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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Concise, easy-to-understand information on every aspect of bookkeeping
Bookkeeping For Dummies is a clear guide to tracking transactions, figuring out balance sheets, keeping ledgers or journals, creating financial statements, and operating accounts for businesses. This necessary resource offers relevant, up-to-date tax information and small business laws, so you'll have everything you need to conquer small business bookkeeping tasks. Looking for the latest on QuickBooks Online software, government reporting requirements, and keeping your data secure on the cloud? This new edition has you covered. Make sure your financial records and plans are accurate and complete—without taking too much time away from your business.
- Understand all components of a financial cycle
- Track business transactions and prepare financial reports correctly
- Save time and money by simplifying tax preparation
- Keep your data secure with QuickBooks Online and other cloud-based tools
Bookkeeping For Dummies is the perfect crash course for small business owners or employees who are tasked with bookkeeping duties.
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Seitenzahl: 500
Veröffentlichungsjahr: 2025
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Bookkeeping For Dummies®
To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Bookkeeping For Dummies Cheat Sheet” in the Search box.
Table of Contents
Cover
Table of Contents
Title Page
Copyright
Introduction
About This Book
Conventions Used in This Book
Foolish Assumptions
Beyond the Book
Icons Used in This Book
Where to Go from Here
Part 1: Basic Bookkeeping: Why You Need It
Chapter 1: So, You Want to Do the Books
Delving into Bookkeeping Basics
Recognizing the Importance of an Accurate Paper Trail
Using Bookkeeping’s Tools to Manage Daily Finances
Running Tests for Accuracy
Finally Showing Off Your Financial Success
Chapter 2: Getting Down to Bookkeeping Basics
Bookkeepers: The Record Keepers of the Business World
Wading through Basic Bookkeeping Lingo
Pedaling through the Accounting Cycle
Tackling the Big Decision: Cash-basis or Accrual Accounting
Seeing Double with Double-Entry Bookkeeping
Differentiating Debits and Credits
Chapter 3: Outlining Your Financial Road Map with a Chart of Accounts
Getting to Know the Chart of Accounts
Starting with the Balance Sheet Accounts
Tracking the Income Statement Accounts
Setting Up Your Chart of Accounts
Part 2: Keeping a Paper Trail
Chapter 4: Ledgers: A One-Stop Summary of Your Business Transactions
The Eyes and Ears of a Business
Developing Entries for the Ledger
Posting Entries to the Ledger
Adjusting for Ledger Errors
Using Computerized Transactions to Post and Adjust in the General Ledger
Chapter 5: Keeping Journals
Establishing a Transaction’s Point of Entry
When Cash Changes Hands
Managing Sales Like a Pro
Keeping Track of Purchases
Dealing with Transactions that Don’t Fit
Posting Journal Information to Accounts
Simplifying Your Journaling with Computerized Accounting
Chapter 6: Computer Options for Your Bookkeeping
Surveying Your Software Options
Setting Up Your Computerized Books
Chapter 7: Controlling Your Books, Your Records, and Your Money
Putting Controls on Your Business’s Cash
Keeping the Right Paperwork
Protecting Your Business Against Internal Fraud
Insuring Your Cash through Employee Bonding
Chapter 8: Securing Your Online Bookkeeping
Implementing Strong Password Protocols
Adding Multi-factor Authentication
Protecting Data during Transit
Managing Updates and Patches
Developing Employee Controls and Permissions
Instituting Backup Policies
Conducting Security Audits
Requiring Virtual Private Networks (VPNs) for Remote Access
Part 3: Tracking Your Day-to-Day Operations with Your Books
Chapter 9: Buying and Tracking Your Purchases
Keeping Track of Inventory
Buying and Monitoring Supplies
Staying on Top of Your Bills
Chapter 10: 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 11: 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
Outsourcing Payroll and Benefits Work
Chapter 12: Employer-Paid Taxes and Government Payroll Reporting
Paying Employer Taxes on Social Security and Medicare
Completing Unemployment Reports and Paying Unemployment Taxes
Carrying Workers’ Compensation Insurance
Maintaining Employee Records
Part 4: Preparing the Books for Year’s (or Month’s) End
Chapter 13: Depreciating Your Assets
Defining Depreciation
Reducing the Value of Assets
Tackling Taxes and Depreciation
Setting Up Depreciation Schedules
Recording Depreciation Expenses
Chapter 14: Paying and Collecting Interest
Deciphering Types of Interest
Handling Interest Income
Delving into Loans and Interest Expenses
Chapter 15: Proving Out the Cash
Why Prove Out the Books?
