Mahmood Reza explains how balancing the books maintains a company’s equilibrium.
Book keeping, in other words, the keeping of financial records, is an essential but misunderstood responsibility. There is a legal requirement for organisations and freelancers to keep accounts: the Taxes Acts require record keeping where individuals are subject to the self-assessment regime, and Company Law requires companies to keep accounts to show and explain their transactions, financial position etc. Charitable arts companies also operate within the framework of Charity Law.
Apart from the legal imposition, effective record keeping is crucial for a number of reasons: to keep track of business activities; to comply with tax, PAYE and VAT; for a management information system to tell us about levels of cash, income, costs, debt, monies owing, successes and failures; as part of a risk reduction approach; and to help keep accounting fees at an acceptable level.
Management responsibilities tend to cover planning, control, decision-making and evaluation, and book keeping is a fundamental part of the management information system that helps managers to discharge these functions. Financial data arises as the result of organisational activity. For example, a theatrical performance will generate income (ticket sales, grant income), incur costs (artists fees, equipment hire), create liabilities (artists fees not yet paid), and create assets (grants not yet received). Book keeping needs to capture this data so that management information can be extracted and utilised, for example, to assess the financial impact of the performance on cash flow.
The book keeping system also needs to distinguish between credit and cash transactions. A credit transaction will occur where there is a delay (normally of more than a day) between buying or selling goods and services and the actual cash being paid over or received. Income should be recorded when goods or services are sold, costs are normally recorded when the goods or services are provided by the supplier. Cash is a general term and we distinguish between transactions of physical cash (including notes and coins) and those transactions flowing through the bank accounts (deposits and payments).
Records are normally subject to a classification, and the main classifications are: income, for example grants and fees; cost of sales relating to the main activity of an entity, for example artists’ fees and freelance costs; overheads (running costs), for example salary, travel and subsistence. The summaries of these categories are shown in the profit statement, or Statement of Financial Activities (SOFA) for a charity. Additional categories are required for assets, for example cash and unpaid customer accounts; liabilities, for example unpaid supplier accounts and overdrafts; capital and reserves (the net funds available to an entity, and the profit or loss for the year).
Book keeping aims to reflect the financial impact of a business transaction, and this normally involves recording information in two accounts. For example, the payment by cheque of an outstanding bill means recording a reduction of bank funds and the reduction of this debt; work carried out for credit means recording income earned and the increase assets (money owed). Records can be maintained manually and/or electronically (using Excel and/or accounting software), and the choice should be driven by the needs and skills of the user, any internal reporting requirements (such as board meetings), the relative costs, accuracy of systems, and the number and complexity of transactions.