DIVISION OF ECONOMIC DEVELOPMENT
REGIONAL BUSINESS DEVELOPMENT OFFICE
Paper
Bookkeeping
MANUAL BOOKKEEPING OR
“PAPER” BOOKKEEPING IS A
PRACTICAL METHOD FOR
FINANCIAL RECORDS
MANAGEMENT
Thursday,
May 3, 2007
1:00 PM – 4:00 PM
REGIONAL BUSINESS DEVELOPMENT OFFICE
NAVAJO NATION SHOPPING CENTER
SUITE 2
SHIPROCK, NEW MEXICO
THE ACCOUNTING SYSTEM IN FIVE STEPS
1. Every accounting entry is based on a business transaction, which is usually evidenced by a business document, such as a check
or a sales invoice.
2. A journal is a place to record the transactions of a business.
3. While a journal records transactions as they happen, a ledger groups transactions according to their type, based on the
accounts they affect. The general ledger is a collection of all balance sheet, income, and expense accounts used to keep a
business’s accounting records. At the end of an accounting period, all journal entries are summarized and transferred to the
general ledger accounts. This procedure is called “posting.”
4. A trial balance is prepared at the end of an accounting period by adding up all the account balances in your general ledger.
The sum of the debit balances should equal the sum of the credit balances. If the total debits don’t equal total credits, you
must track down the errors.
5. Finally, the financial statements are prepared from the information in your trial balance.
1
Navajo Nation Department of
Economic Development (DED)
Paper Bookkeeping
WELCOME
Paper Bookkeeping
1:00 PM - 5:00 PM
Thursday, May 3, 2007
Please Sign In and Be Seated
We Will Begin Shortly
Welcome
Shiprock - Regional Business
Development Office (RBDO)
Randolph Sells,
Program Manager
Rose Morgan,
Senior Economic
Development Specialist
Sally Begay,
Senior Economic
Development Specialist
Henry Silentman,
Economic Development
Specialist
Eva Begaye, Office
Specialist
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Paper Bookkeeping
Definitions
--Bookkeeping
“The art of recording business transactions in a regular,
systematic manner”
--Paper Bookkeeping
“The art of recording business transactions in a regular,
systematic manner using only paper and manual tools, no
automatic processes, i.e. computer”
Paper Bookkeeping
Why is bookkeeping important?
Who should know basic bookkeeping
concepts and processes?
Introduction
How to keep financial records of your
financial transactions
How to use your financial records
Practical Overview of the Bookkeeping
Function
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Agenda
History and Overview
Accounting Principles and Elements
“Cash vs. Accrual”
“Debt and Credit”
Transaction Characteristics
Agenda (Cont’d)
Chart of Accounts
Transactions Examples
Reconciliation of Accounts
Financial Statements
Case Study – Work Session
-- Bilagaana Trading Co. --
History
Who Started keeping books? Why?
Isolation vs. Interaction
Your
Company
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History (Cont’d)
Bookkeeping has a standard
Financial Accounting Standards Board (FASB)
--1973 – FASB was formed
-- Generally Accepted Accounting Principles (G.A.A.P.)
