DIVISION OF ECONOMIC DEVELOPMENT REGIONAL BUSINESS DEVELOPMENT OFFICE
Paper Bookkeeping
MANUAL BOOKKEEPING OR “PAPER” BOOKKEEPING IS A PRACTICAL METHOD FOR FINANCIAL RECORDS MANAGEMENT
Thursday, May 3, 2007 1:00 PM – 4:00 PM
REGIONAL BUSINESS DEVELOPMENT OFFICE NAVAJO NATION SHOPPING CENTER SUITE 2 SHIPROCK, NEW MEXICO
THE ACCOUNTING SYSTEM IN FIVE STEPS
1. Every accounting entry is based on a business transaction, which is usually evidenced by a business document, such as a check or a sales invoice.
2. A journal is a place to record the transactions of a business.
3. While a journal records transactions as they happen, a ledger groups transactions according to their type, based on the accounts they affect. The general ledger is a collection of all balance sheet, income, and expense accounts used to keep a business’s accounting records. At the end of an accounting period, all journal entries are summarized and transferred to the general ledger accounts. This procedure is called “posting.”
4. A trial balance is prepared at the end of an accounting period by adding up all the account balances in your general ledger. The sum of the debit balances should equal the sum of the credit balances. If the total debits don’t equal total credits, you must track down the errors.
5. Finally, the financial statements are prepared from the information in your trial balance. 1
Navajo Nation Department of Economic Development (DED)
Paper Bookkeeping
WELCOME
Paper Bookkeeping
1:00 PM - 5:00 PM Thursday, May 3, 2007
Please Sign In and Be Seated
We Will Begin Shortly
Welcome Shiprock - Regional Business Development Office (RBDO) Randolph Sells, Program Manager
Rose Morgan, Sally Begay, Senior Economic Senior Economic Development Specialist Development Specialist
Henry Silentman, Eva Begaye, Office Economic Development Specialist Specialist
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Paper Bookkeeping
Definitions --Bookkeeping “The art of recording business transactions in a regular, systematic manner” --Paper Bookkeeping “The art of recording business transactions in a regular, systematic manner using only paper and manual tools, no automatic processes, i.e. computer”
Paper Bookkeeping
Why is bookkeeping important?
Who should know basic bookkeeping concepts and processes?
Introduction
How to keep financial records of your financial transactions
How to use your financial records
Practical Overview of the Bookkeeping Function
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Agenda
History and Overview
Accounting Principles and Elements
“Debt and Credit”
Transaction Characteristics
Agenda (Cont’d)
Chart of Accounts
Transactions Examples
Reconciliation of Accounts
Financial Statements
Case Study – Work Session
-- Bilagaana Trading Co. --
History
Who Started keeping books? Why?
Isolation vs. Interaction
Your
Company
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History (Cont’d)
Bookkeeping has a standard
Financial Accounting Standards Board (FASB)
--1973 – FASB was formed
-- Generally Accepted Accounting Principles (G.A.A.P.)