Making Sure Ending Cash Is Right
Closing the Cash Journals
Using a Temporary Posting Journal
Reconciling Bank Accounts
Posting Adjustments and Corrections
Chapter 16: Closing the Journals
Prepping to Close: Checking for Accuracy and Tallying Things Up
Posting to the General Ledger
Checking Out Computerized Journal Records
Chapter 17: Checking Your Accuracy — By Trial and (Hopefully) No Error
Working with a Trial Balance
Testing Your Balance Using Computerized Accounting Systems
Developing a Financial Statement Worksheet
Replacing Worksheets with Computerized Reports
Chapter 18: Adjusting the Books
Adjusting All the Right Areas
Testing Out an Adjusted Trial Balance
Changing Your Chart of Accounts
Part 5: Reporting Results and Starting Over
Chapter 19: Developing a Balance Sheet
What Is a Balance Sheet?
Gathering Balance Sheet Ingredients
Ta Da! Pulling Together the Final Balance Sheet
Putting Your Balance Sheet to Work
Generating Balance Sheets Electronically
Chapter 20: Producing an Income Statement
What Is an Income Statement?
Formatting the Income Statement
Preparing the Income Statement
Deciphering Gross Profit
Monitoring Expenses
Using the Income Statement to Make Business Decisions
Net Income-Testing Profits
Branching Out with Income Statement Data
Chapter 21: Completing Year-End Payroll and Reports
Year-End Employee Reporting
Producing 1099s for Vendors and Contractors
Filing Year-End Summaries
Chapter 22: Satisfying the Tax Man
Finding the Right Business Type
Tax Reporting for Sole Proprietors
Filing Tax Forms for Partnerships
Paying Corporate Taxes
Taking Care of Sales Taxes Obligations
Chapter 23: Prepping the Books for a New Accounting Cycle
Finalizing the General Ledger
Conducting Special Year-End Bookkeeping Tasks
Starting the Cycle Anew
Part 6: The Part of Tens
Chapter 24: Top Ten Ways to Manage Your Business Cash with Your Books
Charting the Way
Balancing Your Entries
Posting Your Transactions
Tracking Customer Collections
Paying Bills Accurately and On Time
Planning Profits
Comparing Budget to Actual Expenses
Comparing Sales Goals to Actual Sales
Tracking Cost Trends
Making Pricing Decisions
Chapter 25: Top Ten (Okay, Eleven) Most Important Accounts for Any Bookkeeper
Cash
Accounts Receivable
Inventory
Accounts Payable
Loans Payable
Sales
Purchases
Payroll Expenses
Office Expenses
Owner’s Equity
Retained Earnings
Glossary
Index
About the Author
Connect with Dummies
End User License Agreement
List of Tables
Chapter 2
TABLE 2-1 How Credits and Debits Impact Your Accounts
Chapter 9
TABLE 9-1 Comparison of Gross Profit Based on Inventory Valuation Method
Chapter 11
TABLE 11-1 Portion of an IRS Tax Table for Employers
Chapter 12
TABLE 12-1 Filing Requirements for Employer’s Quarterly Federal Tax Return (Form...
