Guide to Basic Bookkeeping

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Guide to Ba sic Bookkeeping What is Bookkeeping? Bookkeeping is the process of recording and classifying business financial transactions, or to put it another way, the process of maintaining the records of a business’s financial activities. The objective in bookkeeping is to create a useable summary of financial transactions, which provides a snapshot of the business’s financial stability. Types of Bookkeeping Systems The most basic form of accounting is the single-entry system. In this system,
    Guide to Basic Bookkeeping   What is Bookkeeping?  Bookkeeping is the process of recording and classifying business financialtransactions, or to put it another way, the process of maintaining the records of abusiness’s financial activities. The objective in bookkeeping is to create auseable summary of financial transactions, which provides a snapshot of thebusiness’s financial stability. Types of Bookkeeping Systems The most basic form of accounting is the single-entry system . In this system,you record each transaction only once, as either a deposit or as an expense.This system is generally used to determine the profit/loss of a business.However, the preferred system is the double-entry system . The double-entrysystem is more accurate, and has built-in checks and balances. In this system,each transaction is recorded twice, in each “account” it affects. This is a morethorough method of keeping a business’s financial transaction in order. Basic Elements of Bookkeeping  There are three basic elements of bookkeeping: assets, liabilities, and netassets. Assets are all items used in the operation or investment activities of a business.This category includes all property, or items of value, owned by a business.Examples include cash, buildings, land, vehicles, tools, inventory, office supplies,furniture, investments, and accounts receivable (any funds owed to thebusiness).Increases in assets are called debits . Decreases in assets are called credits .Generally, various assets are referred to as debit accounts . Liabilities are claims by creditors to the assets of a business, or debts owed bythe business to others. Types of liabilities include loans, notes payable, and linesof credit. Net assets are the equity earned by the business. Net assets are the value of the business once all liabilities have been paid. It can also be called owner’s   equity , capital , net worth , profit , or  proprietorship .Increases in liabilities or net assets are called credits , and decreases in liabilitiesor net assets are called debits . Generally, a company’s liabilities and net assetsare referred to as credit accounts .There are also several other things to keep in mind when considering acompany’s net assets: ã   Revenue is the increase in net worth resulting from the operationsand other activities of the business. Revenue includes incomeearned through the business’s services, interest earned oninvestments, and contributions from individuals or foundations.Although net assets are considered to be credit accounts, sourcesof revenue are actually considered to be debit accounts. ã   Expenses are the costs of doing business. This includes the costof goods, fixed assets, and services/supplies used in the business’soperations. Examples of expenses include salaries, rent, travelexpenses, and the costs of supplies and utilities. Expenses arecredit accounts. ã Net assets are calculated by subtracting total expenses from totalrevenue, on a yearly basis. Whenever revenue is received, netassets increase. Whenever expenses are paid, net assetsdecrease. The Bookkeeping Equation The basic elements of bookkeeping can be expressed in a simple equation: Assets = Liabilities + Net Assets In other words, the property of a business must be equal to the claims againstthat property. A bookkeeper wants to track not only the properties acquired bythe business, but also how those properties were acquired and from whom.Another way to think of this equation, which is helpful when consideringbookkeeping documents, is: Assets – Liabilities = Net AssetsTypes of Business Transactions All business transactions result in at least two changes to the bookkeepingequation. In other words, a transaction that changes a business’s assets mustalso change that business’s liabilities or net assets.  Some transactions increase accounts. If a business’s assets increase, thenthere must also be an increase in either liabilities or net assets.For example, Business X has $5000 worth of assets, which is equal to$2000 worth of liabilities plus $3000 worth of net assets.$5000 = $2000 + $3000(assets) = (liabilities) + (net assets)Business X then borrows $2000 from the Bank. This is a liability, becauseit is a debt owed to the Bank. The transaction could be expressed thusly:$5000 = $2000 + $3000+$2000 = + $2000 + -0-$7000 = $4000 + $3000Later, Business X receives a $5000 grant. This is a new asset, as it is anitem of value now owned by the business. The new equation would be:$7000 = $4000 + $3000+ $5000 = -0- + +$5000   $12000 = $4000 + $8000Other transactions can decrease accounts. If a business’s assets decrease, somust either its liabilities or its net assets.Business X decides to pay back half of the amount it owes the Bank($1000). The new equation is:$12000 = $4000 + $8000- $1000 = -$1000 + -0-$11000 = $3000 + $8000 Recording Transactions: Journals  A  journal is the first book in which complete information about a transaction isrecorded. A business often keeps multiple journals, which are categorized basedon the type of transaction. These journals include:  ã   Cash Disbursements Journal , in which to record all checks written or allcash spent;   ã   Cash Receipts Journal , in which to record all cash or checks depositedby the business;   ã   General Journal , in which to record all non-cash transactions (such asacquisition of furniture or supplies);   ã   Payroll Journal , in which to record all payroll-related transactions;   ã   Accounts Payable and Accounts Receivable Journal , in which torecord all income and expense accruals   The general journal is the type of journal most often used by a business.Each page of each journal should be numbered. Each page should contain achart, with the following column headings: complete date (month, day and year);name of the account credited or debited; posting references; amount debited;and amount credited. Furthermore, all entries should be in chronological order.Debit accounts should always be written down first when recording transactionsin a journal. For example, if Business X were to receive a $1000 donation, the journal entry would look as follows: Date   Account Title   PR   Debit   Credit   mm/dd/yy   Donation 1,000   00   Revenue and ExpenseSummary   1,000   00   Debit accounts are always listed first in a journal. Remember, a debit account iseither an asset that increases, or a liability or net asset that decreases. Becausethe $1000 donation increases Business X’s assets, the transaction is recordedfirst as a debit. But, per the accounting equation, this donation also increasesBusiness X’s net assets (as it is a source of revenue), and therefore must besecondarily recorded as a credit. Posting to the Ledger  A ledger  is a book that contains the accounts of the business. Each debit or credit account should have its own section in the ledger.Periodically, transactions srcinally recorded in the business’s journals should betransferred to the ledger, in a process called posting .
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