--International Accounting Standards Board (IASB)
Internal Revenue Service (IRS)
Your Fiscal Relationship with the US Government
US Government Your Company
Recordkeeping for the IRS
Tax Preparation (IRS) Audits
Government
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Recordkeeping for the IRS
IRS Recordkeeping Requirements Clearly shows your income and expenses It will enable you to file a correct return Orderly Traceable
Government
Overview
Lender Requirements Honest Representation of Revenue, Expenses, Profit, and Cash Flow RMA – Risk Management Association, formerly
Roberts Management Lenders Association
Overview
z May require a specific method of accounting z Record of transaction z Orderly transfer of funds
Suppliers Customers
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Overview
z Management tool z Decision-Making Your z Identify problems Company z Financial statements z Forecasting
Vocabulary
z Journal z Debit z Credit z Ledger z Account z Reconciliation
Cash vs. Accrual
Accounting/Bookkeeping Systems
Cash Accrual
-- Impact of Events Not -- Impact of Events Recognized until Cash is Recognized as They Occur Paid or Received
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Debit vs. Credit
z Resource (owned by the company) vs. Source(s) (of the resource) z Active Account vs. Passive Account z “T” Account – An aid to visualize how the transaction affects the different accounts
“T” Account
Debit Credit
“T” Account Cash Account Debit Credit
Bal 04/01 $100.00
04/10 $25.00
Bal 04/15 $125.00
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“T” Account City Market Account Debit Credit
Bal 04/01 $30.00
04/11 $25.00
Bal 04/15 $55.00
Kinds of Transactions
z Cash Sales z Credit Sales z Accounts Receivable z Accounts Payable z Receipts z Payments z Payroll z Purchases z Depreciation z Accounting Entries (Adjusting Entries)
Transaction
z Date z Account Number (X2, if double-entry) z Amount (X2, if double-entry) z Memo
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Chart of Accounts
z What do you want your Chart of Accounts to Include? z The ability to track accounts you want to track z Sales Accounts for each line of products or range of service z Do not track each product’s sales
Chart of Accounts
z Assets – (100s) z Liabilities – (200s) z Owner Equity – (300s) z Revenue – (400s) z Cost of Goods Sold (500s) z Expenses – (600s)
Journal
z Diary of the business’s financial activity z Double-entry vs. Single-entry z “Cash Disbursement Journal” z “General Ledger”
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Double-Entry vs. Single-Entry
Accounting/Bookkeeping Systems Single-Entry Double-Entry -- One journal entry for -- Two journal entries for each transaction each transaction -- Records only Active -- Reconciliation – Errors Account easy to find -- Reconciliation -- Checks and Balances -- “The Basis of a True Accounting System”
“T” Account Cash Account Debit Credit
Bal 04/01 $100.00
04/10 $25.00
Bal 04/15 $125.00
“T” Account City Market Account Debit Credit
Bal 04/01 $30.00
04/11 $25.00
Bal 04/15 $55.00
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“T” Account
Debit Credit
“T” Account
Debit = Credit
“T” Account Cash Account Debit Credit
Bal 04/15 $125.00
04/22 $39.00
Bal 04/30 $86.00
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“T” Account City Market Account Debit Credit
Bal 04/15 $55.00
04/22 $39.00
Bal 04/30 $16.00
Ledger
z A record of transactions specific to one account (i.e. Cash account, Accounts Payable account) z Chart of accounts
Account Reconciliation
z What is Reconciliation/Posting? z Why do we Reconcile? z How Often do we Reconcile? z Single Entry vs. Double Entry z Trial Balance – Sum of totals from all ledger accounts z Adjusting Entries
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Adjusting Entries
z End-of-Period adjustments z May require assistance of an accountant z Requires judgment and some accounting knowledge z Record the adjusting entries in the general journal at the end of the accounting period
Transactions Requiring Adjusting Entries
z Prepaid Insurance z Depreciation z Inventory (FIFO, LIFO) z Accrued Wages z Adjustments for Bad Debts z Refresh the Ledger Account Balance for Accounts Receivable and Accounts Payable
Financial Statements
z Balance Sheet z Income Statement z Cash Flow Statement
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Balance Sheet
z Snapshot of your company’s net worth at one point in time z Resources Owned (Assets) z Resources Owed (Liabilities) z Investment and Past Profits (Owner Equity) z Assets = Liabilities + Owner Equity
Income Statement
z A Summary of Company’s results during a Period of Time z Sales (Revenue) z Payments (Expenses) z Reports Net Income and Loss for the Period
Cash Flow Statement
z A Summary of inflows and outflows of cash during a period of time z Reports Cash Receipts and Cash Payments z Find the Cash position at a certain point in time z Combines Income and Balance Sheet (Asset) Accounts Activity
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Bilagaana Trading Co.
z At the beginning of April, Matt Bilagaana opened a trading post selling Jewelry.
z Matt Bilagaana had had some accounting at the local college and he is going to do his own bookkeeping.
Chart of Accounts for Bilagaana Trading Co.