--International Accounting Standards Board (IASB)
Internal Revenue Service (IRS)
Your Fiscal Relationship with
the US Government
US Government
Your Company
Recordkeeping for the IRS
Tax Preparation (IRS)
Audits
Government
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Recordkeeping for the IRS
IRS Recordkeeping Requirements
Clearly shows your income and expenses
It will enable you to file a correct return
Orderly
Traceable
Government
Overview
Lender Requirements
Honest Representation of Revenue, Expenses,
Profit, and Cash Flow
RMA – Risk Management
Association, formerly
Roberts Management
Lenders
Association
Overview
z
z
z
May require a specific method of accounting
Record of transaction
Orderly transfer of funds
Suppliers
Customers
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Overview
z
z
z
z
z
Management tool
Decision-Making
Identify problems
Financial statements
Forecasting
Your
Company
Vocabulary
z
z
z
z
z
z
Journal
Debit
Credit
Ledger
Account
Reconciliation
Cash vs. Accrual
Accounting/Bookkeeping Systems
Cash
-- Impact of Events Not
Recognized until Cash is
Paid or Received
Accrual
-- Impact of Events
Recognized as They Occur
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Debit vs. Credit
z
z
z
Resource (owned by the company) vs. Source(s)
(of the resource)
Active Account vs. Passive Account
“T” Account – An aid to visualize how the
transaction affects the different accounts
“T” Account
Debit
Credit
“T” Account
Cash Account
Debit
Credit
Bal 04/01
04/10
Bal 04/15
$100.00
$25.00
$125.00
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“T” Account
City Market Account
Debit
Credit
Bal 04/01
$30.00
04/11
$25.00
Bal 04/15
$55.00
Kinds of Transactions
z
z
z
z
z
z
z
z
z
z
Cash Sales
Credit Sales
Accounts Receivable
Accounts Payable
Receipts
Payments
Payroll
Purchases
Depreciation
Accounting Entries (Adjusting Entries)
Transaction
z
z
z
z
Date
Account Number (X2, if double-entry)
Amount (X2, if double-entry)
Memo
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Chart of Accounts
z
What do you want your Chart of Accounts to
Include?
z
The ability to track accounts you want to track
Sales Accounts for each line of products or range of
service
z Do not track each product’s sales
z
Chart of Accounts
z
z
z
z
z
z
Assets – (100s)
Liabilities – (200s)
Owner Equity – (300s)
Revenue – (400s)
Cost of Goods Sold (500s)
Expenses – (600s)
Journal
z
z
z
z
Diary of the business’s financial activity
Double-entry vs. Single-entry
“Cash Disbursement Journal”
“General Ledger”
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Double-Entry vs. Single-Entry
Accounting/Bookkeeping Systems
Single-Entry
Double-Entry
-- One journal entry for
each transaction
-- Two journal entries for
each transaction
-- Records only Active
Account
-- Reconciliation – Errors
easy to find
-- Reconciliation
-- Checks and Balances
-- “The Basis of a True
Accounting System”
“T” Account
Cash Account
Debit
Credit
Bal 04/01
$100.00
04/10
$25.00
Bal 04/15
$125.00
“T” Account
City Market Account
Debit
Credit
Bal 04/01
$30.00
04/11
$25.00
Bal 04/15
$55.00
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“T” Account
Debit
Credit
“T” Account
Debit
=
Credit
“T” Account
Cash Account
Debit
Credit
Bal 04/15
$125.00
04/22
Bal 04/30
$39.00
$86.00
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“T” Account
City Market Account
Debit
Credit
04/22
Bal 04/15
$55.00
Bal 04/30
$16.00
$39.00
Ledger
z
z
A record of transactions specific to one
account (i.e. Cash account, Accounts
Payable account)
Chart of accounts
Account Reconciliation
z
z
z
z
z
z
What is Reconciliation/Posting?
Why do we Reconcile?
How Often do we Reconcile?
Single Entry vs. Double Entry
Trial Balance – Sum of totals from all ledger
accounts
Adjusting Entries
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Adjusting Entries
z
z
z
z
End-of-Period adjustments
May require assistance of an accountant
Requires judgment and some accounting
knowledge
Record the adjusting entries in the general journal
at the end of the accounting period
Transactions Requiring
Adjusting Entries
z
z
z
z
z
z
Prepaid Insurance
Depreciation
Inventory (FIFO, LIFO)
Accrued Wages
Adjustments for Bad Debts
Refresh the Ledger Account Balance for
Accounts Receivable and Accounts Payable
Financial Statements
z
z
z
Balance Sheet
Income Statement
Cash Flow Statement
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Balance Sheet
z
z
z
z
z
Snapshot of your company’s net worth at one
point in time
Resources Owned (Assets)
Resources Owed (Liabilities)
Investment and Past Profits (Owner Equity)
Assets = Liabilities + Owner Equity
Income Statement
z
z
z
z
A Summary of Company’s results during a Period
of Time
Sales (Revenue)
Payments (Expenses)
Reports Net Income and Loss for the Period
Cash Flow Statement
z
z
z
z
A Summary of inflows and outflows of cash
during a period of time
Reports Cash Receipts and Cash Payments
Find the Cash position at a certain point in time
Combines Income and Balance Sheet (Asset)
Accounts Activity
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Bilagaana Trading Co.
