accounting and bookkeeping by alma12

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Bookkeeping and Accounting - From Start to Finish

                            Basic Bookkeeping - A Tutorial
                      Monthly Accounting - A Walk-through Guide

                              HOW TO USE THIS TUTORIAL

     Okay, here's the scenario for this walk-through lesson: Let's assume that you are
     sitting down to do your monthly bookkeeping. It is a day slightly past the end of
     the month you are doing the books for - say, the tenth. The sun is shining, a bird
     is chirping outside your window... oops, sorry I got a little carried away there.
     Anyway, you paid as many bills as you could before the end of last month, you've
     received most bills you're going to get and - you're ready to do the monthly

     In this walk-through guide we'll cover the activities associated with your monthly
     accounting, section by section. We'll include a description of what you'll be doing
     as well as why you're doing it. We'll also include an explanation of the "debits &
     credits" in this guide, but as we've noted in a prior section, if you are using an
     accounting software application, the debits & credits are generally taken care of
     for you -- at least until you have to record journal entries, etc. So our approach
     will be based on a "semi-manual" set of books so that you learn more about the
     "why" -- this will make the job easier in the long run and provide you with a better
     foundation for really using your monthly financial statements.

     Here's a list of what will be covered in this walk-through guide:

     Expenses Paid by Check                     Expenses Paid by Cash
     Accounts Payable                           Cash Discounts - Purchases
     Petty Cash                                 Payroll
     Sales & Customer Deposits                  Accounts Receivable
     Deposits                                   Inventory
     Depreciation                               Sale of Assets
     Suspense                                   Month End Adjustments
     Paper Trail                                Owner's Review Checklist
     Accounting Software                        Professional Help

     Expenses paid by check. Go through and enter all the other checks you have
     written by check number and to whom they were written. In general, all those
     entries will be credit cash; debit expense (decrease cash, increase expense).
     Make sure you put everything in the correct expense account. (And, since you
     have followed your "rule" about writing down the expense category right when
     you made the purchase you don't have any trouble remembering what this
     purchase was for, right?) The exceptions to this have been noted above:
     payments on loans, payments made on large equipment or fixtures, or additions
     to inventory.
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     Expenses paid by cash. You may have paid for some things with cash. The
     entry here is exactly the same as if you paid with a check - it's just keeping track
     of these things that's different. You should have a file of receipts, and most of
     them will match a check (it will be easier to confirm if you've written the check
     number on the receipt). Any that were paid with cash should have that noted on
     them, along with what the item or account number was. Same entry - debit,
     expense, credit, and cash.

     If you have more than one cash account, have a separate account number for
     each bank account, and credit the account from which you are actually taking the
     money out of. If you move money from a savings to a checking account, the entry
     will be: credit (reduce) savings; and debit (increase) checking.

     Accounts Payable. At the end of any given month, you have things you have
     used or purchased, but have not paid for. These are listed as accounts payable.
     When you enter these bills, your entry is debit expense, credit accounts payable.
     Each month, you need to make and keep a list of items that were in accounts
     payable at the end of the month. When you are closing out our sample month,
     you will have paid these bills, which were in AP the previous month, reducing
     your cash. Using your list, identify the checks written for items that were listed in
     accounts payable the month before. You already listed the expenses the prior
     month - so you don't list them again. The entry to show on your books that you
     have paid your accounts payable is: debit accounts payable, credit cash. Reduce
     your cash; reduce your accounts payable. Assuming you pay all your bills each
     month, this step will bring your accounts payable to zero (and if not, the accounts
     payable balance per your books should equal all the outstanding bills). Later, you
     will rebuild a new AP list for the current month.

     Cash Discounts - purchases. In our sample chart of accounts we have set up
     account number 7100 for cash discounts on purchases. If you are paying a
     material order and get to deduct 2% for paying early, by all means, try to do so.
     This is where that amount goes: you debit the entire expense to the materials
     account as if you didn't take the discount, but credit the actual amount of your
     check to cash, and credit the remainder to the cash discounts account. This
     helps you see the value of paying early, and if you're in a position to do this fairly
     regularly, it looks great to your banker - so take the time to book it correctly.