ASSETS REVENUE
110 Cash 410 Sales, Squash Blossoms 120 Squash Blossoms, Inventory 411 Sales, Rings 125 Rings, Inventory 130 Pre-Paid Insurance COST OF GOODS SOLD
LIABILITIES 510 Cost of Goods Sold, Squash Blossoms 520 Cost of Goods Sold, Rings 210 Nakai Trading Co. 211 Ohtsáad Trading Co. EXPENSES
OWNER EQUITY 610 Advertising Expense 620 Miscellaneous 310 Matthew Bilagaana, Capital 630 Rent Expense 311 Matthew Bilagaana, Drawing 640 Utilities Expense 615 Insurance Expense 635 Supplies Expense
Instructions
Bilagaana Trading Co. uses a monthly accounting cycle Record Bilagaana Trading Co.’s transactions for July on a general journal form.
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Summary
z Bookkeeping – a logical method for organizing your small business’s finances
z Uses of bookkeeping data
How to apply your new skills
z Analyze a transaction z Identify the affected accounts z Identify how the accounts are affected z Use “T” accounts to visualize transaction z Use the memo field to record information effectively
Useful Websites
z Small business assistance, useful tips and suggestions for a wide variety of small business issues www.sba.gov
z Federal tax forms, Small business accounting guidelines, www.irs.gov
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More Useful Websites
z Small business information website. Resource provider through its small business owner’s toolkit by CCH, Inc. www.toolkit.cch.com
z Small business resource website www.businesstown.
Even More Useful Websites
z Canadian Website for small business bookkeeping or bookkeeper referral www.bookkeeperlist.com
Questions and Discussion
Page 17 Shiprock RBDO Practice problem for the “Paper Bookkeeping” Workshop
Chart of Accounts for Bilagaana Trading Co.
ASSETS REVENUE
110 Cash 410 Sales, Squash Blossoms 120 Squash Blossoms, Inventory (beginning 411 Sales, Rings 10 Squash Blossoms @ $200 each) 125 Rings, Inventory (beginning 10 Rings @ COST OF GOODS SOLD $25 each) 130 Pre-Paid Insurance 510 Cost of Goods Sold, Squash Blossoms 520 Cost of Goods Sold, Rings LIABILITIES EXPENSES 210 Nakai Trading Co. 211 Ohtsáad Trading Co. 04/01 Bal. $1,200 610 Advertising Expense 620 Miscellaneous OWNER EQUITY 630 Rent Expense 640 Utilities Expense 310 Matthew Bilagaana, Capital 615 Insurance Expense 311 Matthew Bilagaana, Drawing 635 Supplies Expense
Bilagaana Trading Co. uses a monthly accounting cycle
Instructions
1. Record Bilagaana Trading Co.’s transactions for April on a general journal form.
Transactions: April 2 Received cash from owner as an April 20 Paid cash on account to investment, $12,750 Ohtsáad Trading Co., $500 3 Paid cash for rent, $600 20 Received cash from sales (5 5 Paid cash for insurance, $600 Squash Blossoms), $2500 6 Received cash from sales (2 Squash 25 Paid cash for 8 Squash Blossoms), $1000 Blossoms, $1,600 9 Paid cash for miscellaneous expenses, 27 Paid cash for 5 Rings, $125 $50 27 Received cash from sales (3 11 Paid cash for 2 Squash Blossoms, $400 Squash Blossoms, 6 Rings) 13 Bought 8 Rings on account from Nakai $1,800 Trading Co., $200 30 Paid cash to owner for personal 13 Received cash from sales (4 Rings), $200 use, $400 16 Paid cash for electric bill, $100 30 Received cash from sales (4 18 Paid cash for advertising, $150 Rings), $200
2. Reconcile the journal 5. Trial Balance 3. Reconcile the cash account. Beginning 6. Adjusting entries balance on April 1 is $0. 7. Prepare the monthly financial statements 4. Post the transactions to the ledger accounts General JOURNAL Page ____ of ____
POST DATE DESCRIPTION DEBIT CREDIT REF
1 Apr 01 120 - Squash Blossoms - Inventory $2,000.00 1
