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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Your all-in-one accounting resource If you're a numbers person, it's your lucky day! Accounting jobs are on the rise -- in fact, the Bureau of Labor Statistics projects a faster-than-average growth rate of 11% in the industry through 2024. So, if you're seeking long-term job security while also pursuing your passion, you'll be stacking the odds in your favor by starting a career in accounting. Accountants don't necessarily lead a solitary life behind a desk in a bank. The field offers opportunities in auditing, budget analysis, financial accounting, management accounting, tax accounting, and more. In Accounting All-in-One For Dummies, you'll benefit from cream-of-the-crop content culled from several previously published books. It'll help you to flourish in whatever niche you want to conquer in the wonderful world of accounting. You'll also get free access to a quiz for each section of the book online. * Report on financial statements * Make savvy business decisions * Audit and detect financial fraud * Handle cash and make purchasing decisions * Get free access to topic quizzes online If you're a student studying the application of accounting theories or a professional looking for a valuable desktop reference you can trust, this book covers it all.
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Accounting All-in-One For Dummies®, 2nd Edition
Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com
Copyright © 2018 by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Library of Congress Control Number: 2018932104
ISBN 978-1-119-45389-5 (pbk); ISBN 978-1-119-45394-9 (ebk); ISBN 978-1-119-45396-3 (ebk)
Accounting All-in-One For Dummies®
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Table of Contents
Cover
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Book 1: Setting Up Your Accounting System
Chapter 1: Grasping Bookkeeping and Accounting Basics
Knowing What Bookkeeping and Accounting Are All About
Wrapping Your Brain around the Accounting Cycle
Working the Fundamental Accounting Equation
Chapter 2: Outlining Your Financial Road Map with a Chart of Accounts
Getting to Know the Chart of Accounts
Setting Up Your Chart of Accounts
Mulling Over Debits versus Credits
Understanding Double-Entry Accounting
Chapter 3: Using Journal Entries and Ledgers
Keeping a Journal
Bringing It All Together in the Ledger
Putting Accounting Software to Work for You
Chapter 4: Choosing an Accounting Method
Distinguishing between Cash and Accrual Basis
Sorting through Standards for Other Types of Accounting
Considering the Conceptual Framework of Financial Accounting
Book 2: Recording Accounting Transactions
Chapter 1: Keeping the Books
Analyzing the Effect of Business Transactions
Managing Your Bookkeeping and Accounting System
Wrapping Up with End-of-Period Procedures
Chapter 2: Tracking Purchases
Keeping Track of Inventory
Buying and Monitoring Supplies
Staying on Top of Your Bills
Chapter 3: Counting Your Sales
Collecting on Cash Sales
Selling on Credit
Proving Out the Cash Register
Tracking Sales Discounts
Recording Sales Returns and Allowances
Monitoring Accounts Receivable
Accepting Your Losses
Chapter 4: Processing Employee Payroll and Benefits
Staffing Your Business
Collecting Employee Taxes
Determining Net Pay
Surveying Your Benefits Options
Preparing Payroll and Posting It in the Books
Depositing Employee Taxes
Chapter 5: Computing and Reporting Payroll Taxes
Paying Employer Taxes on Social Security and Medicare
Completing Unemployment Reports and Paying Unemployment Taxes
Carrying Workers’ Compensation Insurance
Maintaining Employee Records
Book 3: Adjusting and Closing Entries
Chapter 1: Depreciating Your Assets
Defining Depreciation
Evaluating Your Depreciation Options
Tackling Taxes and Depreciation
Chapter 2: Paying and Collecting Interest
Deciphering Types of Interest
Handling Interest Income
Delving into Loans and Interest Expenses
Chapter 3: Proving Out the Cash
Why Prove Out the Cash?
