The duties of a Credit Risk Manager

Credit Risk Management

Credit risk refers to the probability of loss due to a borrower’s failure to make payments on any type of debt. Credit risk management, meanwhile, is the practice of mitigating those losses by understanding the adequacy of both a bank’s capital and loan loss reserves at any given time – a process that has long been a challenge for financial institutions. Let us look at the duties of a Credit Risk Manager

Risk managers advise organisations on any potential risks to the profitability or existence of the company. They identify and assess threats, put plans in place for if things go wrong and decide how to avoid, reduce or transfer risks.

Risk managers are responsible for managing the risk to the organisation, its employees, customers, reputation, assets and interests of stakeholders.

They may work in a variety of sectors and may specialise in a number of areas including:

  • enterprise risk;
  • corporate governance;
  • regulatory and operational risk;
  • business continuity;
  • information and security risk;
  • technology risk;
  • market and credit risk.

Herewith the list of duties of a Credit Risk Manager:

  • To establish and monitor policies and procedures that will help the company meet its sales and risk management goals.
  • Monitoring and evaluating active accounts to reduce or prevent bad debt losses.
  • Keep policies and procedures current, and communicate them to your subordinates and to other affected parties.
  • To listen to input from sales and sales management and then look for ways to help the sales department achieve its goals without damaging your department’s ability to manage risk and control payment delinquency to acceptable levels.
  • Control the costs to operate the credit and collection functions
  • Convincing senior management when opportunities present themselves to invest in technology that can help the credit department cut costs, accelerate the decision making process, and/or improve the quality and consistency of credit decisions being made
  • Review strategic credit positions
  • Assess Changes in Largest Exposures
  • Assess Counterparty Ratings
  • Review if  there are any pending credits to be cleared by the chief credit officer or board
  • Review if there are any credit limit excesses
  • Review Credit Limits
  • Assess if provisions are up to date
  • Review if concentrations are within stipulated limits
  • Assess if all credit exposures are covered and mapped
  • Check for wrong way positions
  • Report all significant risks
  • Ensure credit risk reports reach all relevant parties
  • Discuss significant credit risks if any with top management
  • Conduct stress and scenario testing and analysis of portfolio at global levels
  • Ensure no relevant scenarios are missed in testing
  • Review past or anticipated changes in provisions
  • Review if any changes need to be made in specific provisions
  • Ensure all transactions have full and proper documentation
  • Review rating triggers and break clauses
  • Ensure credit protection is fully understood and utilized
  • Explore if there are any further possibilities of exploiting credit protection
  • Establishing and communicating department goals and performance results to subordinates
  • To staff the department, train its employees and delegate work to meet senior management’s expectations and the market’s requirements
  • To actively support employee growth through training, performance reviews, mentoring and coaching
  • To meet corporate standards relating to managing subordinates, avoiding conflicts of interest, communicating with customers, and interacting with peers and superiors.
  • To praise subordinates in public, and reprimand them in private.
  • planning, designing and implementing an overall risk management process for the organisation;
  • risk assessment, which involves analysing risks as well as identifying, describing and estimating the risks affecting the business;
  • risk evaluation, which involves comparing estimated risks with criteria established by the organisation such as costs, legal requirements and environmental factors, and evaluating the organisation’s previous handling of risks;
  • establishing and quantifying the organisation’s ‘risk appetite’, i.e. the level of risk they are prepared to accept;
  • risk reporting in an appropriate way for different audiences, for example, to the board of directors so they understand the most significant risks, to business heads to ensure they are aware of risks relevant to their parts of the business and to individuals to understand their accountability for individual risks;
  • corporate governance involving external risk reporting to stakeholders;
  • carrying out processes such as purchasing insurance, implementing health and safety measures and making business continuity plans to limit risks and prepare for if things go wrong;
  • conducting audits of policy and compliance to standards, including liaison with internal and external auditors;
  • providing support, education and training to staff to build risk awareness within the organisation.

Some of the skills of an effective Credit Risk Manager:

  • technical acumen;
  • problem-solving and decision-making abilities;
  • analytical skills and a good eye for detail;
  • ability to cope under pressure;
  • planning and organisation skills;
  • negotiation skills and the ability to influence people;
  • good communication and presentation skills;
  • commercial awareness;
  • numerical skills and the ability to evaluate costs;
  • ability to understand broad business issues.

