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the state of affairs of the pany at （a certain date） and the financial statements
have been properly prepared in accordance with the panies Act
2006。’
The panies Act 2006； the longest Act ever introduced； has brought
in some tough rules on how auditors； among others； should report on
pany accounts。 MBAs； unless they are also accountants； don’t get
involved in doing audits。 But they are expected to know who’s who in the
auditing world。 Accountancy Age （accountancyage/resource/
top50） will keep you informed as to who’s who in the auditing world。
BOOKKEEPING – THE WAY TRANSACTIONS
ARE RECORDED
Until Luca Pacioli wrote what was in essence the world’s first accounting
book； over 500 years ago； accounting records were maintained in singleentry
format； one event merited one record。 This meant that errors could
be prevented only by a major duplication of effort； for example by having
different people making and counting up parallel records。 Pacioli； a
mathematician who worked for the Doge of Venice； came up with a system
of double…entry bookkeeping that required two entries for each transaction
and so provides built…in checks and balances to ensure accuracy。 Each
transaction requires an entry as a debit and as a credit。
24 The Thirty…Day MBA
To give an example； selling goods in a double…entry system might result
in two separate journal entries – a debit reducing the stock by ￡250 and a
corresponding credit of ￡250 of new cash in – a double entry （see Table 1。3）。
The debits in a double…entry system must always equal the credits。 If they
don’t； you know there is an error somewhere。 So； double entry allows you
to balance your books； which you can’t do with the single…entry method。
Pacioli’s genius lay in seeing that the ultimate balancing number in a
pany’s accounts was the profit or loss for the owners of that enterprise。
In fact he required at least two entries or as many as are required to balance
the books。 Let us take the above example to its logical conclusion。 On the
not unreasonable assumption that the business plans to make a profit from
selling goods； the figures will look rather different。 To keep the numbers
simple； let’s suppose the goods they sold cost them ￡125 （a 50 per cent
margin）； then the entries would be as follows。 Goods in stock go down by
￡125； while cash goes up by ￡250。 That net change of ￡125 is balanced by an
increase in profits of ￡125； so the assets and liabilities are kept in balance。
In this example； had the goods sold for less than was paid there would
have been a loss； which would have reduced the value of the owner’s stake
in the business by a corresponding amount。
This is all an MBA student needs to know about bookkeeping； the main
part of the knowledge they require is how to interpret the figures once
recorded。
CASH FLOW
There is a saying in business that profit is vanity and cash flow is sanity。
Both are necessary； but in the short term； and o。。en that is all that ma。。ers in
a business as it struggles to get a foothold in the shi。。ing sands of trading；
cash flow is life or death。 The rules on what constitutes cash are very simple
– it has to be just that； or negotiable securities designated as being as good
as cash。 Cash flow is looked at in two distinct and important ways： as a
projection of future expected cash flows； and as an analysis of where cash
came from and went to in an accounting period and the resultant increase
or decrease in cash available。
Table 1。3 An example of a double…entry ledger
General Journal of Andrew’s Bookshop
Date Description of entry Debit Credit
10 July Rent expense ￡250
Cash ￡250
Accounting 25
Cash…flow forecasts
The future is impossible to predict with great accuracy but it is possible to
anticipate likely outes and be prepared to deal with events by building
in a margin of safety。 The starting point for making a projection is to make
some assumptions about what you want to achieve and test those for
reasonableness。
Take the situation of High Note； a business being established to sell sheet
music； small instruments and CDs to schools and colleges； which will expect
trade credit； and members of the public who will pay cash。 The owner plans
to invest ￡10；000 and to borrow ￡10；000 from a bank on a long…term basis。
The business will require ￡11；500 for fixtures and fi。。ings。 A further ￡1；000
will be needed for a puter； so。。ware and a printer。 That should leave
around ￡7；500 to meet immediate trading expenses such as buying in stock
and spending ￡1；500 on initial advertising。 Hopefully customers’ payments
will start to e in quickly to cover other expenses； such as some wages
for bookkeeping； administration and fulfilling orders。 Sales in the first six
months are expected to be ￡60；000 based on negotiations already in hand；
plus some cash sales that always seem to turn up。 The rule of thumb in the
industry seems to be that stock is marked up by 100 per cent； so ￡30；000 of
bought…in goods sell on for ￡60；000。
On the basis of the above assumptions it is possible to make the cashflow
forecast set out in Table 1。4。 It has been simplified and some elements
such as VAT and tax have been omi。。ed for ease of understanding。
The maths in the table is straightforward； the cash receipts from various
sources are totalled； as are the payments。 Taking one from the other leaves
a cash surplus or deficit for the month in question。 The bo。。om row shows
the cumulative position。 So； for example； while the business had ￡2；450
cash le。。 at the end of April； taking the cash deficit of ￡1；500 in May into
account； by the end of May only ￡950 （￡2；450 – ￡1；500） cash remains。
Overtrading
In the example above； the business looks like having insufficient cash；
based on the assumptions made。 An outsider； a banker perhaps； would
look at the figures in August and see that the faster sales grew the greater
the cash…flow deficit became。 We know； using our crystal ball； the position
will improve from September and that if we can only hang on in there for
a few more months we should elim