Making Sure Ending Cash Is Right
Closing the Cash Journals
Using a Temporary Posting Journal
Chapter 4: Reconciling Accounts and Closing Journal Entries
Reconciling Bank Accounts
Posting Adjustments and Corrections
Prepping to Close: Checking for Accuracy and Tallying Things Up
Posting to the General Ledger
Checking Out Computerized Journal Records
Chapter 5: Checking Your Accuracy
Working with a Trial Balance
Testing Your Balance by Using Computerized Accounting Systems
Developing a Financial Statement Worksheet
Replacing Worksheets with Computerized Reports
Chapter 6: Adjusting the Books
Adjusting All the Right Areas
Testing an Adjusted Trial Balance
Book 4: Preparing Income Statements and Balance Sheets
Chapter 1: Brushing Up on Accounting Standards
Exploring the Origins of Accounting Standards
Recognizing the Role of the American Institute of Certified Public Accountants (AICPA)
Checking Out the U.S. Securities and Exchange Commission (SEC)
Getting to Know the Financial Accounting Standards Board (FASB)
Chapter 2: Preparing an Income Statement and Considering Profit
Understanding the Nature of Profit
Choosing the Income Statement Format
Deciding What to Disclose in the Income Statement
Examining How Sales and Expenses Change Assets and Liabilities
Considering the Diverse Financial Effects of Making a Profit
Reporting Extraordinary Gains and Losses
Correcting Common Misconceptions about Profit
Chapter 3: Assessing the Balance Sheet’s Asset Section
Homing in on Historic Cost
Discovering What Makes an Asset Current
Keeping Track of Noncurrent (Long-Term) Assets
Exploring the Asset Section of the Balance Sheet
Chapter 4: Digging for Debt in the Balance Sheet’s Liabilities Section
Seeing How Businesses Account for Liabilities
Keeping Current Liabilities under Control
Planning for Long-Term Obligations
Accounting for Bond Issuances
Chapter 5: Explaining Ownership in the Equity Section of the Balance Sheet
Understanding How Owner Equity Varies among Business Entities
Distinguishing between Two Types of Capital Stock
Defining Paid-In Capital
Recording Retained Earnings
Spotting Reductions to Stockholders’ Equity
Exploring Stock Splits
Computing Earnings per Share
Chapter 6: Coupling the Income Statement and Balance Sheet
Rejoining the Income Statement and Balance Sheet
Introducing Operating Ratios
Adding Fixed Assets, Depreciation, and Owners’ Equity
Completing the Balance Sheet with Debt
Book 5: Reporting on Your Financial Statements
Chapter 1: Presenting Financial Condition and Business Valuation
Clarifying the Values of Assets in Balance Sheets
Introducing Business Valuation
Comparing Business Valuation Methods
Chapter 2: Laying Out Cash Flows and Changes in Equity
Understanding the Difference between Cash and Profit
Realizing the Purpose of the Statement of Cash Flows
Walking through the Cash Flow Sections
Recognizing Methods for Preparing the Statement of Cash Flows
Interpreting the Statement of Cash Flows
Looking Quickly at the Statement of Changes in Stockholders Equity
Chapter 3: Analyzing Financial Statements
Judging Solvency and Liquidity
Understanding That Transactions Drive the Balance Sheet
Measuring Profitability
Exploring Activity Measures
Comparing Horizontal and Vertical Analysis
Using Common Size Financial Statements
Chapter 4: Reading Explanatory Notes and Disclosures
Realizing How Corporations Should Govern Themselves
Identifying Corporate Characteristics
Reviewing Common Explanatory Notes
Putting the Onus on the Preparer
Chapter 5: Studying the Report to the Shareholders
Why Private and Public Companies Treat Annual Reports Differently
Fulfilling Three Purposes
Reading the Annual Report to Shareholders
Walking through Form 10-K
Book 6: Planning and Budgeting for Your Business
Chapter 1: Incorporating Your Business
Securing Capital: Starting with Owners
Recognizing the Legal Roots of Business Entities
Incorporating a Business
Chapter 2: Choosing a Legal Structure for a Business
Differentiating between Partnerships and Limited Liability Companies
Going It Alone: Sole Proprietorships
Choosing the Right Legal Structure for Income Tax
Chapter 3: Drawing Up a Business Plan to Secure Cash
Outlining the Basic Business Plan
Developing a Business Plan
Incorporating Third-Party Information into Your Plan
Chapter 4: Budgeting for a Better Bottom Line
Brushing Up on Budgeting Basics
Recognizing Factors That Impact Your Budgeting Process
The Nuts and Bolts of Budgeting
Chapter 5: Mastering and Flexing Your Budgeting
Budgeting with Cash or Accrual Accounting
Budgeting to Produce the Income Statement and Balance Sheet
Flexing Your Budget: When Plans Change
Chapter 6: Planning for Long-Term Obligations
Managing Long-Term Debt
Accounting for Bonds
Book 7: Making Savvy Business Decisions
