the essentials of accounting basics

7/25/2019 The Essentials of Accounting Basics

1/21

THE ESSENTIALS OF ACCOUNTING BASICSBookkeepers, accountants, and business managers must have a firm grasp ofaccounting fundamentals. Accounting is an essential business function that involvesrecording transactions, summarizing data, and then reporting and analyzing the resultson a periodic basis.

1: The Difference between Bookkeepin !n" Acco#ntin

Important! E$er% b#&ine&& !n" not'for'profit entit% nee"& ! re(i!b(e bookkeepin &%&te) b!&e" one&t!b(i&he" !cco#ntin princip(e&* +eep in )in" th!t accounting i& ! )#ch bro!"er ter) th!n

bookkeeping * Bookkeepin refer& )!in(% to the recor"'keepin !&pect& of !cco#ntin , it-& e&&enti!((%the proce&& of recor"in !(( the infor)!tion re !r"in the tr!n&!ction& !n" fin!nci!( !cti$itie& of !b#&ine&&*

Definin bookkeepin

Bookkeepin i& !n in"i&pen&!b(e b&et of !cco#ntin * Bookkeeping refer& to the proce&& of!cc#)#(!tin . or !ni/in . &torin . !n" !cce&&in the fin!nci!( infor)!tion b!&e of !n entit%. which i&nee"e" for two b!&ic p#rpo&e&:

F!ci(it!tin the "!%'to'"!% oper!tion& of the entit%

0rep!rin fin!nci!( &t!te)ent&. t! ret#rn&. !n" intern!( report& to )!n! er&

Bookkeepin 2!(&o c!((e" recordkeeping 3 c!n be tho# ht of !& the fin!nci!( infor)!tion infr!&tr#ct#reof !n entit%* The fin!nci!( infor)!tion b!&e &ho#(" be co)p(ete. !cc#r!te. !n" ti)e(%* E$er%recor"keepin &%&te) nee"& 4#!(it% contro(& b#i(t into it. which !re c!((e" internal controls.

Definin !cco#ntin

The ter) accounting i& )#ch bro!"er, oin into the re!() of "e&i nin the bookkeepin &%&te).e&t!b(i&hin contro(& to )!ke re the &%&te) i& workin we((. !n" !n!(%/in !n" $erif%in therecor"e" infor)!tion* Acco#nt!nt& i$e or"er&, bookkeeper& fo((ow the)*

Acco#ntin enco)p!&&e& the prob(e)& in )e!rin the fin!nci!( effect& of econo)ic !cti$it%*F#rther)ore. !cco#ntin inc(#"e& the f#nction of financial reporting of $!(#e& !n" perfor)!nce


2/21

)e!re& to tho&e th!t nee" the infor)!tion* B#&ine&& )!n! er&. in$e&tor&. !n" )!n% other&"epen" on fin!nci!( report& for infor)!tion !bo#t the perfor)!nce !n" con"ition of the entit%*

Important! Acco#nt!nt& "e&i n the intern!( contro(& for the bookkeepin &%&te). which &er$e to)ini)i/e error& in recor"in the (!r e n#)ber of !cti$itie& th!t !n entit% en ! e& in o$er the perio"*The intern!( contro(& th!t !cco#nt!nt& "e&i n !re !(&o re(ie" on to "etect !n" "eter theft.e)be//(e)ent. fr!#". !n" "i&hone&t beh!$ior of !(( kin"&*

Acco#nt!nt& prep!re report& b!&e" on the infor)!tion !cc#)#(!te" b% the bookkeepin proce&&:fin!nci!( &t!te)ent&. t! ret#rn&. !n" $!rio#& confi"enti!( report& to )!n! er&* 5e!rin profit i& !critic!( t!&k th!t !cco#nt!nt& perfor) 6 ! t!&k th!t "epen"& on the !cc#r!c% of the infor)!tionrecor"e" b% the bookkeeper* The !cco#nt!nt "eci"e& how to )e!re &!(e& re$en#e !n" e pen&e&to "eter)ine the profit or (o&& for the perio"*

7: Bookkeepin !n" It& B!&ic 0#rpo&e

Bookkeepin . when "one proper(%. i$e& %o# !n e ce((ent !# e of how we(( %o#r b#&ine&& i& "oin *Bookkeepin !(&o pro$i"e& fin!nci!( infor)!tion thro# ho#t the %e!r &o %o# c!n te&t the cce&& of%o#r b#&ine&& &tr!te ie& !n" )!ke co#r&e correction& to enre th!t %o# re!ch %o#r %e!r'en" profito!(&*

TIP! Bookkeepin c!n beco)e %o#r be&t &%&te) for )!n! in %o#r fin!nci!( !&&et& !n" te&tin

%o#r b#&ine&& &tr!te ie&. &o "on8t &hortch!n e it* T!ke the ti)e to "e$e(op %o#r bookkeepin &%&te)with %o#r !cco#nt!nt before %o# e$en open %o#r b#&ine&&8& "oor& !n" )!ke %o#r fir&t &!(e*

Choo&in %o#r !cco#ntin )etho"

The two b!&ic !cco#ntin )etho"& %o# h!$e to choo&e fro) !re cash-basis accounting 2!(&o c!((e" 9#&tcash accounting 3 !n" accrual accounting. The ke% "ifference between the&e two !cco#ntin)etho"& i& the point !t which %o# recor" &!(e& !n" p#rch!&e& in %o#r book&:

If %o# #&e c!&h !cco#ntin . %o# recor" tr!n&!ction& on(% when c!&h ch!n e& h!n"&* For

e !)p(e. %o# "on8t recor" ! p#rch!&e fro) ! $en"or #nti( %o# !ct#!((% (!% o#t the c!&h to the$en"or*

If %o# #&e !ccr#!( !cco#ntin . %o# recor" ! tr!n&!ction when it8& co)p(ete". e$en if c!&h

"oe&n8t ch!n e h!n"&* For e !)p(e. %o# recor" ! p#rch!&e fro) ! $en"or when %o# recei$e thepro"#ct&. !n" %o# !(&o recor" the f#t#re "ebt in !n !cco#nt c!((e" Acco#nt& 0!%!b(e*


3/21

Un"er&t!n"in !&&et&. (i!bi(itie&. !n" e4#it%

E$er% b#&ine&& h!& three ke% fin!nci!( p!rt& th!t )#&t be kept in b!(!nce:

Assets inc(#"e e$er%thin the co)p!n% own&. ch !& c!&h. in$entor%. b#i("in &. e4#ip)ent.

