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Lita Epstein

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Beschreibung

The easy way to get a handle on bookkeeping Accurate and complete 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. Bookkeeping For Dummies provides the easy and painless way to master this critical skill. You'll get clear and concise information on keeping track of transactions, figuring out balance sheets, keeping ledgers or journals, creating financial statements, and operating accounts for businesses, along with practices and examples to hone your skills. Plus, the bonus CD includes samples of bookkeeping forms, working papers, letters, resources, and spreadsheets. * Keeping track of transactions * Figuring out the balance sheet * Keeping a ledger and journal * Creating financial statements * Operating accounts for businesses * Recognizing assets and liabilities * Up-to-date tax information * Changes in small business regulations * Additional and complementary examples * Demonstration problems * True/false and multiple-choice questions and scenarios Whether you're a professional or a student looking to expand your skills, Bookkeeping Kit For Dummies is a one-stop resource for anyone interested in this ever-growing occupation.

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Bookkeeping Kit For Dummies®

Visit www.dummies.com/cheatsheet/bookkeepingkit to view this book's cheat sheet.

Table of Contents

Introduction
About This Book
Conventions Used in This Book
Foolish Assumptions
What You’re Not to Read
How This Book Is Organized
Part I: Basic Bookkeeping: Why You Need It
Part II: Keeping a Paper Trail
Part III: Tracking Day-to-Day Business Operations with Your Books
Part IV: Preparing the Books for Year’s (or Month’s) End
Part V: Reporting Results and Starting Over
Part VI: The Part of Tens
Part VII: Appendixes
Icons Used in This Book
Where to Go From Here
Part I: Basic Bookkeeping: Why You Need It
Chapter 1: So You Want to Do the Books
Delving Into Bookkeeping Basics
Picking your accounting method
Understanding assets, liabilities, and equity
Introducing debits and credits
Charting your bookkeeping course
Recognizing the Importance of an Accurate Paper Trail
Maintaining a ledger
Keeping journals
Consider computerizing
Instituting internal controls
Using Bookkeeping’s Tools to Manage Daily Finances
Maintaining inventory
Tracking sales
Handling payroll
Running Tests for Accuracy
Proving out your cash
Testing your balance
Doing bookkeeping corrections
Finally Showing Off Your Financial Success
Preparing financial reports
Paying taxes
Chapter 2: Getting Down to Bookkeeping Basics
Bookkeepers: The Record Keepers of the Business World
Basic Bookkeeping Lingo
Accounts for the balance sheet
Accounts for the income statement
Other common bookkeeping terms
Practice: Account Basics
Pedaling through the Accounting Cycle
Tackling the Big Decision: Cash-Basis or Accrual Accounting
Waiting for funds with cash-basis accounting
Recording right away with accrual accounting
Practice: Accrual versus Cash Accounting
Seeing Double with Double-Entry Bookkeeping
Differentiating Debits and Credits
Practice: Double-Entry Accounting
Answers to Problems on the Basics
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
Tackling assets
Laying out your liabilities
Eyeing the equity
Tracking the Income Statement Accounts
Recording the money you make: Revenue
Tracking the cost of sales
Acknowledging the money you spend: Expense accounts
Setting Up Your Chart of Accounts
Part II: Keeping a Paper Trail
Chapter 4: The General Ledger: A One-Stop Summary of Your Business Transactions
The Eyes and Ears of a Business: Looking at the General Ledger
Developing Entries for the Ledger
Practice: Summaries for General Ledger
Posting Entries to the Ledger
The Cash account
The Accounts Receivable account
The Accounts Payable account
The balance sheet
The Sales account
Adjusting for Ledger Errors
Practice: Posting to the General Ledger
Using Computerized Transactions to Post and Adjust in the General Ledger
Answers to Problems on Ledgers
Chapter 5: Keeping Journals
Establishing a Transaction’s Point of Entry
When Cash Changes Hands: Juggling the Cash Accounts Journals
Keeping track of incoming cash
Following outgoing cash
Practice: Cash Receipts and Cash Disbursements Journals
Managing Sales Like a Pro