Chapter 1: Estimating Costs with Job Costing
Understanding How Job Costing Works
Taking a Closer Look at Indirect Costs by Using Normal Costing
Following the Flow of Costs through a Manufacturing System
Chapter 2: Performing Activity-Based Costing
Avoiding the Slippery Slope of Peanut Butter Costing
Designing an Activity-Based Costing System
Using Activity-Based Costing to Compute Total Cost, Profit, and Sale Price
Chapter 3: Examining Contribution Margin
Computing Contribution Margin
Preparing a Cost-Volume-Profit Analysis
Generating a Break-Even Analysis
Shooting for Target Profit
Observing Margin of Safety
Taking Advantage of Operating Leverage
Chapter 4: Accounting for Change with Variance Analysis
Setting Up Standard Costs
Understanding Variances
Teasing Out Variances
Chapter 5: Making Smart Pricing Decisions
Differentiating Products
Taking All Costs into Account with Absorption Costing
Pricing at Cost-Plus
Extreme Accounting: Trying Variable-Cost Pricing
Bull’s-Eye: Hitting Your Target Cost
Chapter 6: Using Financial Formulas
Analyzing Profitability
Using Assets Effectively
Evaluating Firm Liquidity
Checking on Company Solvency
Book 8: Handling Cash and Making Purchase Decisions
Chapter 1: Identifying Costs and Matching Costs with Revenue
Defining Costs and Expenses in the Business World
Satisfying the Matching Principle
Identifying Product and Period Costs
Discovering Which Costs Are Depreciated
Preparing a Depreciation Schedule
Deciding When to Recognize Revenue
Chapter 2: Exploring Inventory Cost Flow Assumptions
Discovering How Inventory Valuation Affects the Financial Statements
Logging Inventory for Service Companies
Classifying Inventory Types
Getting to Know Inventory Valuation Methods
Preparing an Inventory Worksheet
Chapter 3: Answering the Question: Should I Buy That?
Identifying Incremental and Opportunity Costs
Keeping It Simple: The Cash Payback Method
It’s All in the Timing: The Net Present Value (NPV) Method
Measuring Internal Rate of Return (IRR)
Considering Qualitative Factors
Chapter 4: Knowing When to Use Debt to Finance Your Business
Understanding the Basics of Debt Capital
Determining When Debt Is Most Appropriate
Using Loans, Leases, and Other Sources of Debt
Getting Creative with Capital
Chapter 5: Interpreting Your Financial Results as a Manager
Gauging the Relative Importance of Information
Reviewing Profit and Earnings
Judging the Company’s Cash Position
Tackling Extraordinary Gains and Losses
Recognizing the Risks of Restatement
Remembering the Limits of Financial Reports
Chapter 6: Handling the Financial End of a Business Sale
Maximizing Business Value
Becoming a Team Player
Funding a Business Purchase
Working through Due Diligence
Coming to Terms with a Sale Price
Book 9: Auditing and Detecting Financial Fraud
Chapter 1: Mulling Over Sarbanes-Oxley Regulation
Pre-SOX Securities Laws
The Scope of SOX: Securities and Issuers
The Post-SOX Paper Trail
Chapter 2: Preventing Cash Losses from Embezzlement and Fraud
Setting the Stage for Protection
Putting Internal Controls to Work
Recognizing Limitations of Internal Controls
Chapter 3: Assessing Audit Risk
Using the Audit Risk Model
Following Risk Assessment Procedures
Figuring Out What’s Material and What Isn’t
Evaluating Your Audit Risk Results
Chapter 4: Collecting and Documenting Audit Evidence
Management Assertions: Assessing the Information a Client Gives You
Eyeing the Four Concepts of Audit Evidence
Applying Professional Judgment
Using Your Audit Program to Request the Right Evidence
Documenting the Audit Evidence
Chapter 5: Auditing a Client’s Internal Controls
Defining Internal Controls
Identifying the Five Components of Internal Controls
Determining When You Need to Audit Internal Controls
Testing a Client’s Reliability: Assessing Internal Control Procedures
Limiting Audit Procedures When Controls Are Strong
Tailoring Tests to Internal Control Weaknesses
Timing a Client’s Control Procedures
Chapter 6: Getting to Know the Most Common Fraud Schemes
Frauds Committed by Businesses
Frauds Committed against Businesses
Chapter 7: Cooked Books: Finding Financial Statement Fraud
Exploring the Financial Statement Fraud Triangle
Spotting the Common Methods of Fraud
Uncovering Financial Statement Fraud
About the Authors
Connect with Dummies
Index
End User License Agreement
Guide
Cover
Table of Contents
Begin Reading
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Introduction
To the general public, accounting means crunching numbers. Accountants are bean counters, whose job it is to make sure enough money is coming in to cover all the money going out. Most people also recognize that accountants help individuals and businesses complete their tax returns. Few people give much thought to the many other facets of accounting.