!n" $ehic(e&*

Liabilities inc(#"e e$er%thin the co)p!n% owe& to other&. ch !& $en"or bi((&. cre"it c!r"

b!(!nce&. !n" b!nk (o!n&*

Equity inc(#"e& the c(!i)& owner& h!$e on the !&&et& b!&e" on their portion of owner&hip in

the co)p!n%*

Important! The for)#(! for keepin %o#r book& in b!(!nce in$o($e& the&e three e(e)ent&:

A&&et& Li!bi(itie& ; E4#it%

Intro"#cin "ebit& !n" cre"it&

To keep the book& for %o#r b#&ine&&. %o# nee" to re$i&e %o#r thinkin !bo#t two co))on fin!nci!(ter)&: "ebit& !n" cre"it&* 5o&t non'bookkeeper& !n" non'!cco#nt!nt& think of "ebit& !&btr!ction& fro) their b!nk !cco#nt&* The oppo&ite i& tr#e with cre"it& 6 peop(e #!((% &ee the&e!& !""ition& to their !cco#nt&. in )o&t c!&e& in the for) of ref#n"& or correction& in f!$or of the!cco#nt ho("er&*

Debit& !n" cre"it& !re tot!((% "ifferent !ni)!(& in the wor(" of bookkeepin * Bec!#&e keepin thebook& in$o($e& ! )etho" c!((e" double-entry bookkeeping, %o# h!$e to )!ke ! (e!&t two entrie& 6! "ebit !n" ! cre"it 6 into %o#r bookkeepin &%&te) for e$er% tr!n&!ction*


4/21

recor" fin!nci!( tr!n&!ction& 6 fro) b!(!nce &heet& !n" inco)e &t!te)ent& to !cco#nt& p!%!b(e!n" recei$!b(e* The fo((owin &ection& (i&t bookkeepin ter)& th!t %o#-(( #&e on ! "!i(% b!&i&*

B!(!nce &heet ter)ino(o %

Here !re ! few ter)& %o#8(( w!nt to know when workin with b!(!nce &heet&:

Balance sheet: The fin!nci!( &t!te)ent th!t pre&ent& ! &n!p&hot of the co)p!n%8& fin!nci!(

po&ition !& of ! p!rtic#(!r "!te in ti)e* It8& c!((e" ! b!(!nce &heet bec!#&e the thin & owne" b%the co)p!n% 2 assets 3 )#&t e4#!( the c(!i)& ! !in&t tho&e !&&et& 2 liabilities !n" equity 3*

Assets: A(( the thin & ! co)p!n% own& in or"er to cce&&f#((% r#n it& b#&ine&&. ch !&

c!&h. b#i("in &. (!n". too(&. e4#ip)ent. $ehic(e&. !n" f#rnit#re*

Liabilities: A(( the "ebt& the co)p!n% owe&. ch !& bon"&. (o!n&. !n" #np!i" bi((&*

Equity: A(( the )one% in$e&te" in the co)p!n% b% it& owner&* In ! &)!(( b#&ine&& owne" b%

one per&on or ! ro#p of peop(e. the owner8& e4#it% i& &hown in ! C!pit!( !cco#nt* In ! (!r erb#&ine&& th!t8& incorpor!te". owner8& e4#it% i& &hown in &h!re& of &tock*

Another ke% E4#it% !cco#nt i& Retained Earnings, which tr!ck& !(( co)p!n% profit& th!t h!$ebeen rein$e&te" in the co)p!n% r!ther th!n p!i" o#t to the co)p!n%8& owner&* S)!((b#&ine&&e& tr!ck )one% p!i" o#t to owner& in ! Dr!win !cco#nt. where!& incorpor!te"b#&ine&&e& "o(e o#t )one% to owner& b% p!%in "i$i"en"&*

Inco)e &t!te)ent ter)ino(o %

Here !re ! few ter)& re(!te" to the inco)e &t!te)ent th!t %o#8(( w!nt to know:

Income statement: The fin!nci!( &t!te)ent th!t pre&ent& ! ))!r% of the co)p!n%8&

fin!nci!( !cti$it% o$er ! cert!in perio" of ti)e. ch !& ! )onth. 4#!rter. or %e!r* The &t!te)ent&t!rt& with ?e$en#e e!rne". btr!ct& the Co&t& of Goo"& So(" !n" the E pen&e&. !n" en"&with the botto) (ine 6 Net 0rofit or Lo&&*

Revenue: A(( )one% co((ecte" in the proce&& of &e((in the co)p!n%8& oo"& !n" &er$ice&*

So)e co)p!nie& !(&o co((ect re$en#e thro# h other )e!n&. ch !& &e((in !&&et& the b#&ine&&no (on er nee"& or e!rnin intere&t b% offerin &hort'ter) (o!n& to e)p(o%ee& or otherb#&ine&&e&*

Costs of oo s sol : A(( )one% &pent to p#rch!&e or )!ke the pro"#ct& or &er$ice& !

