Module 5 - Bookkeeping and financial statements

What you will learn in this module

Understand the benefits of bookkeeping
Basic books of accounts
Basic financial statements (Profit and Loss accounts, Balance Sheet and Cash Flow statements)

Session 1 - Importance of bookkeeping and basic books of accounts

• Ask participants whether people who run small businesses keep regular accounts. Ask them if their own groups keep accounts.

• Start a discussion on why some businesses and groups do not maintain proper accounts. The following explanations may be given:

- group members do not know the importance of bookkeeping
- they do not know how to write the books
- it is a difficult and complex job
- they do not have the time to write the books

• Ask them why it is important to write the accounts. They may make one or more of the following points:

- it is important because no one can remember all the details
- to know whether the business is making a profit or a loss
- to know whether the business will do better or worse
- it provides basic information for planning future business
- so that variable costs can be reduced if possible and the product sold at a viable price
- because everyone must know the details of the business

• Bookkeeping is an important aid in the management of a group business.

• Members of a women's group business must understand the importance of keeping accounts and to maintain basic books of accounts as explained in the handouts.

• Organize a short plenary session (15 - 20 minutes) on basic books that the group should maintain.

• Divide participants into groups and ask them to: i) discuss the case study; ii) suggest the kind of accounts that should have been maintained.

• Tell them to read and discuss basic account books before the next session.

Handout 1: importance of bookkeeping

Most small businesses ask why they should maintain accounts when they already have a lot of work to do. Read the following case study in this context.

The Saket Women's Cooperative Group in Phitsanulok prepares and sells food outside a hospital every day. They have many customers, including relatives of patients. Some group members buy the vegetables and noodles and then make and serve the food. In the evening, they have enough money to take their wages and to make purchases for the next morning. The group runs a very successful business.

Now analyse the case study. Is it necessary for a small business to keep records? Many small businesses, especially those run by illiterate people, do not maintain records, but are still successful. The reasons why such groups do not keep records are:

• There is a need for literacy and numerical skills; at least one or two members must be literate.

• It takes time to write the records and one or two members must be able to find this time.

• Trained people are needed to write the accounts.

• Many groups do not know how to use accounts and, therefore, feel that the time and money invested in the activity is not worthwhile.

How accounts help

The practice of writing accounts helps to manage the business well. It also helps to monitor the business and know if it is making profit or losing.

The following example explains some ways in which accounts are useful:

• The Thung Ngew women's group buys fabric and gives it to its 20 members to make garments. If they keep an account of how much material has been given to each member, they can estimate the number of garments that can be produced each week.

• If they write how much fabric they have in stock and how much is required for the following week, they can calculate how much extra they will need to meet their orders.

• If they keep an account of the cost price and the selling price it will help them to calculate the profit they make per garment.

• Sometimes the fabric is bought on credit and the women forget to pay for it in time, upsetting the supplier. If these details are recorded in the accounts, the group can plan the payment on time.

• If the group writes down its costs, it can plan ways to reduce these and thus make a larger profit.

• Maintaining records of debtors helps in following up on payments.

• Keeping accounts also helps to calculate the profit made at the end of each month or year. This, in turn, helps the group to determine the amount of money to be distributed among their members.

• They can also keep aside some money for the following month's expenses and future investments.

Thus, keeping accounts helps the group to:

• plan the purchase of raw material
• plan the sale of finished goods
• calculate costs and profits
• plan reduction in costs
• plan cash flows
• pay their creditors and follow up their debtors, thus improving their cash flow
• gauge whether the business is making a profit or loss
• know how they have used their money by comparing profits with the capital invested in the business

Groups must keep accounts to ensure that they do not face cash shortages.

Good records of all transactions with proper evidence for every expense can be used by other facilitators and technical experts to make financial statements.

Thus, good bookkeeping helps in keeping the business on track and improving its performance.

Basic accounting records

The group must maintain some basic stationery for keeping accounts. This includes:

• vouchers for recording all expenses; wherever possible, the actual bills/receipts for purchase must be attached to these vouchers;

• cash memo books in sets of two so that when one is issued to the customer, a copy remains with the group;

• receipt books, for cash and cheque payments;

• receipt and delivery books to record incoming and outgoing material.

The first step is to make a record of every transaction in the above books. All payments must be made with vouchers, sales must be made with bills and all goods that go out or come in, should be entered in the books. These bills, receipts and vouchers must be completed with full details and then entered in appropriate accounting records such as stock registers, ledgers etc. Money must be put in a bank account as frequently as possible and should not be withdrawn without the approval of the group.