z
At the beginning of April, Matt Bilagaana opened
a trading post selling Jewelry.
z
Matt Bilagaana had had some accounting at the
local college and he is going to do his own
bookkeeping.
Chart of Accounts for
Bilagaana Trading Co.
ASSETS
REVENUE
110
120
125
130
410 Sales, Squash Blossoms
411 Sales, Rings
Cash
Squash Blossoms, Inventory
Rings, Inventory
Pre-Paid Insurance
LIABILITIES
210 Nakai Trading Co.
211 Ohtsáad Trading Co.
OWNER EQUITY
310 Matthew Bilagaana, Capital
311 Matthew Bilagaana, Drawing
COST OF GOODS SOLD
510 Cost of Goods Sold, Squash Blossoms
520 Cost of Goods Sold, Rings
EXPENSES
610
620
630
640
615
635
Advertising Expense
Miscellaneous
Rent Expense
Utilities Expense
Insurance Expense
Supplies Expense
Instructions
Bilagaana Trading Co. uses a monthly
accounting cycle
Record Bilagaana Trading Co.’s transactions for
July on a general journal form.
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Summary
z
Bookkeeping – a logical method for organizing
your small business’s finances
z
Uses of bookkeeping data
How to apply your new skills
z
z
z
z
z
Analyze a transaction
Identify the affected accounts
Identify how the accounts are affected
Use “T” accounts to visualize transaction
Use the memo field to record information
effectively
Useful Websites
z
Small business assistance, useful tips and
suggestions for a wide variety of small
business issues
www.sba.gov
z
Federal tax forms, Small business accounting
guidelines,
www.irs.gov
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More Useful Websites
z
Small business information website.
Resource provider through its small business
owner’s toolkit by CCH, Inc.
www.toolkit.cch.com
z
Small business resource website
www.businesstown.
Even More Useful Websites
z
Canadian Website for small business
bookkeeping or bookkeeper referral
www.bookkeeperlist.com
Questions
and
Discussion
Page 17
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Practice problem
for the
“Paper Bookkeeping” Workshop
Chart of Accounts for Bilagaana Trading Co.
ASSETS
REVENUE
110 Cash
120 Squash Blossoms, Inventory (beginning
10 Squash Blossoms @ $200 each)
125 Rings, Inventory (beginning 10 Rings @
$25 each)
130 Pre-Paid Insurance
410 Sales, Squash Blossoms
411 Sales, Rings
LIABILITIES
COST OF GOODS SOLD
510 Cost of Goods Sold, Squash Blossoms
520 Cost of Goods Sold, Rings
EXPENSES
210 Nakai Trading Co.
211 Ohtsáad Trading Co. 04/01 Bal. $1,200
OWNER EQUITY
310 Matthew Bilagaana, Capital
311 Matthew Bilagaana, Drawing
610
620
630
640
615
635
Advertising Expense
Miscellaneous
Rent Expense
Utilities Expense
Insurance Expense
Supplies Expense
Bilagaana Trading Co. uses a monthly accounting cycle
Instructions
1. Record Bilagaana Trading Co.’s transactions for April on a general journal form.
Transactions:
April 2 Received cash from owner as an
investment, $12,750
3 Paid cash for rent, $600
5 Paid cash for insurance, $600
6 Received cash from sales (2 Squash
Blossoms), $1000
9 Paid cash for miscellaneous expenses,
$50
11 Paid cash for 2 Squash Blossoms, $400
13 Bought 8 Rings on account from Nakai
Trading Co., $200
13 Received cash from sales (4 Rings), $200
16 Paid cash for electric bill, $100
18 Paid cash for advertising, $150
2. Reconcile the journal
3. Reconcile the cash account. Beginning
balance on April 1 is $0.
