Basic Bookkeeping For Dummies
This Bookkeeping for Dummies book will help teach you how to maintain thourough and accurate bookkeeping which is crucial to any business. It is also very important to others who work with each business. These people include employees, financial lenders and investors and they can benefit from the basic Bookkeeping For Dummies book as well. Both inside and outside of the business, all of the people involved depend on a bookkeeper’s thourough and accurate recordkeeping and the basic Bookkeeping for Dummies book teaches you how to accomplish this.
This basic Bookkeeping for Dummies guide features all kinds of tips and tricks for managing your business cash and also references important accounts for any bookkeeper to be aware of. There is no question that bookkeepers must be detail-oriented, thourough, and accurate. The basic Bookkeeping For Dummies book shows you how to keep track of your business’s financial well-being and ensure your future success!
Product Description of the basic Bookkeeping For Dummies book
Are you finding that your invoices and bank statements pile up every month, untouched and shied away from? Does your accountant spend more time on basic bookkeeping than on minimising your tax bill? If you’re a small business owner who wants to take financial matters into your own hands, look no further. Basic Bookkeeping for Dummies will guide you through all the basic skills needed to keep your business efficient and cost–effective – from tracking your transactions and keeping ledgers, to producing balance sheets and satisfying the taxman at year–end. Learn to manage your finances painlessly and clearly, and master the art of bookkeeping basics!
About the Author of the basic Bookkeeping For Dummies book
The author of the basic Bookkeeping For Dummies book is Lita Epstein. She earned her MBA from Emory University’s Goizueta Business School and enjoys helping people develop good financial, investing, and tax planning skills. While getting her MBA, Lita worked as a teaching assistant for the financial accounting department and actually ran the accounting lab. After completing her MBA, she managed the finances for a small nonprofit organization and for the facilities management section of a large medical clinic.
She teaches and designs online courses on topics such as getting ready for tax time, finance and investing for women and investing for retirement. She has written more than ten books besides the basic Bookkeeping For Dummies book, including Trading For Dummies and Streetwise Retirement Planning. Lita was the content director for a financial services Web site called MostChoice.com. She also managed the Web site Investing for Women.
As a Congressional press secretary, Lita gained firsthand knowledge about how to work within and around the Federal bureaucracy, which gives her really great insight into how government programs work as well as how to write her basic Bookkeeping For Dummies guide. In the past, Lita has been a daily newspaper reporter, magazine editor, and fundraiser for the international activities of former President Jimmy Carter through The Carter Center.
Table of Contents of the basic Bookkeeping For Dummies book
Introduction of the basic Bookkeeping For Dummies book.
Chapter 1 Glimpse of the basic Bookkeeping For Dummies book.
So You Want to Do the Books
In this chapter, I provide an overview of a bookkeeper’s work. If you’re just starting a business, you may be your own bookkeeper for a while until you can afford to hire one, so think of this chapter as your to-do list.
Delving in to Bookkeeping Basics
Like most business people, you probably have great ideas for running your own business and just want to get started. You don’t want to sweat the small stuff, like keeping detailed records of every penny spent; you just want to quickly build a business in which you can make lots of money. Well slow down there — this isn’t a race! If you don’t carefully plan your bookkeeping operation and figure out exactly how and what financial detail you want to track, you’ll have absolutely no way to measure the success (or failure, unfortunately) of your business efforts.
Bookkeeping, when done properly, gives you an excellent gauge of how well you’re doing. It also provides you with lots of information throughout the year so you can test the financial success of your business strategies and make course corrections early in the year if necessary to ensure that you reach your year-end profit goals.
Bookkeeping can become your best friend for managing your financial assets and testing your business strategies, so don’t shortchange it. Take the time to develop your bookkeeping system with your accountant before you even open your business’s doors and make your first sale.
Picking your accounting method
You can’t keep books unless you know how you want to go about doing so. The two basic accounting methods you have to choose from are cash-basis accounting and accrual accounting. The key difference between these two accounting methods is the point at which you record sales and purchases in your books. If you choose cash-basis accounting, you only record transactions when cash changes hands. If you use accrual accounting, you record a transaction when it’s completed, even if cash doesn’t change hands.
For example, suppose your company buys products to sell from a vendor but doesn’t actually pay for those products for 30 days. If you’re using cash-basis accounting, you don’t record the purchase until you actually lay out the cash to the vendor. If you’re using accrual accounting, you record the purchase when you receive the products, and you also record the future debt in an account called Accounts Payable.I talk about the pros and cons of each type of accounting method in Chapter 2.
Understanding assets, liabilities, and equity
Every business has three key financial parts that must be kept in balance: assets, liabilities, and equity. Assets include everything the company owns, such as cash, inventory, buildings, equipment, and vehicles. Liabilities include everything the company owes to others, such as vendor bills, credit card balances, and bank loans. Equity includes the claims owners have on the assets based on their portion of ownership in the company.
