General Bookkeeping Made Easy For Business Owners & Aspiring Bookkeepers

Most people associate bookkeeping and accounting with MATH, that dreaded subject from high school. I find it rather amusing simply because I can add, subtract, multiply and divide, period. And for these functions there are both calculators and computers that will do it for you. The fear of Math should never deter a business entrepreneur from learning and understanding the financial aspects of his/her business.

Most accounting professionals who want your business will sell this process by making it sound much more difficult than it really is. (Give them your taxes, not your operations). It is actually a very simple process. The numbers produce themselves with your sales, expenses, equipment you might buy, credit policies and so on. Basically knowing where to put the numbers automatically reveals how to treat the numbers (+,-,x,/). And, to top it off, there is a specific set of bookkeeping rules as to where to put the numbers.

"General Bookkeeping Made Easy" is based on the rules of where to put the numbers and in plain language, pictures and color coding, illustrates every rule of basic bookkeeping. Once these rules are practiced, bookkeeping for any business will be rewarding. Bookkeeping is actually FUN! when you know what you're doing.

Bookkeeping involves what, when, where, how and why. Your chosen area of business involved learning the same things when you tackled it. It usually occurs at the end of a given month (when) to produce the results of business decisions and transactions.

The first piece of information needed is the Definitions of all the terms used in general bookkeeping. What a "Balance Sheet" is, what an "Income Statement" is, what a "General Journal" and what "Subsidiary Ledgers" are and so on.

The second piece of information needed is How They Work. As well as having the definitions for Assets, Liabilities, Revenue, Expenses and Owners' Equity, the Rules of General Bookkeeping tell how they work. This basically tells the budding bookkeeper where to put the numbers. I have to tell you, once learned, these rules do not change. This allows the budding bookkeeper to learn the processes of bookkeeping with practice and do the work with confidence and success. Understanding the principles follows with experience and reviewing the theory (why). Learning through a manual system reinforces this knowledge. "General Bookkeeping Made Easy" is based on a manual system to ensure that the principles and processes involved in bookkeeping are understood.

A computer system package, to my knowledge, has never successfully created bookkeeping standards for every possible business. Many people rely on the computer to know all the answers. That's where the failure comes in. Unfortunately, a computer can only do what it's told. Giving a computer "trash" for input begets "trash" for output. The individual armed with knowledge of General Bookkeeping builds a much better system because that individual already knows what it's suppose to look like before the computer spits it out. After being built by a person knowledgeable in General Bookkeeping, a computerized system does it faster.

Bookkeeping is simply knowing where to put the numbers. In order to put those numbers in the right place a general knowledge of bookkeeping classifications of numbers is necessary. There are 5 basic catagories of numbers in bookkeeping:

1. Assets-what is owned
2. Liabilities-what is owed
3. Owners' Equity or Capital-reinvestment or profit
4. Revenue-how money comes in
5. Expenses-what was it spent on

Assets, Liabilities and Owners' Equity are Balance Sheet accounts and report life to date. Revenue and Expenses are Income Statement accounts and report monthly and year-to-date and are closed to owners' equity at year end.

Assets, what is owned, include cash, accounts receivable, inventory and equipment. They all add value to the business.

Liabilities, what is owed, include accounts payable, taxes payable, payroll liability, mortages and loans of any type. They take away value from the business.

Owners' Equity (Capital), reinvestment or profit, include the results of operations (income statement accounts-revenue less expenses) plus any additional funding, less any disbursements to the owner(s).

In bookkeeping, Assets always equal Liabilities plus Owners Equity. Or stated another way: Assets, what you own, less Liabilities, what you owe, equals Owners' Equity or what's left after all is said and done. If an asset changes in value, either a liability or owners equity will change for the same amount. Examples are:

1. Money was deposited into the business checking account from a personal account. The effect on the business is the asset, Cash, increased and owners' equity increased for the same amount. By adding cash, the business has more money and the owner has more equity or ownership in the business.