Practice: Sales Journals
Keeping Track of Purchases
Practice: Purchases Journal
Dealing with Transactions that Don’t Fit the Big Four
Practice: General Journal
Posting Journal Information to Accounts
Simplifying Your Journaling with Computerized Accounting
Answers to Problems on Keeping Journals
Chapter 6: Computer Options for Your Bookkeeping
Surveying Your Software Options
Bookkeeper
QuickBooks
Sage Peachtree Complete Accounting
Setting Up Your Computerized Books
Customizing software to match your operations
Converting your manual bookkeeping to a computerized system
Chapter 7: Controlling Your Books, Your Records, and Your Money
Putting Controls on Your Business’s Cash
Checking accounts
Savings accounts
Petty cash accounts
Cash registers
Practice: Cash Controls
Keeping the Right Paperwork
Creating a filing system
Figuring out what to keep and for how long
Protecting Your Business Against Internal Fraud
Facing the reality of financial fraud
Dividing staff responsibilities
Balancing control costs
Practice: Internal Controls
Insuring Your Cash through Employee Bonding
Answers to Problems on Controlling Your Books, Records, and Money
Part III: Tracking Day-to-Day Business Operations with Your Books
Chapter 8: Buying and Tracking Your Purchases
Keeping Track of Inventory
Entering initial cost
Managing inventory and its value
Practice: Working with Inventory and Calculating Cost of Goods Sold
Buying and Monitoring Supplies
Staying on Top of Your Bills
Keeping tasks separate
Developing a system for Accounts Payable
Paying early if it benefits you
Practice: Calculating Discounts
Answers to Problems on Buying and Tracking Your Purchases
Chapter 9: Counting Your Sales
Collecting on Cash Sales
Discovering the value of sales receipts
Recording cash transactions in the books
Practice: Recording Sales in the Books
Selling on Credit
Deciding whether to offer store credit
Recording store credit transactions in the books
Practice: Sales on Store (Direct) Credit
Proving Out the Cash Register
Practice: Proving Out
Tracking Sales Discounts
Practice: Recording Discounts
Recording Sales Returns and Allowances
Practice: Tracking Sales Returns and Allowances
Monitoring Accounts Receivable
Practice: Aging Summary
Accepting Your Losses
Answers to Counting Your Sales
Chapter 10: Employee Payroll and Benefits
Setting the Stage for Staffing: Making Payroll Decisions
Completing government forms
Picking pay periods
Determining wage and salary types
Collecting Employee Taxes
Sorting out Social Security tax
Making sense of Medicare tax
Figuring out federal withholding tax
Settling up state and local withholding taxes
Determining Net Pay
Practice: Payroll Tax Calculations
Surveying Your Benefits Options
Tax-exempt benefits
Taxable benefits
Dealing with cafeteria plans
Preparing Payroll and Posting It in the Books
Calculating payroll for hourly employees
Doling out funds to salaried employees
Totaling up for commission checks
Determining base salary plus tips
Practice: Payroll Preparation
Finishing the Job
Depositing Employee Taxes
Outsourcing Payroll and Benefits Work
Answers to Problems on Employee Payroll and Benefits
Chapter 11: Employer-Paid Taxes and Government Payroll Reporting
Paying Employer Taxes on Social Security and Medicare
Filing Form 941
Knowing how often to file
Completing Unemployment Reports and Paying Unemployment Taxes
Examining how states calculate the FUTA tax rate
Calculating FUTA tax
Filing and paying unemployment taxes to state governments
Practice: Calculating FUTA Tax
Carrying Workers’ Compensation Insurance
Maintaining Employee Records
Answers to Problems on Employer-Paid Taxes and Government Payroll Reporting
Part IV: Preparing the Books for Year’s (Or Month’s) End
Chapter 12: Depreciating Your Assets
Defining Depreciation
Knowing what you can and can’t depreciate
Figuring out the useful life of a fixed asset
Delving into cost basis
Practice: Calculating Cost Basis
Reducing the Value of Assets
Sharing the cost evenly: Straight-Line depreciation
Starting stronger: Sum-of-Years-Digits depreciation
Decreasing more quickly: Double-Declining Balance depreciation
Accounting for varying output: Units of Production depreciation
Practice: Calculating Depreciation
Tackling Taxes and Depreciation
Section 179
MACRS
Setting Up Depreciation Schedules
Recording Depreciation Expenses
Answers to Problems on Depreciating Your Assets