Accounting is much more than just keeping the books and completing tax returns. Sure, that is a large part of it, but in the business world, accounting also includes setting up an accounting system, preparing financial statements and reports, analyzing financial statements, planning and budgeting for a business, attracting and managing investment capital, securing loans, analyzing and managing costs, making purchase decisions, providing financial insight and advice to business owners and management, and preventing and detecting fraud.
Although no single book can help you master everything there is to know about all fields of accounting, this book provides the information you need to get started in the most common areas.
About This Book
Accounting All-In-One For Dummies, 2nd Edition expands your understanding of what accounting is and provides you with the information and guidance to master the skills you need in various areas of accounting. This book, actually nine books in one, covers everything from setting up an accounting system to preventing and detecting fraud:
Book 1: Setting Up Your Accounting System
Book 2: Recording Accounting Transactions
Book 3: Adjusting and Closing Entries
Book 4: Preparing Income Statements and Balance Sheets
Book 5: Reporting on Your Financial Statements
Book 6: Planning and Budgeting for Your Business
Book 7: Making Savvy Business Decisions
Book 8: Handling Cash and Making Purchase Decisions
Book 9: Auditing and Detecting Financial Fraud
Foolish Assumptions
In order to narrow the scope of this book and present information and guidance that would be most useful to you, the reader, we had to make a few foolish assumptions about who you are:
You're an accountant, accountant wannabe, a businessperson who needs to know about some aspect of business accounting, or an investor who needs to know how to make sense of financial statements.
This book doesn't cover how to budget for groceries or complete your 1040 tax return. In other words, this book is strictly business. Some chapters are geared more toward accountants, while others primarily address business owners and managers.
You're compelled to or genuinely interested in finding out more about accounting.
If you're not motivated by a need or desire to acquire the knowledge and skills required to perform fundamental accounting tasks, you probably need to hire an accountant instead trying to do this stuff on your own.
You can do the math.
You don't need to know trigonometry or calculus, but you do need to be able to crunch numbers by using addition, subtraction, multiplication, and division. As for that higher-level math, that’s why we have accounting software.
Icons Used in This Book
Throughout this book, icons in the margins cue you in on different types of information that call out for your attention. Here are the icons you'll see and a brief description of each.
It would be nice if you could remember everything you read in this book, but if you can't quite do that, then remember the important points flagged with this icon.
Tips provide insider insight. When you're looking for a better, faster way to do something, check out these tips.
“Whoa!” This icon appears when you need to be extra vigilant or seek professional help before moving forward.
Beyond the Book
In addition to the abundance of information and guidance on accounting that's provided in this book, you’re entitled to some online bonus material:
Quizzes: Each of the nine Books that comprise this book has an online quiz you can use to self-evaluate the knowledge and skills you acquired or at least see how much of the information you can recall. After completing each Book, test your knowledge with the corresponding quiz.
To gain access to the quizzes and videos, all you have to do is register. Just follow these simple steps:
Find your PIN access code located on the inside front cover of this book.
Go to Dummies.com and click Activate Now.
Find your product (
Accounting All-in-One For Dummies,
2nd Edition) and then follow the on-screen prompts to activate your PIN.
Now you’re ready to go! You can go back to the program at testbanks.wiley.com as often as you want — simply log on with the username and password you created during your initial login. No need to enter the access code a second time.
Tip: If you have trouble with your PIN or can’t find it, contact Wiley Product Technical Support at 877-762-2974 or go to support.wiley.com.
Video presentations:
Ken Boyd, former CPA, current online accounting trainer, and one of the many authors who contributed to this mini accounting library has contributed a number of videos on various accounting topics covered in this book. To view these engaging and educational videos, simply go to
www.dummies.com/go/accountingaiovids
.
You can also access a free Cheat Sheet at dummies.com (enter Accounting All-in-One For Dummies Cheat Sheet in the search box). The Cheat Sheet features key accounting terms, tips for controlling cash, essential formulas for cost accounting, and definitions of key financial accounting terms. It also explains the relationship between cash flow and profit.