2. Computer equipment was purchased for the business on credit. The effect on the business is the asset, Equipment, increased and a liability increased for the same amount. By adding the equipment value was added to the business but because it was bought on credit the liability negated that value to "0" until it is paid for.

For the many transactions that occur in any business, this is always true: Assets will always equal Liabilities plus Owners' Equity (Capital).

Revenue, how money comes in, include sales from any product or service, interest income on bank accounts or investments. Expenses, what money was spent on, include rent, supplies, labor and the list can be enormous based on the business. If Revenue exceeds the Expenses incurred, the Net Income is a profit or a Net Profit From Operations. If Expenses incurred exceed Revenue, the Net Income is a loss or Net Loss From Operations.

And if there is a Net Profit From Operations (revenue exceeds expenses), owners' equity increases. If there is a Net Loss From Operations (expenses exceed revenue), owners' equity decreases. Examples are:

1.Total Sales and Interest Income is------------- $1000
Less: Total Expenses To Produce the Income----- 500
Total Amount Closed to Owners' Equity------------ 500

2.Total Sales and Interest Income is --------------$ 500
Less: Total Expenses To Produce the Income---- 1000
Total Amount Closed to Owners' Equity------------ (500)

Any transaction picked up on the Income Statement in the revenue and expense accounts affects the balance sheet accounts in one way or another. The Net Income or "bottom line" on the Income Statement rolls to Owners' Equity monthly and reports year-to-date as part of the Balance Sheet.

This has been a general overview of what bookkeeping is all about. "General Bookkeeping Made Easy" explains each section in great detail with journalized examples. It details the effects of each transaction on the Income Statement and the Balance Sheet to provide a greater understanding of the overall results of business operations and decisions. Knowing "where" to put the numbers makes understanding the results those numbers produce much clearer.

Bookkeeping is doing exactly what it says, keeping the set of books. In a manual system, the "books" consist of:

**The General Journal
**The Sales Journal
**The Cash Receipts Journal
**The Cash Disbursements Journal
**The Payroll Register

The General Journal records every transaction from the Balance Sheet (Assets, Liabilities and Owners' Equity) and from the Income Statement (Revenues and Expenses) which originate with the Sales Journal, Cash Receipts Journal, Cash Disbursements Journal and the Payroll Register. This journal has a complete history of transactions, life-to-date for the balance sheet and monthly and year-to date for the income statement.

The Sales Journal records sales on account, or sales to those who have been granted credit. It records the date, the sales invoice number, the customer name, the amount of the account receivable including any applicable sales tax, the sales tax liability and the actual sale.

The Cash Receipts Journal records receipts of cash from all sources including cash sales, interest income, sale of equipment, additional funding, any source of cash received. It includes the date, the account being credited, whether it be a payment of a sale on account or a cash sale. It also includes any applicable sales taxes and the sales tax liability. In addition, if you accept credit cards there is a spot for the immediate reduction of cash due to the credit card fee being assessed at time of payment and finally the amount of cash received.

The Cash Disbursements Register records every payment made whether it be for inventory, rent expense, the sales tax payment, credit card payments, anything paid out in the course of doing business. It includes the date paid, the check number used, what was paid for, the amount, any purchase discounts and finally cash paid.

The Payroll Register contains all payment information to employees. It is usually run each time you process a payroll and includes gross earnings for each employee net of statutory taxes and any deductions. The payroll register holds quarterly totals for tax reporting purposes and year-to-date information for W2 processing.

These are the major components of a manual bookkeeping system. "General Bookkeeping Made Easy" explains and gives illustrations of how each component works and provides the explanation of the results the information provides when combined into financial statements.

There are several bookkeeping software packages available on the market to computerize your bookkeeping. All systems assume that the user knows how to build them and gives instruction on maneuvering within their system. Some give examples of transactions and reports but if you do not understand what they are talking about, examples of processes in bookkeeping are rendered meaningless.

