BOOKKEEPING Basics
BOOKKEEPING Basics
BOOKKEEPING Basics
BASICS
Accrual, Double-Entry
Accounting, Debits & Credits,
Chart of Accounts,
Journals
and, Ledger
Part 1
WHAT’S
HERE…
Introduction Double-Entry Accounting
Business Types Debits & Credits
Business Organization The Journal
Professional Advice The Ledger
Accounting and Records Additional Information
Accrual Accounting
Basic Bookkeeping
Chart of Accounts
INTRODU
CTION
Accounting is the bookkeeping methodology
involved in creating a financial record of all
business transactions and in preparing
statements concerning the assets, liabilities
and operating results of the business
Accounting methods and terms have standard
rules known as:
– Generally Accepted Accounting Principles
(GAAP)
INTRODU
CTION
Causes of recurring business difficulty and
failure include:
– Inadequate planning
– Lack of business knowledge
– Lack of capital
– Poor management, judgment, and decisions
Successful business managers understand
their business information and make
comparisons from month-to-month and year-
to-year
INTRODU
CTION
Accounting collects, organizes and presents
business information in a timely manner
and standardized format
This tutorial outlines accounting “basics” with a
primary focus on manual, double entry,
accrual accounting processes
BUSINESS
TYPES
Let’s imagine you are going to open a new
business – what will be its purpose?
BUSINESS
ORGANIZATION
How will you structure the business?
– Sole proprietorship
– Partnership
– Corporation
– Limited Liability Company
PROFESSIONAL
ADVICE
Accountants
Attorneys
Bankers
Insurance Agents Starting and
Investment Advisors working a
business without
Investors
professional
Partner/s assistance is not
Government agencies recommended!!
Vendors / suppliers
Local business people
Professional association members
ACCOUNTING AND
RECORDS
Cash-basis Accounting
Single-entry record keeping
Double-entry record keeping
Accrual-basis Accounting
(2) Identify correct line item account (e.g., Salaries & Wages;
Employer Share of FICA; Sick Leave Expense, Annual Leave Expense, etc.)
- Expenses
+ Revenue
Net Worth
Liabilities
Assets
- Expenses
+ Revenue
Liabilities
Capital
$75,000
Cash
Worth
Asset
$75,00
Net
s
0
DOUBLE-ENTRY
ACCOUNTING
Example 2 – The business buys a $55,000 building
with $5,000 cash and a mortgage which is posted as:
- Expenses
+ Revenue
Net Worth
$50,000
Liabilitie
Mortgag
Payable
$5,000
$5,000
Cash
Asset
Buildin
$50,00
s
0
g
e/
s
-
DEBITS AND
CREDITS
Accountants have used the
terms debit and credit for
debit credit
hundreds of years to describe
where numbers are placed in
Journals and Ledger Books.
Debit means left
Credit means right
ALWAYS
!
Latin Dr and Cr:
• Dr for Debit
• Cr for Credit
DEBITS AND
CREDITS
Asset
Debit Credit
+ - Liabilities ALWAYS!
Debit Credit
- + Net Worth
Debit Credit
Revenue
- +
Debit Credit
When recording - + Expenses
transactions in the Debit
Journal and Ledgers, the five major Credit
account categories are increased or +
decreased by debits or credits as shown. -
THE
JOURNAL
The Journal or General Journal is used to
record all transactions in chronological order
The Journal is the book of original entry
Entries are made on a daily basis, according
to the time and date they occur
The Journal records debits (left side) and
credits (right side) as illustrated on the next
slide
THE
JOURNAL
Date Description of Entry PR Debit Credit
20XX
Mar 1 Cash 40000
Capital 40000
Invested in the business
2 Rent 600
Cash 600
April 1 – bought new truck. Invested $10,000 cash in truck with remainder on a note payable.
The truck cost $28,000.