Chapter 13: Paying and Collecting Interest
Deciphering Types of Interest
Simple interest
Compound interest
Practice: Calculating Simple and Compound Interest
Handling Interest Income
Delving Into Loans and Interest Expenses
Short-term debt
Long-term debt
Practice: Calculating and Recording Credit and Long-Term Debt Payments
Answers to Problems on Paying and Collecting Interest
Chapter 14: Proving Out the Cash
Why Prove Out the Books?
Making Sure Ending Cash Is Right
Closing the Cash Journals
Finalizing cash receipts
Finalizing cash outlays
Practice: Closing the Cash Journals
Using a Temporary Posting Journal
Reconciling Bank Accounts
Tracking down errors
Using a computerized system
Posting Adjustments and Corrections
Answers to Problems on Proving Out the Cash
Chapter 15: Closing the Journals
Prepping to Close: Checking for Accuracy and Tallying Things Up
Paying attention to initial transaction details
Summarizing journal entries
Analyzing summary results
Planning for cash flow
Posting to the General Ledger
Checking Out Computerized Journal Records
Chapter 16: Checking Your Accuracy by Trial and (Hopefully No) Error
Working with a Trial Balance
Conducting your trial balance
Dealing with trial balance errors
Practice: Preparing a Trial Balance
Testing Your Balance with Computerized Accounting Systems
Developing a Financial Statement Worksheet
Replacing Worksheets with Computerized Reports
Answers to Problem on Checking Your Accuracy
Chapter 17: Adjusting the Books
Adjusting All the Right Areas
Depreciating assets
Allocating prepaid expenses
Counting inventory
Allowing for bad debts
Recognizing unpaid salaries and wages
Practice: Adjusting for Certain Expenses and Inventory
Testing Out an Adjusted Trial Balance
Changing Your Chart of Accounts
Answers to Problems on Adjusting the Books
Part V: Reporting Results and Starting Over
Chapter 18: Developing a Balance Sheet
Gathering Balance Sheet Ingredients
Dividing and listing your assets
Acknowledging your debts
Naming your investments
Ta Da! Pulling Together the Final Balance Sheet
Account format
Report format
Financial Position format
Practice: Formatting Balance Sheets
Putting Your Balance Sheet to Work
Testing your cash
Assessing your debt
Practice: Calculating Balance Sheet Ratios
Generating Balance Sheets Electronically
Answers to Developing a Balance Sheet
Chapter 19: Producing an Income Statement
What’s an Income Statement?
Formatting the Income Statement
Preparing the Income Statement
Finding Net Sales
Finding Cost of Goods Sold
Drawing the remaining amounts from your worksheet
Gauging your Cost of Goods Sold in a manufacturing environment
Practice: Calculating Net Sales and Cost of Goods Sold
Deciphering Gross Profit
Monitoring Expenses
Using the Income Statement to Make Business Decisions
Testing Profits
Return on Sales
Return on Assets
Return on Equity
Practice: Calculating ROS, ROA, and ROE
Branching Out with Income Statement Data
Answers to Producing an Income Statement
Chapter 20: Completing Year-End Payroll and Reports
Tackling Year-End Employee Reporting
Sending in wage reports
Producing 1099s for Vendors and Contractors
Filing Year-End Summaries
Chapter 21: Satisfying the Tax Man
Finding the Right Business Type
Sole proprietorship
Partnership
Limited Liability Companies (LLCs)
Corporations
Tackling Tax Reporting for Sole Proprietors
Filing Tax Forms for Partnerships
Paying Corporate Taxes
Reporting for an S corporation
Reporting for a C corporation
Taking Care of Sales Taxes Obligations
Chapter 22: Prepping the Books for a New Accounting Cycle
Finalizing the General Ledger
Zeroing out income statement accounts
Carrying over balance sheet accounts
Conducting Special Year-End Bookkeeping Tasks
Checking customer accounts
Assessing vendor accounts
Deleting accounts
Starting the Cycle Anew
Part VI: The Part of Tens
Chapter 23: 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
Looking at Sales Goals against Actual Sales
Monitoring Cost Trends
Making Pricing Decisions
Chapter 24: The Ten (Plus One) Most Important Accounts for Any Bookkeeper
Cash
Accounts Receivable
Inventory
Accounts Payable
Loans Payable
Sales
Purchases
Payroll Expenses
Office Expenses
Owners’ Equity
Retained Earnings
Part VII: Appendixes
Appendix A: Glossary
Appendix B: About the CD
Software
Chapter files
EULA
Cheat Sheet
Download CD/DVD Content