Challenges to Successful Credit Risk Management:

  • Inefficient data management. An inability to access the right data when it’s needed causes problematic delays.
  • No groupwide risk modeling framework. Without it, banks can’t generate complex, meaningful risk measures and get a big picture of groupwide risk.
  • Constant rework. Analysts can’t change model parameters easily, which results in too much duplication of effort and negatively affects a bank’s efficiency ratio.
  • Insufficient risk tools. Without a robust risk solution, banks can’t identify portfolio concentrations or re-grade portfolios often enough to effectively manage risk.
  • Cumbersome reporting. Manual, spreadsheet-based reporting processes overburden analysts and IT.
  • Unclear duties of a Credit Risk Manager. When a Manager is unsure of what is expected of him or her, especially on entering a new business industry.

Steel

Kredcor, debt collectors in the Steel Industry

As you can see on this page, Kredcor approaches an Industry, and to continue delivering the best service we can, we familiarise ourselves wit that Industry and contact the main role players of that Industry, to assist them with the collection of their overdue accounts, as well as compiling fresh, verified credit reports on our clients’ potential clients.

Is your financial information sensitive? Industries have different approaches, as to whether the role players share sensitive info, or keep it private? If required, Kredcor signs NDAs with all the role players.                         (Non-Disclosure Agreements) This means that your data stays private, and is not taken out of the Kredcor office, nor shared with any third parties.

As debt collectors, we know the Steel Industry well enough, to handle your debtors with the necessary firm approach, while keeping in mind the role the Economy plays. We also know when your debtor is just using a lame excuse, not to pay you.

Because we are in contact with all the players in the Steel Industry, we have exposure to all the debtors, and we know which are “good” debtors, which debtors need to be “strongly managed” and which debtors should be avoided.

Kredcor is already active in the Steel Industry, in the following sub-divisions:

  • Alluminium
  • Stainless Steel
  • Re-Inforcing and Mesh
  • Sheeting
  • Galvinising
  • Foundries
  • Manufacturers
  • Distributors

We would like to have you on board as well.

How can Kredcor help you?

  • we collect your overdue accounts on your behalf (this means improved cash flow, less credit risk)
  • we compile credit reports with fresh, verified information on your potential clients, even existing clients as well (this means better, qualified credit risk exposure)
  • tracing and default listing of non paying clients
  • determination of the maximum amount of credit which can be extended to a client

Phone Kredcor for an appointment now, and let Kredcor assist you with the collection of your overdue accounts, and the compilation of fresh, verified credit reports.

Agriculture

Kredcor serves the Agricultural Industry as debt collectors

As you can see on this page, Kredcor approaches an Industry, and to continue delivering the best service we can, we familiarise ourselves wit that Industry and contact the main role players of that Industry, to assist them with the collection of their overdue accounts, as well as compiling fresh, verified credit reports on our clients’ potential clients.

Is your financial information sensitive? Industries have different approaches, as to whether the role players share sensitive info, or keep it private? If required, Kredcor signs NDAs with all the role players.                         (Non-Disclosure Agreements) This means that your data stays private, and is not taken out of the Kredcor office, nor shared with any third parties.

As debt collectors, we know the Agricultural Industry well enough, to handle your debtors with the necessary firm approach, while keeping in mind the role Nature plays, whether it is drought, pests or excessive rain or hail damage. We also know when the farmer is just using a lame excuse, not to pay you.

Kredcor is already active in the Agriculture Industry, in the following sub-divisions:

  • Chemicals
  • Equipment
  • Nurseries
  • Supplies
  • Feeds
  • Fertilizer
  • Seeds
  • Scientific services
  • Irrigation
  • Crop protection services
  • Co-ops

We would like to have you on board as well.

How can Kredcor help you?

  • we collect your overdue accounts on your behalf (this means improved cash flow, less credit risk)
  • we compile credit reports with fresh, verified information on your potential clients, even existing clients as well (this means better, qualified credit risk exposure)
  • tracing and default listing of non paying clients
  • determination of the maximum amount of credit which can be extended to a client

Phone Kredcor for an appointment now, and let Kredcor assist you with the collection of your overdue accounts, and the compilation of fresh, verified credit reports.

