Introduction to Bookkeeping
- Some people think that is the same as accounting. They assume that keeping a company's books and preparing its financial statements and tax reports are all part of bookkeeping. Accountants do not share their view.
- Others see as limited to recording transactions in journals or daybooks and then posting the amounts into accounts in ledgers. After the amounts are posted, the bookkeeping has ended and an accountant with a college degree takes over. The accountant will make adjusting entries and then prepare the financial statements and other reports.
- The past distinctions between bookkeeping and accounting have become blurred with the use of computers and accounting software. For example, a person with little bookkeeping training can use the accounting software to record vendor invoices, prepare sales invoices, etc. and the software will update the accounts in the general ledger automatically. Once the format of the financial statements has been established, the software will be able to generate the financial statements with the click of a button.
- At mid-size and larger corporations the term might be absent. Often corporations have accounting departments staffed with accounting clerks who process accounts payable, accounts receivable, payroll, etc. The accounting clerks will be supervised by one or more accountants.
Bookkeeping in the Old Days
- additional revenues and assets may have been earned but were not recorded
- additional expenses and liabilities may have been incurred but were not recorded
- some of the amounts that had been recorded by the bookkeeper may have been prepayments which are no longer prepaid
- depreciation and other non-routine adjustments needed to be computed and recorded
- revenues and assets that were earned, but not yet entered into the software
- expenses and liabilities that were incurred, but not yet entered into the software
- prepayments that are no longer prepaid
- recording depreciation expense, bad debts expense, etc.
- The purchase of supplies with cash.
- The purchase of merchandise on credit.
- The sale of merchandise on credit.
- Rent for the business office.
- Salaries and wages earned by employees.
- Buying equipment for the office.
- Borrowing money from a bank.
- Accrual method
- Cash method
- a more complete reporting of the company's assets, liabilities, and stockholders' equity at the end of an accounting period,
- a more realistic reporting of a company's revenues, expenses, and net income for a specific time interval such as a month, quarter or year.
- has earned revenue of $1,000,
- has earned a receivable of $1,000.
- the income statement account Service Revenues will be increased by $1,000,
- the asset Accounts Receivable will be increased by $1,000
- has incurred an expense of $200,
- has incurred a liability of $200.
- the income statement account Temporary Help Expense will be increased by $200,
- the liability Accounts Payable will be increased by $200.
- the asset Cash will be decreased by $200,
- the liability Accounts Payable will be decreased by $200.
- Earned revenue of $1,000
- Incurred an expense of $200
- No revenue, expense or net income would have been reported on the December income statement.
- The revenues of $1,000 might be reported in February if the customer paid in 35 days.
- The expense of $200 will be reported in January when Servco pays the temp agency.]
Double-Entry, Debits and Credits
Debits and Credits
- An entire transaction (both the debit amount and the credit amount) was omitted.
- An entire transaction was entered twice.
- An incorrect was entered as a debit and as a credit.
- An incorrect was debited.
- An incorrect was credited.
General Ledger Accounts
- Assets (Cash, Accounts Receivable, Land, Equipment)
- Liabilities (Loans Payable, Accounts Payable, Bonds Payable)
- Stockholders' equity (Common Stock, Retained Earnings)
- Operating revenues (Sales, Service Fees)
- Operating expenses (Salaries Expense, Rent Expense, Depreciation Expense)
- Non-operating revenues and gains (Investment Income, Gain on Disposal of Truck)
- Non-operating expenses and losses (Interest Expense, Loss on Disposal of Equipment)
- Balance sheet accounts
- Stockholders' (or Owner's) equity
- Income statement accounts
- Operating revenues
- Operating expenses
- Non-operating revenues and gains
- Non-operating expenses and losses
Debits and Credits in the Accounts
- The corporation receives cash, which is recorded as a corporation asset.
- The corporation issues shares of common stock. The amount received for the shares will be recorded as part of the corporation's stockholders' equity.
