Happy Bookworm Coffee Shop Plc is a successful chain of coffee shops operating primarily in large bookshops of major bookselling retailers all over the United Kingdom. It was first set up in 1995 by Mr. Oscar Archibald, a coffee expert (and a coffee-addict, too), in a small local book and stationery shop. Soon it became a very pleasant place for local people to meet up and within one year’s time, also the bookshop’s turnover considerably increased. The word was spread and other bookshops became interested. Today Happy Bookworm Coffee Shop is an established brand and operates on more than 200 sites, apart from bookshops also in a number of public libraries.
When Mr. Archibald decided to set up his coffee shop back in 1995, he needed some money/funding to start with, the capital. He didn’t need much, but still, he had to borrow the money from a bank; he took a loan. For some time then, Happy Bookworm owed money to the bank and was in debt. When he paid off/paid back/repaid the loan, he also had to pay some interest on it, i.e. the price for borrowing the money from the bank. Naturally, there were other expenses for Mr. Archibald to pay. He had to pay building companies to incorporate the coffee shop into bookstores, and equipment suppliers who first provided him their goods and services on credit. His accountant, Mrs. Octavia Archibald (yes, it is his wife), kept a record of all these expenses as liabilities.
On a more or less regular basis, Mr. Archibald has to pay for things related to everyday running of the shop: maintenance services, coffee, tea and soft drinks supply, electricity bills, rent, and – of course – his employees’ salaries. This type of expenses is called overheads. Fortunately, there is also money coming into the business, which Mrs. Archibald records as revenue/sales/turnover. It is the total amount of money that Happy Bookworm takes in by selling its products and services during e.g. a month (monthly revenue) or a year (annual revenue). When Mrs. Archibald subtracts all operating expenses from the revenue, she gets a figure known as profit/earnings/net income.
Apart from regular bookkeeping (recording financial transactions), Mrs. Archibald must be also ready to produce clear evidence of Happy Bookworm’s financial standing (situation). She does this in form of financial statements. Let’s have a look at two of them.
Also called Statement of Financial Position, it reports the financial position of an accounting entity (Happy Bookworm Coffee Shop in our case) at a point in time. It is a document made up of two halves. The totals of both halves are always the same, i.e. they balance. One half shows the company’s assets (what it owns), the other half shows its liabilities (what it owes) and capital/shareholders’ (stockholders’) equity (funding of the business provided by shareholders).
Here is a simplified version of what such a Happy Bookworm balance sheet might look like.
Also called Profit and Loss Account. It is a document showing the difference between a company’s revenues and expenses, i.e. net income/profit, of an accounting period.
Here is an example of Happy Bookworm’s income statement for 2014.
Apart from these two basic financial statements, companies are also required to produce:
*Cash Flow Statement/Funds Flow Statement, which gives details of inflows (receipts) and outflows (payments) of cash during an accounting period;
* Statement of Retained Earnings, which reports the way net income and distribution of dividends to shareholders affect a company’s financial position during an accounting period
Happy Bookworm has a corporate bank account (i.e. one suited to large clients) in London Royal Bank. Here are some services that the bank offers. Most of them relate to private banking as well.
You can open a current/checking account, which allows you to take out/withdraw your money on every-day basis. This is done in the bank, but more conveniently also with a debit card at ATMs (Automated Teller Machines)/cash dispensers. Here you can also make deposits. Don’t confuse a debit card with a credit card. With a credit card, you can pay for goods and services and you can also borrow money from a financial institution. But it is not your own money – you have to pay it back and also pay interest on borrowing it.
When you arrange an overdraft with your bank (and pay for it, too…), the bank will allow you to overdraw your account. This is cheaper and more convenient if you want to overdraw only for a short time than taking a loan, not to speak of mortgages (loans for buying a house or flat). And when you, on the other hand, want to save money, you can open a saving/deposit account.
With internet banking/e-banking, you can easily pay online via bank transfer. This is how Happy Bookworm usually pays for their purchases and bills. These are normally paid as standing orders, used to pay regular (and more or less fixed) sums of money.
Every month or so, the bank issues a bank (reconciliation) statement with a list of debits (sums of money going out), credits (sums of money coming in) and balance calculation. You can easily find it in your internet banking and check any period of time.
Here is an example of what Happy Bookworm’s bank statement might look like for a one-week period.
Royal Bank of London
123 London Street
EC 1A 1AA
Business Account Statement
March 05, 2015 to March 12, 2015
Happy Bookworm Coffee Shop PLC
456 Cambridge Street
EC 2A 2BB London
Account number: 12345 123 4567
Online Banking payment
Point of Sale credit
Telephone Banking Transfer
Point of Sale credit
Best Beans purchase
Espresso Machines payment