Truck Cash Note Payable
General Journal
Types
of
Journals
THE
JOURNAL
Sales Journals Record only sales on credit
Purchases
Journals
Record everything bought on credit
Cash Receipts
Journals Record all incoming cash
Cash Disbursements
Journals Record all outgoing cash
Starts here:
Journal Entries
Balance Sheet
and Adjusting Entries
Income Statement
Closing Entries
ACCOUNTING
CYCLE
Journal
Steps 1 and 2 – Transactions occur resulting in
business revenue and expense details that are
recorded in the Journal
Cash
Step 3 – Information from Journal
Accounts is posted to applicable ledgers
Accounts
Payable Recurring transactions are grouped together
into like accounts (categories) such as
cash, receivables, payables, equipment,
etc.
ACCOUNTING
CYCLE
Trial Balance
Cash
Assets
Accounts Liabilities
Net Worth
Accounts Revenue
Payable Expense
ACCOUNTING
CYCLE
Journal
Step 5 Adjusting entries are
completed at the end of
the accounting period
(e.g., monthly) to match
Cash
proper revenue with
Accounts expenses in that period
Accounts
Payable Step 6 Adjusting entries from the
Journal are posted into the
General Ledger
ACCOUNTING
CYCLE
Cash Adjusted
Accounts Trial Balance
Accounts
Payable
ACCOUNTING
CYCLE
Journal
Step 8 All temporary (nominal)
accounts are closed and
have a zero balance at the
beginning of the next
Cash
accounting period (month)
Accounts
All closing entries at the
Accounts
Payable end of the accounting
period are recorded in the
Journal
ACCOUNTING
CYCLE
The Balance Sheet equation cannot balance until net income (or loss) is added to the
Balance Sheet from the Income Statement.
T-
ACCOUNTS,
PAGE 1 OF 7
20XX 20XX
Jan 1 J1 2500 Jan 2 J1 250
Jan 3 J1 175
2500 452
Jan XX Balance 2048
Standard Ledger
Account … the
“T” Account Footing (adding) helps balance the account.
Withdrawals
Balances are the differences Debit Credit
+ -
between debits and credits in
the accounts.
Debits LEFT
Credits RIGHT
Normal balance for all asset
accounts are debits.
Normal balance for liability
accounts are credits.
T-
ACCOUNTS,
PAGE 3 OF 7
On Jan 1, 20XX, the business owner invested $5000 cash and $100 office
equipment in the business.
Cash Equipment Capital
Debit Debit Credit Debit Credit
Credit
100 5100
5000
On Jan 15, 20XX, the business bought a used truck for $1000 cash and a
note payable for $4000.
Cash Truck Note Payable
Debit Credit Debit Credit Debit Credit
On Jan 20, 20XX, the business paid utilities on the building for $200.
Cash Utilities Expense
Debit Credit Debit Credit
5000 1000 200
2000 200
T-
ACCOUNTS,
PAGE 5 OF 7
On Jan 21, 20XX, the business paid its monthly building/office rent of
$500.
Cash Rent Expense
Debit Credit Debit Credit
5000 1000 500
2000 200
500
On Jan 22, 20XX, the business bought office supplies for $250.
Cash Office Supplies
Debit Credit Debit Credit
5000 1000 250
2000 200
500
250
T-
ACCOUNTS,
PAGE 6 OF 7
On Jan 24, 20XX, the business owner withdrew $100 cash to pay personal
expenses.
Cash Withdrawals
Debit Credit Debit Credit
5000 1000 100
2000 200
500
250
100
T-
ACCOUNTS,
PAGE 7 OF 7
Business Name
Trial Balance When the Trial Balance
Date matches (equals),
Debit Credit
everything is fine.
Debits = Credits
TRIAL
BALANCE,
PAGE 2 OF 2
10 Supplies 3500
Cash 3500
Asset
– Accounts such as prepaid insurance, office supplies,
prepaid rent have been paid in advance and recorded as
assets. These should be expensed as used.
Liabilities
– A unique liability may be created when services are paid in
advance for something the business has not yet done.
This receipt of cash increased the cash account and
a liability called Unearned Revenue which remains in this
account until “earned”.
As it is “earned” it is transferred out of this account
and into Revenue.