Bookkeeping Kit For Dummies®

by Lita Epstein

Bookkeeping Kit For Dummies®

Published by John Wiley & Sons, Inc.111 River St. Hoboken, NJ 07030-5774 www.wiley.com

Copyright © 2012 by John Wiley & Sons, Inc., Hoboken, New Jersey

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

Trademarks: Wiley, the Wiley logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com, Making Everything Easier, and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc., and/or its affiliates in the United States and other countries, and may not be used without written permission. All other trademarks are the property of their respective owners. John Wiley & Sons, Inc., is not associated with any product or vendor mentioned in this book.

Limit of Liability/Disclaimer of Warranty: The publisher and the author make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation warranties of fitness for a particular purpose. No warranty may be created or extended by sales or promotional materials. The advice and strategies contained herein may not be suitable for every situation. This work is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If professional assistance is required, the services of a competent professional person should be sought. Neither the publisher nor the author shall be liable for damages arising herefrom. The fact that an organization or Website is referred to in this work as a citation and/or a potential source of further information does not mean that the author or the publisher endorses the information the organization or Website may provide or recommendations it may make. Further, readers should be aware that Internet Websites listed in this work may have changed or disappeared between when this work was written and when it is read.

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Library of Congress Control Number: 2011945571

ISBN 978-1-118-11645-6 (pbk); ISBN 978-1-118-22437-3 (ebk); ISBN 978-1-118-23770-0 (ebk); ISBN 978-1-118-24217-9 (ebk)

Manufactured in the United States of America

10 9 8 7 6 5 4 3 2 1

About the Author

Lita Epstein, who earned her MBA from Emory University’s Goizueta Business School, 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 ran the accounting lab. After completing her MBA, she managed finances for a small nonprofit organization and for the facilities management section of a large medical clinic.

She designs and teaches online courses on topics such as accounting, reading financial reports, and investing. She’s written more than 25 books, including Reading Financial Reports For Dummies and The Business Owner’s Guide to Reading and Understanding Financial Reports (Wiley).

Lita blogs periodically for AOL’s Daily Finance and Real Estate. 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.

Dedication

To my father, Jerome Kirschbrown, who taught me the importance of accounting, bookkeeping, and watching every detail.

Author’s Acknowledgments

I want to take this opportunity to thank all the people who have helped make this book a reality. In particular, I want to thank the wonderful folks at Wiley who shepherded this project to completion, especially Stacy Kennedy and Tim Gallan. Finally, I want to thank my agent, Jessica Faust at BookEnds, who helps find all my book projects, and my husband, who’s learned to stay out of the way when I’m on a deadline.