co)p!n% p(!n& to &e(( to it& c#&to)er&*


5/21

E"penses: A(( )one% &pent to oper!te the co)p!n% th!t8& not "irect(% re(!te" to the &!(e of

in"i$i"#!( oo"& or &er$ice&*

Other co))on bookkeepin ter)&

So)e other co))on ter)& #&e" in bookkeepin inc(#"e the fo((owin :

Accountin perio : The ti)e perio" for which fin!nci!( infor)!tion i& bein tr!cke"* 5o&t

b#&ine&&e& tr!ck their fin!nci!( re(t& on ! )onth(% b!&i&. &o e!ch !cco#ntin perio" e4#!(&one )onth* So)e b#&ine&&e& choo&e to "o fin!nci!( report& on ! 4#!rter(% or !nn#!( b!&i&*B#&ine&&e& th!t tr!ck their fin!nci!( !cti$itie& )onth(% #!((% !(&o cre!te 4#!rter(% !n" !nn#!(report&*

Accounts payable: The !cco#nt #&e" to tr!ck !(( o#t&t!n"in bi((& fro) $en"or&.

contr!ctor&. con(t!nt&. !n" !n% other co)p!nie& or in"i$i"#!(& fro) who) the co)p!n% b#%&oo"& or &er$ice&*

Accounts receivable: The !cco#nt #&e" to tr!ck !(( c#&to)er &!(e& th!t !re )!"e b% &tore

cre"it* Store credit refer& not to cre"it c!r" &!(e& b#t r!ther to &!(e& in which the c#&to)er i&i$en cre"it "irect(% b% the &tore !n" the &tore nee"& to co((ect p!%)ent fro) the c#&to)er !t !(!ter "!te*

#epreciation: An !cco#ntin )etho" #&e" to tr!ck the ! in !n" #&e of !&&et&* For

e !)p(e. if %o# own ! c!r. %o# know th!t e!ch %e!r %o# #&e the c!r it& $!(#e i& re"#ce" 2#n(e&&

%o# own one of tho&e c(!&&ic c!r& th!t oe& #p in $!(#e3* E$er% )!9or !&&et ! b#&ine&& own&! e& !n" e$ent#!((% nee"& rep(!ce)ent. inc(#"in b#i("in &. f!ctorie&. e4#ip)ent. !n" other ke%!&&et&*

$eneral Le er:


6/21

Payroll: The w!% ! co)p!n% p!%& it& e)p(o%ee&* 5!n! in p!%ro(( i& ! ke% f#nction of the

bookkeeper !n" in$o($e& reportin )!n% !&pect& of p!%ro(( to the o$ern)ent. inc(#"in t! e& tobe p!i" on beh!(f of the e)p(o%ee. #ne)p(o%)ent t! e&. !n" work)!n8& co)pen&!tion*

Trial balance: How %o# te&t to be re the book& !re in b!(!nce before p#((in to ether

infor)!tion for the fin!nci!( report& !n" c(o&in the book& for the !cco#ntin perio"*

@: ?e&pon&ibi(itie& of !n Acco#ntin Dep!rt)ent

5o&t peop(e "on8t re!(i/e the i)port!nce of the !cco#ntin "ep!rt)ent in keepin ! b#&ine&&oper!tin witho#t hitche& !n" "e(!%&* Th!t8& prob!b(% bec!#&e !cco#nt!nt& o$er&ee )!n% of theb!ck'office f#nction& in ! b#&ine&& 6 !& oppo&e" to &!(e&. for e !)p(e. which i& front'(ine !cti$it%.

o#t in the open !n" in the (ine of fire*

Fo(k& )!% not think )#ch !bo#t the&e b!ck'office !cti$itie&. b#t the% wo#(" re notice if tho&e!cti$itie& "i"n8t et "one* On p!%"!%. ! b#&ine&& h!" better not te(( it& e)p(o%ee&. Sorr%. b#t the!cco#ntin "ep!rt)ent i& r#nnin ! (itt(e (!te thi& )onth, %o#8(( et %o#r check& (!ter*

Important! T%pic!((%. the !cco#ntin "ep!rt)ent i& re&pon&ib(e for the fo((owin :

Payroll: The tot!( w! e& !n" &!(!rie& e!rne" b% e$er% e)p(o%ee e$er% p!% perio". which

!re c!((e" gross wages or gross earnings, h!$e to be c!(c#(!te"* B!&e" on "et!i(e" pri$!te

infor)!tion in per&onne( fi(e& !n" e!rnin &'to'"!te infor)!tion. the correct !)o#nt& of inco)et! . &oci!( &ec#rit% t! . !n" other "e"#ction& fro) ro&& w! e& h!$e to be "eter)ine"*

Stubs, which report $!rio#& infor)!tion to e)p(o%ee& e!ch p!% perio". h!$e to be !tt!che" top!%ro(( check&* The tot!( !)o#nt& of withhe(" inco)e t! !n" &oci!( &ec#rit% t! e&. p(#& thee)p(o%)ent t! e& i)po&e" on the e)p(o%er. h!$e to be p!i" to fe"er!( !n" &t!te o$ern)ent! encie& on ti)e* ?etire)ent. $!c!tion. &ick p!%. !n" other benefit& e!rne" b% the e)p(o%ee&h!$e to be #p"!te" e$er% p!% perio"*

In &hort. p!%ro(( i& ! co)p(e !n" critic!( f#nction th!t the !cco#ntin "ep!rt)ent perfor)&*

5!n% b#&ine&&e& o#t&o#rce p!%ro(( f#nction& to co)p!nie& th!t &peci!(i/e in thi& !re!*

