you may have heard of debits and credits. These are easier explained with a simple example:
Let's say a company has $5000 in the bank, of that $500 is withdrawn to purchase a van. This one transaction has two entries to accounting, first the withdrawal of $500 from the bank (credit) and then the addition of a van worth $500 (debit). This represents the equal and opposite effects.
This is a very simple example of double-entry, but it isn't always a simple two entry transaction, it might be made up of many entries but ultimately it must still balance; debits must equal credits.
Debits & credits
You may think you know what a debit is and what a credit is, but it can be far more confusing than you might first realize! In short, a debit is adding and a credit is subtracting. But that doesn't mean that debiting is an increase and a credit is a decrease. In accounting, adding is different to increasing. That is to say, a credit (i.e.. subtracting) can be an increase! Confused?
Debiting and crediting relies heavily on what type of account you are dealing with. You should read about the chart of accounts to understand more about these account types.
Rather than trying to explain how or why the above is true (it could take a lot of time), this table will help you to identify whether an entry is increasing or decreasing an account:
As an example, a credit to a sales type account is an increase (yes, an increase), that is to say you have sold an item and recorded sales revenue.
Every transaction is recorded in accounting using a journal. A journal contains all the debits and credits that make up that transaction and must (according to double-entry bookkeeping rules) always balance (debits = credits). Every journal has a unique reference called a journal ID. These references can be written on the paperwork for the transaction, such as purchase invoices that you may file away. This will allow you to easily find the paperwork relating to accounting entries at a later date. Each journal in Brightpearl is also given a transaction type to help you identify during which process it was created, for example by invoicing a sale.
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.
Each bank account you have needs to be created as an account in Brightpearl (current assets). This allows you to create the same transactions in Brightpearl that are occurring in the real world. 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.
Brightpearl accounting provides a bookkeeping 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. It is possible to integrate with payment providers such as SagePay or SecureTrading in order to process card payments.
Brightpearl can be set up for UK and USA tax schemes. In the UK you can produce a VAT return report which will provide you with all the information you need to complete your VAT return, and in the USA you'll be able to produce a Sales tax report.
Tax is applied to transactions by using tax codes. The tax code applies the relevant rate and also marks the relevant amounts within the accounting to ensure they appear in the correct places on your tax reports.
Types of account
Assets are generally things that are owed to the company. Assets can be broken into two general groups:
- Fixed Assets
- Assets that are not expected to be turned into cash within one year. These may be items such as vehicles, property, office equipment, etc.
- Current Assets
- Assets that are likely to be turned into cash receipts within one year, such as inventory, outstanding customer invoices, short-term loans etc.
Liabilities are generally debts and things that the company owes. Liabilities can be broken into two general groups:
- Current Liabilities
- These are debts to others that are likely to be paid within one year, such as supplier invoices.
- Long Term Liabilities
- Debts that are not likely to be paid within one year, such as mortgages, loans and directors' cash injections.
Capital & Reserves
Do not post transactions with these codes unless you know what you are doing.
Sales / Income
All your sales should use one of these accounts. If you want, you can split sales up and allocate part of a sales invoice with one code and part of an invoice with another code.
Purchases / Cost of Sales
These codes should be used for purchases that relate directly to your sales (cost of sales), for example Import Duty on products, Carriage invoices from your courier company, packaging costs and so on.
Expenses & Overheads
These types of account are used to record money paid out for things related to the operation of the business, such as advertising fees, travel costs, wages, heat and light bills or rent.
Depreciation & Sundry
These accounts are used for recording depreciation of your assets and miscellaneous items.
These accounts are used on a temporary basis for receipts, disbursements or discrepancies until such time as the analysis is complete and they can be properly classified.