Where to Go from Here
Although you're certainly welcome to read Accounting All-In-One For Dummies, 2nd Edition from start to finish (probably not at a single sitting), feel free to skip and dip, focusing on whichever area of accounting and whichever topic is most relevant to your current needs and interests. If you're just getting started, Books 1 to 3 may be just what you're looking for. If you're facing the daunting challenge of preparing financial statements for a business, consult Books 4 and 5. If you own or manage a business, check out Books 6 to 8 for information and guidance on managerial accounting. And if you're in charge of preventing and detecting incidents of fraud, or you just want to know more about accounting fraud so that you can do your part to prevent it, check out the chapters in Book 9.
Wherever you go, you’ll find the information and guidance you need in an engaging and easily accessible format.
Book 1
Setting Up Your Accounting System
Contents at a Glance
Chapter 1: Grasping Bookkeeping and Accounting Basics
Knowing What Bookkeeping and Accounting Are All About
Wrapping Your Brain around the Accounting Cycle
Working the Fundamental Accounting Equation
Chapter 2: Outlining Your Financial Road Map with a Chart of Accounts
Getting to Know the Chart of Accounts
Setting Up Your Chart of Accounts
Mulling Over Debits versus Credits
Understanding Double-Entry Accounting
Chapter 3: Using Journal Entries and Ledgers
Keeping a Journal
Bringing It All Together in the Ledger
Putting Accounting Software to Work for You
Chapter 4: Choosing an Accounting Method
Distinguishing between Cash and Accrual Basis
Sorting through Standards for Other Types of Accounting
Considering the Conceptual Framework of Financial Accounting
Chapter 1
Grasping Bookkeeping and Accounting Basics
IN THIS CHAPTER
Examining the differences between bookkeeping and accounting
Getting to know the accounting cycle
Maintaining balance with the fundamental accounting equation
Most folks aren’t enthusiastic bookkeepers. You probably balance your checkbook against your bank statement every month and somehow manage to pull together all the records you need for your annual federal income tax return. But if you’re like most people, you stuff your bills in a drawer and just drag them out once a month when you pay them.
Individuals can get along quite well without much bookkeeping — but the exact opposite is true for a business. A business needs a good bookkeeping and accounting system to operate day to day, and a business needs accurate and timely data to operate effectively.
In addition to facilitating day-to-day operations, a company’s bookkeeping and accounting system serves as the source of information for preparing its periodic financial statements, tax returns, and reports to managers. The accuracy of these reports is critical to the business’s survival. That’s because managers use financial reports to make decisions, and if the reports aren’t accurate, managers can’t make intelligent decisions.
Obviously, then, a business manager must be sure that the company’s bookkeeping and accounting system is dependable and up to snuff. This chapter shows you what bookkeepers and accountants do, so you have a clear idea of what it takes to ensure that the information coming out of the accounting system is complete, accurate, and timely.
Knowing What Bookkeeping and Accounting Are All About
In a nutshell, accountants “keep the books” of a business (or not-for-profit or government entity) by following systematic methods to record all the financial activities and prepare summaries. This summary information is used to create financial statements.
Financial statements are sent to stakeholders. Stakeholders are people who have a stake in the company’s success or failure. Here are some examples of stakeholders:
Stockholders:
If you own stock in General Electric, for example, you receive regular financial reports. Stockholders are owners of the business. They need to know the financial condition of the business they own.
Creditors:
Entities that loan money to your business are creditors. They need to review financial statements to determine whether your business still has the ability to repay principal and make interest payments on the loan.
Regulators:
Most businesses have to answer to some type of regulator. If you produce food, for example, you send financial reports to the Food and Drug Administration (FDA). Reviewing financial statements is one responsibility of a regulator.
The following sections help you embark on your journey to develop a better understanding of bookkeeping and accounting. Here you discover the differences between the two and get a bird’s-eye view of how they interact.
Distinguishing between bookkeeping and accounting
Distinguishing between bookkeeping and accounting is important, because they’re not completely interchangeable. Bookkeeping refers mainly to the recordkeeping aspects of accounting — the process (some would say the drudgery) of recording all the detailed information regarding the transactions and other activities of a business (or other organization, venture, or project).
The term accounting is much broader; it enters the realm of designing the bookkeeping system, establishing controls to make sure the system is working well, and analyzing and verifying the recorded information. Accountants give orders; bookkeepers follow them.
Bookkeepers spend more time with the recordkeeping process and dealing with problems that inevitably arise in recording so much information. Accountants, on the other hand, have a different focus. You can think of accounting as what goes on before and after bookkeeping. Accountants design the bookkeeping and accounting system (before) and use the information that the bookkeepers enter to create financial statements, tax returns, and various internal-use reports for managers (after).
