How to talk the talk…

Here at Easy Peasy, we don’t like to complicate things by using fancy words, and if there is anything we do say that you might not understand, we encourage your questions – no question is silly...

However, if you feel like you need to know some of the Financial terms – here is a breakdown of what they mean.

1. Cash vs. Accrual

Cash based accounting is, as it might sound, based on Cash. Transactions are recorded as the payments happen.

The easiest way to describe Accrual based accounting, is that it is based on invoices, and invoice dates.

Here is an example of how you would record a sales invoice in each instance:

A sales invoice is raised and sent to the customer on the 1stOctober – it isn’t paid until 25thOctober.

With Accrual based accounting, it would be recorded on the 1st, and with Cash, it would be the 25th.

2. Depreciation

You might have seen this sat on your profit & loss report, and your balance sheet. This is the calculation that is put through accounts to decrease the value of your business assets per year.

Once you buy a computer, it won’t always be worth the £500 you paid for it, that’s why this expense is put through.

3. Direct Expense vs. Overhead

Direct expenses are costs that you can directly apply to a specific sale.

For example, you are providing a client with a new website and during this project you have incurred the following costs: Domain Name, Stock Images and the cost of a freelancer for this specific project. These would all be classed as Direct Expenses.

However, expenses such as premises rent, advertising, stationery, admin staff costs can’t be applied to that specific project, so would be an overhead.

4. Gross Profit and Net Profit

Gross profit is the profit you have made directly from the sale of an item. This is all your sales, minus the direct expenses explained above.

Net profit is the gross profit, minus all of those other overheads.

5. Equity

This word is thrown around a lot in the business world, but what does it actually mean? It is the difference between the assets and the liabilities of something owned. A really simple example is the equity someone has in their car:

The car is worth £20,000 (asset)

The remaining payments on the loan are £13,000 (liabilities)

Therefore, the equity in the car is £7,000

That’s my words for today's blog, let me know if there are any others you would like explaining – ping us a message – you don’t even have to be an Easy Peasy customer.

AC :)