Publisher’s Acknowledgments

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Some of the people who helped bring this book to market include the following:

Acquisitions, Editorial, and Vertical Websites

Senior Project Editor: Tim Gallan

Acquisitions Editor: Stacy Kennedy

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Assistant Editor: David Lutton

Editorial Program Coordinator: Joe Niesen

Editorial Manager: Michelle Hacker

Editorial Assistants: Rachelle S. Amick, Alexa Koschier

Vertical Websites: Jenny Swisher

Cover Photos: © iStockphoto.com / pagadesign

Cartoons: Rich Tennant (www.the5thwave.com)

Compositions Services

Project Coordinator: Katie Crocker

Layout and Graphics: Lavonne Roberts, Corrie Socolovitch

Proofreader: Cynthia Fields

Indexer: Glassman Indexing Services

Publishing and Editorial for Consumer Dummies

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Kristin Ferguson-Wagstaffe, Product Development Director

Ensley Eikenburg, Associate Publisher, Travel

Kelly Regan, Editorial Director, Travel

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Debbie Stailey, Director of Composition Services

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 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 any clue about what happens with their financial transactions. Without accurate financial bookkeeping, a company owner wouldn’t know how many sales the company made, how much cash it collected, or how much cash it paid for the products sold to customers during the year. He also wouldn’t know how much cash he paid to employees or spent on other business needs throughout the year.

Accurate and complete financial bookkeeping is crucial to any business owner, but it’s also important to those who work with the business, including investors, financial institutions, and employees. People both inside (managers, owners, and employees) and outside the business (investors, lenders, and employees in government agencies) all depend on the bookkeeper’s accurate recording of financial transactions.

Yes, the bookkeeper’s job is crucial and requires certain skills and talents. Bookkeepers must be detailed-oriented, enjoy working with numbers, and be meticulous about accurately entering those numbers in the books. They must 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 Bookkeeping Kit For Dummies, 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. Along the way, I include practice exercises that help you get a feel for the various bookkeeping tasks.

Yes, bookkeeping is a continuous cycle that runs from making, recording, and posting financial transactions to testing and adjusting/correcting your books to preparing financial reports and 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 22.

Conventions Used in This Book

I use QuickBooks Pro 2011 throughout this book. This program is the basic level of QuickBooks for use in your business; you can also find online and more-advanced versions. I point out features not available in QuickBooks Pro.

Additionally, I use a few formatting conventions to make the text easy for you to navigate:

New words are italicized and accompanied by an easy-to-understand definition.

Bold text highlights keywords in bulleted lists and indicates the active parts of numbered steps.

Websites appear in monofont. During the book’s layout, some URLs may have broken over two lines. Where this break happens, I haven’t added any extra characters such as hyphens; just type the address into your browser exactly as you see it.

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’re

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 you’re making entries correctly and accurately, and how to prepare financial reports by using the data you collect.

What You’re Not to Read

Throughout Bookkeeping Kit For Dummies, I’ve included some gray shaded boxes of information that may be fun and/or helpful but that isn’t essential to your understanding of the topic at hand. If you’re short on time, you can skip these sidebars without losing vital information. You can also bypass text marked with a Technical Stuff icon; these bits go into more detail than is necessary for your grasp on the key aspects of how to keep the books.

How This Book Is Organized

Bookkeeping Kit For Dummies is divided into seven parts to make it easy to access. Here’s how it breaks down:

Part I: Basic Bookkeeping: Why You Need It

In Part I, I discuss the importance of bookkeeping, explain how it works, and help you get started with setting up your company’s books. I also touch on the terms that are unique to bookkeeping and tell you how to set up the road map for your books, the Chart of Accounts.

Part II: Keeping a Paper Trail

In Part II, I explain how you enter your financial transactions in the books, how you post transactions to your General Ledger (the granddaddy of your bookkeeping system), and how you track all the transaction details in your journals. I also give tips for developing a good internal control system for managing your books and your company’s cash and talk about your options if you decide to computerize your bookkeeping.