Cash collections: A(( c!&h recei$e" fro) &!(e& !n" fro) !(( other &o#rce& h!& to be

c!ref#((% i"entifie" !n" recor"e". not on(% in the c!&h !cco#nt b#t !(&o in the !ppropri!te !cco#ntfor the &o#rce of the c!&h recei$e"* The !cco#ntin "ep!rt)ent )!ke& re th!t the c!&h i&"epo&ite" in the !ppropri!te checkin !cco#nt& of the b#&ine&& !n" th!t !n !"e4#!te !)o#nt ofcoin !n" c#rrenc% i& kept on h!n" for )!kin ch!n e for c#&to)er&*


7/21


8/21

: How Acco#ntin Foc#&e& on Tr!n&!ction&

Important! B#&ine&& !cco#ntin foc#&e& on transactions. A oo" bookkeepin &%&te) #nf!i(in (%c!pt#re& !n" recor"& e$er% tr!n&!ction th!t t!ke& p(!ce* Un"er&t!n"in !cco#ntin . to ! (!r ee tent. )e!n& #n"er&t!n"in how !cco#nt!nt& recor" the fin!nci!( effect& of tr!n&!ction&* The% !(&orecor" e ents th!t h!$e !n econo)ic i)p!ct on ! b#&ine&&*

Co#ntin on tr!n&!ction&

The i))e"i!te !n" f#t#re fin!nci!( effect& of &o)e tr!n&!ction& c!n be "iffic#(t to "eter)ine* Ab#&ine&& c!rrie& on econo)ic e ch!n e& with &i b!&ic t%pe& of per&on& or entitie&:

It&customers( who b#% the pro"#ct& !n" &er$ice& th!t the b#&ine&& &e((&*

It&employees( who pro$i"e &er$ice& to the b#&ine&& !n" !re p!i" w! e& !n" &!(!rie& !n"

pro$i"e" with benefit&. ch !& ! retire)ent p(!n. )e"ic!( inr!nce. worker&8 co)pen&!tion.!n" #ne)p(o%)ent inr!nce*

It&suppliers !n" ven ors( who &e(( ! wi"e r!n e of thin & to the b#&ine&&. ch !& (e !(

!"$ice. pro"#ct& for re&!(e. e(ectricit% !n" !&. te(ephone &er$ice. co)p#ter&. $ehic(e&. too(& !n"e4#ip)ent. f#rnit#re. !n" e$en !#"it&*

It& ebt sources of capital who (o!n )one% to the b#&ine&&. ch!r e intere&t on the !)o#nt

(o!ne". !n" !re "#e to be rep!i" !t "efinite "!te& in the f#t#re*

It&equity sources of capital( the in"i$i"#!(& !n" fin!nci!( in&tit#tion& th!t in$e&t )one% in

the b#&ine&& !n" e pect the b#&ine&& to e!rn profit on the c!pit!( the% in$e&t*

The overnment( or the fe"er!(. &t!te. !n" (oc!( ! encie& th!t co((ect inco)e t! e&. &!(e&

t! e&. p!%ro(( t! e&. !n" propert% t! e& fro) the b#&ine&&*

Here-& ! (ook !t the inter!ction& between ! b#&ine&& !n" the other p!rtie& in it& econo)ice ch!n e&*


9/21

"ransactions between a business and the parties it deals with.

: Acco#ntin for e$ent&

E$en ! re(!ti$e(% &)!(( b#&ine&& ener!te& ! rpri&in (% (!r e n#)ber of tr!n&!ction&. !n" !((tr!n&!ction& h!$e to be recor"e"* Cert!in other e$ent& th!t h!$e ! fin!nci!( i)p!ct on the b#&ine&&h!$e to be recor"e". !& we((* The&e !re c!((e" e ents bec!#&e the%8re not b!&e" on i$e'!n"'t!keb!r !inin 6 #n(ike the &o)ethin ' i$en'for'&o)ethin 'recei$e" n!t#re of econo)ic e ch!n e&*

E$ent& ch !& the fo((owin h!$e !n econo)ic i)p!ct on ! b#&ine&& !n" !re recor"e":

A b#&ine&& )!% (o&e ! (!wit !n" be or"ere" to p!% "!)! e&* The (i!bi(it% to p!% the

"!)! e& i& recor"e"*

A b#&ine&& )!% ffer ! f(oo" (o&& th!t i& #ninre"* The w!ter(o e" !&&et& )!% h!$e to be

written "own. )e!nin th!t the recor"e" $!(#e& of the !&&et& !re re"#ce" to /ero if the% no(on er h!$e !n% $!(#e to the b#&ine&&* For e !)p(e. pro"#ct& th!t were bein he(" for &!(e toc#&to)er& 2#nti( the% f(o!te" "own the ri$er3 )#&t be re)o$e" fro) the in$entor% !&&et !cco#nt*

A b#&ine&& )!% "eci"e to !b!n"on ! )!9or pro"#ct (ine !n" "own&i/e it& workforce.

re4#irin th!t &e$er!nce co)pen&!tion be p!i" to the (!i"'off e)p(o%ee&*


10/21

At the en" of the %e!r. the !cco#nt!nt )!ke& ! &peci!( r$e% to )!ke re th!t !(( e$ent& !n""e$e(op)ent& "#rin the %e!r th!t &ho#(" be recor"e" h!$e been recor"e". &o th!t the fin!nci!(&t!te)ent& !n" t! ret#rn& for the %e!r !re co)p(ete !n" correct*

: B!(!nce Sheet B!&ic& !n" the Acco#ntin E4#!tion

TEC)*ICAL +T,--! One t%pe of !cco#ntin report i& ! b!(!nce &heet. which i& b!&e" on the!cco#ntin e4#!tion: Assets # Liabilities $ %wners& Equity * The b!(!nce &heet 6 !(&o c!((e"! state!ent of financial condition 6 i& !