     Petty Cash. Petty cash is a handy item to have for small purchases, but it needs
     to be accounted for correctly. Do a one-time entry in your books to set up the
     petty cash account. If you want $300 in the account, credit the bank account you
     are taking the cash from, and debit your petty cash account. Then put that petty
     cash in a box. Every time you take some out to spend, keep track of what you've
     taken out, with a receipt, and at the end of the month you'll have a list that looks
     like this:

Supplies (coffee, paper)                     $25.00
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Small tools                                  $13.52
Postage                                      $22.30

    Write a check to petty cash, which will be for the total of what you spent over the
    month, or $60.82. When you enter that check, credit cash and debit the three
    appropriate expense account numbers - supplies, small tools and postage. Cash
    the check, put the cash into the box, and start all over again. You can do this as
    many times over the month as you need to - every time you need to replenish the
    petty cash box, just write a check and make the balancing entries the same way.
    You never make the entries to Petty Cash itself after you initially set up the
    account, unless you want to make it larger or smaller at some point.

    Payroll. This one's a bit've actually done a lot of things when you
    write that paycheck. If you have an accounting system and are using payroll, you
    should be in good shape - but even then, you may need some understanding of
    exactly what that system is doing for you. If you're doing payroll by hand, you will
    calculate and record the components described below.

              In Payroll you have:

        o     the wages themselves,
        o     the taxes the government makes you withhold,
        o     and taxes that you have to pay that you don't withhold.

    Gross wages get debited to the wages expense account - divided properly
    between direct and indirect labor. (Recall that gross wages for people actually
    producing your goods or providing your services are direct expenses; gross
    wages for the office help and sales are indirect expenses.)

    Payroll taxes. Some of these come out of the employee's check - the federal
    withholding and the employee's share of FICA. Others come out of your pocket,
    like the employer portion of FICA, state and federal unemployment taxes. The
    ones that come out of your pocket require two entries: they get debited to payroll
    tax expense (either direct or indirect, depending on where the employee's wages
    go), and credited to the proper liability account - either FICA payable, Fed
    payable, UI payable, FUTA payable or Workers Compensation payable.

    Determining tax liabilities. For each of these you have to figure the total due
    based on the gross wages for that period - these taxes are figured as a percent
    of gross. For example, when the FICA and Medicare tax is 7.65% of gross
    wages, you take the gross wage, multiply it by .0765, and that is what you owe
    for the employer portion of FICA. You can get a chart which shows the Federal
    and state taxes due for each employee, based on their W-4 status and earnings.
    Unemployment will be based partly on a state multiplier and partly on your
    company's unemployment history. Workers compensation will depend on the
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    industry code your employees work under, as well as your company's

    All the taxes that are withheld from the employee's check as well as those which
    come out of your pocket - are listed as liabilities, and are easier to deal with if you
    sort them out by what kind of tax they are. In the liability accounts, there is no
    need to separate direct from indirect numbers - it's just plain money you owe, and
    it doesn't matter whether it comes out of the employees check or out of you
    pocket. The FICA payable, for example, will contain all the FICA that was
    withheld from everyone's check, in addition to the amount that you are matching
    as the employer.

    Here's the picture of what you do with payroll, using a fictitious shop person
    who's going to have his salary listed under 4010, direct labor. In this payroll
    period, he made $700.00. His workers' compensation rate is 13.2 %.

                                                    Debit              Credit
4010 Gross wages                                    700.00
2102 FICA withheld                                                      53.55
2100 Fed withheld                                                       42.00
2104 State tax withheld                                                 19.00
1001 Cash (paycheck amount)                                            585.45
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    Up to this point, the entries balance, as they must. Now, to enter the employer's
    tax expenses:

                                                   Debit             Credit
2102 FICA Payable                                                    53.55
2103 FUTA Payable                                                     5.60
2105 State Unemployment payable                                      19.60
5015 Payroll Tax Expense                           78.75
2107 Workers Comp Payable                                            92.40
5023 Workers Comp Expense                          92.40

    As a side note, here's a point you need to keep in mind: that person, who you
    thought was costing you $585.45, because that's what her paycheck says, or is
    costing you his gross wage of $700.00, is actually costing you $871.15 ($700
    wages plus the payroll tax costs to you, which in this case total $171.15). If
    you're adding any benefits like insurance or retirement, put those on top. This is a
    prime example of the kind of overhead you need to make sure gets added into
    your pricing structure.