TABLE 12-2 Sampling of Unemployment Tax Rates
Chapter 13
TABLE 13-1 Depreciation Recovery Periods for Business Equipment
Chapter 14
TABLE 14-1 Credit Card Interest Calculation
TABLE 14-2 Six-Month Amortization Chart for Truck Payments
Chapter 15
TABLE 15-1 Bank Reconciliation
Chapter 16
TABLE 16-1 Aging Summary: Accounts Receivable as of March 31, 2024
TABLE 16-2 Aging Summary: Accounts Payable as of March 31, 2014
Chapter 19
TABLE 19-1 Balance Sheet Accounts
Chapter 22
TABLE 22-1 Comparison of Tax Obligations for Sole Proprietors
List of Illustrations
Chapter 2
FIGURE 2-1: The accounting cycle.
Chapter 3
FIGURE 3-1: The top portion of a sample Chart of Accounts.
Chapter 4
FIGURE 4-1: Summarizing cash transactions so they can be posted to the General ...
FIGURE 4-2: Summarizing sales transactions so they can be posted to ...
FIGURE 4-3: Summarizing goods to be sold transactions so they can be posted to ...
FIGURE 4-4: Summarizing miscellaneous transactions so they can be posted to the...
FIGURE 4-5: Cash account in the General Ledger.
FIGURE 4-6: Accounts Receivable account in the General Ledger.
FIGURE 4-7: Accounts Payable account in the General Ledger.
FIGURE 4-8: Sales account in the General Ledger.
FIGURE 4-9: Quick Link to a Chart of Accounts as it appears in QuickBooks.
FIGURE 4-10: A peek inside the Accounts Payable account in QuickBooks.
Chapter 5
FIGURE 5-1: The first point of entry for incoming cash is the Cash Receipts jou...
FIGURE 5-2: The first point of entry for outgoing cash is the Cash Disbursement...
FIGURE 5-3: The first point of entry for sales made on store credit is the Sale...
FIGURE 5-4: The first point of entry for purchases bought on credit is the Purc...
FIGURE 5-5: The point of entry for miscellaneous transactions is the General jo...
FIGURE 5-6: Summary of Cash Receipts journal entries after the first five days.
FIGURE 5-7: Customer Payment entry form.
FIGURE 5-8: List of bills to be paid.
FIGURE 5-9: Customer Invoice entry form.
Chapter 6
FIGURE 6-1: QuickBooks generates a Chart of Accounts based on the type of busin...
FIGURE 6-2: QuickBooks allows you to bring in bank transactions manually or aut...
Chapter 7
FIGURE 7-1: A business voucher check is used by many businesses that manually w...
FIGURE 7-2: Computer-printed checks usually pre-print the business’s name. This...
Chapter 9
FIGURE 9-1: Recording of the receipt of inventory with a bill using QuickBooks.
FIGURE 9-2: Setting up an Inventory Item using QuickBooks.
Chapter 10
FIGURE 10-1: Example of a sales receipt in QuickBooks.
FIGURE 10-2: QuickBooks sales invoice for purchases made on store credit.
FIGURE 10-3: Generating statements for customers using QuickBooks.
FIGURE 10-4: In QuickBooks, recording payments from customers who bought on sto...
FIGURE 10-5: With QuickBooks you can generate an Aging Summary report in second...
Chapter 11
FIGURE 11-1: You must file IRS Form SS-4 to get an Employer Identification Numb...
FIGURE 11-2: IRS Form W-4 should be completed by all employees when they’re hir...
FIGURE 11-3: U.S. employers must verify a new hire's eligibility to work in the...
FIGURE 11-4: Employers must file Form 941 to report taxes collected on behalf o...
FIGURE 11-5: Form 941 (continued).
Chapter 12
FIGURE 12-1: Employers report their FUTA tax on Form 940. This is page 1.
FIGURE 12-2: Page 2 of Form 940.
Chapter 15
FIGURE 15-1: Using QuickBooks, you can easily generate reports showing your com...
FIGURE 15-2: Using QuickBooks, you can produce reports showing your company’s a...
FIGURE 15-3: When you start the reconciliation process in QuickBooks, you indic...
Chapter 16
FIGURE 16-1: A sample Accounts Receivable journal summary.
FIGURE 16-2: QuickBooks lets you run reports concerning what you owe.
FIGURE 16-3: When you run an Accounts Payable Detail report in QuickBooks, you ...