11/21

An !cco#ntin e4#!tion e !)p(e

S#ppo&e ! b#&ine&& report& 7* )i((ion in tot!( !&&et&* The tot!( of it& (i!bi(itie&. p(#& the c!pit!(in$e&te" b% it& owner&. p(#& it& ret!ine" profit. !""& #p to 7* )i((ion* Otherwi&e. it& book& wo#(" beo#t of b!(!nce. which )e!n& there !re bookkeepin error&*

Contin#in with thi& e !)p(e. ppo&e th!t the tot!( !)o#nt of the (i!bi(itie& of the b#&ine&& i& 1*)i((ion* Thi& )e!n& th!t the tot!( !)o#nt of owners& equity in the b#&ine&& i& 1* )i((ion. whiche4#!(& tot!( !&&et& (e&& tot!( (i!bi(itie&* The tot!( owner&8 e4#it% )!% be tr!ce!b(e to c!pit!( in$e&te"b% the owner& in the b#&ine&& !& we(( !& profit ret!ine" in the b#&ine&&* The tot!( of the&e two&o#rce& of owner&8 e4#it% i& 1* )i((ion*

The fin!nci!( con"ition of the b#&ine&& in thi& e !)p(e i& ))!ri/e" in the fo((owin accountingequation 2in )i((ion&3:

'(.) assets # '*.+ liabilities $ '*.) owners& equity

Lookin !t the !cco#ntin e4#!tion. %o# c!n &ee wh% the &t!te)ent of fin!nci!( con"ition i& c!((e"the balance sheet , the e4#!( &i n )e!n& the two &i"e& b!(!nce*

Important! ouble-entry bookkeeping i& b!&e" on the !cco#ntin e4#!tion 6 the f!ct th!t the tot!(of !&&et& on the one &i"e i& co#nterb!(!nce" b% the tot!( of (i!bi(itie&. in$e&te" c!pit!(. !n" ret!ine"profit on the other &i"e* Do#b(e'entr% bookkeepin )e!n& th!t both &i"e& of tr!n&!ction& !rerecor"e"* For e !)p(e. if one !&&et oe& #p. !nother !&&et oe& "own 6 or. !(tern!ti$e(%. either !

(i!bi(it% or owner&8 e4#it% oe& #p* Thi& i& the econo)ic n!t#re of tr!n&!ction&* Do#b(e'entr%)e!n& two-sided, not th!t the tr!n&!ction& !re recor"e" twice*

J: The Ei ht Step& of the Acco#ntin C%c(e

A& ! bookkeeper. %o# co)p(ete %o#r work b% co)p(etin the t!&k& of the !cco#ntin c%c(e* It8& c!((e"! c%c(e bec!#&e the !cco#ntin workf(ow i& circ#(!r: enterin tr!n&!ction&. )!nip#(!tin thetr!n&!ction& thro# h the !cco#ntin c%c(e. c(o&in the book& !t the en" of the !cco#ntin perio".

!n" then &t!rtin the entire c%c(e ! !in for the ne t !cco#ntin perio"*The !cco#ntin c%c(e h!& ei ht b!&ic &tep&. which %o# c!n &ee in the fo((owin i((#&tr!tion* The&e&tep& !re "e&cribe" in the (i&t be(ow*


12/21

./ Transactions

Fin!nci!( tr!n&!ction& &t!rt the proce&&* Tr!n&!ction& c!n inc(#"e the &!(e or ret#rn of ! pro"#ct.the p#rch!&e of pp(ie& for b#&ine&& !cti$itie&. or !n% other fin!nci!( !cti$it% th!t in$o($e& thee ch!n e of the co)p!n%8& !&&et&. the e&t!b(i&h)ent or p!%off of ! "ebt. or the "epo&it fro) orp!%o#t of )one% to the co)p!n%8& owner&*

0/ %ournal entries

The tr!n&!ction i& (i&te" in the !ppropri!te 9o#rn!(. )!int!inin the 9o#rn!(8& chrono(o ic!( or"erof tr!n&!ction&* The 9o#rn!( i& !(&o known !& the book of ori in!( entr% !n" i& the fir&t p(!ce !tr!n&!ction i& (i&te"*

1/ Postin

The tr!n&!ction& !re po&te" to the !cco#nt th!t it i)p!ct&* The&e !cco#nt& !re p!rt of theGener!( Le" er. where %o# c!n fin" ! ))!r% of !(( the b#&ine&&8& !cco#nt&*

2/ Trial balance At the en" of the !cco#ntin perio" 2which )!% be ! )onth. 4#!rter. or %e!r "epen"in on !b#&ine&&8& pr!ctice&3. %o# c!(c#(!te ! tri!( b!(!nce*

3/ 4or5sheet


13/21

Unfort#n!te(%. )!n% ti)e& %o#r fir&t c!(c#(!tion of the tri!( b!(!nce &how& th!t the book& !ren8t inb!(!nce* If th!t8& the c!&e. %o# (ook for error& !n" )!ke correction& c!((e" ad ust!ents, which!re tr!cke" on ! work&heet*

A"9#&t)ent& !re !(&o )!"e to !cco#nt for the "epreci!tion of !&&et& !n" to !"9#&t for one'ti)e

p!%)ent& 2ch !& inr!nce3 th!t &ho#(" be !((oc!te" on ! )onth(% b!&i& to )ore !cc#r!te(%)!tch )onth(% e pen&e& with )onth(% re$en#e&* After %o# )!ke !n" recor" !"9#&t)ent&. %o#t!ke !nother tri!( b!(!nce to be re the !cco#nt& !re in b!(!nce*