    Sales & Customer Deposits. OK, now you've entered your accounts payable,
    your expenses, your payroll. Now for the good stuff - let's enter your sales.
    Remember: sales accounts are credit accounts. So when you want to increase
    the amount of sales. You have made, you make the entry as a credit entry.
    These entries are pretty easy, on the surface: you receive a check and put it in
    your account: debit cash. The sale, if it is an item you have on hand and give to
    the buyer, you enter as an immediate sale. Credit sales, the equal amount that
    you debited cash.

    HOWEVER, if you have just signed a contract, and have not actually done any
    work on that project this month, you have not yet earned that sale. You're just
    holding the person's money for them, keeping it safe. Right? So, it is not yet truly
    a sale - it's a customer deposit. The entry will be debit to cash (it's in the bank,
    either way) and credit customer deposit, which is a liability account (you would
    have to refund the money if you don't do the job). If you have a lot of jobs going
    at any one time, you'll make your job easier if you give each job its own number
    in customer deposits, so you can easily keep track of how much has been turned
    into sales, and how much remains to be earned.

    Customer deposits turn into cash as you earn them - through the purchase of
    materials or labor performed. It's a bit of a call, how you evaluate each month
    what part of each job is done, and this is beyond the scope of this walk-through
    guide. So if you need help with accounting for contractors, send us an email and
    we'll forward some information to you.
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    Accounts Receivable- Accounts Receivables and sales operate much the same
    as Accounts Payables and your purchases. Under the accrual method, you'll be
    entering sales as you earn them and invoice your customers. Have a simple
    chart that shows who owes you money each month - have a beginning balance
    which equals last months' ending balance. Enter any payments they've made or
    new charges they've incurred, and come up with an ending balance. That must
    equal the amount you list as AR on your books - if it doesn't, your task is to figure
    out where the discrepancy is.

    Inventory. Inventory is a current asset account, which means it is something
    you have that can be turned into cash quickly. When you purchase inventory, you
    do so out of cash, so one side of the entry is credit cash - the other side, to
    increase inventory, is debit inventory. Basically, by listing an inventory item,
    you're just saying, I bought it this month, but I plan to keep it - or at least part of it
    - around, so the entire cost should not show up this month. The trick with
    inventory is knowing how to book it when you use it.

    Some common inventory items are materials - which is simple. You have a value
    of raw material in inventory - which matches what you paid for it. (You cannot
    increase the value of your inventory as it sits in the yards, as prices go up. You
    make your gain when you use that cheaper material in a project where you're
    able to charge more for it than it cost you.) As you use your raw materials, you
    credit inventory, to reduce it, and debit the 4101 account, materials. Basically,
    think of it as buying the material from yourself, with no cash changing hands.

    Another way that inventory might come up is when you buy $5,000 worth of
    brochures. Put that as a lump sum in your books for any given month, and you'll
    be a sad business owner, you'll think you're losing money hand over fist. So, try
    this: decide how long those brochures will last you, say three years. Divide
    $5,000 over 36 months, and you'll find that each month you need to book
    $138.89 (Call it $140 and be done with it).

    The whole sequence will look like this:
    First, you buy the brochures and put them in inventory:

                                                      Debit              Credit
1001 Cash                                                                $5,000
1003 Inventory                                        $5,000
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     Then, each month as you use the brochures, you will make an entry:

                                                      Debit             Credit
5312 Advertising Expense                              $140
1003 Inventory                                                          $140

     What you're saying is that each month, you have to cover $140 as the cost of
     your brochures. It'll show up on your income statement as an actual cost. Each
     month the value of that inventory will decrease by that amount, until it's all gone.
     Theoretically your brochures will be gone about the same time - or outdated.