ADJUSTING
ENTRIES,
PAGE 5 OF 11
Accrued Expense
– These are expenses that have been incurred, but
not yet paid.
Accrued Revenue
– A job will not be completed for several months and
the business won’t get paid until the end of the
job. At the end of the first month, an adjusting
entry is needed for the amount of earnings in the
current month, even though the job is not yet
completed and no bill has been sent.
Adjusting Entries,
Business Name: Date Page 6 of 11
Trial Balance
Debit Credit
Cash 1000.00 This sample trial balance will be
Accounts Receivable 5000.00 used to demonstrate end-of-
Prepaid Insurance 600.00 month/period adjusting entries
Office Supplies 400.00 for:
Equipment 10000.00
• Current Assets
Automobiles 24000.00
Buildings 80000.00
• Long-Term Assets
Land 25000.00 • Current Liabilities
Accounts Payable 25000.00 • Accrued Expense
Notes Payable 15000.00 • Accrued Revenue
Unearned Revenue 1500.00
While each of the examples are
Mortgage Payable 80000.00
Capital 27500.00
separate, all of these that are
Withdrawals 12000.00
applicable would be made and
Revenue (earnings) 90000.00 an Adjusted Trial Balance
Wage Expense 48000.00 prepared.
Utilities Expense 12000.00
Adjustments will appear in blue.
Advertising Expense 6000.00
Repair Expense 15000.00
TOTAL 239000.00 239000.00
Business Name:
Debit
ADJUSTING ENTRIES,
Credit
PAGE 7 OF 11
Cash 1000.00
Accounts Receivable 5000.00
Adjusting Current Assets:
Prepaid Insurance 600.00
Office Supplies 400.00 Date P.R. Debit Credit
300.00
Equipment 10000.00 Dec 31 Office Supplies Exp 100
Buildings 80000.00
Land 25000.00
Accounts Payable 25000.00
Notes Payable 15000.00
Current assets are adjusted by removing the used amount
Unearned Revenue 1500.00 from the asset account and transferring it to the expense
Mortgage Payable 80000.00 account.
Capital 27500.00
Withdrawals 12000.00
Revenue (earnings) 90000.00
Wage Expense 48000.00
Office Supplies Expense 100.00
Utilities Expense 12000.00
Advertising Expense 6000.00
Repair Expense 15000.00
TOTAL 239000.00 239000.00
ADJUSTING ENTRIES,
Business Name: Date
Adjusted Trial
Balance
Debit Credit
Cash 1000.00
Equipment 10000.00
Buildings 80000.00
Debit
ADJUSTING ENTRIES,
Credit
PAGE 9 OF 11
Cash 1000.00
Accounts Receivable 5000.00
Adjusting Current Liabilities:
Prepaid Insurance 600.00
Office Supplies 400.00 Date P.R. Debit Credit
Equipment 10000.00
Automobiles 24000.00 Dec 31 Unearned Revenue 500
Land 25000.00
Accounts Payable 25000.00
Notes Payable 15000.00
Unearned Revenue 1500.00
Earnings of $500 are recorded as revenue from the
1000.00 liability account. The liability account was created when
Mortgage Payable 80000.00 the company received cash in advance, but had not
earned the amount. When the amount is earned, it is
Capital 27500.00
transferred to the revenue account.
Withdrawals 12000.00
Revenue (earnings) 90000.00
90500.00
Wage Expense 48000.00
Utilities Expense 12000.00
Advertising Expense 6000.00
Repair Expense 15000.00
TOTAL 239000.00 239000.00
Business Name:
Debit
ADJUSTING ENTRIES,
Credit
PAGE 10 OF 11
Cash 1000.00
Accounts Receivable 5000.00
Adjusting Accrued Expense:
Prepaid Insurance 600.00
Office Supplies 400.00 Date P.R. Debit Credit
Equipment 10000.00
Automobiles 24000.00 Dec 31 Wage Expense 1500
Land 25000.00
Accounts Payable 25000.00
Wage Payable 1500.00
Notes Payable 15000.00
This entry would be made by a company that pays
Unearned Revenue 1500.00 payroll on the 5th and 20th of the month. The last days of
Mortgage Payable 80000.00 the month would be recorded as a payable, because the
expense had been incurred, but the company will not
Capital 27500.00
make a payment until the 5th.