FIGURE 16-4: In QuickBooks, you can run a series of reports that summarize cust...
FIGURE 16-5: A computerized accounting system keeps a journal of all transactio...
Chapter 17
FIGURE 17-1: A sample trial balance.
FIGURE 17-2: The For My Accountant section of the QuickBooks Reports page provi...
FIGURE 17-3: A sample trial balance report produced by QuickBooks.
FIGURE 17-4: This sample worksheet shows the first step in developing a company...
FIGURE 17-5: The Business Overview on the Reports page in QuickBooks gives you ...
Chapter 18
FIGURE 18-1: Record a Bad Debt using the Credit Memo In Quickbooks Online.
Chapter 21
FIGURE 21-1: Sample W-2 Wage and Tax Statement for the 2025 tax year.
FIGURE 21-2: Sample W-3, Transmittal of Wage and Tax Statements.
FIGURE 21-3: QuickBooks guides you through the process of generating 1099 forms...
FIGURE 21-4: Sample 1099 Miscellaneous Income for contractors and vendors.
FIGURE 21-5: Sample of Form 1096 for submitting 1099s and other forms for repor...
FIGURE 21-6: Sample of Form 945 for submitting a summary of all federal tax wit...
Chapter 22
FIGURE 22-1: Sole proprietors report business income and expenses on the first ...
FIGURE 22-2: Sole proprietors report Cost of Goods Sold as well as business veh...
FIGURE 22-3: Use Schedule SE to report net profit from your business in order t...
FIGURE 22-4: Calculate self-employment tax for Social Security and Medicare on ...
FIGURE 22-5: Use Form 8832 to change the IRS classifications of your small busi...
FIGURE 22-6: Your partnership must file an informational form called Schedule K...
FIGURE 22-7: On the first page of Schedule E, you report income from rental rea...
FIGURE 22-8: On the second page of Schedule E, you report income and expenses f...
FIGURE 22-9: Florida requires you to file a monthly Sales and Use Tax Return to...
FIGURE 22-10: Page 2 of the Florida Sales and Use Tax Return lists special sale...
Chapter 23
FIGURE 23-1: Set the closing date for your accounts in QuickBooks.
Guide
Cover
Table of Contents
Title Page
Copyright
Begin Reading
Glossary
Index
About the Author
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Bookkeeping For Dummies®, 3rd Edition
Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com
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Published simultaneously in Canada
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Library of Congress Control Number: 2025936529
ISBN 978-1-394-34979-1 (pbk); ISBN 978-1-394-34981-4 (ebk); ISBN 978-1-394-34980-7 (ebk)
Introduction
Bookkeepers manage all the financial data for small companies. If you subscribe to the idea that information is power (which I do), you’ll agree that the bookkeeper has a tremendous amount of power within a company. Information tracked in the books helps business owners make key decisions involving sales planning, hiring and product offerings and manage many other financial aspects of their business.
If it weren’t for the hard work of bookkeepers, companies wouldn’t have a good idea about what happens with their financial transactions. Without accurate financial bookkeeping, a company owner wouldn’t know how many sales were made, how much cash was collected, or how much cash was paid for the products sold to customers during the year. They also wouldn’t know how much cash was paid to employees or how much cash was spent on other business needs throughout the year. In other words, accurate and consistent bookkeeping is the most effective way to keep track of a business’s cash flow.
Accurate and complete financial bookkeeping is crucial to any business owner, but it’s also important to those who work with the business, such as investors, financial institutions, and employees. People both inside (managers, owners, and employees) and outside the business (investors, lenders, and government agencies) all depend on the bookkeeper’s accurate recording of financial transactions.
Yes, the bookkeeper’s job is critical and requires certain skills and talents. Bookkeepers must be detail-oriented, enjoy working with numbers, and be meticulous about accurately entering those numbers in the books. They must also be vigilant about keeping a paper trail and filing all needed backup information about the financial transactions entered into the books.
Whether you’re a business owner keeping the books yourself or an employee keeping the books for a small business owner, your job is critical for the smooth financial operation of the company.