4. Post the transactions to the ledger
accounts
April 20 Paid cash on account to
Ohtsáad Trading Co., $500
20 Received cash from sales (5
Squash Blossoms), $2500
25 Paid cash for 8 Squash
Blossoms, $1,600
27 Paid cash for 5 Rings, $125
27 Received cash from sales (3
Squash Blossoms, 6 Rings)
$1,800
30 Paid cash to owner for personal
use, $400
30 Received cash from sales (4
Rings), $200
5. Trial Balance
6. Adjusting entries
7. Prepare the monthly financial statements
General JOURNAL
DATE
1
Apr
DESCRIPTION
01 120 - Squash Blossoms - Inventory
2
211 - Ohstáad Trading Co.
3
310 - Matthew Bilagaana, Capital
Apr
Apr
Apr
Apr
Apr
Apr
5
02 101 - Cash
03 630 - Rent
05 615 - Insurance Expense
06 101 - Cash
09 620 - Miscellaneous Expense
Apr
11 120 - Squash Blossoms - Inventory
$12,750.00
8
$12,750.00
Apr
13 125 - Rings, Inventory
$600.00
11
$600.00
Apr
13 101 - Cash
$100.00
14
$500.00
15
$600.00
$1,000.00
Apr
16 640 - Utilities Expense
101 - Cash
16
17
$1,000.00
$50.00
18
19
$50.00
$400.00
20
21
$400.00
$200.00
22
23
$200.00
$200.00
411 - Sales, Rings
26
12
13
210 - Nakai Trading Co.
24
9
10
101 - Cash
22
6
7
101 - Cash
20
28
3
$250.00
410 Sales - Squash Blossoms
18
27
$800.00
$250.00
101 - Cash
16
25
01 125 - Rings, Inventory
130 - Pre-Paid Insurance
15
23
2
April Rent
13
21
$1,200.00
4
101 - Cash
12
19
1
received cash from owner
10
17
$2,000.00
310 - Matthew Bilagaana, Capital
9
14
CREDIT
Adjusting Entry for Inventory Investment
7
11
DEBIT
310 - Matthew Bilagaana, Capital
6
8
POST
REF
bought squash blossoms on credit; adjusting entry
4
5
Page ____ of ____
24
25
$200.00
$100.00
26
27
$100.00
28
29
Apr
Apr
Apr
Apr
Apr
25 120 - Squash Blossoms - Inventory
27 125 - Rings, Inventory
Apr
27 101 - Cash
40
410 - Sales, Squash Blossoms
41
411 - Sales, Rings
42
Apr
Apr
May
May
51
$125.00
01 310 - Matthew Bilagaana, Capital
01 510 - Cost of Goods Sold, Squash Blossoms
May
01 520 - Cost of Goods Sold, Rings
125 - Rings, Inventory
36
37
$125.00
$1,800.00
38
39
$1,500.00
40
$300.00
41
$400.00
42
$400.00
$200.00
43
44
$200.00
$400.00
45
46
$400.00
$1,000.00
120 - Squash Blossoms, Inventory
49
50
30 101 - Cash
34
35
$1,600.00
311 - Matthew Bilagaana, Drawing
47
48
$1,600.00
411 - Sales, Rings
45
46
30 311 - Matthew Bilagaana, Drawing
32
33
$2,500.00
101 - Cash
43
44
$2,500.00
101 - Cash
38
39
20 101 - Cash
30
31
$500.00
101 - Cash
36
37
$500.00
410 - Sales, Squash Blossoms
34
35
20 211 - Ohstáad Trading Co.