Business rescue

Chapter 6 of the Companies Act 2008 (Act 71 of 2008) provides for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders. 

All businesses that are financially distressed and want to take a decision to start rescue proceedings can file a notice to start business rescue proceedings with the CIPC.

Business rescue can be initiated by:

  • The board of directors;
  • By an application to court when the business is financially distressed;
  • Various affected persons by application to court (including shareholders, creditors, registered trade unions and employees).

The decision by a board to pass a resolution for business rescue needs to be done urgently to enable the business rescue practitioner to take control for the purposes of having a business rescue plan approved and thereafter implemented.

A business rescue practitioner will be appointed to oversee and supervise on a temporary basis the management, affairs and business of the company and to devise, prepare, develop and implement a business rescue plan.  The plan will be implemented if approved by creditors and shareholders to the extent that the rights of the shareholders will be affected.

A director or a member would have a duty to pass a resolution for a company’s business rescue or alternatively resolve to wind up or liquidate as soon as he or she becomes knowingly aware that the company is either:

  • financially distressed or
  • is trading in insolvent circumstances (both factually in that its liabilities exceed its assets, and commercially in that it cannot pay its debts to creditors as and when they fall due

During the company’s business rescue proceedings, each director of the company:

  • would continue to exercise the functions of a director subject to the authority of the practitioner duly appointed
  • must assist the practitioner that is expected to operate the company and to continue to run its business
  • may delegate any power or function to the practitioner duly appointed that would have full management control of the company in substitution for its board and pre-existing management.

Important:  No liquidation proceedings must have commenced against the company when a decision is taken to start business rescue proceedings.

To file for business rescue, follow these steps:

1. Register as a Customer

To view information on how to register as a customer, click here.  If you are already registered as a customer, and know your customer code and password, proceed to step 2.

2. File for business rescue

The following supporting documents must be included in your e-mail:

  • Sworn statement with reasons for resolution set out in detail.
  • Indication of primary business activities, PI Score break down and total
  • Resolution by company (directors)
  • Practitioner Nomination letter by company
  • Acceptance letter of the nomination from Practitioner (A business rescue practitioner has to be licensed as a practitioner before he can be appointed.  See “Application for License as Business Rescue Practitioner”.
  • If the board decides not to adopt  a resolution commencing business rescue proceedings, after considering the financial state of the company, the notice of decision not be begin business rescue (CoR123.3) must be filed with CIPC by emailing it to businessrescue@cipc.co.za together with a statement of the criteria for being financially distressed and the reason for not adopting a business rescue resolution.
Service turnaround time:  2 working days of receipt of notice to start business rescue proceedings.

Click here to lodge an enquiry.

Important:  Queries relating to  transactions already lodged should only be submitted once the Service Turnaround Time has lapsed.

You can track the progress of your document by clicking on “Track my transactions” on the home page.  Click on  “Additional Services”, select “Customers” and then select “Document Status”. To check the tracking number, go to “Customer Transactions” under “Customers”.

File and Publish Notice of Appointment of Practitioner

Within five days after filing a resolution, the company must appoint a business rescue practitioner, conditionally licensed for the project.

Click here to view a list of Licensed Business Rescue Practitioners.

Once the nominated practitioner received a registration certificate, then the company applying for business rescue must print and complete form CoR 123.2.

  • The CoR123.2 must be accompanied by a consent letter of the practitioner accepting the appointment.

Scan and e-mail the completed and signed documents to businessrescue@cipc.co.za

  • The company must also inform all affected parties of the appointment.

File a status report with CIPC

The Practitioner must file a status report (CoR125.1) with CIPC after three months by e-mailing it tobusinessrescue@cipc.co.za. If business rescue proceedings are not concluded within 3 months, or within the time extension granted by court, the business rescue practitioner must file monthly report updates with the CIPC or to the court, in the case of a court-ordered business rescue process, until the proceedings are concluded.

File Notice of Substantial Implementation of business rescue plan or business rescue termination

Print and complete CoR125.2 (Notice of Termination of Business Rescue Proceedings)  or CoR125.3(Notice of Substantial Implementation of a Business Rescue Plan)

E-mail the completed form to businessrescue@cipc.co.za.