About This Book
In this book, I introduce you to the key aspects of bookkeeping and how to set up and use your financial books. I walk you through the basics of bookkeeping, starting with the process of setting up your company’s books and developing
A list of your company’s accounts, called the Chart of Accounts.
Your company’s General Ledger, which summarizes all the activity in a company’s accounts.
Your company’s journals, which give details about all your financial transactions.
Then, I take you through the process of recording all your transactions — sales, purchases, and other financial activity. I also talk about how to manage payroll, governmental reporting, and external financial reporting.
Finally, I show you how to start the yearly cycle all over again by closing out the necessary accounts for the current year and opening up any new ones for the next year.
Yes, bookkeeping is a continuous cycle starting with financial transactions, recording those transactions in journals, posting those transactions to the General Ledger, testing your books to be sure that they’re in balance, making any necessary adjustments or corrections to the books to keep them in balance, preparing financial reports to understand how well the business did during the year, and finally getting ready to start the process all over again for the next year.
You find out all about this cycle, starting with Chapter 2 and following the bookkeeping journey through closing out the year and getting ready for the next year in Chapter 23.
I’ve included a number of examples of how to apply the basics of bookkeeping to real-life situations. If you’re primarily reading this book to gain a general knowledge of the subject and don’t need to delve into all the nitty-gritty, day-to-day aspects of bookkeeping, you may want to skip over the paragraphs marked with the Example icon (see the section “Icons Used in This Book” later in this Introduction). Skipping the examples shouldn’t interfere with your grasp of the key aspects of how to keep the books.
I use QuickBooks Online throughout this book, so I will show you some of its advanced features where appropriate.
Conventions Used in This Book
To help you find your way around in the book, I use the following conventions:
Italics
are used both to emphasize a word to make a sentence clearer and to highlight a new word that’s being defined.
Bold
highlights keywords in bulleted lists.
Foolish Assumptions
While writing this book, I made some key assumptions about who you are and why you’ve picked up this book to get a better understanding of bookkeeping. I assume that you are
A business owner who wants to know how to do your own books. You have a good understanding of business and its terminology but have little or no knowledge of bookkeeping and accounting.
A person who does bookkeeping or plans to do bookkeeping for a small business and needs to know more about how to set up and keep the books. You have some basic knowledge of business terminology but don’t know much about bookkeeping or accounting.
A staff person in a small business who’s just been asked to take over the company’s bookkeeping duties. You need to know more about how transactions are entered into the books, how to prove out transactions to be sure that you’re making entries correctly and accurately, and how to prepare financial reports using the data you collect.
Beyond the Book
In addition to what you’re reading right now, this product also comes with a free access-anywhere Cheat Sheet, where you can see the building blocks for a successful bookkeeping system, key steps for keeping the books, and tips on controlling your business cash and calculating and testing cash flow. To get this Cheat Sheet, simply go to www.dummies.com and enter “Bookkeeping For Dummies Cheat Sheet” in the Search box.
Icons Used in This Book
This book contains icons that point to the type of information you’re reading.
Look to this icon for ideas on how to improve your bookkeeping processes and use the information in the book to manage your business.
This icon marks anything I want you to recall about bookkeeping after you’ve finished reading this book.
Who doesn’t love a little technical jargon? I’ve pulled out these paragraphs so you can understand the technical aspects of bookkeeping without getting overwhelmed.
This icon points out any aspect of bookkeeping that comes with dangers or perils that may hurt the accuracy of your entries or the way in which you use your financial information in the future. I also use this icon to mark certain things that can get you into trouble with the government, your lenders, your vendors, your employees, or your investors.
Where to Go from Here
Can you feel the excitement? You’re now ready to enter the world of bookkeeping! Because of the way Bookkeeping For Dummies, 3rd Edition is set up, you can start anywhere you like.
If you need the basics or if you’re a little rusty and want to refresh your knowledge of bookkeeping, start with Part I. However, if you already know bookkeeping basics, are familiar with the key terminology, and know how to set up a Chart of Accounts, consider diving into Part II.