6/ A 7ustin 7ournal entries

=o# po&t !n% correction& nee"e" to the !ffecte" !cco#nt& once %o#r tri!( b!(!nce &how& the!cco#nt& wi(( be b!(!nce" once the !"9#&t)ent& nee"e" !re )!"e to the !cco#nt&* =o# "on8tnee" to )!ke !"9#&tin entrie& #nti( the tri!( b!(!nce proce&& i& co)p(ete" !n" !(( nee"e"correction& !n" !"9#&t)ent& h!$e been i"entifie"*

8/ -inancial statements

=o# prep!re the b!(!nce &heet !n" inco)e &t!te)ent #&in the correcte" !cco#nt b!(!nce&*

9/ Closin the boo5s

=o# c(o&e the book& for the re$en#e !n" e pen&e !cco#nt& !n" be in the entire c%c(e ! !in with/ero b!(!nce& in tho&e !cco#nt&*

Important! A& ! b#&ine&&per&on. %o# w!nt to be !b(e to !# e %o#r profit or (o&& on )onth b%)onth. 4#!rter b% 4#!rter. !n" %e!r b% %e!r b!&e&* To "o th!t. ?e$en#e !n" E pen&e !cco#nt&)#&t &t!rt with ! /ero b!(!nce !t the be innin of e!ch !cco#ntin perio"* In contr!&t. %o# c!rr%o$er A&&et. Li!bi(it%. !n" E4#it% !cco#nt b!(!nce& fro) c%c(e to c%c(e*

K: Choo&in !n Acco#ntin 5etho" for =o#r B#&ine&&

Different b#&ine&&e& )!ke "ifferent !cco#ntin "eci&ion&* So)e b#&ine&&e& choo&e con&er$!ti$e!cco#ntin )etho"& whi(e other& choo&e (iber!( !cco#ntin )etho"&* Acco#ntin i& )ore th!n 9#&tre!"in the f!ct& or interpretin the fin!nci!( o#tco)e& of b#&ine&& tr!n&!ction&* Acco#ntin !(&ore4#ire& !cco#nt!nt& to choo&e between !(tern!ti$e !cco#ntin )etho"&*

Si)i(!r to the con&er$!ti$e &t!te& !n" (iber!( &t!te& !""re&&e" in po(itic&. !cco#ntin h!&:

Conservative accountin metho s: The&e !cco#ntin )etho"& "e(!% the recor"in of

re$en#e !n" !cce(er!te the recor"in of e pen&e&* 0rofit i& reporte" &(ow(%*

Liberal accountin metho s: The&e !cco#ntin )etho"& !cce(er!te the recor"in of

re$en#e !n" "e(!% the recor"in of e pen&e&* 0rofit i& reporte" 4#ick(%*


14/21

In ener!( ter)&. con&er$!ti$e !cco#ntin )etho"& !re pe&&i)i&tic. !n" (iber!( )etho"& !reopti)i&tic* The choice of !cco#ntin )etho"& !(&o !ffect& the $!(#e& reporte" for !&&et&. (i!bi(itie&.!n" owner&8 e4#itie& in the b!(!nce &heet*

Acco#ntin )etho"& )#&t &t!% within the bo#n"!rie& of Gener!((% Accepte" Acco#ntin 0rincip(e&2GAA03* A b#&ine&& c!n8t con9#re #p !cco#ntin )etho"& o#t of thin !ir* GAA0 i&n8t ! &tr!it9!cket, it(e!$e& p(ent% of wi (e roo). b#t the one f#n"!)ent!( con&tr!int i& th!t ! b#&ine&& )#&t &tick withit& !cco#ntin )etho" when it )!ke& ! choice*

Con&i&tenc% i& the r#(e, the &!)e !cco#ntin )etho"& )#&t be #&e" %e!r !fter %e!r* The Intern!(?e$en#e Ser$ice 2I?S3 !((ow& b#&ine&&e& to ch!n e their !cco#ntin )etho"& once in ! whi(e. b#tthe 9#&tific!tion h!& to be per!&i$e*

A new b#&ine&& with no !cco#ntin hi&tor% h!& to )!ke !cco#ntin "eci&ion& ch !& the fo((owin .

for the fir&t ti)e: If the b#&ine&& &e((& pro"#ct&. it h!& to &e(ect which co&t of oo"& &o(" e pen&e )etho" to

#&e*

If the b#&ine&& own& fi e" !&&et&. it h!& to &e(ect which "epreci!tion )etho" to #&e*

If the b#&ine&& )!ke& &!(e& on cre"it. it h!& to "eci"e which b!" "ebt& e pen&e )etho" to

#&e*

Important! The choice& of !cco#ntin )etho"& for the&e three e pen&e& 6 co&t of oo"& &o("."epreci!tion. !n" b!" "ebt& 6 c!n )!ke ! &i/!b(e "ifference in the !)o#nt of profit or (o&& recor"e"for the %e!r* Choo&in con&er$!ti$e !cco#ntin )etho"& for the&e three e pen&e& c!n c!#&e profitfor the %e!r to be (ower b% ! re(!ti$e(% (!r e percent co)p!re" with #&in (iber!( !cco#ntin )etho"&for the e pen&e&*

1 : The B!&ic& of Do#b(e'Entr% Bookkeepin

A(( b#&ine&&e&. whether the% #&e the c!&h'b!&i& !cco#ntin )etho" or the !ccr#!( !cco#ntin)etho". #&e double-entry bookkeeping to keep their book&* A pr!ctice th!t he(p& )ini)i/e error&

!n" incre!&e the ch!nce th!t %o#r book& b!(!nce. "o#b(e'entr% bookkeepin et& it& n!)e bec!#&e%o# enter !(( tr!n&!ction& twice*

Important!