29
$150.00
101 - Cash
32
33
$150.00
101 - Cash
30
31
18 610 - Advertising Expense
47
48
$1,000.00
$350.00
49
50
$350.00
51
52
52
53
53
54
54
55
55
56
56
57
57
58
58
59
59
60
60
Bilagaana Trading Co.
"T"accounts - April 2007
101
Cash
04/01
04/02
04/06
04/13
04/20
$0
$12,750
04/03
04/05
$600
$600
04/09
04/11
$50
$400
04/16
04/18
04/20
$100
$150
$500
04/25
04/27
$1,600
$125
04/30
$400
120
$1,000
$1,000
$200
$2,500
04/27
$1,800
04/30
$200
05/01
$13,925
04/01
04/13
04/27
Rings, Inv.
$250
$200
$125
05/01
125
04/01
04/05
05/01
05/01
Squash Blossoms, Inv.
04/01
$2,000
04/11
$400
04/25
$1,600
05/01
$3,000
Prepaid Insurace
$0
$500
130
$350
$225
05/01
$500.00
Nakai Trading Co.
04/01
04/13
210
$0
$200
Ohtsáad Trading Co.
04/01
04/20
$500
211
$1,200
05/01
$200
05/01
$700
Matthew Bilagaana, Capital
04/01
04/01
04/02
05/01
$400
05/01
310
$800
$250
$12,750
$13,400
Matthew Bilagaana, Drawing
04/01
$0
04/30
$400
05/01
05/01
311
$400
$0
Sales, Squash Blossoms
04/01
04/06
04/20
04/27
05/01
CGS, Squash Blossoms
04/01
$0
05/01
$1,000
05/01
04/01
04/18
05/01
04/01
04/03
05/01
04/01
04/05
05/01
410
$0
$1,000
$2,500
$1,500
Sales, Rings
04/01
04/10
04/27
04/30
411
$0
$200
$300
$200
$5,000
05/01
$700
510
$1,000
Advertising Expense
$0
$150
05/01
610
$150
Rent Expense
$0
$600
630
04/01
04/16
$100
05/01
615
04/01
05/01
520
$350
Miscellaneous Expense
04/01
$0
04/09
$50
05/01
$600
Insurance Expense
$0
$100
Cost of Goods Sold, Rings
04/01
$0
05/01
$350
620
$50
Utilities Expense
$0
$100
640
$100
Supplies Expense
$0
$0
635
101 Cash Account JOURNAL
DATE
DESCRIPTION
Page ____ of ____
POST
REF
DEBIT
CREDIT
1
Apr
02 101 - Cash
$12,750.00
2
Apr
03 101 - Cash
$600.00
2
3
Apr
05 101 - Cash
$600.00
3
4
Apr
06 101 - Cash
5
Apr
09 101 - Cash
$50.00
5
6
Apr
11 101 - Cash
$400.00
6
7
Apr
13 101 - Cash
8
Apr
16 101 - Cash
$100.00
8
9
Apr
18 101 - Cash
$150.00
9
10
Apr
20 101 - Cash
$500.00
10
11
Apr
20 101 - Cash
12
Apr
25 101 - Cash
$1,600.00
12
13
Apr
27 101 - Cash
$125.00
13
14
Apr
27 101 - Cash
15
Apr
30 101 - Cash
16
Apr
30 101 - Cash
$1,000.00
7
$2,500.00
11
$1,800.00
14
$400.00
$200.00
18
19
4
$200.00
$18,450.00
17
1
15
16
$4,525.00
17
18
May
01 Total
$13,925.00
19
20
20
21
21
22
22
23
23
24
24
25
25
26
26
27
27
28
28
Trial Balance as of 05-01-07 JOURNAL
DATE
1
May
DESCRIPTION
01 101 - Cash
Page ____ of ____
POST
REF
DEBIT
CREDIT
$13,925.00
1
$3,000.00
2
2
120 - Squash Blossoms, Inventory
3
125 - Rings, Inventory
$225.00
3
4
130 - Prepaid Insurance
$500.00
4
5
210 - Nakai Trading Co.