If you’ve set up your books already and feel comfortable with the basics of bookkeeping, you may want to start with Part III on how to enter various transactions. On the other hand, if your priority is using the financial information you’ve already collected, check out the financial reporting options in Part V.
Part 1
Basic Bookkeeping: Why You Need It
IN THIS PART …
Introducing you to the world of bookkeeping
Exploring bookkeeping basics
Developing your financial road map
Chapter 2
Getting Down to Bookkeeping Basics
IN THIS CHAPTER
Keeping business records
Navigating the accounting cycle
Choosing between cash-basis and accrual accounting
Deciphering double-entry bookkeeping
All businesses need to keep track of their financial transactions — that’s why bookkeeping and bookkeepers are so important. Without accurate records, how can you tell whether your business is making a profit or taking a loss?
In this chapter, I cover the key parts of bookkeeping by introducing you to the language of bookkeeping, familiarizing you with how bookkeepers manage the accounting cycle, and showing you how to understand the most difficult type of bookkeeping — double-entry bookkeeping.
Bookkeepers: The Record Keepers of the Business World
Bookkeeping, the methodical way in which businesses track their financial transactions, is rooted in accounting. Accounting is the total structure of records and procedures used to record, classify, and report information about a business’s financial transactions. Bookkeeping involves the recording of that financial information into the accounting system while maintaining adherence to solid accounting principles.
Bookkeepers are the ones who toil day in and day out to ensure that transactions are accurately recorded. Bookkeepers need to be very detail-oriented and love to work with numbers because numbers and the accounts they go into are just about all these people see all day. A bookkeeper is not required to be a certified public accountant (CPA).
Many small businesspeople who are just starting up their businesses initially serve as their own bookkeepers until the business is large enough to hire someone dedicated to keeping the books. Few small businesses have accountants on staff to check the books and prepare official financial reports; instead, they have bookkeepers on staff who serve as the outside accountants’ eyes and ears. Most businesses do seek an accountant with a CPA certification.
In many small businesses today, a bookkeeper enters the business transactions on a daily basis while working inside the company. At the end of each month or quarter, the bookkeeper sends summary reports to the accountant, who then checks the transactions for accuracy and prepares financial statements.
In most cases, the accounting system is initially set up with the help of an accountant in order to be sure it uses solid accounting principles. That accountant periodically stops by the office and reviews the system to be sure transactions are being handled properly.
Accurate financial reports are the only way you can know how your business is doing. These reports are developed using the information you, as the bookkeeper, enter into your accounting system. If that information isn’t accurate, your financial reports are meaningless. As the old adage goes, “Garbage in, garbage out.”
Wading through Basic Bookkeeping Lingo
Before you can take on bookkeeping and start keeping the books, the first things you must get a handle on are key accounting terms. The following is a list of terms that all bookkeepers use on a daily basis.
Note: This isn’t an exhaustive list of all the unique terms you need to know as a bookkeeper. For full coverage of bookkeeping terminology, turn to the Glossary at the back of the book.
Accounts for the balance sheet
Here are a few terms you’ll want to know:
Balance sheet: The financial statement that presents a snapshot of the company’s financial position (assets, liabilities, and equity) as of a particular date in time. It’s called a balance sheet because the things owned by the company (assets) must equal the claims against those assets (liabilities and equity).
On an ideal balance sheet, the total assets should equal the total liabilities plus the total equity. If your numbers fit this formula, the company’s books are in balance. (I discuss the balance sheet in greater detail in Chapter 19.)
Assets:
All the things a company owns in order to successfully run its business, such as cash, buildings, land, tools, equipment, vehicles, and furniture.
Liabilities:
All the debts the company owes, such as bonds, loans, and unpaid bills.
Equity:
All the money invested in the company by its owners. In a small business owned by one person or a group of people, the owner’s equity is shown in a Capital account. In a larger business that’s incorporated, the owner’s equity is shown in shares of stock. Another key Equity account is
Retained Earnings,
which tracks all company profits that have been reinvested in the company rather than paid out to the company’s owners. Small, unincorporated businesses track money paid out to owners in a Drawing account, whereas incorporated businesses dole out money to owners by paying
dividends
(a portion of the company’s profits paid by the share of common stock for the quarter or year).