2 211 - Ohstáad Trading Co. $1,200.00 2
3 310 - Matthew Bilagaana, Capital $800.00 3
4 bought squash blossoms on credit; adjusting entry 4
5 Apr 01 125 - Rings, Inventory $250.00 5
6 310 - Matthew Bilagaana, Capital $250.00 6
7 Adjusting Entry for Inventory Investment 7
8 Apr 02 101 - Cash $12,750.00 8
9 310 - Matthew Bilagaana, Capital $12,750.00 9
10 received cash from owner 10
11 Apr 03 630 - Rent $600.00 11
12 101 - Cash $600.00 12
13 April Rent 13
14 Apr 05 615 - Insurance Expense $100.00 14
15 130 - Pre-Paid Insurance $500.00 15
16 101 - Cash $600.00 16
17 Apr 06 101 - Cash $1,000.00 17
18 410 Sales - Squash Blossoms $1,000.00 18
19 Apr 09 620 - Miscellaneous Expense $50.00 19
20 101 - Cash $50.00 20
21 Apr 11 120 - Squash Blossoms - Inventory $400.00 21
22 101 - Cash $400.00 22
23 Apr 13 125 - Rings, Inventory $200.00 23
24 210 - Nakai Trading Co. $200.00 24
25 Apr 13 101 - Cash $200.00 25
26 411 - Sales, Rings $200.00 26
27 Apr 16 640 - Utilities Expense $100.00 27
28 101 - Cash $100.00 28 29 Apr 18 610 - Advertising Expense $150.00 29
30 101 - Cash $150.00 30
31 Apr 20 211 - Ohstáad Trading Co. $500.00 31
32 101 - Cash $500.00 32
33 Apr 20 101 - Cash $2,500.00 33
34 410 - Sales, Squash Blossoms $2,500.00 34
35 Apr 25 120 - Squash Blossoms - Inventory $1,600.00 35
36 101 - Cash $1,600.00 36
37 Apr 27 125 - Rings, Inventory $125.00 37
38 101 - Cash $125.00 38
39 Apr 27 101 - Cash $1,800.00 39
40 410 - Sales, Squash Blossoms $1,500.00 40
41 411 - Sales, Rings $300.00 41
42 Apr 30 311 - Matthew Bilagaana, Drawing $400.00 42
43 101 - Cash $400.00 43
44 Apr 30 101 - Cash $200.00 44
45 411 - Sales, Rings $200.00 45
46 May 01 310 - Matthew Bilagaana, Capital $400.00 46
47 311 - Matthew Bilagaana, Drawing $400.00 47
48 May 01 510 - Cost of Goods Sold, Squash Blossoms $1,000.00 48
49 120 - Squash Blossoms, Inventory $1,000.00 49
50 May 01 520 - Cost of Goods Sold, Rings $350.00 50
51 125 - Rings, Inventory $350.00 51
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60 60 Bilagaana Trading Co. "T"accounts - April 2007
Cash101 Squash Blossoms, Inv. 120 04/01 $0 04/01 $2,000 04/02 $12,750 04/11 $400 04/03 $600 04/25 $1,600 04/05 $600 05/01 $1,000 04/06 $1,000 04/09 $50 04/11 $400 04/13 $200 04/16 $100 04/18 $150 04/20 $500 04/20 $2,500 04/25 $1,600 04/27 $125 04/27 $1,800 04/30 $400 04/30 $200
05/01 $13,925 05/01 $3,000
Rings, Inv.125 Prepaid Insurace 130 04/01 $250 04/01 $0 04/13 $200 04/05 $500 04/27 $125 05/01 $350
05/01 $225 05/01 $500.00
Nakai Trading Co.210 Ohtsáad Trading Co. 211 04/01 $0 04/01 $1,200 04/13 $200 04/20 $500
05/01 $200 05/01 $700
Matthew Bilagaana, Capital310 Matthew Bilagaana, Drawing 311 04/01 $800 04/01 $0 04/01 $250 04/30 $400 04/02 $12,750 05/01 $400 05/01 $400
05/01 $13,400 05/01 $0 Sales, Squash Blossoms410 Sales, Rings 411 04/01 $0 04/01 $0 04/06 $1,000 04/10 $200 04/20 $2,500 04/27 $300 04/27 $1,500 04/30 $200
05/01 $5,000 05/01 $700
CGS, Squash Blossoms510 Cost of Goods Sold, Rings 520 04/01 $0 04/01 $0 05/01 $1,000 05/01 $350
05/01 $1,000 05/01 $350
Advertising Expense610 Miscellaneous Expense 620 04/01 $0 04/01 $0 04/18 $150 04/09 $50
05/01 $150 05/01 $50
Rent Expense630 Utilities Expense 640 04/01 $0 04/01 $0 04/03 $600 04/16 $100
05/01 $600 05/01 $100
Insurance Expense615 Supplies Expense 635 04/01 $0 04/01 $0 04/05 $100
05/01 $100 05/01 $0 101 Cash Account JOURNAL Page ____ of ____
POST DATE DESCRIPTION DEBIT CREDIT REF
1 Apr 02 101 - Cash $12,750.00 1
2 Apr 03 101 - Cash $600.00 2
3 Apr 05 101 - Cash $600.00 3
4 Apr 06 101 - Cash $1,000.00 4
5 Apr 09 101 - Cash $50.00 5
6 Apr 11 101 - Cash $400.00 6
7 Apr 13 101 - Cash $200.00 7
8 Apr 16 101 - Cash $100.00 8