Some basic accounting records should be maintained by every group. These are:

Cash book (two columns): Cash and bank transactions are entered in this register in the chronological order of their occurrence. One side of the register is used for recording receipts and the other to record payments.

Petty cash: All petty expenses are entered in this register, consolidated and the total of each individual expenditure account is transferred to the general ledger at the end of each month.

Journal register: All transactions not involving cash and bank entries are recorded in this register and individually posted to the general ledger.

Purchase and sales register: All purchase and sales transactions are recorded in chronological order in this register.

General ledger: This register has an alphabetical index to indicate the location of each account. It may be income, expenditure, liability or asset. The accounts under each head are separately opened on different folios. This will help in preparing a trial balance and financial statement.

Bank book: This book keeps a record of all bank transactions. All cheques/cash received or deposited must be recorded here with details of amount, date, from whom received and for which sales. Similarly, details of the number, date, amount and recipient, for every cheque or demand draft (DD) issued must be noted. Often, a group deposits a cheque into a bank account, but the money is not realized for a few weeks. At other times, the group may issue cheques, but the money may not be transferred for a few weeks. Transactions entered in the bankbook can be reconciled every month and eventually at the end of the year to give a complete financial picture.

Stock register: Records of any raw material issued to a member should be entered in the stock register.

As the nature of every group business differs, it is useful to get professional advice on the account books that must be maintained. A good bookkeeping system requires that at least one or two persons are specially assigned to do the job. These people should be trained to maintain accounts in accordance with the laws and practices relating to cooperatives and women's groups as well as those of their donors/creditors. A daily account must be maintained and the leader of the group or another group member should check that the accounts are written. Cash transactions must be tallied regularly.

Some ways of maintaining an efficient system of accounts:

• Make and regularly update the list of money owing to the group and follow up with the clients.

• Maintain a list of bills that have to be paid and prioritize payments. If a payment cannot be made in time, contact the creditor and inform her/him and fix another date for payment.

• Tally the balance in the cashbook every day, and in the bank book, every fortnight or every month.

• Make a cash flow statement at the end of every month, for the following month or preferably for the next quarter.

• Make a Profit and Loss statement and Balance Sheet every month, and discuss among the group.

Good account keeping can yield dramatic benefits. Cash planning as well as business planning in general is better. All members can discuss the finances of the group and its performance and plan for its improvement. Thus the business performance too begins to improve.

Handout 2: case study on bookkeeping

The Muang Ho women's group business makes rice noodles and chips. The members meet at the group leader's house to use the machine kept there. They make and sell noodles throughout the day. At the end of every day, the money they earn is given to Khun Thao, the leader, who puts it in a basket. Before handing the money over, the group notes the amount on a small pad kept for this purpose in the basket. Sometimes, they forget to enter small amounts. If they need petty cash, they take it out of the basket.

Mrs. Thao deposits the money in the bank once in a month. She keeps it with her till then and pays for other expenses such as bags of rice and noodles when stocks are low. Khun Piya and Khun Tum often make these purchases. Khun Thao knows how to write accounts but has three small children and, sometimes, does not have the time to do the accounting for three months at a time. Once, when she visited the bank, she found that the group had only 1 000 Baht remaining in their account.

She was worried and convened a meeting of members as soon as she returned. The members had not met for three months. They were very angry with Khun Thao. Khun Piya and Khun Tum could not locate all the slips where they had noted down the purchases made. The other members were upset and accused them of taking away money from the business. They said the business was good and they should have earned a profit, rather than make a loss.

Exercise

Let the participants discuss the story and the importance of book keeping. What can happen if books are not kept? What can happen if entries are not made in time? Emphasize the importance of daily cash control and profit calculations.

Session 2 - Profit and loss accounts

• It is important that participants understand the concept of Profit and Loss before they begin to start making Profit/Loss (P/L) accounts.

• Open the plenary session by asking participants how many have made P/Loss accounts before. Assure them that this is not difficult and those not familiar with this will be taught how to do so.

• Organize a discussion on a specific business, such as making artificial flowers, and work out the accounts on the board.

• Ask participants to list all items of cost and write these on the left side of the board. Then ask them to list all income sources and write these on the right side. Remember that expenses such as cost of machine/s, grants, donations and loans are excluded from P/L accounts. But interest earned or paid, is included.

• After listing the Profit and Loss figures, ask participants to match these with the schedule details given in the handout to check if any item has been missed. Explain that they now have to calculate the P/L account for one month. Remind them that all income and expense that they take into account must be relevant to the one-month period.

• Then divide the participants into groups and give them between 45 minutes to one hour to work out P/L accounts for the case study in the handout. A full hour will be needed if participants do not have prior experience in preparing financial statements.

