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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 Page 1 Shiprock RBDO 2 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 Page 2 Shiprock RBDO 3 Agenda History and Overview Accounting Principles and Elements “Cash vs. Accrual” “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 Page 3 Shiprock RBDO 4 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 Page 4 Shiprock RBDO 5 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 Page 5 Shiprock RBDO 6 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 Page 6 Shiprock RBDO 7 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 Page 7 Shiprock RBDO 8 “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 Page 8 Shiprock RBDO 9 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” Page 9 Shiprock RBDO 10 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 Page 10 Shiprock RBDO 11 “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 Page 11 Shiprock RBDO 12 “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 Page 12 Shiprock RBDO 13 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 Page 13 Shiprock RBDO 14 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 Page 14 Shiprock RBDO 15 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. Page 15 Shiprock RBDO 16 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 Page 16 Shiprock RBDO 17 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.
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