9 Apr 18 101 - Cash $150.00 9
10 Apr 20 101 - Cash $500.00 10
11 Apr 20 101 - Cash $2,500.00 11
12 Apr 25 101 - Cash $1,600.00 12
13 Apr 27 101 - Cash $125.00 13
14 Apr 27 101 - Cash $1,800.00 14
15 Apr 30 101 - Cash $400.00 15
16 Apr 30 101 - Cash $200.00 16
17 $18,450.00 $4,525.00 17
18 18
19 May 01 Total $13,925.00 19
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28 28 Trial Balance as of 05-01-07 JOURNAL Page ____ of ____
POST DATE DESCRIPTION DEBIT CREDIT REF
1 May 01 101 - Cash $13,925.00 1
2 120 - Squash Blossoms, Inventory $3,000.00 2
3 125 - Rings, Inventory $225.00 3
4 130 - Prepaid Insurance $500.00 4
5 210 - Nakai Trading Co. $200.00 5
6 211 - Ohtsaad Trading Co. $700.00 6
7 310 - Matthew Bilagaana, Capital $13,400.00 7
8 311 - Matthew Bilagaana, Drawing $0.00 8
9 410 - Sales, Squadh Blossoms $5,000.00 9
10 411 - Sales, Rings $700.00 10
11 510 - Cost of Goods Sold, Squash Blossoms $1,000.00 11
12 520 - Cost of Goods Sold, Rings $350.00 12
13 610 - Advertising Expense $150.00 13
14 620 - Miscelaneous Expense $50.00 14
15 630 - Rent Expense $600.00 15
16 640 - Utilities Expense $100.00 16
17 615 - Insurance Expense $100.00 17
18 635 - Supplies Expense $0.00 18
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20 $20,000.00 $20,000.00 20
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29 29 Bookkeeping From Wikipedia, the free encyclopedia
Bookkeeping (also commonly referred to as book-keeping, book keeping or bookeeping) is the recording of all financial transactions undertaken by a business (or an individual). A bookkeeper (or book-keeper), sometimes called an accounting clerk in the US, is a person who keeps the books of an organization. The organization might be a business, a charity or even a local sports club. Two methods are widely in use: single-entry accounting system and double-entry bookkeeping system.
The system most commonly used in bookkeeping is the double-entry bookkeeping system. A bookkeeper is usually responsible for writing up the "daybooks". The daybooks consist of purchase, sales, receipts and payments. The bookkeeper is responsible for ensuring that all transactions are recorded in the correct daybook, suppliers ledger, customer ledger and general ledger. The bookkeeper will bring the books to the trial balance stage for a financial accountant. This accountant will prepare the profit and loss statement and balance sheet using the trial balance and ledgers prepared by the bookkeeper.
Bookkeeping can also consist of simply listing payments on a page, e.g. recording deposits received from people (single entry bookkeeping).
Bookkeeping is an essential part of any business. Without bookkeeping no accounting information can be compiled. Bookkeeping is the first level of financial data gathering.
Manual bookkeeping system
Books, daybooks, and ledgers are the mainstay of manual entry bookkeeping. The picture of a person leaning over a big leather bound ledger, with an ink quill pen in their hand, portrays the historical image of the bookkeeper performing their bookkeeping entries. The painstaking accuracy required to ensure that a bookkeeping system was kept properly may have attracted the type of person who was unfairly portrayed as "boring" or a perfectionist. The skillset required to be a bookkeeper requires accuracy and perfectionism. A knowledge of debits and credits ensured that the bookkeeper understood how any financial transactions would affect the financial presentation of a company's accounts. An invoice received or a cheque paid out were recorded in the correct daybooks by the bookkeeper and transferred to the relevant nominal ledger account.