• Hold a plenary at the end of one hour. Ask participants if they have reached a net profit of 53 400 Baht. If necessary, work out the details on the board to ensure that everybody has understood.

• Ask the participants which aspect they find difficult to understand and spend some time in explaining the concepts.

• Two concepts that are often difficult to understand are depreciation and cost of goods sold. Explain these with the help of the handout.

Handout 1: format for profit and loss account

The Profit and Loss account is a statement that normally helps one to determine whether a business has made a profit or a loss between any given period. The Profit and Loss statement must be made at least once a year. Making a statement every month will also help.

Profit and Loss accounts as on... (date)

Note

• All costs and earnings for the period are taken into account for making the Profit and Loss statement

• The material cost must be calculated for the raw material used during the period under consideration. For example, a group with 150 kg of raw material as opening stock, bought 900 kg during the month and had 50 kg remaining at the end of the month.

• Therefore:

Opening stock 150 kg
Purchased 900 kg
Closing Stock 50 kg

• Thus material used during the month is estimated as follows:

Opening stock + Purchases minus Closing stock = Material used
150 kg + 900 kg - 50 kg = 1 000 kg

• Make a note of all other costs incurred during the month for that month's production. There are, however, some expenses that will not appear in the monthly statement, for example a machine that was purchased for 20 000 Baht. Again, a deposit that has been paid for the electricity connection will not appear in this account.

• All monthly earnings will be included in the monthly Profit and Loss account.

• Money receipts not related to that month's production will not be entered into the P & L account. For example, entries related to government grants.

• Thus the P & L account only records the income and expenses relating to production/services of the business in the month.

How to calculate depreciation

In any business in agriculture using machinery or tools it is necessary to invest in new equipment after many years of use. For this, capital is needed. In order to accumulate this capital on a timely basis, the depreciation of the value of the machinery and tools must be calculated over the years that they can be used. For example, if a rice thresher costing 5 000 Baht needs to be replaced after five years, then the depreciation is 1 000 Baht per year. Accordingly, the business planning needs to reserve 1 000 Baht per year from the total annual income for the purchase of a new rice thresher after five years. This has to be done for all equipment used by the agricultural cooperative enterprise. This means that profit is calculated after depreciation costs have been taken into account.

Handout 2: case study on calculating profit and loss account

The Sirikant women's group has 50 members who are actively involved in making baskets with water hyacinth. They make these baskets at the cost of 120 Baht each and sell them at 150 Baht per basket. In September, the group had an opening stock of 300 baskets and they purchased 2 000 pieces from the members during the same month. They sold 2 100 pieces. The group's earning on direct sale of raw material to non-members was about 3 Baht per kg of raw material (water hyacinth). The same month they sold 3 000 kg of raw material to non-members. The group pays 300 Baht per month towards electricity charges and a commission on sales at five Baht per piece sold.

The group pays monthly salaries of 3 000 and 2 000 Baht to an accountant and a public relations/marketing assistant. The monthly telephone charge is 200 Baht, while postage costs about 800 Baht per month. They do not have to pay rent. Their office stationery costs are about 600 Baht in six months. The monthly transport cost of members' to supply the goods is about 300 Baht. Tea and food served to guests from different government departments cost about 400 Baht per month.

The group was given a machine as a gift by the government which was worth 60 000 Baht. The government officer told them that they would have to replace the machine with their own money. The machine will work for about five years. The group plans to charge depreciation of 12 000 Baht per year so that they can replace the machine after five years.

Discuss the above case study and find out whether the group makes a profit or loss.

Solution: Profit and Loss account for the month of September

Handout 3: format for balance sheet

What is a balance sheet?

A balance sheet is like a photograph of the financial position of a business at any point in time. It shows where the money came from and how it was used. It can be seen as a description of the sources and uses of money in a business. The following concepts are used in the preparation of a balance sheet:

Working capital

This is essential for carrying the business on a day-to-day basis. Working capital takes care of problems of liquidity and cash requirements of the business.

Current assets

Assets held by the business for a period of one year or less. E.g. advances, deposits, sundry closing stock (raw material, finished goods) cash balance, bank balance.

Current liabilities

Outstanding payments of a business that must be made within a period of one year or less. E.g. advances from customers, deposits from customers, short term loan, working capital facility and sundry creditors.

Initial investment or fixed assets

Initial project investment for starting a business indicates the initial capital required to set up a business. E.g. land, building, machinery, deposits, power installations, etc.

