Part 1: Bookkeeping Basics

Role of a Bookkeeper

Tracking and Recording the financial transactions of a business

Accounts Payable

Money a business owes to others for goods or services

Accounts Receivable

Money owed to a business for goods or services

Responsibilities of bookkeeper

-Record Financial Transactions

-Reconcile Bank Accounts (Compare and match transactions in business's accounting records w those in the bank statement

-Manage Accounts Receivable & Payable

-Work with tax preparers & assist with tax compliance

-Generate Financial Statements

4 Components of Ethics

Honesty, Objectivity, Professionalism, and Confidentiality

Accounting Equation

Assets=Liabilities+Equity

Assets

What the business owns

Example: Cash, Equipment, Accounts Receivable, Inventory, Investments in other businesses, Buildings

Anything of value that the business owns or has potential to turn into cash

Liabilities

What the business owes to others

Example: Loans, Unpaid bills, mortgage, payroll, sales tax owed to the government, credit cards

Equity

How much the owner/owners have invested into the business and the accumulated profits or losses overtime. Businesses net worth.

Value of the business if it were to liquidate all assets to pay all liabilities

Balance Sheet

-The accounting equation displayed as a financial statement

-Snapshot of business assets, equity, and liability at a specific time

Revenue

Income earned through business operations

Gross proceeds from sales of products, services, rentals, ect.

Expenses

the costs of operating a business

Example: Labor costs like salaries, employee benefits, utilities, rent, insurance, taxes, advertising

Income Statement

Document that summarizes a clients financial performance

Revenues - Expenses = Net Income or Net Loss

Question:

Client bills homeowner for mowing their lawn, which balances will change?

Assets (what the business owns, like cash!) and

Revenue (income earned through business)

Debit

Increase in Assets or Expenses OR

Decrease in Liabilities, Owners equity, or Revenue

Credit

Decrease in Assets or Expense OR

Increase in Liabilities, Owners equity, or Revenue

Question:

When recording the purchase of office supplies purchased on account, which side of ledger should the accounts payable be recorded on?

Credit the accounts payable (liability) to reflect the increase in the amount owed

Question:

When recording the payment of salaries to employees, which side of the salary expense ledger should the transaction be recorded?

Debit the salary expense (increase in expense means debit) and credit the cash (asset) when recording the payment of salaries to employees

Economic Entity Assumption

Financial activities must be kept separate from any personal finances

Reliability Assumption

information recorded in clients financial documents is verifiable and backed by proper documentation

If invoice, receipt, or bank statement can't be provided, it is not a reliable transaction and cannot be recorded

Full Disclosure Principle

Any information lenders or investors may need to make informed decisions should be disclosed in the financial statements

Conservatism Principle

Err on the side of caution, choose the option that shows less income or asset benefit. Potential losses can be recorded while potential gains should not be.

Materiality Principle

states that an amount can be ignored if its effect on the financial statements is unimportant to users' business decisions

Example: Numbers are often rounded to the nearest dollar

Consistency Principle

Once a business uses a specific accounting method, all similar items should be recorded the same

Monetary Unit Assumption

Use one currency throughout all accounting activities

Going Concern Assumption

The assumption that the business is stable enough to operate and meet its obligations

Question:

Your client is considering buying a second photobooth using their suppliers financing services. Would the booth be considered an asset?

The booth is an asset while the transaction will add a liability since they will be financing

Question:

-Four shareholders contributed $60,000 ($15k each) in exchange for the gyms common stock

-The gym purchases inventory for $10,000 and pays cash for the invoice

How does this effect the accounting equation?

Assets increase by $60,000 and shareholders equity also increase by $60,000

Assets= Liability + Equity

$60,000= _______ + $60,000

Question:

If the Gym purchases increase liabilities by $600, what also needs to happen for the accounting equation to be in balance?

Add $600 to assets

Question:

The gym borrows $150,000 from the bank and uses the loan to buy a warehouse. What effect does this have on the accounting equation?

The assets and liabilities both increase by $150,000

The accounting Cycle

from the beginning of transaction to it's inclusion in the financial statements

The accounting cycle order

1) Collect and Analyze transactions

2)Record and Post transactions

3)Prepare unadjusted Trial Balance

4)Prepare adjusting entries

5)Prepare adjusted Trial Balances

6)Prepare financial Statements

Step 1 of the Accounting Cycle

a. Collect and analyze events to see if there are transactions that impact the business

b. Gather source documents that back up transactions

c. Review clients Chart of Accounts (list of accounts business uses for recording transactions)

Examples: Business purchases, paying off debts, or earning revenue from sales

Step 2 of the Accounting Cycle

a. Record and post all important information about each transaction by recording journal entries

b. Double Entry Accounting is done where every transaction is recorded as both a debit and credit in two or more subledger accounts

c. Once journal entries are entered and approved they are transferred as summary entries/"posted" to General Ledger (GL)

General Ledger (GL)

-Record of each financial transaction during life of the business

-Contains all accounts needed to prepare financial statements

Step 3 of the Accounting Cycle

Recorded transactions are combined into a trail balance (this is the unadjusted trial balance)

Step 4 of the Accounting Cycle

Prepare adjusting entries to ensure financial statements are accurate

Examples of adjusting entries:

Depreciation=spreads out the cost of an item over its useful life

Accrual Entries=records future payments or expenses to the current record

(usually provided to bookkeepers by CPA’s or Accountants)

Step 5 of Accounting Cycle

Prepare adjusted Trial Balance

-List of final balances in all accounts

-Shows that all changes and corrections have been accurately recorded and that accounts are in balance

Step 6 in Accounting Cycle

The adjusted trial balance is used to prepare financial statements

Statement of Equity

A report showing the difference between total assets and total liabilities resulting in overall value of owners equity

Statement of Cash Flows

Reports the cash generated and spent during a specific period of time (month, quarter, year)

Also acts as a bridge between the income statement and balance sheet by showing how cash is moved in and out of the business