Withdrawals 12000.00
Revenue (earnings) 90000.00
Wage Expense 48000.00
49500.00
Utilities Expense 12000.00
Advertising Expense 6000.00
Repair Expense 15000.00
TOTAL 239000.00 239000.00
Business Name:
Debit
ADJUSTING ENTRIES,
Credit
PAGE 11 OF 11
Cash 1000.00
Accounts Receivable 5000.00
Adjusting Accrued Revenue:
6000.00
Prepaid Insurance 600.00 Date P.R. Debit Credit
Buildings 80000.00
Land 25000.00
Accounts Payable 25000.00
Notes Payable 15000.00
This entry is made for a job that is not completed by the
Unearned Revenue 1500.00 end of the accounting period, but needs to be recorded
Mortgage Payable 80000.00 since the service was performed in the accounting period.
Capital 27500.00
Withdrawals 12000.00
Revenue (earnings) 90000.00
91000.00
Wage Expense 48000.00
Utilities Expense 12000.00
Advertising Expense 6000.00
Repair Expense 15000.00
TOTAL 239000.00 239000.00
CLOSING
ENTRIES,
PAGE 1 OF 4
Withdrawals
Revenue
All ledger
accounts Post-Closing Expenses
with Trial
balances are Balance
listed in the
Post-Closing
Trial
CLOSING
ENTRIES,
PAGE 2 OF 4
Part 3
WHAT’S
HERE…
Introduction
Financial Statements
Income Statement
Balance Sheet
Sample Statements
Impacting the Business
Analyzing Financials
INTROD
UCTION,
PAGE 1 OF 3
= Net Income or
Loss Net income (or loss) is moved to the
Balance Sheet through the closing
entries.
INCOME
STATEMENT,
PAGE 2 OF 3
Current Ratio:
Current Ratio = Current
Assets Current
Liabilities
2006 2005
28000 18500
= 1.57 = 2.98
17800 6200
The current ratio is a more dependable indication of liquidity than net working
capital. Comparing current year’s to past year’s, the larger the ratio, the
lower the risk.
Quick Ratio:
Current Ratio = Current Assets -
Inventory Current
Liabilities
2006 2005
28000 - 10000 18500 - 6800
= 1.01 = 1.88
17800 6200
2000
2006 = 25%
8000 The gross profit margin indicates the
percentage of each sales dollar remaining after
2500
2005 = 43% the business has paid for its goods.
5800 The higher the profit margin, the better.
This business did better in 2005 than in 2006.
ANALYZING
FINANCIALS,
PAGE 8 OF 16
1000
2006 = 13%
8000 This ratio ignores interest and taxes.
It represents pure operations.
1200
2005 = 21% The higher the Operating Profit Margin, the
5800 better.
This business did better in 2005 than in
2006.
ANALYZING
FINANCIALS,
PAGE 9 OF 16
Profitability Analysis:
If the business’ profit ratios are too low, you
should ask:
– Is there enough mark-up on goods? (Check
gross profit margin)
– Are operating expenses too high? (Check
operating profit margin.)
– Are interest expenses too high? (Check net
profit margin.)
ANALYZING
FINANCIALS,
PAGE 11 OF 16
Vertical Analysis:
– A percentage analysis of the current and past year’s (or
period’s) Balance Sheets and Income Statements on a single
statement
– Balance Sheet:
Each Asset is shown as a percentage of total assets
Each liability is shown as a percentage of total
liabilities and equity
– Income Statement
Each element is shown as a percent of net sales.
1998 1997
Amount Percent Amount Percent
Horizontal Analysis:
– A percentage analysis of the current and past year’s (or
period’s) increases and decreases in the statement items
shown on a single statement
– The actual increase or decrease of an item between
current and past year (period) is listed
– The percentage increase or decrease is listed in the last
(right hand) column
assets?
SUMMARY,
PAGE 2 OF 3