$200.00
5
6
211 - Ohtsaad Trading Co.
$700.00
6
7
310 - Matthew Bilagaana, Capital
$13,400.00
7
8
311 - Matthew Bilagaana, Drawing
$0.00
8
9
410 - Sales, Squadh Blossoms
$5,000.00
9
$700.00
10
10
411 - Sales, Rings
11
510 - Cost of Goods Sold, Squash Blossoms
12
$1,000.00
11
520 - Cost of Goods Sold, Rings
$350.00
12
13
610 - Advertising Expense
$150.00
13
14
620 - Miscelaneous Expense
$50.00
14
15
630 - Rent Expense
$600.00
15
16
640 - Utilities Expense
$100.00
16
17
615 - Insurance Expense
$100.00
17
18
635 - Supplies Expense
$0.00
18
19
20
19
$20,000.00
$20,000.00
20
21
21
22
22
23
23
24
24
25
25
26
26
27
27
28
28
29
29
Bookkeeping
From Wikipedia, the free encyclopedia
Bookkeeping (also commonly referred to as book-keeping, book keeping or bookeeping) is the recording of
all financial transactions undertaken by a business (or an individual). A bookkeeper (or book-keeper),
sometimes called an accounting clerk in the US, is a person who keeps the books of an organization. The
organization might be a business, a charity or even a local sports club. Two methods are widely in use:
single-entry accounting system and double-entry bookkeeping system.
The system most commonly used in bookkeeping is the double-entry bookkeeping system. A bookkeeper is
usually responsible for writing up the "daybooks". The daybooks consist of purchase, sales, receipts and
payments. The bookkeeper is responsible for ensuring that all transactions are recorded in the correct
daybook, suppliers ledger, customer ledger and general ledger. The bookkeeper will bring the books to the
trial balance stage for a financial accountant. This accountant will prepare the profit and loss statement and
balance sheet using the trial balance and ledgers prepared by the bookkeeper.
Bookkeeping can also consist of simply listing payments on a page, e.g. recording deposits received from
people (single entry bookkeeping).
Bookkeeping is an essential part of any business. Without bookkeeping no accounting information can be
compiled. Bookkeeping is the first level of financial data gathering.
Manual bookkeeping system
Books, daybooks, and ledgers are the mainstay of manual entry bookkeeping. The picture of a person leaning
over a big leather bound ledger, with an ink quill pen in their hand, portrays the historical image of the
bookkeeper performing their bookkeeping entries. The painstaking accuracy required to ensure that a
bookkeeping system was kept properly may have attracted the type of person who was unfairly portrayed as
"boring" or a perfectionist. The skillset required to be a bookkeeper requires accuracy and perfectionism. A
knowledge of debits and credits ensured that the bookkeeper understood how any financial transactions
would affect the financial presentation of a company's accounts. An invoice received or a cheque paid out
were recorded in the correct daybooks by the bookkeeper and transferred to the relevant nominal ledger
account.
The computerisation of bookkeeping
The computerisation of Bookkeeping has removed many of the "Books" that were used to record
transactions. Computer software has de-skilled the job of a bookkeeper and opened it up to more people. The
software ensures that no entries are omitted from the ledger by performing the automatic double entry of
every transaction. Computer software has also improved the speed at which the bookkeeping can be
performed.
Online bookkeeping is a new chapter in the field of bookkeeping, where source documents and data reside in
web-based applications which allow remote access to bookkeepers and accountants.