15/21

In or"er to !"9#&t the b!(!nce of !cco#nt& in the bookkeepin wor(". %o# #&e ! co)bin!tionof debits !n" credits. =o# )!% think of ! "ebit !& ! btr!ction bec!#&e %o#8$e fo#n" th!t "ebit!((% )e!n ! "ecre!&e in %o#r b!nk b!(!nce* An". %o#8$e prob!b(% fo#n" #ne pecte" cre"it& in%o#r b!nk or cre"it c!r" !cco#nt th!t )e!n )ore )one% h!& been !""e" in %o#r f!$or* Now for etwh!t %o#8$e (e!rne" !bo#t "ebit& or cre"it&* In bookkeepin . their )e!nin & !ren8t &o &i)p(e*

Important! The on(% "efinite thin when it co)e& to "ebit& !n" cre"it& in the bookkeepin wor(" i&th!t ! "ebit i& on the (eft &i"e of ! tr!n&!ction !n" ! cre"it i& on the ri ht &i"e of ! tr!n&!ction*

Tr!n&!ction 1: 0#rch!&in !n ite) with c!&h

Here8& !n e !)p(e of the pr!ctice in !ction* S#ppo&e %o# p#rch!&e ! new "e&k th!t co&t& 1. for %o#r office* Thi& tr!n&!ction !ct#!((% h!& two p!rt&: =o# &pen" !n !&&et 6 c!&h 6 to b#% !nother!&&et 6 f#rnit#re* So. %o# )#&t !"9#&t two !cco#nt& in %o#r co)p!n%8& book&: the C!&h !cco#nt

!n" the F#rnit#re !cco#nt* Here8& wh!t the tr!n&!ction (ook& (ike in ! bookkeepin entr%:

Purchasin a *e ;ffice #es5

Account #ebit Cre it

F#rnit#re 1.

C!&h 1.

In thi& tr!n&!ction. %o# recor" the !cco#nt& i)p!cte" b% the tr!n&!ction* The "ebit incre!&e& the$!(#e of the F#rnit#re !cco#nt. !n" the cre"it "ecre!&e& the $!(#e of the C!&h !cco#nt* For thi&tr!n&!ction. both !cco#nt& i)p!cte" !re !&&et !cco#nt&. &o. (ookin !t how the b!(!nce &heet i&!ffecte", %o# c!n &ee th!t the on(% ch!n e& !re to the !&&et &i"e of the b!(!nce &heet e4#!tion:


F#rnit#re incre!&e No ch!n e to thi& &i"e of the e4#!tion

C!&h "ecre!&e

In thi& c!&e. the book& &t!% in b!(!nce bec!#&e the e !ct "o((!r !)o#nt th!t incre!&e& the $!(#e of%o#r F#rnit#re !cco#nt "ecre!&e& the $!(#e of %o#r C!&h !cco#nt* At the botto) of !n% 9o#rn!( entr%.%o# &ho#(" inc(#"e ! brief "e&cription th!t e p(!in& the p#rpo&e for the entr%*


16/21

Tr!n&!ction 7: 0#rch!&in ite)& on cre"it

To &how %o# how %o# recor" ! tr!n&!ction if it i)p!ct& both &i"e& of the b!(!nce &heet e4#!tion.here8& !n e !)p(e th!t &how& how to recor" the p#rch!&e of in$entor%* S#ppo&e th!t %o# p#rch!&e. worth of wi" et& on cre"it*

The&e new wi" et& !"" $!(#e to %o#r In$entor% A&&et !cco#nt !n" the% !(&o !"" to %o#r Acco#nt&0!%!b(e !cco#nt* 2?e)e)ber. the Acco#nt& 0!%!b(e !cco#nt i& ! Li!bi(it% !cco#nt where %o# tr!ckbi((& th!t nee" to be p!i" !t &o)e point in the f#t#re*3 Here8& how the bookkeepin tr!n&!ction for%o#r wi" et p#rch!&e (ook&:

Purchasin 4i ets for +ale to Customers

Account #ebit Cre it

In$entor% .

Acco#nt& 0!%!b(e .

Here8& how thi& tr!n&!ction !ffect& the b!(!nce &heet e4#!tion:


In$entor% incre!&e& Acco#nt& 0!%!b(e incre!&e& ; No ch!n e

In thi& c!&e. the book& &t!% in b!(!nce bec!#&e both &i"e& of the e4#!tion incre!&e b% . *

Important! =o# c!n &ee fro) the two e !)p(e tr!n&!ction& how "o#b(e'entr% bookkeepin he(p& tokeep %o#r book& in b!(!nce 6 !& (on !& %o# )!ke re e!ch entr% into the book& i& b!(!nce"*B!(!ncin %o#r entrie& )!% (ook &i)p(e here. b#t &o)eti)e& bookkeepin entrie& c!n et $er%co)p(e when )ore th!n two !cco#nt& !re i)p!cte" b% the tr!n&!ction*

11: +e% B!&ic Acco#nt& for B!(!nce Sheet& !n" Inco)e St!te)ent&

A bookkeeper tr!ck& !(( the fin!nci!( tr!n&!ction& of ! b#&ine&& !n" i& re&pon&ib(e for i"entif%in the!cco#nt in which e!ch tr!n&!ction &ho#(" be recor"e"* Acco#ntin pro$i"e& the &tr#ct#re %o# )#&t#&e to or !ni/e the&e tr!n&!ction&. !& we(( !& the proce"#re& %o# )#&t #&e to recor". c(!&&if%. !n"report infor)!tion !bo#t %o#r b#&ine&&*


17/21

In )o&t c!&e&. the !cco#ntin &%&te) wi(( be &et #p with the he(p of !n !cco#nt!nt to be re theinfor)!tion ener!te" b% th!t &%&te) wi(( be #&e!b(e !n" )eet& the re4#ire)ent& of &o(i"!cco#ntin princip(e&*