Taking a panoramic view of bookkeeping and accounting
Figure 1-1 presents a panoramic view of bookkeeping and accounting for businesses and other entities that carry on business activities. This brief overview can’t do justice to all the details of bookkeeping and accounting, of course. But it serves to clarify important differences between bookkeeping and accounting.
©John Wiley & Sons, Inc.
FIGURE 1-1: Panoramic view of bookkeeping and accounting.
Bookkeeping has two main jobs: recording the financial effects and other relevant details of the wide variety of transactions and other activities of the entity; and generating a constant stream of documents and electronic outputs to keep the business operating every day.
Accounting, on the other hand, focuses on the periodic preparation of three main types of output — reports to managers, tax returns (income tax, sales tax, payroll tax, and so on), and financial statements and reports. These outputs are completed according to certain schedules. For example, financial statements are usually prepared every month and at the end of the year (12 months).
Accounting All-In-One For Dummies, 2nd Edition is concerned predominately with financial and management accounting. Financial accounting refers to the periodic preparation of general-purpose financial statements (see Books 4 and 5). General purpose means that the financial statements are prepared according to standards established for financial reporting to stakeholders, as explained earlier in this chapter.
These financial statements are useful to managers as well, but managers need more information than is reported in the external financial statements of a business. Much of this management information is confidential and not for circulation outside the business. Management accounting refers to the preparation of internal accounting reports for business managers. Management accounting is used for planning business activity (Book 6) and to make informed business decisions (Book 7).
This chapter offers a brief survey of bookkeeping and accounting, which you may find helpful before moving on to the more hands-on financial and management topics.
Wrapping Your Brain around the Accounting Cycle
Figure 1-2 presents an overview of the accounting cycle. These are the basic steps in virtually every bookkeeping and accounting system. The steps are done in the order presented, although the methods of performing the steps vary from business to business. For example, the details of a sale may be entered by scanning bar codes in a grocery store, or they may require an in-depth legal interpretation for a complex order from a customer for an expensive piece of equipment. The following is a more detailed description of each step:
Prepare source documents for all transactions, operations, and other events of the business; source documents are the starting point in the bookkeeping process.
When buying products, a business gets an invoice from the supplier. When borrowing money from the bank, a business signs a note payable, a copy of which the business keeps. When preparing payroll checks, a business depends on salary rosters and time cards. All of these key business forms serve as sources of information entered into the bookkeeping system — in other words, information the bookkeeper uses in recording the financial effects of the activities of the business.
Determine the financial effects of the transactions, operations, and other events of the business.
The activities of the business have financial effects that must be recorded — the business is better off, worse off, or affected in some way as the result of its transactions. Examples of typical business transactions include paying employees, making sales to customers, borrowing money from the bank, and buying products that will be sold to customers. The bookkeeping process begins by determining the relevant information about each transaction. The chief accountant of the business establishes the rules and methods for measuring the financial effects of transactions. Of course, the bookkeeper should comply with these rules and methods.
Make original entries of financial effects in journals, with appropriate references to source documents.
Using the source documents, the bookkeeper makes the first, or original, entry for every transaction into a journal; this information is later posted in accounts (see the next step). A journal is a chronological record of transactions in the order in which they occur — like a very detailed personal diary.
Here’s a simple example that illustrates recording a transaction in a journal. Expecting a big demand from its customers, a retail bookstore purchases, on credit, 100 copies of The Beekeeper Book from the publisher, Animal World. The books are received, a few are placed on the shelves, and the rest are stored. The bookstore now owns the books and owes Animal World $2,000, which is the cost of the 100 copies. This example focuses solely on recording the purchase of the books, not recording subsequent sales of the books and payment to Animal World.
The bookstore has established a specific inventory asset account called “Inventory–Trade Paperbacks” for books like this. And the liability to the publisher should be entered in the account “Accounts Payable–Publishers.” Therefore, the original journal entry for this purchase records an increase in the inventory asset account of $2,000 and an increase in the accounts payable account of $2,000. Notice the balance in the two sides of the transaction. An asset increases $2,000 on the one side, and a liability increases $2,000 on the other side. All is well (assuming no mistakes).
Post the financial effects of transactions to accounts, with references and tie-ins to original journal entries.