Accounts for the income statement
Here are a few terms related to the income statement that you’ll want to know:
Income statement:
The financial statement that presents a summary of the company’s financial activity over a certain period of time, such as a month, quarter, or year. The statement starts with revenue earned, subtracts out the costs of goods sold and the expenses, and ends with the bottom line — net profit or loss. (I will show you how to develop an income statement in
Chapter 20
.)
Revenue:
All money collected in the process of selling the company’s goods and services. Some companies also collect revenue through other means, such as selling assets the business no longer needs or earning interest by offering short-term loans to employees or other businesses. (I discuss how to track revenue in
Chapter 10
.)
Costs of goods sold:
All money spent to purchase or make the products or services a company plans to sell to its customers. (I talk about purchasing goods for sale to customers in
Chapter 9
.)
Expenses:
All money spent to operate the company that’s not directly related to the sale of individual goods or services. (I review common types of expenses in
Chapter 3
.)
Other common terms
Some other common terms include the following:
Accounting period:
The time for which financial information is being tracked. Most businesses track their financial results on a monthly basis, so each accounting period equals one month. Some businesses choose to do financial reports on a quarterly basis, so the accounting periods are three months. Other businesses only look at their results on a yearly basis, so their accounting periods are 12 months. Businesses that track their financial activities monthly usually also create quarterly and
annual reports
(a year-end summary of the company’s activities and financial results) based on the information they gather.
Accounts Receivable:
The account used to track all customer sales that are made by store credit.
Store credit
refers not to credit card sales but rather to sales for which the customer is given credit directly by the store and the store needs to collect payment from the customer at a later date. (I discuss how to monitor Accounts Receivable in
Chapter 10
.)
Accounts Payable:
The account used to track all outstanding bills from vendors, contractors, consultants, and any other companies or individuals from whom the company buys goods or services. (I talk about managing Accounts Payable in
Chapter 9
.)
Depreciation:
An accounting method used to track the aging and use of assets. For example, if you own a car, you know its value value is reduced each year you use it (unless you own one of those classic cars that goes up in value). Every major asset a business owns ages and eventually needs replacement, including buildings, factories, equipment, and other key assets. (I discuss how you monitor depreciation in
Chapter 13
.)
General Ledger:
Where all the company’s accounts are summarized. The General Ledger is the granddaddy of the bookkeeping system. (I discuss posting to the General Ledger in
Chapter 4
.)
Interest:
The money a company needs to pay if it borrows money from a bank or other company. For example, when you buy a car using a car loan, you must pay not only the amount you borrowed but also additional money, or interest, based on a percentage of the amount you borrowed. (I discuss how to track interest expenses in a business’s books in
Chapter 14
.)
Inventory:
The account that tracks all products that will be sold to customers. (I review inventory valuation and control in
Chapter 9
.)
Journals:
Where bookkeepers keep records (in chronological order) of daily company transactions. Each of the most active accounts, including cash, Accounts Payable, and Accounts Receivable, has its own journal. (I discuss entering information into journals in
Chapter 5
.)
Payroll:
The way a company pays its employees. Managing payroll is a key function of the bookkeeper and involves reporting many aspects of payroll to the government, including taxes to be paid on behalf of the employee, unemployment taxes, and workers’ compensation. (I discuss employee payroll in
Chapter 11
and the government side of payroll reporting in
Chapter 12
.)
Trial balance:
How you test to be sure the books are in balance before pulling together information for the financial reports and closing the books for the accounting period. (I discuss how to do a trial balance in
Chapter 17
.)
Pedaling through the Accounting Cycle
As a bookkeeper, you complete your work by completing the tasks of the accounting cycle. It’s called a cycle because the workflow is circular: entering transactions, manipulating the transactions through the accounting cycle, closing the books at the end of the accounting period, and then starting the entire cycle again for the next accounting period.
The accounting cycle has eight basic steps, which you can see in Figure 2-1.
