Bookkeeping

SITUATION

Metro-Polo Office Cleaning is a franchise organisation. Its founder is Arturo Foscatelli, whose head office is in Rome. The small businesses which join his franchise are given training, allowed to use the Metro-Polo brand name and benefit from Metro-Polo's advertising. In return, each franchisee pays a quarterly subscription to the franchisor. In this lesson we see if Metro-Polo's newest franchisee can manage to run the business and cope with all the financial paperwork involved.

CHARACTERS

LANGUAGE

Looking at the trial balance

14.1 Listen and read

Patrick Flynn runs a Metro-Polo office cleaning franchise. He gets a visit from Arturo Foscatelli, the company's president. Listen to what they say. Why is Arturo visiting Patrick?

ARTURO	Mr Flynn? Good morning. I'm Arturo Foscatelli.
PATRICK	Hello, Mr Foscatelli. Come on in - do sit down.
ARTURO	Thank you. As I explained on the phone, I make a point of visiting new members of our organisation at least once during their first year of operation. In your case, it seems that things are going well: lots of contracts, and morale is high.
PATRICK	Well, yes, as long as you don't mind working sixteen hours a day!
ARTURO	Yes, indeed! Now, I wonder if we can put some figures on the performance so far. You've completed your first three months' trading. Do you have any idea what your turnover was, roughly?
PATRICK	Er - yes - getting on for thirteen thousand pounds.
ARTURO	Mm. That's well on target . Now, how about the outgoings , especially the overheads? That's always something we have to watch in a new business.
PATRICK	I must say, Mr Foscatelli, I think this is where I probably need your advice. I've been recording all my transactions very carefully on the computer, and everything seems to be OK. But I don't really understand this idea of 'double entry'.
ARTURO	Don't the figures balance?
PATRICK	Oh, yes, they balance, but I don't understand what they mean. Look. This is the trial balance I printed out for the first quarter.

14.2 Document study

This is the trial balance that Patrick prepared. Read through it carefully. Which of the names here are probably those of Patrick's customers? Why does the name Metro-Polo appear here?

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TRIAL BALANCE
as at 31/10/91

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Purchases	2406.00
Sales			12874.00
Stock at 1/8/91	1050.00
Wages and salaries	3995.00
Advertising	2860.00
Postage	118.00
Petrol	263.00
Telephone	142.00
Premises (rent)	900.00
Gas and electricity	230.00
Vans (leasing)	840.00
Equipment (leasing)	390.00
Bank	3682.00
Cash	371.00
Midland Furniture	98.00
Goodies Ltd	205.00
Wonder-Bar Security	36.00
Q Smith & Sons	582.00
Capital			7260.00
Drawings	3872.00
Metro-Polo			1500.00
All-Clean Supplies			406.00
	22040.00		22040.00
Stock in hand 31/10/91		2079.00

14.3 Writing practice: figures

Look again at the trial balance in 14.2. Then answer the questions below.

14.4 Listen and read

Arturo explains the trial balance to Patrick. Listen to what they say. Is Metro-Polo a creditor or a debtor of Patrick Flynn?

ARTURO	Yes, that seems reasonable. What's the problem?
PATRICK	I know I did a training course on this, but I never really got the hang of it. Which side is which?
ARTURO	Well, briefly, the left-hand column shows you the debits - that's where the money went to. The right-hand column is the credits - where the money came from. Or we can say that the right-hand side represents the sources of funds , and the left-hand side the uses of funds.
PATRICK	But I thought debit meant that you owed money to somebody?
ARTURO	It depends who 'you' are, doesn't it? Look at these four people here - Midland Furniture, Goodies, Wonder-Bar and Smith and Sons. They owe you money, right? They are your debtors. Metro-Polo and All-Clean Supplies, on the other hand, are your creditors - you owe money to them.
PATRICK	But that's money going out, so why is it on the right-hand side, with sales, which is money coming in?
ARTURO	Because creditors are people you haven't paid yet! As long as you don't pay them, All-Clean and the others are lending money to your business. In effect, they are giving you free use of their money. So you benefit, just as you do from sales.
PATRICK	Ah! So Midland Furniture and Goodies and the other debtors - they're doing business with my money?
ARTURO	Well, until they pay you, yes.
PATRICK	I'll get on to them right away!