- Revenues of $400 are earned and that causes stockholders' equity to increase.
- The company earns the right to receive $400. This increases the company's asset account Accounts Receivable.
- An expense of $150 occurred and the expense will cause stockholders' equity to decrease.
- The company has reduced its asset Cash by $150.
- When cash is received, debit Cash.
- When cash is paid out, credit Cash.
- When revenues are earned, credit a revenue account.
- When expenses are incurred, debit an expense account.
- Stockholders' equity (or owner's equity)
- Short-term Investments
- Accounts Receivable
- Allowance for Doubtful Accounts (a contra-asset account)
- Accrued Revenues/Receivables
- Prepaid Expenses
- Long-term Investments
- Furniture and Fixtures
- Accumulated Depreciation (a contra-asset account)
Liability and Stockholders' Equity Accounts
- Short-term Loans Payable
- Current Portion of Long-term Debt
- Accounts Payable
- Accrued Expenses
- Unearned or Deferred Revenues
- Installment Loans Payable
- Mortgage Loans Payable
- Par value of the common stock, and
- Paid-in capital in excess of the par value of the common stock
Income Statement Accounts
- Operating revenues
- Operating expenses
- Other revenues and gains
- Other expenses and losses
- Sales Revenues
- Service Revenues
- Fees Earned
- Sales - Product Line #1
- Sales - Product Line #2
- Cost of Goods Sold
- Cost of Goods Sold - Product Line #1
- Salaries Expense
- Fringe Benefit Expense
- Rent Expense
- Utilities Expense
- Utilities Expense - Store #45
- Depreciation Expense - Buildings
- Depreciation Expense - Equipment
- Repairs Expense
- Comparing the following amounts
- The balance on the bank statement
- The balance in the company's general ledger account. (The account title might be Cash - checking.)
- Outstanding checks (checks written but not yet clearing the bank)
- Deposits in transit (company receipts that are not yet deposited in the bank)
- Bank service charges and other bank fees
- Check printing charges
- Errors in entering amounts in the company's general ledger
- You must identify the two or more accounts involved
- One of the accounts will be a balance sheet account
- The other account will be an income statement account
- You must calculate the amounts for the adjusting entries
- You will enter both of the accounts and the adjustment in the general journal
- You must designate which account will be debited and which will be credited.
- Accrued revenues
- Accrued expenses
- Balance Sheet
- Income Statement
- Cash Flow Statement
- Statement of Stockholders' Equity
- Paid-in capital (the amounts paid by investors when the original shares of a corporation were issued)
- Retained earnings (the earnings of the corporation since it began minus the amounts that were distributed in the form of dividends to the stockholders)
- Treasury stock (a subtraction that represents the amount paid to repurchase the corporation's own stock)
- The first subtraction results in the subtotal .
- The second subtraction results in the subtotal .
- The third subtraction provides the bottom line .
Cash Flow Statement
- Operating activities
- Investing activities
- Financing activities
- the amount of paid
- the amount of paid
- of major items that did not involve cash (such as exchanging land for common stock, converting bonds into common stock, etc.).
- Direct method
- Indirect method
- The cash received from selling long-term assets. These are reported as amounts.
- The cash used to purchase long-term assets. These are reported as amounts.
- Issuing bonds payable
- Borrowing through other long-term loans
- Issuing shares of stock
- Borrowing through short-term loans
- Retiring (paying off) long-term debt
- Purchasing shares of the company's stock (treasury stock)
- Paying dividends to stockholders
- Repaying short-term loans
Statement of Stockholders' Equity
The closing process
- Separate the handling of cash from the person processing accounts receivable.
- Have the bank statement reconciled by someone who does not process the receipts or record the amounts in the general ledger cash account.
- Have the owner of a small company approve all purchase orders.
- Have the owner of a small company review all payments and sign all checks.
- Have all credit memos to customers be approved by the owner.