Part III: Tracking Day-to-Day Business Operations with Your Books

In Part III, I show you how to monitor your day-to-day business operations, including recording sales, purchases, and any adjustments to those sales and purchases, such as discounts and returns. In addition, I talk about the basics of setting up and managing employee payroll as well as all the government paperwork you need to complete as soon as you decide to hire employees.

Part IV: Preparing the Books for Year’s (or Month’s) End

In Part IV, I introduce you to the process of preparing your books for closing out the accounting period, whether you’re closing out the books at the end of a month or the end of a year. The closing-out process involves making key adjustments to record depreciation of your assets, and calculating and recording your interest payments and receipts in your books. This part also covers various aspects of proving out your books, from checking your cash and testing the balance of your books to making any needed adjustments or corrections.

Part V: Reporting Results and Starting Over

In Part V, I tell you how to use all the information in your books to prepare reports that show how well your company did during the month, quarter, or year. I also lay out all the paperwork you have to deal with, including year-end government reports and IRS forms. Finally, I show you how to close out the books at year-end and get ready for the next year.

Part VI: The Part of Tens

The Part of Tens is the hallmark of the For Dummies series. In this part, I highlight the top ten accounts you need to know how to manage and the ten ways you can efficiently manage your business’s cash by using your books.

Part VII: Appendixes

In this part, I give you a glossary of accounting terms used throughout the book, and I outline how to use this book’s CD.

Icons Used in This Book

For Dummies books use little pictures, called icons, to flag certain chunks of text that either you shouldn’t want to miss or you’re free to skip. The icons in Bookkeeping Kit For Dummies are as follows:

Look to this icon for ideas on how to improve your bookkeeping processes and use the information in the books to manage your business.

This icon marks anything I want you to recall about bookkeeping after you’re finished reading this book.

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.

In the practice sections, I often provide sample problems and explanations, highlighted by this icon, to give you an idea of how to tackle the rest of the practice.

This icon points you to documents and forms you can find on the book’s accompanying CD. If you are reading this text in an electronic format, please go to the table of contents for access to the additional content.

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 Kit For Dummies is set up, you can start anywhere you want.

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 in at 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 and its info 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 I

Basic Bookkeeping: Why You Need It

In this part . . .

Not sure why bookkeeping is important? In this part, I explain the basics of how bookkeeping works and help you get started with the task of setting up your books.

This part also exposes you to terms that you may already know but that have a unique meaning in the world of bookkeeping, such as ledger, journal, posting, debit, and credit. Finally, I start you on your bookkeeping journey by showing you how to set up the road map for your books, the Chart of Accounts.

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 adhering 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. Bookkeepers aren’t required to be certified public accountants (CPAs).

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 to be sure it uses solid accounting principles. That accountant periodically stops by the office and reviews the system’s use 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 by 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.”

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. What follows is a list of terms that all bookkeepers use on a daily basis.

Note: This section 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 in Appendix A.

Accounts for the balance sheet

Here are a few terms you want to know about the balance sheet:

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 18.)

Assets: All the things a company owns, such as cash, buildings, land, tools, equipment, vehicles, and furniture, in order to successfully run its business.

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, 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 share of common stock for the quarter or year).

Accounts for the income statement

These important terms related to the income statement are worth knowing:

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 show you how to develop an income statement in Chapter 19.)

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 9.)

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 8.)

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 bookkeeping 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. These businesses usually also create quarterly reports and annual reports (a year-end summary of the company’s activities and financial results) based on the information they gather. 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.

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 in which the store directly gives the customer credit and needs to collect payment from the customer at a later date. (I discuss how to monitor Accounts Receivable in Chapter 9.)

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 8.)

Depreciation: An accounting method used to track the aging and use of assets. For example, if you own a car, you know that each year you use the car, its value is reduced (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 this depreciation of assets in Chapter 12.)

General Ledger: Where all the company’s accounts are summarized. The General Ledger provides a good history of your transactions chronologically. (I discuss posting to the General Ledger in Chapter 5.)

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 by using a car loan, you must pay not only the amount you borrowed but also additional money, or interest, based on a percent of the amount you borrowed. (I discuss how to track interest expenses in a business’s books in Chapter 13.)

