- Assets — things you own - can include debts owed to you, as well as fixed assets like houses or liquid assets like money in the bank
- Liabilities — things you owe - almost always debts to people, includes unspent grant funding and unpaid bills
- Income — increases the value of your accounts/equity
- Expenses — decreases the value of your accounts/equity
- Equity — overall value of your co-op - its ‘net worth’
- Cashflow - money going in and out of bank accounts (doesn't care if it's income, expenses or a ‘balance sheet transaction’
- Balance sheet transaction - A change in assets and liabilities that doesn't change the value of your equity (either an asset changed into another asset, or an asset traded with a matching liability)
- Shares - the part of a co-op owned by another entity (normally a person or co-op)
- member shares - for us, these tend to be nominal value (£1) to make sure that the member has ownership of the co-op (shared with other people) - they generally give you a vote in the co-operative
- investor shares - bits of a co-op owned by people who want to invest money in the organisation and probably recieve interest in return, sometimes these give you a vote, (and for some orgs, but not us, they give you MORE votes the more you invest), sometimes they don't
- Rootstock - an investor co-op that is a member of Radical Routes and allows people tin invest in RR without gaining full control of Radical Routes (Rootstock buys non-voting shares in RR to give it cash to lend to other members).
- Loanstock - a form of loan that co-ops are allowed to advertise to seek money to invest (note, this isn't rootstock, or Radical Routes loans, but people often confuse these terms because they are confusing)
- CT600 – an online form you fill in to tell the tax office how much you owe
- HMRC – Her Majesty’s Revenue and Customs ie the tax officers
- FCA – Financial Conduct Authority – the organisation that registers co-operative societies
- RR – Radical Routes – a secondary co-operative and mutual aid organisation
- Gnucash – don’t worry about what GNU stands for, as it’s a very nerdy joke, Gnucash is a free accounting software
- Turnover, income, revenue - each has a specific meaning, but basically means ‘money coming in, in one way or another
- Equity and net worth and reserves - each means slightly different things, but basically means ‘what your co-op is worth if everything was sold and all debt paid off’
- Debtor – Someone who owes you money
- Creditor – Someone who you owe money
Accounting sees the world in terms of cash value. It only understands things that could be bought and sold, and currency. It’s a bit bleak. There’s three main things accounts are made up of:
- Cashflow – Money going in and out of bank accounts
- Profit & Loss – Things going up and down in value
- Assets & Liabilities – Things you own, and things you owe
At the heart of book-keeping and accounting, there are five types of things worth money, each fitting into its own type of account.
- Assets — things you own.
- Liabilities — things you owe.
- Income — increases the value of your accounts.
- Expenses — decreases the value of your accounts.
- Equity — overall value of your co-op - its ‘net worth’
It is possible to put your whole financial world into these 5 groups.
For example -
For an individual:
- the cash in your bank account is an asset
- your mortgage or unpaid bills are liabilities
- your pay packet is income
- the cost of dinner last night is an expense.
For a housing co-op:
- house is an asset
- Radical Routes loan is a liability
- rent is income
- council tax is an expense
For Radical Routes:
- loans to member co-ops are an asset
- unpaid expense claims from working groups are a liability
- interest on loans and member payments are income
- working group spending and interest on shares (currently via Rootstock) are expenses
Equity (also called net worth) is not in these examples, because it’s not quite as clear-cut as the rest. It’s the result of a sum we do with ALL of the other four accounts.
Firstly, equity is the total of your assets and liabilities.
Your net worth is calculated by subtracting your liabilities from your assets:
Assets - Liabilities = Equity
Everything you own, minus everything you owe is your equity.
You can increase your equity through income, and decrease equity through expenses.
This makes sense of course, when you receive a paycheck you become “richer” and when you pay for dinner you become “poorer”.
This is expressed mathematically in what is known as the Accounting Equation:
Assets - Liabilities = Equity = (All Income ever – all Expenses ever)
(Normally, instead of looking at all income and expenses ever, we look at last year's equity, add this year's income, subtract this year's expenses, and end up with a new equity at the end of the year. At ANY POINT in time though, we can look at assets minus liabilities and have it line up with equity calculated through income and expenses)
If you receive money in as income that is an increase in your assets.
eg When the rent comes in, your bank balance goes up.
You could have an increase in assets if you have a matching increase in liabilities. (This is called a ‘balance sheet transaction).
For example: When you buy a house, you get a load of cash from the bank (asset), by getting a mortgage (liability). You then use the cash (asset) to buy the house (still an asset). If all these are for the same value, then there's been no change in your equity, it's all balance sheet transactions.
What accounting doesn’t always care about, is how much money you have in your bank account.
You can have loads of equity, and no money in the bank, if you have a bill when this happens, you could get in trouble.
You can be in negative equity, but have loads of money in the bank. If this is the case, you’d better have a plan to pay off your debts.
To think about your cashflow, you need to think about money coming in, and money coming out. You need to think about how much these are and when they happen. This requires planning, research, and a healthy expectation of the unexpected.