Transactions:
Financial transactions start the process. Transactions can include the sale or return of a product, the purchase of supplies for business activities, or any other financial activity that involves the exchange of the company’s assets, the establishment or payoff of a debt, or the deposit from or payout of money to the company’s owners. All sales and expenses are transactions that must be recorded. I cover transactions in greater detail throughout the book as I discuss the basics of documenting business activities — recording sales, purchases, and assets, taking on new debt, or paying off debt.
FIGURE 2-1: The accounting cycle.
Journal entries:
The transaction is listed in the appropriate journal, maintaining the journal’s chronological order of transactions. (The journal is also known as the “book of original entry” and is the first place a transaction is listed.) I talk more about journal entries in
Chapter 5
.
Posting:
The transactions are posted to the account that it impacts. These accounts are part of the General Ledger, where you can find a summary of all the business’s accounts. I discuss posting in
Chapters 4
and
5
.
Trial balance:
At the end of the accounting period (which may be a month, quarter, or year, depending on your business’s practices), you calculate a trial balance.
Worksheet:
Unfortunately, many times, your first calculation of the trial balance shows that the books aren’t in balance. If that’s the case, you look for errors and make corrections called
adjustments,
which are tracked on a worksheet. Adjustments are also made to account for the depreciation of assets and to adjust for one-time payments (such as insurance) that should be allocated on a monthly basis to more accurately match monthly expenses with monthly revenues. After you make and record adjustments, you take another trial balance to be sure the accounts are in balance.
Adjusting journal entries:
You post any corrections needed to the affected accounts once your trial balance shows the accounts will be balanced after the adjustments needed are made to the accounts. You don’t need to make adjusting entries until the trial balance process is completed and all needed corrections and adjustments have been identified.
Financial statements:
You prepare the balance sheet and income statement using the corrected account balances.
Closing: You close the books for the revenue and expense accounts and begin the entire cycle again with zero balances in those accounts.
As a businessperson, you want to be able to gauge your profit or loss on month-by-month, quarter-by-quarter, and year by year bases. To do that, Revenue and Expense accounts must start with a zero balance at the beginning of each accounting period. In contrast, you carry over Asset, Liability, and Equity account balances from cycle to cycle because the business doesn’t start each cycle by getting rid of old assets and buying new assets, paying off and then taking on new debt, or paying out all claims to owners and then collecting the money again.
Tackling the Big Decision: Cash-basis or Accrual Accounting
Before starting to record transactions, you must decide whether to use cash-basis or accrual accounting. The crucial difference between these two processes is in how you record your cash transactions.
Waiting for funds with cash-basis accounting
With cash-basis accounting, you record all transactions in the books when cash actually changes hands, meaning when cash payment is received by the company from customers or paid out by the company for purchases or other services. Cash receipt or payment can be in the form of cash, check, credit card, electronic transfer, or other means used to pay for an item.
Cash-basis accounting can’t be used if a store sells products on store credit and bills the customer at a later date. There is no provision to record and track money due from customers at some time in the future in the cash-basis accounting method. That’s also true for purchases. With the cash-basis accounting method, the owner only records the purchase of supplies or goods that will later be sold when he actually pays cash. If he buys goods on credit to be paid later, he doesn’t record the transaction until the cash is actually paid out.
MAKING THE SWITCH TO ACCRUAL ACCOUNTING
Changing between the cash-basis and accrual basis of accounting may not be simple, and you should check with your accountant to be sure you do it right. You may even need to get permission from the IRS, which tests whether you’re seeking an unfair tax advantage when making the switch. You must even complete the IRS form Change in Accounting Method (Form 3115) within 180 days before the end of the year for which you make this change. You don’t need to fill out Form 3115 if your business activity is changing fundamentally. For example, if you started as a service business and shifted to a business that carries inventory, you probably won’t need permission for the accounting method change.
Businesses that should never use cash-basis accounting include
Businesses that carry an inventoryBusinesses that incorporated as a C corporation (more on incorporation in Chapter 22)Businesses with gross annual sales that exceed $5 million