Liquidating or winding up your company

Business in liquidation

Liquidation and deregistration are not the same thing.

Liquidation

Liquidation implies that the business is not able to pay its debts.

Liquidation further implies that the business will cease to operate (generally as a result of financial problems).

The liquidation may come about:

  • as a result of a legal court process, or
  • by the creditors or
  • it may be voluntary liquidation i.e. applied for by members of the CC.

Voluntary Winding up of a company

Solvent company

A solvent company or close corporation may be wounded up voluntarily by members or by a creditor by the adoption of a Special resolution by the company or close corporation.  The resolution must be filed with the CIPC by filing the CoR40.1 with supporting documents.

Before the resolution is adopted by the company or close corporation, the company or close corporation must set security with the Master of the High Court for the payment of the company’s debts within no more than 12 months after the start of the winding-up of the company or close corporation or obtain consent of the Master to dispense with security.

For consent to dispense with security the following information must be provided to the Master:

  • A sworn statement by a director (if a company) or member (if a close corporation) authorised by the board of the company stating that the company or close corporation has no debts;  and
  • A certificate by the company’s or close corporation’s auditor, or a person who meets the requirements for the appointment of an auditor (if company does not have a auditor) stating that to the best of the auditor’s knowledge and belief and according to the financial records of the company or close corporation, the company or close corporation appears to have no debts.
  • Note:  It should be noted that the above requirements are determined by the Master itself and therefore, the above may not be correct.  Therefore, the above only serves as a guide as to what the Master may require.
  • A company or close corporation remains a juristic person and retains all of its powers as such while it is being winded up voluntarily.  From the beginning of the company close corporation’s winding-up, it must stop carrying on its business except for those activities required for the benefit of the winding up process.  Also all the powers of the company’s directors or close corporation’s members cease, except to the extent specifically authorised,
    • by the liquidator or shareholders in  a general meeting in the case of winding-up by company, or
    • by the liquidator or creditors in the case of winding-up by creditors.
  • A company or close corporation is dissolved as of the date its name is removed from the companies’ or close corporation register.  The removal of a company or close corporation’s name does not affect the liability of any former director or shareholder (for close corporation its members) or any other person in respect of any act or omission that took place before the close corporation was removed from the register.
  • At any time after a company or close corporation has been dissolved, the liquidator or other person with an interest may apply to a court for an order declaring the dissolution to have been void, or any other order that is just and equitable in the circumstances and if the court declares the dissolution to have been void, any proceedings may be taken against the company or close corporation as might have been taken if the company close corporation had not been dissolved.
  • Legal personality is only terminated once the entity is “dissolved”.

To voluntarily liquidate your solvent company, follow these steps:

  1. Register as a Customer

To view information on how to register as a customer, click here.  If you are already registered as a customer, and know your customer code and password, proceed to step 2.

2. Deposit funds

Deposit R250 into the CIPC bank account.  For the bank account details, click here.  Use your customer code as reference when depositing money into the CIPC bank account.

3. Apply for solvent liquidation of your company or close corporation

The following supporting documents must be included in your e-mail for winding up by the company or creditors:

    • Security – JM12 or consent to dispense with security – if winding up is by company or close corporation itself;
    • Original or certified copy of the written special resolution or minutes (accompanied by the agenda/notice) of the meeting at which the decision to wind-up was taken;
    • Originally certified ID copy of signatory (active director (company) or member (close corporation)/company secretary/representative)
    • Power of attorney – if representative
Service turnaround time:  10 working days from date of tracking.

Click here to lodge an enquiry.

Important:  Queries relating to  transactions already lodged should only be submitted once the Service Turnaround Time has lapsed.

You can track the progress of your document by clicking on “Track my transactions” on the home page.  Click on  “Additional Services”, select “Customers” and then select “Document Status”. To check the tracking number, go to “Customer Transactions” under “Customers”.

Insolvent company or close corporation

To voluntarily wind up your insolvent company or close corporation, follow these steps:

1. Register as a Customer

To view information on how to register as a customer, click here.  If you are already registered as a customer, and know your customer code and password, proceed to step 2.

2. Deposit funds

  • Deposit R80.00 (plus penalty of R150.00 if not lodged within a month after the meeting).  For the bank account details, click here.  Use your customer code as reference when depositing money into the CIPC bank account.