As Step 3 explains, the pair of changes for the bookstore’s purchase of 100 copies of this book is first recorded in an original journal entry. Then, sometime later, the financial effects are posted, or recorded in the separate accounts — one an asset and the other a liability. Only the official, established chart, or list of accounts, should be used in recording transactions. An account is a separate record, or page, for each asset, each liability, and so on. One transaction affects two or more accounts. The journal entry records the whole transaction in one place; then each piece is recorded in the accounts affected by the transaction. After posting all transactions, a trial balance is generated. This document lists all the accounts and their balances, as of a certain date.
The importance of entering transaction data correctly and in a timely manner cannot be stressed enough. The prevalence of data entry errors is one important reason that most retailers use cash registers that read bar-coded information on products, which more accurately captures the necessary information and speeds up data entry.
Perform end-of-period procedures — the critical steps for getting the accounting records up-to-date and ready for the preparation of management accounting reports, tax returns, and financial statements.
A period is a stretch of time — from one day (even one hour) to one month to one quarter (three months) to one year — that’s determined by the needs of the business. Most businesses need accounting reports and financial statements at the end of each quarter, and many need monthly financial statements.
Before the accounting reports can be prepared at the end of the period (see Figure 1-1), the bookkeeper needs to bring the accounts up to date and complete the bookkeeping process. One such end-of-period requirement, for example, is recording the depreciation expense for the period (see Book 3, Chapter 1 for more on depreciation).
The accountant needs to be heavily involved in end-of-period procedures and be sure to check for errors in the business’s accounts. Data entry clerks and bookkeepers may not fully understand the unusual nature of some business transactions and may have entered transactions incorrectly. One reason for establishing internal controls (see Book 2, Chapter 1) is to keep errors to an absolute minimum. Ideally, accounts should contain no errors at the end of the period, but the accountant can’t assume anything and should perform a final check for any errors.
Compile the adjusted trial balance for the accountant, which is the basis for preparing management reports, tax returns, and financial statements.
In Step 4, you see that a trial balance is generated after you post the accounting activity. After all the end-of-period procedures have been completed, the bookkeeper compiles a comprehensive listing of all accounts, which is called the adjusted trial balance. Modest-sized businesses maintain hundreds of accounts for their various assets, liabilities, owners’ equity, revenues, and expenses. Larger businesses keep thousands of accounts.
The accountant takes the adjusted trial balance and combines similar accounts into one summary amount that is reported in a financial report or tax return. For example, a business may keep hundreds of separate inventory accounts, every one of which is listed in the adjusted trial balance. The accountant collapses all these accounts into one summary inventory account presented in the balance sheet of the business. In grouping the accounts, the accountant should comply with established financial reporting standards and income tax requirements.
Close the books — bring the bookkeeping for the fiscal year just ended to a close and get things ready to begin the bookkeeping process for the coming fiscal year.
Books is the common term for a business’s complete set of accounts along with journal entries. A business’s transactions are a constant stream of activities that don’t end tidily on the last day of the year, which can make preparing financial statements and tax returns challenging. The business has to draw a clear line of demarcation between activities for the year ended and the year to come by closing the books for one year and starting with fresh books for the next year.
©John Wiley & Sons, Inc.
FIGURE 1-2: Basic steps of the accounting cycle.
Most medium-sized and larger businesses have an accounting manual that spells out in great detail the specific accounts and procedures for recording transactions. A business should regularly review its chart of accounts and accounting rules and policies and make revisions. Companies don’t take this task lightly; discontinuities in the accounting system can be major shocks and have to be carefully thought out. The remaining chapters in Book 1 lead you through the process of developing an accounting system. See Book 3 for details on adjusting and closing entries.
Chapter 2
Outlining Your Financial Road Map with a Chart of Accounts
IN THIS CHAPTER
Introducing the chart of accounts
Warming up with balance sheet accounts
Creating your own chart of accounts
Grasping the basics of debits and credits
Getting schooled in double-entry accounting
Can you imagine the mess your checkbook would be if you didn’t record each debit card transaction? If you’re like most people, you’ve probably forgotten to record a debit card purchase or two on occasion, but you certainly learn your lesson when you realize that an important payment bounces as a result. Yikes!
Keeping the books of a business can be a lot more difficult than maintaining a personal checkbook. You have to carefully record each business transaction to make sure that it goes into the right account. This careful bookkeeping gives you an effective tool for figuring out how well the business is doing financially.