Important! A bookkeepin &%&te) i& "e&i ne" b!&e" on the "!t! nee"e" for the two ke% fin!nci!(report& 6 the b!(!nce &heet !n" the inco)e &t!te)ent* The b!(!nce &heet i$e& %o# ! &n!p&hot of! b#&ine&& !& of ! p!rtic#(!r "!te* The inco)e &t!te)ent i$e& %o# ! ))!r% of !(( tr!n&!ction&"#rin ! p!rtic#(!r perio" of ti)e. #!((% ! )onth. ! 4#!rter. or ! %e!r*

The ke% b!(!nce &heet !cco#nt& inc(#"e:

Assets: E$er%thin the b#&ine&& own& in or"er to oper!te cce&&f#((% i& con&i"ere" !n

!&&et* Thi& inc(#"e& c!&h. b#i("in &. (!n". too(&. e4#ip)ent. $ehic(e&. !n" f#rnit#re* E!ch t%pe of!&&et h!& ! &ep!r!te !cco#nt* Another !&&et i& the Acco#nt& ?ecei$!b(e !cco#nt 2)one% "#e

fro) c#&to)er& who bo# ht on cre"it3* Inventory: 0ro"#ct& on h!n" th!t the b#&ine&& p(!n& to &e((*

Liabilities: A(( the )one% the co)p!n% owe& to other& !re con&i"ere" (i!bi(itie&* Thi&

inc(#"e& #np!i" bi((& 2c!((e" Acco#nt& 0!%!b(e !cco#nt3. (o!n&. !n" bon"&* E!ch t%pe of (i!bi(it%wi(( h!$e ! &ep!r!te !cco#nt*

Equity: A(( the )one% in$e&te" in the co)p!n% b% the owner& or &tock ho("er& i& con&i"ere"

e4#it%* E!ch t%pe of e4#it%. !n" po&&ib(% e!ch owner in ! &)!(( b#&ine&&. wi(( h!$e ! &ep!r!te

!cco#nt*

The ke% inco)e &t!te)ent !cco#nt& inc(#"e:

Revenue: A(( the )one% ! b#&ine&& recei$e& in &e((in it& pro"#ct& or &er$ice& i& c!((e"

re$en#e or &!(e& !n" tr!cke" in the&e !cco#nt&*

Cost of oo s sol : A(( )one% the co)p!n% )#&t &pen" to b#% or )!n#f!ct#re the oo"&

or &er$ice& it &e((& to c#&to)er& i& tr!cke" in the&e !cco#nt&* An !cco#nt c!((e" 0#rch!&e& i&e" to tr!ck oo"& p#rch!&e"*

E"penses: A(( )one% th!t i& &pent to r#n the co)p!n% th!t i& not re(!te" &pecific!((% to !

pro"#ct or &er$ice bein &o(" i& tr!cke" in e pen&e !cco#nt&* For e !)p(e. Office S#pp(ie&. A"$erti&in . S!(!rie&. !n"


18/21


19/21

Cost of $oo s +ol : Inc(#"e& !(( !cco#nt& th!t tr!ck the "irect co&t& in$o($e" in &e((in the

co)p!n%8& oo"& or &er$ice&*

E"penses: Inc(#"e& !(( !cco#nt& th!t tr!ck e pen&e& re(!te" to r#nnin the b#&ine&&e& th!t

!ren8t "irect(% tie" to the &!(e of in"i$i"#!( pro"#ct& or &er$ice&*


20/21

onnections between inco!e state!ent and balance sheet accounts.

Here8& ! 4#ick ))!r% e p(!inin the (ine& of connection in the fi #re. &t!rtin fro) the top !n"workin "own to the botto):

5!kin &!(e& 2!n" inc#rrin e pen&e& for )!kin &!(e&3 re4#ire& ! b#&ine&& to )!int!in !workin c!&h b!(!nce*

5!kin &!(e& on cre"it ener!te& !cco#nt& recei$!b(e*

Se((in pro"#ct& re4#ire& the b#&ine&& to c!rr% !n in$entor% 2&tock3 of pro"#ct&*

Ac4#irin pro"#ct& in$o($e& p#rch!&e& on cre"it th!t ener!te !cco#nt& p!%!b(e*

Depreci!tion e pen&e i& recor"e" for the #&e of fi e" !&&et& 2(on 'ter) oper!tin re&o#rce&3*

Depreci!tion i& recor"e" in the !cc#)#(!te" "epreci!tion contr! !cco#nt 2in&te!" "ecre!&inthe fi e" !&&et !cco#nt3*

A)orti/!tion e pen&e i& recor"e" for (i)ite"'(ife int!n ib(e !&&et&*

Oper!tin e pen&e& i& ! bro!" c!te or% of co&t& enco)p!&&in &e((in . !")ini&tr!ti$e. !n"

ener!( e pen&e&:

So)e of the&e oper!tin co&t& !re prep!i" before the e pen&e i& recor"e". !n" #nti(

the e pen&e i& recor"e". the co&t &t!%& in the prep!i" e pen&e& !&&et !cco#nt*

So)e of the&e oper!tin co&t& in$o($e p#rch!&e& on cre"it th!t ener!te !cco#nt&

p!%!b(e* So)e of the&e oper!tin co&t& !re fro) recor"in #np!i" e pen&e& in the !ccr#e"

e pen&e& p!%!b(e (i!bi(it%*

7 Borrowin )one% on note& p!%!b(e c!#&e& intere&t e pen&e*

> A portion 2#!((% re(!ti$e(% &)!((3 of inco)e t! e pen&e for the %e!r i& #np!i" !t %e!r'en".which i& recor"e" in the !ccr#e" e pen&e& p!%!b(e (i!bi(it%*


21/21

@ E!rnin net inco)e incre!&e& ret!ine" e!rnin &*

the essentials of accounting basics

Documents