Trivia
Bookkeeping, bookkeeper, and its other derivatives, are the only non-hyphenated words in the English
language to feature three consecutive double-letter pairs. Subbookkeeper is the only word to feature four
consecutive double-letter pairs.
External links
•
Bookkeeping Explanation with examples.
GLOSSARY
ACCOUNTING EQUATION: assets = liabilities + owner’s equity. The accounting equation is the basis for the financial
statement called the balance sheet.
ACCOUNTS PAYABLE: Also called A/P, accounts receivable are the bills your business owes to suppliers.
ACCOUNTS RECEIVABLE: Also called A/R, accounts receivable are the amounts owed to you by your customers.
ACCRUAL METHOD OF ACCOUNTING: With the accrual method, you record income when the sale occurs, not necessarily
when you receive payment. You record an expense when you receive the goods or services, even though you may not pay
for them until later.
ADJUSTING ENTRIES: Special accounting entries that must be made when you close the books at the end of an accounting
period. Adjusting entries are necessary to update your accounts for items that are not recorded in your daily transactions.
AGING REPORT: An aging report is a list of customers’ accounts receivable amounts and their due dates. It alerts you to
any slow-paying customers. You can also prepare an aging report for your accounts payable, which will help you manage
your outstanding bills.
ALLOWANCE FOR BAD DEBTS: Also called reserve for bad debts, it is an estimate of uncollectible customer accounts. It is
known as a “contra” account because it is listed with the assets, but it will have a credit balance instead of a debit balance.
For balance sheet purposes, it is a reduction of accounts receivables.
ASSETS: Things of value held by the business. Assets are balance sheet accounts. Examples of assets are cash, accounts
receivable, and furniture and fixtures.
BALANCE SHEET: Also called a statement of financial position, it is a financial “snapshot” of your business at a given date
in time. It lists your assets, your liabilities, and the difference between the two, which is your equity, or net worth.
CAPITAL: Money invested in the business by the owners. Also called equity.
CASH METHOD OF ACCOUNTING: If you use the cash method, you record income only when you receive cash from your
customers. You record an expense only when you write the check to the vendor.
CHART OF ACCOUNTS: The list of account titles you use to keep your accounting records.
CLOSING: Closing the books refers to procedures that take place at the end of the accounting period. Adjusting entries are
made, and then the income and expense accounts are “closed.” The net profit that results from the closing of the incomes
and expense accounts is transferred to an equity account such as retained earnings.
COST OF GOODS SOLD: Cost of inventory items sold to your customers. It may consist of several cost components, such
as merchandise purchase costs, freight, and manufacturing costs.
CREDITS: At least one component if every accounting transaction (journal entry) is a credit. Credits increase liabilities and
equity and decrease assets.
CURRENT ASSETS: Assets that are in the form of cash or will generally be converted to cash or used up within one year.
Examples are accounts receivable and inventory.
CURRENT LIABILITIES: Liabilities payable within one year. Examples are accounts payable and payroll taxes payable.
DEBIT MEMO: Billing a customer again. A debit memo would be required, for example, when a customer has made a
payment on their account by check, but the check bounced.
DEBITS: At least one component of every accounting transaction (journal entry) is a debit. Debits increase assets and
decrease liabilities and equity.
DEPRECIATION: An annual write-off of a portion of the cost of fixed assets, such as vehicle and equipment. Depreciation
is listed among the expenses on the equipment expenses.
DOUBLE-ENTRY ACCOUNTING: In double-entry accounting, every transaction has two journal entries: a debit and a
credit. Debits must always equal credits. Double-entry accounting is the basis of a true accounting system.
DRAWING ACCOUNT: A general ledger account used by some sole proprietorships and partnerships to keep track of
amounts drawn out of business by an owner.
EQUITY: The net worth of your company. Also called owner’s equity or capital. Equity comes from investment in the
business by the owners, plus accumulated net profits that have not been paid out to the owners. Equity accounts are
balance sheet accounts.