3. Apply for insolvent liquidation of your company or close corporation

Scan and e-mail the completed and signed documents together with supporting information toliquidations@cipc.co.za

  • The following supporting documents must be included in your e-mail:
    • CM25a or CM25 plus notice of the meeting;
    • Original or certified copy of the written special resolution or minutes (accompanied by the agenda/notice) of the meeting at which the decision to wind-up was taken;
    • Security – JM12 or consent to dispense with security – if winding up is by company
    • CM100 – Statement of Company AffairsOriginally certified ID copy of signatory on the CM 26 (active director/company secretary/representative)
    • Power of attorney – if representative
Service turnaround time: 10 working days from date of tracking.
Click here to lodge an enquiry.

Important:  Queries relating to  transactions already lodged should only be submitted once the Service Turnaround Time has lapsed.

You can track the progress of your document by clicking on “Track my transactions” on the home page.  Click on  “Additional Services”, select “Customers” and then select “Document Status”. To check the tracking number, go to “Customer Transactions” under “Customers”.

Liquidation or Winding up by Court Order or setting aside of liquidation proceedins or dissolution

To wind up a company close corporation by court order, follow these steps:

1. Register as a Customer  (preferable, but not compulsory)

To view information on how to register as a customer, click here.  If you are already registered as a customer, and know your customer code and password, proceed to step 2.

2. Wind up the company or close corporation by court order

E-mail the following to  liquidations@cipc.co.za

  • Letterhead of person submitting court order indicating contact details of person submitting it and customer code (preferable); and
  • Copy of court order.
Service turnaround time:  10 working days from date of tracking.
Click here to lodge an enquiry.

Important:  Queries relating to  transactions already lodged should only be submitted once the Service Turnaround Time has lapsed.

You can track the progress of your document by clicking on “Track my transactions” on the home page.  Click on  “Additional Services”, select “Customers” and then select “Document Status”. To check the tracking number, go to “Customer Transactions” under “Customers”.

Great SEO Tips Everyone Needs To Know

If you had a dollar for every service available on the market that says it can take your site to the top of the rankings in just a few weeks, you wouldn’t even need to be in web business. You’d be wealthy already. Stay away from those services and handle the SEO yourself. It’s not hard to do, especially if you just follow these SEO tips to get you started and help you to stay on track.

Great SEO Tips

A way to bring your website to the top of a list in a search engine is to promote your website or product on various aggregator websites such as Digg, Fark, Reddit, or StumbleUpon. The more prominent linkages you can create through websites such as these will provide more credibility to your website. This will in turn provide the search bots more evidence that your website it valuable and worth putting near the top.

To optimize their websites’ position on search index results pages, savvy webmasters will register plenty of articles at article databasing sites. An article on such a database will include a link back to the owner’s website. This link will be noted by search engines and contribute to the site’s position in the search index.

Instead of writing in AP style, use SEO style to improve search engine optimization. In this way, you should utilize keywords often while not making your writing choppy or nonsensical. One reason using keywords will improve your rankings on search engines is that search engine spiders work by locating and weighting keywords.

In order to improve your search engine optimization, use as much natural language as possible. Don’t pack your text full of keywords as search engines will count this against you, knowing it has been a trick to boost search rankings in the past. Instead, use carefully chosen keywords sparsely throughout your text.

When you syndicate press releases by sending out a press release for local or national coverage and link yourself into it and help create search engine optimization. A press release is great to write when you are offering new services and products. Syndicating your press release will increase search engine result placement.

Use an XML sitemap generator to build an XML sitemap for your website. Upload it into the same directory as your home page. Edit the robot.txt file to point to the sitemap page. Search engines love seeing sitemaps. This is quick way to help your site improve its rank without disturbing other elements of the site.

Grow Your Business

Realizing that search engine optimization is not a onetime event is important. In order to grow your business and prosper, you will need to constantly monitor and work on your search engine optimization. Search engine algorithms change frequently, new businesses will establish websites, competition will increase, and a variety of other factors will impact you and your company. Stay on top of your search engine optimization and you are sure to succeed.

To help you optimize your search results, identify the top keywords in the category your customers are searching for. Then write articles or blog posts that include these keywords to draw people to your website. This will help you optimize and improve your search engine results and help you grow your business.