Part I: Basic Bookkeeping: Why You Need It
The formula for keeping your books in balance involves these three elements: Assets = Liabilities + Equity
Because it’s so important, I talk a lot about how to keep your books in balance throughout this book. You can find an initial introduction to this concept in Chapter 2.
Introducing debits and credits
Well, forget all you thought you knew about debits and credits. Debits and credits are totally different animals in the world of bookkeeping. Because keeping the books involves a method called double-entry bookkeeping, you have to make a least two entries — a debit and a credit — into your bookkeeping system for every transaction. Whether that debit or credit adds or subtracts from an account depends solely upon the type of account.
I know all this debit, credit, and double-entry stuff sounds confusing, but I promise it will become much clearer as you work through this book. I start explaining this critical yet somewhat confusing concept in Chapter 2.
Charting your bookkeeping course
You can’t just enter transactions in the books willy-nilly. You need to know where exactly those transactions fit into the larger bookkeeping system. That’s where your Chart of Accounts comes in; it’s essentially a list of all the accounts your business has and what types of transactions go into each one. I talk more about the Chart of Accounts in Chapter 3.
Chapter 1: So You Want to Do the Books
Recognizing the Importance of an Accurate Paper Trail
Keeping the books is all about creating an accurate paper trail. You want to track of all your company’s financial transactions so if a question comes up at a later date, you can turn to the books to figure out what went wrong. An accurate paper trail is the only way to track your financial successes and review your financial failures, a task that’s vitally important in order to grow your business. You need to know what works successfully so you can repeat it in the future and build on your success. On the other hand, you need to know what failed so you can correct it and avoid making the same mistake again.
All your business’s financial transactions are summarized in the General Ledger, and journals keep track of the tiniest details of each transaction. You can make your information gathering more effective by using a computerized accounting system, which gives you access to your financial information in many different formats. Controlling who enters this financial information into
your books and who can access it afterwards is smart business and involves critical planning on your part. I address all these concepts in the following sections.
Maintaining a ledger
The granddaddy of your bookkeeping system is the General Ledger. In this ledger, you keep a summary of all your accounts and the financial activities that took place involving those accounts throughout the year. You draw upon the General Ledger’s account summaries to develop your financial reports on a monthly, quarterly, or annual basis. You can also use these account summaries to develop internal reports that help you make key business decisions. I talk more about developing and maintaining the General Ledger in Chapter 4.
Small companies conduct hundreds, if not thousands, of transactions each year. If every transaction were kept in the General Ledger, that record would become unwieldy and difficult to use. Instead, most companies keep a series of journals that detail activity in their most active accounts.
For example, almost every company has a Cash Receipts Journal in which to keep the detail for all incoming cash and a Cash Disbursements Journal in which to keep the detail for all outgoing cash. Other journals can detail sales, purchases, customer accounts, vendor accounts, and any other key accounts that see significant activity.
You decide which accounts you want to create journals for based on your business operation and your need for information about key financial transactions. I talk more about the importance of journals, the accounts commonly journalized, and the process of maintaining journals in Chapter 5.
Many companies today use computerized accounting systems to keep their books. You should consider using one of these systems rather than trying to keep your books on paper. You’ll find your bookkeeping takes less time and is probably more accurate with a computerized system.
In addition to increasing accuracy and cutting the time it takes to do your bookkeeping, computerized accounting also makes designing reports easier. These reports can then be used to help make business decisions. Your computerized accounting system stores detailed information about every transaction, so you can group that detail in any way that may assist your decision making. I talk more about computerized accounting systems in Chapter 6.
Instituting internal controls
Every business owner needs to be concerned with keeping tight controls on company cash and how it’s used. One way to institute this control is by placing internal restrictions on who has access to enter information into your books and who has access necessary to use that information.
You also need to carefully control who has the ability to accept cash receipts and who has the ability to disburse your business’s cash. Separating duties appropriately helps you protect your business’s assets from error, theft, and fraud. I talk more about controlling your cash and protecting your financial records in Chapter 7.
Using Bookkeeping’s Tools to Manage Daily Finances
After you set up your business’s books and put in place your internal controls, you’re ready to use the systems you established to manage the day-to-day operations of your business. You’ll quickly see how a well-designed bookkeeping system can make your job of managing your business’s finances much easier.
If your company keeps inventory on hand or in warehouses, tracking the costs of the products you plan to sell is critical for managing your profit potential. If you see inventory costs trending upward, you may need to adjust your own prices in order to maintain your profit margin. You certainly don’t want to wait until the end of the year to find out how much your inventory cost you.