14.5 Find the right word: bookkeeping

Read the text below on bookkeeping. Write a word from the box to fill each of the gaps.

a - b bookkeeping is a system which enables the business manager to record all money coming in (c ) and all money going out (d ), and to work out the company's progress and present position. For every e , there are two f in the ledgers. In one ledger, it is shown on the g side, and in the other, as a h . Each ledger records transactions of a particular type. By adding the transactions for a period of time, you find the amount needed to i the account. All the balances from the different ledgers are added together in the trial balance. If everything has been entered correctly, their totals must j - that is, they must be equal. The bookkeeper can then go on to prepare the profit and loss account and finally the balance sheet, which shows the state of the business on the date it was drawn up. You can see at a glance the k and uses of funds.

14.6 Structure practice: present tense and future time

Entering a transaction in the ledger

14.7 Listen and read

Arturo asks Patrick how he finds his customers. Listen to what they say. What is Patrick's most successful method?

ARTURO	Judging from your trial balance, most of your customers are quite small. How do you attract them? Just by advertising?
PATRICK	I spend quite a bit on advertising , as you can see. I think I've done better, though, with direct mail . I keep adding to the mailing list . That reminds me, I bought another fifty pounds' worth of stamps today; I must put them on the computer. Er - now...
ARTURO	'New transaction.' Right, now it's asking you in which ledger you want to enter the transaction.
PATRICK	'Purchases'. No! 'Postage'.
ARTURO	That's better!

14.8 Document study

The print-out below shows the entries in Patrick's postage ledger. Read through it carefully. You will need it for 14.9.

POSTAGE

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01/08	Cash	50.00	01/08	Opening balance	0
15/08	Bank	50.00
30/09	Cash	11.04
15/10	Cash	6.57	31/10	To P&L a/c	117.61
		117.61			117.61
01/11	Balance b/d	117.61
05/11	Cash	50.00

14.9 Listen and read

Patrick asks Arturo about the postage ledger. Listen to what they say. Why does Patrick keep a separate ledger for postage?

PATRICK	Suppose I had put postage stamps in the 'Purchases' ledger - what would happen?
ARTURO	Nothing. The computer won't know that you made a mistake. The figures will still balance, but you won't know how much you've spent on stamps.
PATRICK	Right, fifty pounds. Now, why does it ask me how I paid for them?
ARTURO	Because every transaction has to be entered twice. You've debited the postage account, so another ledger has to be credited, and then they balance. How did you pay?
PATRICK	Cash.
ARTURO	Right, so hit 'C' for 'Cash' - then the computer credits the cash ledger. And there you have the principle of double-entry bookkeeping. Invented by Italian merchants in the twelfth century, incidentally.
PATRICK	Ah! It seems so simple when you explain it. If only I'd paid more attention on the induction course.
ARTURO	Speaking of induction courses, did you make up a profit and loss account at the end of your first quarter?
PATRICK	No! Should I have done?
ARTURO	Well, it is a condition of the franchise agreement, but don't worry, you can still do it. Watch! If you select 'Profit and Loss' from the menu, and key in the date for the last day of the quarter, the computer will do the rest for you.

14.10 Find the right word

Read the text below on bookkeeping. Write a word or phrase from the box to fill each of the gaps.

In Britain, the a - b side of the ledger is the debit side, the c - d side is the credit side. Suppose you sell something for £20, and you allow your customer, Mr Smith, credit. He says he will pay at the end of the month. You enter this in the e ledger, as a credit - after all, it's money f . To make your books g , you must also record it on the h side of a ledger that has Mr Smith's name at the top of the page. You i his account £20, because that is the amount he j you. At the end of the month, Mr Smith pays his debt of £20. You write this on the k side of his ledger, so that it l . But what about the m ledger? That £20 must now be recorded somewhere else - but where? It depends how Mr Smith paid. If he gave you a cheque, you n the bank ledger; if he gave you a £20 note, it is recorded as o .

14.11 Document study

This is an example of what Patrick Flynn's profit and loss account might look like. Read through it carefully.

METRO-POLO OFFICE CLEANING (KINGSTON)
Profit and Loss Account
for the quarter ending 31/10/91

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Opening stock	1050.00	Sales	12874.00
Add purchases	2406.00
	3456.00
Less closing stock	(2079.00)
Cost of sales	1377.00
Gross profit	11497.00
	12874.00		12874.00
Wages	3995.00	Gross profit	11497.00
Advertising	2860.00
Postage	118.00
Petrol	263.00
Telephone	142.00
Rent	900.00
Gas and electricity	230.00
Vans (leasing)	840.00
Equipment (leasing)	390.00
	9738.00
Net profit	1759.00
	11497.00		11497.00

Reading the balance sheet

14.12 Document study

This is Patrick Flynn's balance sheet. It is very unusual for fixed assets to be shown on a balance sheet as 'nil'. Why? Is this a problem for Patrick?

