1 Introduction
1.1 Many accountants have honed their skills over many years, and spend much of their time in discussions with their fellow professionals: they therefore have an unerring ability to confuse many a lay audience, without having the slightest realisation that they had done so. This is not entirely due to the rules of secrecy and the protectionist practices of the Beancounters Guild. Rather, it is based on the deeply-held belief of many accountants that what they do is stunningly obvious and requires no explanation. 1.2 The reason for this belief is simple: double entry accounting is a complete mystery until its code is cracked; however, once it is understood by the accounting student, virtually everything in accounting falls into place. 1.3 This chapter is designed to take the non-Accountant through some of the basic concepts, and also some of the terminology, involved in accounts. The words “accounts” is a generic term to describe virtually everything from the briefest of monthly management statements through to the 100 pages or so of financial information included within the annual report of a large plc. The phrase “financial statements” is rather narrower and tends to be reserved for accounts which are published, notably those which are required to comply with the various requirements of the Companies Act, and which are required to give a true and fair view. 2.1 Jane has decided to take a year out of a busy life in the City and to run a small business which imports and sells windsurfers. After 12 months she plans to return to her former life, having made a modest profit and having spent a significant amount of time on the water. She rents a small fully serviced shop in Poole, Dorset at £500 per month for the year in question. She is required to pay a deposit of £1,500 to the landlord. The rent is payable monthly in arrears, on the first day of the following month. She buys an ancient van for £1,200 and considers that it will have no value after 12 months. She pays the van running costs from her private bank account. She buys the windsurfers for £700 each and aims to sell them for £1,000 each, making a gross profit of £300 on each windsurfer. “Gross profit” is the amount of the sales less the direct costs of those items which have been sold. The gross profit percentage is the gross profit expressed as a percentage of the sales. A gross profit of £300 on a sale of £1,000 is a gross profit percentage of 300/1,000 or 30%. 2.2 In order to derive the gross profit it is necessary to derive the costs of those goods which have been sold: as a rigorous accountant Jane counts her stock at the end of every month so that she can do this. She then calculates the amounts of stock that have been used in achieving her sales. She does this in the expectation that she will make a gross margin of 30% a month. 1.4 In this book we use the words “accounts” and “financial statements” virtually interchangeably. 2 Jane’s Windsurfing - A Simple Example
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