     Deposits. Another item that has its own spot in your books is deposits you pay
     for various things, from workers compensations to the cleaning deposit on a
     rental, to a deposit with the post office for express mail. These are items that will
     be returned to you when you finish using the service - technically, it's your money
     that they're holding. These amounts all go into the account called deposits, in our
     system #1800, which is of course under the Asset section of your Balance Sheet.

     Gain or Loss on Sale of Assets. This is where you account for assets you sell
     or dump. If you sell a vehicle, you have its value on that up to date list of assets
     you keep. You also have a record of how much it has been depreciated. You
     enter the cash you make off that sale in 1001, cash. Then you balance that entry
     with a credit to the asset account and a debit to the accumulated depreciation
     account, and whatever it takes to make those number balance is your gain, or
     loss, on that sale.

     Say you sold a truck which you bought for $6,780. It has depreciated by $3,200.
     You managed to get someone to pay you $5,400. The entry to record this sale
     would be as follows:

                                                      Debit             Credit
1001 Cash                                             $5,400
1300 Fixed Assets - truck                                               $6,780
1301 Accum. Depreciation                              $3,200
7100 Gain (or loss) on the sale                                         $1,820

     If your balancing entry had been a debit, it would have meant you lost money on
     the sale. Here's how to think about it: You paid $6,780. On your books, its value
     had decreased by $3,200, meaning you had expensed out that amount of money
     over the period of time you had the truck. So, to you it's actually worth $3,580,
     and you sold it for $5,400, which was a gain of $1,820.

     Depreciation. This is an entry that you can make the call on whether you're
     going to deal with it monthly or annually. It's not a cash expense, in fact it's often
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sniffed at as a "paper expense" but if you have a pretty good sized company and
you think you're making great money, don't count those chickens until you figure
in your depreciation. It's real stuff, because things DO in fact wear out and have
to be replaced, and this is where that process is built into your books.

Basically, your accountant will give you a sheet listing your assets and the
amount they will depreciate this year. You take those totals, and say, OK, my
tools are going to depreciate a total of $890 this year. Take that number and
divide by 12, and you have your monthly depreciation, which in this case is
$74.17. So to give yourself a really good idea of where you are, each month
make the entry of debit account 5341 (depreciation expense) $75, and credit
1601 (accumulated depreciation, tools) by the same amount. If you have office
equipment, vehicles, buildings, all those will have their separate totals that you
work with the same way.

Most computer accounting systems have a setup where you can tell it to make
those entries for you automatically each month, and you won't have to worry
about it. Don't worry about being too exact - at the end of the year, you'll go
through each of these numbers and adjust it so it's exactly in line with your
depreciation schedule. Making the entries monthly saves you the shock when
you thought you'd made $20,000, and your depreciation expense at the end of
the year cuts that in half.

Suspense. Now I'm going to let you in on a secret if you promise not to take
advantage of it. If you are making all these entries and they don't balance, do
this: first, check the number they don't balance by - maybe you just left out an
entry. Divide that number by two and see if anything becomes obvious. Divide it
by nine and if it divides cleanly and evenly by nine, that means you have
transposed an entry somewhere - maybe you said 765 instead of 756. (No, this is
not an old wive's tail - but I do have some good hiccup cures for you after class).
IF you have tried everything you can think of, and you have just got to turn your
computer off and go home, put the remainder that won't balance in suspense.
Then, while you're out of the system, look at all your entries, all your notes, and
figure out the problem. Come back in, make the correcting entry, and take it back
out of suspense by making the opposite entry you did before. If you had to credit
suspense to make things balance, this time debit it - or you'll drive yourself even

Suspense may end up with little bits and pieces of numbers - but it should never
be allowed to get large. $1.31, you can let go. $500, and you'd better get serious
about finding out what that is.