METRO-POLO OFFICE CLEANING (KINGSTON)
Balance Sheet as at 31/10/91

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SOURCE OF FUNDS
Capital	7260.00
Net profit	1759.00	9019.00
less drawings		(3872.00)
		5147.00
USE OF FUNDS
Fixed assets	0
Current assets
Stock	2079.00
Debtors	921.00
Bank	3682.00
Cash	371.00	7053.00
less current liabilities		(1906.00)
		5147.00

14.13 Listen and read

Arturo starts to comment on Patrick's balance sheet. Listen to what they say. Why does Patrick sound pleased?

PATRICK	Why do you say we ought to do the balance sheet now? I thought the accountants only looked at the balance sheet once a year.
ARTURO	For a small business it can be very useful to look at your balance sheet every quarter, or even every month, especially when you have a computer to do the work for you.
PATRICK	Well - how am I doing?
ARTURO	Considering you've only been in business three months, not badly.
PATRICK	Sales are way over target - we've even made a nice profit!
ARTURO	Yes, that's good, and that's one reason for keeping accounts, to see how well you've done in the past. But another reason is to see your present position, and to get some idea of where you're going. There are one or two indicators here that you may need to watch.

14.14 Listen and read

Arturo continues to comment on Patrick's balance sheet. Listen to what they say. What problems does Arturo see?

ARTURO	You're running this business of yours on a shoestring ; I suppose you realise that. You're under-capitalised, and with no fixed assets you'll find it difficult to get a bank loan or an overdraft . You've very little to fall back on.
PATRICK	Well, it was you who approved my application for the franchise! You knew how I stood - what my situation was.
ARTURO	Yes, yes! And I've every confidence in you. All I'm saying is, don't relax. For example, you drew more out of the business in the last quarter than you put in by way of profit.
PATRICK	Well! Living expenses - you know - what with inflation and all that...
ARTURO	Don't look so miserable! You're going to do all right! In fact, there are some very good figures here, but you've got to learn to recognise which they are.

14.15 Listen and read

Arturo continues to comment on Patrick's balance sheet. He sees two further problems. What are they? Does Patrick agree?

ARTURO	Do you remember, on the course, what they told you about accounting ratios?
PATRICK	Er - oh - current assets over current liabilities, that was one of them.
ARTURO	That's the current ratio. It's a test of whether a company can meet its liabilities - whether it can pay its bills.
PATRICK	Well, all my assets are current assets, so my ratio is about three and a half to one! That ought to be high enough.
ARTURO	On the contrary, it's much too high. More than half your capital is just sitting in the bank. I hope at least it's in an interest-bearing account. You've also got a lot of working capital tied up in stock.
PATRICK	Well, those are all cleaning materials, chemicals - you know - what d'you call them - consumables! It's much cheaper to buy in bulk.
ARTURO	On the other hand, your stocks are tying up capital you may need somewhere else, and they cost money to store, and they are liable to depreciate in storage.
PATRICK	No, Mr Foscatelli, I can tell you, I went into all that very thoroughly. I know I've got that bit right.
ARTURO	Now that's what I like to hear. It suggests you're keeping an eye on the cash flow, and that's a key factor in financial management. By the way, perhaps you can let me have a cheque for your franchise subscription. Then you won't have so much surplus cash floating about in the bank!

14.16 Find the right word: cash flow

Read the text below on cash flow. Write a word or phrase from the box to fill each of the gaps.

The movement of money through a firm is called a b . The company may be successful and c and may own valuable fixed d , but if, at the end of a month, there are e to be paid and no cheques have come in, its financial position may be weak. On the other hand, if the accountant allows a large amount of f to stay in the bank, when it should be invested and earning g , the board of directors will not be pleased. Control of cash flow is, as Arturo says, a key h in financial management.
Managers complain that i are slow to pay and j want to be paid at once. New firms are often short of k . Early success can be dangerous. If Patrick Flynn gets a lot of office-cleaning contracts, he will have to buy stock and take on staff. This will cost money, so his l capital will increase, and it will be m in things like vacuum cleaners which will not show a return for several weeks or even months.

14.17 Writing practice

Arturo Foscatelli likes to write a report whenever he visits a franchisee. Write the report on Patrick Flynn for him. Make notes on all the good things and the bad things he discovered, and quote figures to support what you say.