You need a road map to help you determine where to record all those transactions. This road map is called the chart of accounts. This chapter introduces you to the chart of accounts and explains how to set up your chart of accounts. This chapter also spells out the differences between debits and credits and orients you to the fine art of double-entry accounting.
Setting Up Your Chart of Accounts
Cooking up a useful chart of accounts doesn’t require any secret sauce. All you need to do is list all the accounts that apply to your business. A good brainstorming session usually does the trick.
When first setting up your chart of accounts, don’t panic if you can’t think of every type of account you may need for your business. Adding to the chart of accounts at any time is very easy. Just add the account to the list and distribute the revised list to any employees who use the chart of accounts for entering transactions into the system. (Even employees not involved in bookkeeping need a copy of your chart of accounts if they code invoices or other transactions or indicate to which account those transactions should be recorded.) Accounting software makes it easy to add or delete accounts in the chart of accounts listing.
The chart of accounts usually includes at least three columns:
Account:
Lists the account names
Type:
Lists the type of account — asset, liability, equity, revenue, cost of goods sold, or expense
Description:
Contains a description of the type of transaction that should be recorded in the account
Nearly all companies also assign numbers to the accounts, to be used for coding charges. If your company is using a computerized system, the computer automatically assigns the account number. Otherwise, you need to develop your own numbering system. The most common number system is:
Asset accounts:
1000 to 1999
Liability accounts:
2000 to 2999
Equity accounts:
3000 to 3999
Revenue accounts:
4000 to 4999
Cost of goods sold accounts:
5000 to 5999
Expense accounts:
6000 to 6999
This numbering system matches the one used by computerized accounting systems, making it easy for a company to transition to automated books at some future time.
Most companies create an accumulated depreciation account and match it with each unique fixed asset account. So, if you have a fixed asset account called delivery trucks, you likely have an account called accumulated depreciation – delivery trucks. Book value is defined in Book 3, Chapter 1 as cost less accumulated depreciation. This chart of accounts approach allows management to view each asset’s original cost and the asset’s accumulated depreciation together — and calculate book value.
If you choose a computerized accounting system, one major advantage is that a number of different Charts of Accounts have been developed for various types of businesses. When you get your computerized system, whichever accounting software you decide to use, all you need to do is review its list of chart options for the type of business you run, delete any accounts you don’t want, and add any new accounts that fit your business plan.
If you’re setting up your chart of accounts manually, be sure to leave a lot of room between accounts to add new accounts. For example, number your cash in checking account 1000 and your accounts receivable account 1100. That leaves you plenty of room to add other accounts to track cash.
You can set up your chart of accounts to track the profitability of a company, a division, or specific products. Assume, for example, that you manage a sporting goods store with three departments: equipment, uniforms, and shoes. If the company revenue account is 5000, you can create revenue subaccounts for each department. For example, revenue – equipment can be account 5100; revenue – uniforms can be account 5200, and revenue – shoes can be account 5300. You can use the same process for all of your expense accounts.
Using this strategy allows you to track all revenue and expenses by department and generate financial reports to track the profitability of each department. Design your chart of accounts numbering system to make more informed business decisions.
Mulling Over Debits versus Credits
In this section, you discover the mechanism of journal entries, which you use to enter financial information into the company’s accounting software. To properly post journal entries, you need to understand debits and credits.
Writing journal entries is a major area of confusion for anyone who’s just getting started in accounting, because they involve debits and credits that are often counterintuitive. If you’re just starting out in accounting, consider reading this section more than once. After you read this section and start posting some journal entries, you’ll get the hang of it.
These rules regarding debits and credit are always true:
Debits are always on the
left.
In journal entries, debits appear to the left of credits.
Credits are always on the
right.
In journal entries, credits appear to the right of debits.
See the next section for examples of journal entries.
The following rules are also true, but with a few exceptions:
Assets and expenses are debited to add to them and credited to subtract from them. In other words, for assets and expenses, a debit
increases
the account, and a credit
decreases
it.
Liability, revenue, and equity accounts are just the opposite: These accounts are credited to add to them and debited to subtract from them. In other words, for liability, revenue, and equity accounts, a debit
decreases
the account, and a credit
increases
it, as you would expect.
This book covers three exceptions to these two rules. Treasury stock (covered in Book 4, Chapter 5), allowance for doubtful accounts (see Book 4, Chapter 3), and accumulated depreciation (Book 3, Chapter 1) are contra-accounts, which offset the balance of a related account. Other than these exceptions, these two rules hold true.