How To

To really get ahead in the web business game and earn a high ranking for your business, it is imperative that you learn about HTML title and Meta tags. You need to learn how to use them for your own site and also which tags your competitors are using. With a little bit of research, you will quickly learn about how to use quality tags and ultimately earn higher placement.

To optimize search engine results, never change or retire a page without a 301 redirect. A 404 (page not found) is the absolutely worst case scenario a server can deliver. A 301 redirect tells the search engine the new ULR and transfers that into the search position. Learning how to do a 301 redirect is simple and will keep your search engine results optimal.

You can easily learn SEO or search engine optimization online by using the many guides that are out there. Each search engine has a similar way to place the content of your website into a SEO type arrangement to generate higher rankings and visibility. The trick is to learn how to do it.

The server you are using should be configured to remain case sensitive with regards to URL’s. Having a server that isn’t configured to be case sensitive is a recipe for disaster.

Tips

If you are planning on handling the SEO yourself, you have to immerse yourself in the field and really become a student of SEO. Check out various courses around the net, and ask other site owners for little tips of the trade that you may not be able to find by reading articles. SEO is a process, and you should be learning about it every step of the way.

You can learn SEO on your own. There are many resources you can turn to for help. Plenty of websites exist that can help you become an SEO master.

To increase your traffic, create content that people want to link to. You can attract people with pictures and diagrams, ‘how to’ articles or a list of top 10 tips. Once you find a method that works, keep creating content using the same structure. Provide useful information that people will be interested in enough to create a link to it.

To improve search engine optimization, consider repeating the primary keyword or keywords for your web page, in all of the page titles. For example, if you are a running coach, you may want to title your pages “Running Form,” “Running Therapy,” “Running Tips,” “Running Groups” or something similar. Repeating your primary keyword, indicates to search engines that this keyword is very important.

As you can see, SEO isn’t hard at all. It might all be Greek to you at this point, but given a little bit of time, the mystery will start to unravel and you will understand what it expected of you by the search engines, if you want your site found among the similar sites in your category.

Reasons why you should have a credit report done

We all know it is quite important to have credit reports compiled on potential clients, and even existing clients, as this minimises your future credit risk exposure.

Proper credit reports ensure a tight wallet!

Having credit reports done on a regular basis, will keep bad debt surprises down to a minimum, and so your cash flow will be much safer as well.

Here are a few more reasons why credit reports are so important:

  • Tough economic times – you should know the financial status of all your existing and potential clients, to see whether you can afford to extend credit to these companies.
  • The annual cost of credit reports, is much smaller than to have to write off debt of R 50 00.00 or so.
  • Protect your company’s interests, by knowing:
    • whether the Principal has property
    • was Surety signed, worth anything?
    • does the Principal have associated businesses?
    • what opinion does the trade references have of the applicant?
    • was there a recent change of ownership of the applicant?
    • any recent legal action against the applicant?
    • can you afford to raise an existing client’s credit limit, if the client requests it?
  • On the other hand, you can determine who your best paying clients are, and determine whether you want to offer them a higher credit limit, therefore increasing your profit potential.

Our clients rely on our credit reports because:

  • the info is fresh, as in on the day of the report
  • the info is verified, we confirm all information provided by the applicant
  • we obtain a bank code, directly from the applicant’s bankers
  • we contact the trade references provided, and so gauge the applicant’s payment history
  • each report comes with our recommendation, on whether you can extend credit to the applicant
  • this recommendation is based on the many years experience of our senior personnel

So, contact Kredcor now and let’s get the ball rolling.

What is bookkeeping

Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business.

What is bookkeeping

Transactions include purchases, sales, receipts, and payments by an individual person or an organization/corporation. There are several standard methods of bookkeeping, such as the single-entry bookkeeping system and the double-entry bookkeeping system, but, while they may be thought of as “real” bookkeeping, any process that involves the recording of financial transactions is a bookkeeping process.

Bookkeeping is usually performed by a bookkeeper. A bookkeeper (or book-keeper) is a person who records the day-to-day financial transactions of a business. He or she is usually responsible for writing the daybooks, which contain records of purchases, sales, receipts, and payments. The bookkeeper is responsible for ensuring that all transactions are recorded in the correct daybook, supplier’s ledger, customer ledger, and general ledger; an accountant can then create reports from the information concerning the financial transactions recorded by the bookkeeper.