The computerisation of bookkeeping
The computerisation of Bookkeeping has removed many of the "Books" that were used to record transactions. Computer software has de-skilled the job of a bookkeeper and opened it up to more people. The software ensures that no entries are omitted from the ledger by performing the automatic double entry of every transaction. Computer software has also improved the speed at which the bookkeeping can be performed.
Online bookkeeping is a new chapter in the field of bookkeeping, where source documents and data reside in web-based applications which allow remote access to bookkeepers and accountants.
Trivia
Bookkeeping, bookkeeper, and its other derivatives, are the only non-hyphenated words in the English language to feature three consecutive double-letter pairs. Subbookkeeper is the only word to feature four consecutive double-letter pairs.
External links
• Bookkeeping Explanation with examples. GLOSSARY
ACCOUNTING EQUATION: assets = liabilities + owner’s equity. The accounting equation is the basis for the financial statement called the balance sheet.
ACCOUNTS PAYABLE: Also called A/P, accounts receivable are the bills your business owes to suppliers.
ACCOUNTS RECEIVABLE: Also called A/R, accounts receivable are the amounts owed to you by your customers.
ACCRUAL METHOD OF ACCOUNTING: With the accrual method, you record income when the sale occurs, not necessarily when you receive payment. You record an expense when you receive the goods or services, even though you may not pay for them until later.
ADJUSTING ENTRIES: Special accounting entries that must be made when you close the books at the end of an accounting period. Adjusting entries are necessary to update your accounts for items that are not recorded in your daily transactions.
AGING REPORT: An aging report is a list of customers’ accounts receivable amounts and their due dates. It alerts you to any slow-paying customers. You can also prepare an aging report for your accounts payable, which will help you manage your outstanding bills.
ALLOWANCE FOR BAD DEBTS: Also called reserve for bad debts, it is an estimate of uncollectible customer accounts. It is known as a “contra” account because it is listed with the assets, but it will have a credit balance instead of a debit balance. For balance sheet purposes, it is a reduction of accounts receivables.
ASSETS: Things of value held by the business. Assets are balance sheet accounts. Examples of assets are cash, accounts receivable, and furniture and fixtures.
BALANCE SHEET: Also called a statement of financial position, it is a financial “snapshot” of your business at a given date in time. It lists your assets, your liabilities, and the difference between the two, which is your equity, or net worth.
CAPITAL: Money invested in the business by the owners. Also called equity.
CASH METHOD OF ACCOUNTING: If you use the cash method, you record income only when you receive cash from your customers. You record an expense only when you write the check to the vendor.
CHART OF ACCOUNTS: The list of account titles you use to keep your accounting records.
CLOSING: Closing the books refers to procedures that take place at the end of the accounting period. Adjusting entries are made, and then the income and expense accounts are “closed.” The net profit that results from the closing of the incomes and expense accounts is transferred to an equity account such as retained earnings.
COST OF GOODS SOLD: Cost of inventory items sold to your customers. It may consist of several cost components, such as merchandise purchase costs, freight, and manufacturing costs.
CREDITS: At least one component if every accounting transaction (journal entry) is a credit. Credits increase liabilities and equity and decrease assets.
CURRENT ASSETS: Assets that are in the form of cash or will generally be converted to cash or used up within one year. Examples are accounts receivable and inventory.
CURRENT LIABILITIES: Liabilities payable within one year. Examples are accounts payable and payroll taxes payable.
DEBIT MEMO: Billing a customer again. A debit memo would be required, for example, when a customer has made a payment on their account by check, but the check bounced.
DEBITS: At least one component of every accounting transaction (journal entry) is a debit. Debits increase assets and decrease liabilities and equity.
DEPRECIATION: An annual write-off of a portion of the cost of fixed assets, such as vehicle and equipment. Depreciation is listed among the expenses on the equipment expenses.