Inventory: The account that tracks all products that will be sold to customers. (I review inventory valuation and control in Chapter 8.)

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 4.)

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 worker’s compensation. (I discuss employee payroll in Chapter 10 and the government side of payroll reporting in Chapter 11.)

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 16.)

Practice: Account Basics

Q. Where in the books would you find cars owned by the company?

A. In an asset account that tracks vehicles owned by the company.

Q. On which statement and where in that statement would you find the value of the buildings owned by the company?

A. In the Asset section of the Balance Sheet in an account called Buildings.

1. Where in the books would you find bills due to vendors?

Solve It

2. Where in the books would you find inventory you have on hand to sell to customers?

Solve It

3. Where in the books would you find money put into the company when the owners first started the business?

Solve It

4. Where in the books would you find the mortgage that you must pay off for the store that your company owns?

Solve It

5. On which statement and where in that statement would you find the value of the mortgages due to be paid to lenders?

Solve It

6. On which statement and where in that statement would you find your business’s total sales for the year?

Solve It

7. On which statement and where in that statement would you find the total amount your business spent to purchase the products it planned to sell?

Solve It

8. On which statement and where in that statement would you find the value of the inventory your company had on hand to sell to its customers?

Solve It

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:

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 how to record the basics of business activities — recording sales, purchases, asset acquisition, or sale, taking on new debt, or paying off debt.

2. Journal entries: Each 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.

3. Posting: Each transaction is 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.

4. 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.

5. Worksheet: Unfortunately, your first calculation of the trial balance often 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.

6. Adjusting journal entries: You post any corrections needed to the affected accounts after your trial balance shows that making the needed adjustments will balance 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.

7. Financial statements: You prepare the balance sheet and income statement by using the corrected account balances.

8. 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 the company receives cash payment from customers or pays out 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, because this accounting method has no provision to record and track money due from customers at some time in the future.

That’s also true for purchases. With the cash-basis accounting method, the owner records the purchase of supplies or goods that will later be sold only 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.

Depending on the size of your business, you may want to start out with cash-basis accounting. Many small businesses run by a sole proprietor or a small group of partners use cash-basis accounting because it’s easy. But as the business grows, the business owners find it necessary to switch to accrual accounting in order to more accurately track revenues and expenses (see the nearby sidebar for more on that jump). Businesses that should never use cash-basis accounting include businesses that carry an inventory, businesses that incorporated as a C corporation (more on incorporation in Chapter 21), and businesses with gross annual sales that exceed $5 million.

Cash-basis accounting does a good job of tracking cash flow, but it does a poor job of matching revenues earned with money laid out for expenses. This deficiency is a problem particularly when, as it often happens, a company buys products in one month and sells those products in the next month. For example, you pay $1,000 cash for products in June with the intent to sell. You don’t sell the products until July, and that’s when you receive cash for the sales. When you close the books at the end of June, you have to show the $1,000 expense with no revenue to offset it, meaning you have a loss that month. When you sell the products for $1,500 in July, you have a $1,500 profit. So, your monthly report for June shows a $1,000 loss, and your monthly report for July shows a $1,500 profit, when in actuality you had revenues of $500 over the two months.

As I note in the Introduction, I concentrate on the accrual accounting method in this book. If you choose to use cash-basis accounting, don’t panic: You can still find most of the bookkeeping information here useful, but you don’t need to maintain some of the accounts I list, such as Accounts Receivable and Accounts Payable, because you aren’t recording transactions until cash actually changes hands. If you’re using a cash-basis accounting system and sell things on credit, though, you’d better have a way to track what people owe you.

Recording right away with accrual accounting

With accrual accounting, you record all transactions in the books when they occur, even if no cash changes hands. For example, if you sell on store credit, you record the transaction immediately and enter it into an Accounts Receivable account until you receive payment. If you buy goods on credit, you immediately enter the transaction into an Accounts Payable account until you pay out cash.