The bookkeeper brings the books to the trial balance stage: an accountant may prepare the income statement and balance sheet using the trial balance and ledgers prepared by the bookkeeper.

History
The term “waste book” was a term used in colonial America referring to bookkeeping. The purpose was to document daily transactions including receipts and expenditures. This was recorded in chronological order, and the purpose was for temporary use only. The daily transactions would then be recorded in a daybook or account ledger in order to balance an accounts. The name “waste book” comes from the fact that once the waste book’s data were transferred to the actual journal, the waste book could be discarded.

Process
The bookkeeping process primarily records the financial effects of transactions. The difference between a manual and any electronic accounting system results from the former’s latency between the recording of a financial transaction and its posting in the relevant account. This delay—absent in electronic accounting systems due to nearly instantaneous posting into relevant accounts—is a basic characteristic of manual systems, thus giving rise to primary books of accounts such as Cash Book, Bank Book, Purchase Book, and Sales Book for recording the immediate effect of a financial transaction.

In the normal course of business, a document is produced each time a transaction occurs. Sales and purchases usually have invoices or receipts. Deposit slips are produced when lodgements (deposits) are made to a bank account. Checks (spelled “cheques” in the UK and several other countries) are written to pay money out of the account. Bookkeeping first involves recording the details of all of these source documents into multi-column journals (also known as books of first entry or daybooks). For example, all credit sales are recorded in the sales journal; all cash payments are recorded in the cash payments journal. Each column in a journal normally corresponds to an account. In the single entry system, each transaction is recorded only once. Most individuals who balance their check-book each month are using such a system, and most personal-finance software follows this approach.

After a certain period, typically a month, each column in each journal is totalled to give a summary for that period. Using the rules of double-entry, these journal summaries are then transferred to their respective accounts in the ledger, or account book. For example, the entries in the Sales Journal are taken and a debit entry is made in each customer’s account (showing that the customer now owes us money), and a credit entry might be made in the account for “Sale of class 2 widgets” (showing that this activity has generated revenue for us). This process of transferring summaries or individual transactions to the ledger is called posting. Once the posting process is complete, accounts kept using the “T” format undergo balancing, which is simply a process to arrive at the balance of the account.

As a partial check that the posting process was done correctly, a working document called an unadjusted trial balance is created. In its simplest form, this is a three-column list. Column One contains the names of those accounts in the ledger which have a non-zero balance. If an account has a debit balance, the balance amount is copied into Column Two (the debit column); if an account has a credit balance, the amount is copied into Column Three (the credit column). The debit column is then totalled, and then the credit column is totalled. The two totals must agree—which is not by chance—because under the double-entry rules, whenever there is a posting, the debits of the posting equal the credits of the posting. If the two totals do not agree, an error has been made, either in the journals or during the posting process. The error must be located and rectified, and the totals of the debit column and the credit column recalculated to check for agreement before any further processing can take place.

Once the accounts balance, the accountant makes a number of adjustments and changes the balance amounts of some of the accounts. These adjustments must still obey the double-entry rule: for example, the inventory account and asset account might be changed to bring them into line with the actual numbers counted during a stocktake. At the same time, the expense account associated with usage of inventory is adjusted by an equal and opposite amount. Other adjustments such as posting depreciation and prepayments are also done at this time. This results in a listing called the adjusted trial balance. It is the accounts in this list, and their corresponding debit or credit balances, that are used to prepare the financial statements.

Finally financial statements are drawn from the trial balance, which may include:

  • the income statement, also known as the statement of financial results, profit and loss account, or P&L
  • the balance sheet, also known as the statement of financial position
  • the cash flow statement
  • the statement of retained earnings, also known as the statement of total recognised gains and losses or statement of changes in equity
  • Entry systems
  • Two common bookkeeping systems used by businesses and other organizations are the single-entry bookkeeping system and the double-entry bookkeeping system. Single-entry bookkeeping uses only income and expense accounts, recorded primarily in a revenue and expense journal. Single-entry bookkeeping is adequate for many small businesses. Double-entry bookkeeping requires posting (recording) each transaction twice, using debits and credits.