To build a better system requires knowledge of the business financially. This is learned through the manual process of bookkeeping. The manual process of bookkeeping uses descriptions to describe all transactions. Computers like numbers. Computers like numbers orderly and defined. Computers will move those numbers around any way you wish IF they are set up orderly and defined.

The manual system sets up the defined. "General Bookkeeping Made Easy" sets up the orderly. Having established systems in several industries, manual to computerized and computerized to computerized, I can tell you outright that the "Chart of Accounts", the first step, is also the most important step because it will provide both the orderly and defined numbers to any computerized bookkeeping system.

The computerized system works very much the same as the manual system, only faster. But in today's world, faster does seem to be better in business. It takes a little bit of time and a good understanding of bookkeeping principles to build it right the first time. But when done, it saves a lot of time and can produce many reports, both standard and customized to the business, quickly. This allows the users more time for analyzing the results of operations and decisions necessary regarding the business without worrying about the preparation of the reports.

The structure of a computerized accounting system is pretty much standard throughout the industry. It consists of several systems rolling into one system for reporting. Below is an overview of a computerized system.

The Accounts Receivable System handles all cash receipts and customer accounts. The Accounts Receivable System is basically the cash receipts journal and the sales journal in a manual system. The Accounts Receivable System (AR System) is a perpetual system, meaning that any data entered in this system is always in this system. For example, a customer purchased a widget two years ago and never paid for it. If you look that customer up, the system will show that you are owed money from this customer. If at this time, he finally pays for the purchase, his account will reflect both the sale and the very late payment. Over time a huge database can create a very slow response time. Typically a backup of the information is created and stored. At this point very old accounts can be purged out of the system to decrease processing time.

Accounts Payable System handles all purchases of goods and services and issues check payments to vendors. The Accounts Payable System (AP System) is basically the cash disbursements journal in a manual system but allows the user to enter invoices before they have to be paid. For management, this system, based on payable due dates is very useful for the projection of cash flow. This system is also pertetual and will show a long and detailed payment history on any and every vendor.

Payroll System is used to pay your employees. It allows for the accumulation of wage information on a pay period, quarterly and year-to-date basis. This includes statutory taxes, deductions and garnishments. The Payroll System (PR System) is unique. It is perpetual in that payment information for any employee will always be there so you can trace payments from start date to present or completion date. Any terminated employee will also remain in the system for inquiry. In a given year, the quarter-to-date information will clear in March, June, September and December. This is done by indicating in the system when the quarter-to-date end dates exist. Quarter-to-date reports include 941 tax reports for both state and federal tax reporting requirements. Also, in individual states, unemployment reports, for filing unemployment taxes. At year end the system will also be cleared of all totals for wages and deductions after W2s and year end reconcilation reports are run. This is in preparation for the following years wages. Typically prior years detail remains on the system in a separate file or location. The information is always available.

General Ledger is the system that all systems interface to for reporting purposes. Each system based on the chart built into each one sends the information for a given period, ususally one month, to the General Ledger (GL). The GL typically will use the debit and credit activity to report current month and beginning balance plus debit and credit activity to report year-to-date. The General Ledger comes with "canned reports" including the Balance Sheet and Income Statement. Once programmed with your account numbers produce a set of financial statements to review the results of operations. The General Ledger also includes a journal entry function where interfaces from other systems can be corrected and accruals to record expenses or revenue of the period that did not get booked in a given system on time. Fixed expenses such as depreciation or prepaid write-downs are also done in the General Ledger. This system closes monthly by rolling the ending balance to the beginning balance and clearing activity. It closes annually by closing all revenue and expense accounts to an income summary account in retained earnings or owners equity. Each year the revenue and expenses start from "0". The Balance Sheet accounts are perpetual meanign that their balances are carried from the day the business began to the day the business ends.

This is a basic overview of how an automated accounting or bookkeeping system works. To build this system right the first time does require some financial knowledge. General Bookkeeping Made Easy discusses, in detail, the proper setup of the chart of accounts. The system itself will tell you where those numbers should be placed within it so the system reports correctly.