You also must keep careful watch on how much inventory you have on hand and how much was sold. Inventory can get damaged, discarded, or stolen, meaning that your physical inventory counts may differ from the counts you have in your books. Do a physical count periodically — at least monthly for most businesses and possibly daily for active retail stores. In addition to watching for signs of theft or poor handling of inventory, make sure you have enough inventory on hand to satisfy your customers’ needs. I talk more about how to use your bookkeeping system to manage inventory in Chapter 8.
Everyone wants to know how well their sales are doing. If you keep your books up-to-date and accurate, you can get those numbers very easily on a daily basis. You can also watch sales trends as often as you think necessary, whether that’s daily, weekly, or monthly.
Use the information collected by your bookkeeping system to monitor sales, review discounts offered to customers, and track the return of products. All three elements are critical to gauging the success of the sales of your products.
If you find you need to offer discounts more frequently in order to encourage sales, you may need to review your pricing, and you definitely need to research market conditions to determine the cause of this sales weakness. The cause may be new activities by an aggressive competitor or simply a slow market period. Either way, you need to understand the weakness and figure out how to maintain your profit goals in spite of any obstacles.
While sales tracking reveals an increase in the number of your products being returned, you need to research the issue and find the reason for the increase. Perhaps the quality of the product you’re selling is declining, and you need to find a new supplier. Whatever the reason, an increased number of product returns is usually a sign of a problem that needs to be researched and corrected. I talk more about how to use the bookkeeping system for tracking sales, discounts, and returns in Chapter 9.
Payroll can be a huge nightmare for many companies. Payroll requires you to comply with a lot of government regulation and fill out a lot of government paperwork. You also have to worry about collecting payroll taxes and paying employer taxes. And if you pay employee benefits, you have yet another layer of record keeping to deal with. I talk more about managing payroll and government requirements in Chapters 10 and 11. I also talk about year-end payroll obligations in Chapter 20.
Running Tests for Accuracy
All the time it takes to track your transactions isn’t worth it if you don’t periodically test to be sure you’ve entered those transactions accurately. The old adage, “Garbage in, garbage out” holds very true for bookkeeping: If the numbers you put into your bookkeeping system are garbage, the reports you develop from those numbers will be garbage as well.
Proving out your cash
The first step in testing out your books includes proving that your cash transactions are accurately recorded. This process involves checking a number of difference transactions and elements, including the cash taken in on a daily basis by your cashiers and the accuracy of your checking account. I talk about all the steps necessary to take to prove out your cash in Chapter 14.
Testing your balance
After you prove out your cash (see Chapter 14), you can check that you’ve recorded everything else in your books just as precisely. Review the accounts for any glaring errors and then test whether or not they’re in balance by doing a trial balance. You can find out more about trial balances in Chapter 16.
Doing bookkeeping corrections
You may not find your books in balance the first time you do a trial balance, but don’t worry. It’s rare to find your books in balance on the first try. In Chapter 17, I explain common adjustments that may be needed as you prove out your books at the end of an accounting period, and I also explain how to make the necessary corrections.
Finally Showing Off Your Financial Success
Proving out your books and ensuring their balance means you finally get to show what your company has accomplished financially by developing reports to present to others. It’s almost like putting your business on a stage and taking a bow — well . . . at least you hope you’ve done well enough to take a bow.
If you’ve taken advantage of your bookkeeping information and reviewed and consulted it throughout the year, you should have a good idea of how well your business is doing. You also should have taken any course corrections to ensure that your end-of-the-year reports look great.
Preparing financial reports
Most businesses prepare at least two key financial reports, the balance sheet and the income statement, which it can show to company outsiders, including the financial institutions from which the company borrows money and the company’s investors.
The balance sheet is a snapshot of your business’s financial health as of a particular date. The balance sheet should show that your company’s assets are equal to the value of your liabilities and your equity. It’s called a balance sheet because it’s based on a balanced formula: Assets = Liabilities + Equity
The income statement summarizes your company’s financial transactions for a particular time period, such as a month, quarter, or year. This financial statement starts with your revenues, subtracts the costs of goods sold, and then subtracts any expenses incurred in operating the business. The bottom line of the income statement shows how much profit your company made during the accounting period. If you haven’t done well, the income statement shows how much you’ve lost. I explain how to prepare a balance sheet in Chapter 18, and I talk more about developing an income statement in Chapter 19.
Most small businesses don’t have to pay taxes. Instead, their profits are reported on the personal tax returns of the company owners, whether that’s one person (a sole proprietorship) or two or more people (a partnership). Only companies that have incorporated, become a separate legal entity in which investors buy stock (which I explain further in Chapter 21), must file and pay taxes. (Partnerships and LLCs do not pay taxes unless they filed a special form to be taxed as a corporation, but they do have to file information returns, which detail how much the company made and how much profit each owner earned plus any costs and expenses incurred.) I talk more about business structures and how they’re taxed in Chapter 21.
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