Single-entry system
The primary bookkeeping record in single-entry bookkeeping is the cash book, which is similar to a checking account (UK: cheque account, current account) register, but allocates the income and expenses to various income and expense accounts. Separate account records are maintained for petty cash, accounts payable and receivable, and other relevant transactions such as inventory and travel expenses. These days, single-entry bookkeeping can be done with DIY bookkeeping software to speed up manual calculations.

Double-entry system
A double-entry bookkeeping system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different nominal ledger accounts.

Daybooks
A daybook is a descriptive and chronological (diary-like) record of day-to-day financial transactions also called a book of original entry. The daybook’s details must be entered formally into journals to enable posting to ledgers.

Daybooks include:

  • Sales daybook, for recording all the sales invoices.
  • Sales credits daybook, for recording all the sales credit notes.
  • Purchases daybook, for recording all the purchase invoices.
  • Purchases Debits daybook, for recording all the purchase Debit notes.
  • Cash daybook, usually known as the cash book, for recording all money received as well as money paid out. It may be split into two daybooks: receipts daybook for money received in, and payments daybook for money paid out.
  • General Journal daybook, for recording journals.

Petty cash book

A petty cash book is a record of small-value purchases before they are later transferred to the ledger and final accounts; it is maintained by a petty or junior cashier. This type of cash book usually uses the imprest system: a certain amount of money is provided to the petty cashier by the senior cashier. This money is to cater for minor expenditures (hospitality, minor stationery, casual postage, and so on) and is reimbursed periodically on satisfactory explanation of how it was spent.

Journals
Journals are recorded in the general journal daybook. A journal is a formal and chronological record of financial transactions before their values are accounted for in the general ledger as debits and credits. A company can maintain one journal for all transactions, or keep several journals based on similar activity (e.g., sales, cash receipts, revenue, etc.), making transactions easier to summarize and reference later. For every debit journal entry recorded, there must be an equivalent credit journal entry to maintain a balanced accounting equation.

Ledgers
A ledger is a record of accounts. These accounts are recorded separately, showing their beginning/ending balance. A journal lists financial transactions in chronological order, without showing their balance but showing how much is going to be charged in each account. A ledger takes each financial transaction from the journal and records it into the corresponding account for every transaction listed. The ledger also sums up the total of every account, which is transferred into the balance sheet and the income statement.

There are three different kinds of ledgers that deal with book-keeping:

  • Sales ledger, which deals mostly with the accounts receivable account. This ledger consists of the records of the financial transactions made by customers to the business.
  • Purchase ledger is the record of the purchasing transactions a company does; it goes hand in hand with the Accounts Payable account.
  • General ledger, representing the original five, main accounts: assets, liabilities, equity, income, and expenses.

Abbreviations used in bookkeeping
A/C – Account
Acc – Account
A/R – Accounts receivable
A/P – Accounts payable
B/S – Balance sheet
c/d – Carried down
b/d – Brought down
c/f – Carried forward
b/f – Brought forward
Dr – Debit
Cr – Credit
G/L – General ledger; (or N/L – nominal ledger)
P&L – Profit and loss; (or I/S – income statement)
P/R – Payroll
PP&E – Property, plant and equipment
TB – Trial Balance
GST – Goods and services tax
VAT – Value added tax
CST – Central sale tax
TDS – Tax deducted at source
AMT – Alternate minimum tax
EBITDA – Earnings before interest, taxes, depreciation and amortisation
EBDTA – Earnings before depreciation, taxes and amortisation
EBT – Earnings before tax
EAT – Earnings after tax
PAT – Profit after tax
PBT – Profit before tax
Depr – Depreciation
Dep – Depreciation
CPO – Cash paid out
CP – Cash Payment

Chart of accounts
A chart of accounts is a list of the accounts codes that can be identified with numeric, alphabetical, or alphanumeric codes allowing the account to be located in the general ledger. The equity section of the chart of accounts is based on the fact that the legal structure of the entity is of a particular legal type. Possibilities include sole trader, partnership, trust, and company.

Computerized bookkeeping
Computerized bookkeeping removes many of the paper “books” that are used to record the financial transactions of an entity—instead, relational databases take their place, but they still typically enforce the double-entry bookkeeping system and methodology.