basic bookkeeping

Basic Bookkeeping

What is your level of expertise?

• Matrix– Debits and credits– Assets = liabilities + equity– Do you use accounting software?– What do you want to learn?

Why should you keep a set of books?

– Running out of the checkbook– Need to track how your company is doing– Company will hit a block where you won’t grow anymore– GAAP– Use of accounting software, such as QuickBooks or

Peachtree

Cash vs. accrual accounting

– Most businesses start with cash accounting. You record income and expenses as you receive or pay out the cash.

– Under accrual accounting, you measure the income or expense when accrued. Examples are accounts receivable and accounts payable. You would record the sales as receivable when recognized. You would record the bills as expenses when received or incurred by you.

– Companies that have inventory are supposed to use accrual accounting.

Generally accepted accounting principles

– Bookkeeping is double entry. Enter a journal entry on the left side and enter a journal entry on the right side.

– Assets = liabilities + equity formula

What is a T-account?

– Debits = credits– Debits are the left side– Credits are the right side

– Examples of debiting and crediting an account– You purchase a rake for $25 for your business.– Debit Tool Expense for $25– Credit Cash for $25

What is the Chart of Accounts?

• Accounts examples such as cash, accounts payable, accounts receivable, payroll, payroll taxes, long-term loans, owner’s equity, telephone expense, utility expense, income, cost of goods

• Five major account groups:– Assets– Liabilities– Equity– Income– Expense

Assets

• Assets include both current and long term assets• Current assets are cash, checking accounts, accounts

receivable, and inventory• Long term assets are notes receivable, tools and

equipment, land, buildings

Liabilities

• Liabilities include both short-term and long-term.• Short-term liabilities are defined as amounts that are due

within one year. Examples of short-term liabilities are accounts payable, payroll tax liabilities, and the portion of the long-term debt that is owed for that year.

• Long-term liabilities include notes payable, bonds payable, loans.

Equity

• Equity accounts represent what the owners have put into the company as well as the cumulative net earnings of the company.

• Although not making logical sense, the equity account appears on the right side of the assets = liabilities + owners equity equation.

• Owners equity consists of both Owner’s Contributions and Owner’s draw.

• Retained earnings includes what the company has earned over the years.

Income

– You may want to set up several income accounts if you have different streams of income from different work activities. The income and expense total – net earnings – is forwarded into the balance sheet.

Expense– You can create a number of different expense

accounts so that you can properly track your costs of your business. Some expenses are recurring on a monthly basis, e.g. telephone use while other expenses, such as the purchase of tools or repair of equipment will vary.

Practice your understanding of a T-account

• Arrow Manufacturing paid their telephone expense of $95.• Arrow Manufacturing paid their utility expense of $125.• Arrow Manufacturing paid their monthly rent of $800.• Arrow Manufacturing purchased new equipment for

$2,500. The firm paid the new tools in cash.• Arrow Manufacturing purchase new equipment for

$10,000 on credit.

Answers for the T-Accounts

General Journals

– Cash Journal– Sales Journal– Accounts Receivable Journal– Expense Journal

– Journals are used to enter financial data. You can also set up many other subsidiary journals. We’re just going to deal with these four journals. You will be analyzing these transactions on the following pages and deciding which journal to debit and which journal to credit.

Setting up the Journals for Broken Pots ‘R Us

– Write these names on the separate journals– Sales Journal – Entitle Broken Pots ‘R Us– Cash Journal - Show a beginning balance of $175– Expense Journal– Accounts receivable Journal

– Write DR in Column 1 and CR in Column 2 for each journal.

Analyze the following business transactions

– March 2 - Company sells $200 of pottery plates and is paid in cash immediately.

– March 4 - Company issues check #101 for an amount of $35 to purchase clay from Clay Biz.

– March 6 – Company issues check #102 in the amount of $45 to pay a telephone bill owed to Qwest.

– March 8 - Company sells $75 of pottery cups and is paid in cash immediately.

– March 9 - Company issues check #103 in the amount of $95 to pay for a vending booth at the AEO conference.


– March 10 - Company issues check #104 for an amount of $50 for advertising in the Eugene Weekly.

– March 11 – Company sells $125 of pottery plates on credit to Sampson Company that will pay in April.

– March 15 - Company issues check #105 for an amount of $30 for glazing chemicals to Dow N Out Chemical .

– March 20 – Company sells $55 of pottery salad bowls and is paid in cash immediately.

– April 2 – Company sells $65 of pottery cups on credit to Blue Sky company that will pay later in the month.


– April 5th - Company receives payment of $125 from Sampson Company for payment of the pottery plates.

– Total up the debits and credits for each of the journals. (You can load up the calculator on your computer by going to Programs / Accessories / Calculator).

Create an Income / Expense statement

– Set up an Income and Expense Statement on the back side of one of the ledgers for the month of March. You will be looking at only the transactions completed for March

– How much total sales for March?– How much expenses for March?– What is the balance at the end of March in the Accounts

Receivable journal?– What is the balance at the end of March for the Cash

Journal?

Set up two new journal accounts

– Equity Journal– Accounts Payable Journal

– Both of these journals are on the right side of the equation of Assets = Liabilities + Equity


– April 10th – You as the owner of Broken Pots R Us places $500 in the business checking account.

– April 12 – You purchase $125 of office supplies on credit from Office Max.

– April 16 - Company issues check #106 for an amount of $105 for glazing chemicals to Dow N Out Chemical .

– April 19 – Company sells $95 of pottery cups and is paid in cash immediately.

– April 22 – Company sells $65 of pottery cups on credit to Blue Sky company that will pay later next month.

– April 28 – Because of your improved credit, you purchase $65 of clay on credit from Clay Biz.


– May 2nd – You pay the $125 of office supplies owed to Office Max by issuing check #107.

– May 5th - Blue Sky company pays only $40 of the $65 of pottery cups. Blue Sky notifies you that the company is going bankrupt and will not pay the remaining balance.

– May 9th – You withdraw $250 as an owner withdrawl. – May 12th – Company sells $150 of pottery cups and is paid

in cash immediately.– May 19th – Company issues check #108 in the amount of

$65 to Clay Biz for the purchase of clay on credit in April.– May 22nd – Company issues check #109 in the amount of

$125 to Union Bank for payment on its long-term loan.

Assemble Income and Expense statements

– Assemble separate income and expense statements for both April and May.

What is a Balance Sheet

– Balance sheet is a point in time which displays the value of the assets, liabilities, and equity of the company.

– A balance sheet consists of what are called permanent accounts while income and expense accounts are considered “Temporary” accounts.

– Assets = Liabilities + Equity– A balance sheet displays hard numbers, e.g. goodwill or

perceived value of the company is not included in your balance sheet.

– The net earnings or losses are folded into the equity section so that is why the income and expense accounts.

Setting up a Balance Sheet

– You will be setting up a balance sheet and carrying forward the net earnings from March to April to May.

– Balance Sheet as of February 28th, 2005– Cash $175– A/R 0– Tools and equipment $1500– Accounts payable 0– Long-term loan payable 500– Owner’s Equity $1175

Using these balances, we’ll set up the balance sheet as of March 31st and you will continue on for April and May.

basic bookkeeping

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