EXPENSE ACCOUNTS: These are the accounts you use to keep track of the costs of doing business: where the money
goes. Examples are advertising, payroll taxes, and wages. Expenses are income statement accounts.
FIXED ASSETS: Assets that are generally not converted to cash within one year. Examples are equipment and vehicles.
FOOT: To total the amounts in a column, such as a column in a journal or a ledger.
GENERAL LEDGER: A general ledger is a collection of all balance sheet, income, and expense accounts used to keep the
accounting records of a business.
INCOME ACCOUNTS: These are the accounts you use to keep track of your sources of income. Examples are merchandise
sales, consulting revenue, and interest income.
INCOME STATEMENT: Also called a profit and loss statement or a “P&L.” It lists your incomes, espenses, and net profit
(or loss). The net profit (or loss) is equal to your income minus your expenses.
INVENTORY: Goods you hold for sale to customers. Inventory can be merchandise you buy for resale, or it can be
merchandise you manufacture or process, selling the end product to the customer.
JOURNAL: The chronological, day-to-day transactions of a business are recorded in sales, cash receipts, and cash
disbursements journals. A general journal is used to enter period end adjusting and closing entries and other special
transactions not entered in the other journals. In a traditional, manual accounting system, each of these journals is a
collection of multi-column spreadsheets usually contained in a hardcover binder.
LIABILITIES: What your business owes creditors. Liabilities are balance sheet accounts. Examples are accounts payable,
payroll taxes payable, and loans payable.
LONG-TERM LIABILITIES: Liabilities that are not due within one year. An example would be a mortgage payable.
MERCHANDISE INVENTORY: Goods held for sale to customers.
NET INCOME: Also called profit or net profit, it is equal to income minus expenses. Net income is the bottom line of the
income statement.
POST: To summarize all journal entries and transfer them to the general ledger accounts. This is done at the end of an
accounting period.
PREPAID EXPENSES: Amounts you have paid in advance to a vendor or creditor for goods and services. A prepaid
expense is actually an asset of your business because your vendor or supplier owes you the goods or services. An example
would be the unexpired portion of an annual insurance premium.
PREPAID INCOME: Also called unearned revenue, it represents money you have received in advance of providing a service
to your customer. Prepaid income is actually a liability of your business because you still owe the service to the customer.
An example would be an advance payment to you for some consulting services you will be performing in the future.
PROFIT AND LOSS STATEMENT: Also called an income statement or (P&L.” It lists your income, expenses, and net profit
(or loss.. The net profit (or loss) is equal to your income minus your expenses.
RESERVE FOR BAD DEBTS: Also called allowance for bad debts, it is a, estimate of uncollectible customer accounts. It is
known as a “contra” account because it is listed with the assets, but it will have a credit balance instead of a credit balance.
For balance sheet purposes, it is a reduction of accounts receivable.
RETAINED EARNINGS: Profits of the business that have not been paid to the owners; profits that have been “retained” in
the business. Retained earnings is an “equity account” that Is presented on the balance sheet and on the statement of
changes in owners’ equity.
SOLE PROPRIETORSHIP: An unincorporated business with only one owner.
TRIAL BALANCE: A trial balance is prepared at the end of an accounting period by adding up all the account balances in
your general ledger. The debit balances should equal the credit balances.
EXPENSES
INCREASES
DECREASES
OWNER EQUITY
INCOME
DECREASES
DECREASES INCREASES
INCREASES
Chart of Accounts
LIABILITIES
DECREASES
z
z
z
z
z
z
Assets – (100s)
Liabilities – (200s)
Owner Equity – (300s)
Revenue – (400s)
Cost of Goods Sold – (500s)
Expenses – (600s)
ASSETS
INCREASES
INCREASES DECREASES
COST OF GOODS SOLD
INCREASES DECREASES