Month End Adjustments. Now that you're sure you have the right amount of
cash in your system, you're ready to check the rest of the books. How intense
you get about this can well depend on what time of year it is - in a mid-year
month, like March or July, you might be a little more lax about how closely you
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check every account, whereas at the end of the year you will want to tie every
single account down exactly. Even those accounts you don't check over with a
fine-toothed comb should at least be glanced at, to make sure they make basic
sense. If a $3,500 car liability all of sudden turns into a $15,293 item, you'll know
something is entered in the wrong place.

The process is this: go through your balance sheet, item by item. You've already
done cash, and petty cash is a static account, so the next item is inventory.
Check what your inventory was last month, total up what you know you've added
to or deleted from it, and that should be your current total inventory. To make this
easy, keep a list of what is in inventory: office supplies, raw materials, etc. Each
item should have a beginning balance, an amount of current activity, and an
ending balance.

If inventory shows on your books as a higher number than you actually know you
have, adjust that against the material expense. If you have $250 less value in
actual office supplies than you show on the books, the adjustment will be to debit
office supplies (account 5550) and credit inventory. That will reduce your
inventory - which will, by the way, also reduce your profitability...sorry!

When you close your books for the end of the year, you need to take actual
inventory - count it all up and make sure you've really got what you think you do.
At other times of the year, whether or not you go through this step will depend on
how much inventory you carry. Any materials you have a large value of on hand,
it will pay you to take a physical inventory of more often. Failing to do that may
result in a shock at the end of the year when it turns out you've been
underestimating your use of material all year, giving your perceived profitability
one more opportunity to fly out the window. It's amazing how that bird can get up
and go at the smallest opportunity!

This same process gets followed for each item on your balance sheet. If your
books are computerized, you will find a good friend in your Detail Trial Balance
and Detail Transaction Reports. These reports will show you the beginning
balance for each account, what was added to or subtracted from that account
over the month, and then an ending balance. This will be the easiest place for
you to look for those items entered in the wrong account, items entered
backwards (credit when you should debit, can you imagine?), items overlooked,
or items that were transposed when they were entered, which are the top four
ways to end up out of balance.

The good news is that you don't have to do this to every expense account - just
check out that your asset and liability accounts are correct. If you have large
loans, make sure you're accounting for principal and interest correctly - putting
interest in its own account, and taking principal against the liability account. The
easiest way to do this is to call the loan officer and get an actual report (loan
history) of how much you owe as of this date, and make sure your books reflect
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that. As with any of this work, if you're talking about a small loan it may not be
worth adjusting every month - you may want to adjust those once a year. The
items you adjust monthly are the ones that can throw off your books by a large
enough amount that it's worth the time it will take to adjust for them.

This process, completed through your entire balance sheet, will give you the
assurance that your books are correct, and you can trust the bottom line on your
income statement. This is actually about the first point in the process that I would
actually look at the income statement - until you have adjusted your books to
match physical reality, it can be relatively meaningless.

Paper Trail. One last point: all these numbers that are going into your books
need to be backed up by something that will give you a clue about them. You or
someone else will at some point need to go back and recreate something you've
entered, and you need a good clean system for keeping this information.

Keep a list of everything you've done. Have a list and update it monthly, of what
makes up Accounts Payable - and the total of that list needs to equal the AP
entry on your balance sheet. Have a list of customer deposits, accounts
receivable and a list of your assets. You need to be able to say what's in each
number on your balance sheet. It's not nearly as intimidating as it sounds, and it
will save you hours of head scratching later.

You will also need to keep good supporting documentation for your income and
expenses. For more information on the types of records you need to keep, check
out Documenting your journey.

Congratulations! You've now got a real set of books that you can use to analyze your
profitability and pricing, you can take to the bank or use to produce a tax return. Every
month, you'll find this process easier to follow and less time consuming, and you'll
understand the inner workings of your business in a way that will make you much more
powerful and confident in your decision making. And, did you know that the word in the
English language with the most consecutive double consonants is subbookkeeper? A
heady responsibility, I'd say.

Happy bookkeeping! And now you're ready to move on and learn to use your financial
statements to manage by the numbers!

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