Balance sheet

The balance sheet for any type of business will generally consist of the following headings:

Handout 4: cash flow statement

Cash flow is an important aspect of a business. It helps to make sure that enough cash will be available to cover necessary expenses. The cash flow includes:

• how much money goes out (for the purchase of raw material, salary payments, administration expenses, etc.)

• how much money comes in (through sales receipts)

Total cash on hand = Cash on hand + Cash receipts - Cash outflows

(cash receipts are from cash sales, collection of credit from members, loans taken, other cash inflow if any)

It is always better to project cash flows for a year or six months. The format for estimating the cash flow is as follows

Cash flow format for the business

Handout 5: formats for bookkeeping

ACCOUNT PROCEDURE

Financial documents

• Receipt
• Payment bill
• Deposit-withdraw bill
• Invoice

Accounts

• Petty cash
• General records
• Cost and Profit account
• Ledger
• Membership and share records
• Inventory
• Raw material stock
• Fixed asset
• Loan debtor record
• Trading debtor record
• Saving record

Receipt format

Guidelines

• A receipt must be issued for every payment received.
• Fill each blank space in the format i.e. date, name and family name of member or customer.
• Fill the amount of received cash in the right item. In case of other receipts, which are not composed in this format, please describe the item as well as the amount of receipted cash.
• Fill the amount of receipted cash in number and words.
• Every receipt has to be completed with the signature of the recipient.
• Try to fill the account number and membership number of the client so that auditing can be easier.

Expense voucher format: Used in cases where there is no receipt for any expense.

Guidelines

• Supply the details for the blank spaces in the heading.
• Describe the item of expense and the amount of payment.
• Fill the total amount both in number and words.
• Both recipient and payer need to sign.
• This format is not necessary if the recipient has his/her receipt form.
• Correctly filled expense vouchers are useful for internal auditing.

Deposit-withdrawal format

Guidelines

• Describe type of saving account and account number.
• Fill name and family name of account holder.
• Mark in either item of deposit or withdraw as well as amount of money.
• Both account holder and payer need to sign.
• In case of delegation, name of delegated person has to be filled and signed by the account holder.

Invoice format: Used as evidence of product sold on credit

Guidelines

• Supply the details for the blank spaces in the heading.
• Describe the product item, quantity, price per unit and total amount.
• Fill total amount of sales both in numbers and words.
• Complete with signature of both recipient and the person who delivers it.
• Invoice is used as evidence for internal auditing.

Petty cash account: Used to record both income and expenses.

Petty cash account: Record of cash flow of both income and expense.

Income

Expense

Guidelines

Income

Expense

General records format: Used to keep a general record of non-cash items.

Guidelines

Cost and profit account: Used to keep records of sales and cost and profit margin on each item.

Product............... Volume of Production.............. Amount.........

Guidelines

Ledger

Membership record
Name of member............................................
Member No.......................

Guidelines

Inventory

Type of product......... Amount......... Cost per unit......... Price per unit.........

Guidelines

Raw material record: Used for raw material management, particularly in production activity

Type of raw material.........................Cost per unit................
Price per unit.......................................

Guidelines

Fixed asset record

Type of asset.................................................................................

Guidelines

Lending account

Name............................................. Interest rate...........................

Guidelines

Trading debt record

Name of debtor..............................................................

Guidelines

Deposit and withdrawal format

Name of the account holder..........................................

Account No...............................

Guidelines

What you have learnt in this module

When proper accounts are not kept

It can lead to lack of trust among members, because there is insufficient evidence of cash flow in and out of the business.

What do the groups need to do?

• Income and expenditure should be recorded with evidence for every transaction.

• There must be withdrawal/deposit receipts of bank transactions.

• A person should be in charge of cash and record all other transactions.

• Another person should sign all payments.

• Groups must assign the right person for each job and responsibilities must be clearly designated.

• Groups should have meetings to review monthly performance.

• Groups should get their accounts audited at least once a year.

Why keep accounts?

• Bookkeeping and accounts are major tools that help women's group members to plan the best use of resources and monitor group business.

• Each member should be able to understand what is in the accounts books.

• They should know what they put in and what they get out of the business.

• Accounts give an idea of where the money comes from and where it goes. If members understand and track these through proper bookkeeping practices, the flows can be changed to improve the viability the business.

• Accounting information must be shared at regular group meetings for both awareness-raising and for transparency and joint decision-making.

Why groups do not keep accounts?

• It is difficult to find rural people who are skilled in keeping accounts.

• There is no formal institutional linkage between rural women's groups and agricultural cooperatives. As a result, there is no monitoring and evaluation system in place within the cooperatives to facilitate the financial management of these groups.