DOUBLE-ENTRY ACCOUNTING: In double-entry accounting, every transaction has two journal entries: a debit and a credit. Debits must always equal credits. Double-entry accounting is the basis of a true accounting system.
DRAWING ACCOUNT: A general ledger account used by some sole proprietorships and partnerships to keep track of amounts drawn out of business by an owner.
EQUITY: The net worth of your company. Also called owner’s equity or capital. Equity comes from investment in the business by the owners, plus accumulated net profits that have not been paid out to the owners. Equity accounts are balance sheet accounts.
EXPENSE ACCOUNTS: These are the accounts you use to keep track of the costs of doing business: where the money goes. Examples are advertising, payroll taxes, and wages. Expenses are income statement accounts.
FIXED ASSETS: Assets that are generally not converted to cash within one year. Examples are equipment and vehicles.
FOOT: To total the amounts in a column, such as a column in a journal or a ledger.
GENERAL LEDGER: A general ledger is a collection of all balance sheet, income, and expense accounts used to keep the accounting records of a business.
INCOME ACCOUNTS: These are the accounts you use to keep track of your sources of income. Examples are merchandise sales, consulting revenue, and interest income.
INCOME STATEMENT: Also called a profit and loss statement or a “P&L.” It lists your incomes, espenses, and net profit (or loss). The net profit (or loss) is equal to your income minus your expenses.
INVENTORY: Goods you hold for sale to customers. Inventory can be merchandise you buy for resale, or it can be merchandise you manufacture or process, selling the end product to the customer.
JOURNAL: The chronological, day-to-day transactions of a business are recorded in sales, cash receipts, and cash disbursements journals. A general journal is used to enter period end adjusting and closing entries and other special transactions not entered in the other journals. In a traditional, manual accounting system, each of these journals is a collection of multi-column spreadsheets usually contained in a hardcover binder.
LIABILITIES: What your business owes creditors. Liabilities are balance sheet accounts. Examples are accounts payable, payroll taxes payable, and loans payable.
LONG-TERM LIABILITIES: Liabilities that are not due within one year. An example would be a mortgage payable.
MERCHANDISE INVENTORY: Goods held for sale to customers.
NET INCOME: Also called profit or net profit, it is equal to income minus expenses. Net income is the bottom line of the income statement.
POST: To summarize all journal entries and transfer them to the general ledger accounts. This is done at the end of an accounting period.
PREPAID EXPENSES: Amounts you have paid in advance to a vendor or creditor for goods and services. A prepaid expense is actually an asset of your business because your vendor or supplier owes you the goods or services. An example would be the unexpired portion of an annual insurance premium.
PREPAID INCOME: Also called unearned revenue, it represents money you have received in advance of providing a service to your customer. Prepaid income is actually a liability of your business because you still owe the service to the customer. An example would be an advance payment to you for some consulting services you will be performing in the future.
PROFIT AND LOSS STATEMENT: Also called an income statement or (P&L.” It lists your income, expenses, and net profit (or loss.. The net profit (or loss) is equal to your income minus your expenses.
RESERVE FOR BAD DEBTS: Also called allowance for bad debts, it is a, estimate of uncollectible customer accounts. It is known as a “contra” account because it is listed with the assets, but it will have a credit balance instead of a credit balance. For balance sheet purposes, it is a reduction of accounts receivable.
RETAINED EARNINGS: Profits of the business that have not been paid to the owners; profits that have been “retained” in the business. Retained earnings is an “equity account” that Is presented on the balance sheet and on the statement of changes in owners’ equity.
SOLE PROPRIETORSHIP: An unincorporated business with only one owner.
TRIAL BALANCE: A trial balance is prepared at the end of an accounting period by adding up all the account balances in your general ledger. The debit balances should equal the credit balances. EXPENSES
INCREASES DECREASES
OWNER EQUITY INCOME
DECREASES INCREASES DECREASES INCREASES
Chart of Accounts z Assets – (100s) z Liabilities – (200s) z Owner Equity – (300s) z Revenue – (400s) z Cost of Goods Sold – (500s)
z Expenses – (600s) LIABILITIES ASSETS
DECREASES INCREASES INCREASES DECREASES
COST OF GOODS SOLD
INCREASES DECREASES