Bookkeeping Basics

Being that we are so close to the end of the year, I thought I would do a small post about book keeping. This is where a lot of self employed and new small business owners get confused, frustrated and sometimes in trouble with the IRS.

Most people probably think of bookkeeping and accounting as the same thing, but bookkeeping is really one function of accounting, while accounting encompasses many functions involved in managing the financial affairs of a business. Accountants prepare reports based, in part, on the work of bookkeepers.

Bookkeepers perform all manner of record-keeping tasks. Some of them include the following:

-They prepare what are referred to as source documents for all the operations of a business - the buying, selling, transferring, paying and collecting. The documents include papers such as purchase orders, invoices, credit card slips, time cards, time sheets and expense reports. Bookkeepers also determine and enter in the source documents what are called the financial effects of the transactions and other business events. Those include paying the employees, making sales, borrowing money or buying products or raw materials for production.

-Bookkeepers also make entries of the financial effects into journals and accounts. These are two different things. A journal is the record of transactions in chronological order. An accounts is a separate record, or page for each asset and each liability. One transaction can affect several accounts.

-Bookkeepers prepare reports at the end of specific period of time, such as daily, weekly, monthly, quarterly or annually. To do this, all the accounts need to be up to date. Inventory records must be updated and the reports checked and double-checked to ensure that they're as error-free as possible.

-The bookkeepers also compile complete listings of all accounts. This is called the adjusted trial balance. While a small business may have a hundred or so accounts, very large businesses can have more than 10,000 accounts.

-The final step is for the bookkeeper to close the books, which means bringing all the bookkeeping for a fiscal year to a close and summarized.

There are quite a few good accounting programs out there. I am not an affiliate and I am not getting any kickbacks for this, I just enjoy the program and passing it on to you guys.

I have been using this for a few years now and it is awesome. It’s free to use and they have other pro services that you can purchase. For over a year, I used the free services solely and it worked great for my start up.

Go to Wave by clicking here if you are interested.

Accounting Principles

Yep, another one on accounting, but trust me when I say that this is only going to help you to make a successful transition out of the rat race into a successful lifestyle that you want, deserve and will enjoy.

 If everyone involved in the process of accounting followed their own system (or no system at all) there would be no way to truly tell whether a company was profitable or not. Most companies follow what are called generally accepted accounting principles, or GAAP, and there are quite a few books in libraries and bookstores devoted to just this one topic. Unless a company states otherwise, anyone reading a financial statement can make the assumption that company has used GAAP.

If GAAP are not the principles used for preparing financial statements, then a business needs to make clear which other form of accounting they've used and are bound to avoid using titles in its financial statements that could mislead the person examining it. 

GAAP are the gold standard for preparing financial statement. Not disclosing that it has used principles other than GAAP makes a company legally liable for any misleading or misunderstood data. These principles have been fine-tuned over decades and have effectively governed accounting methods and the financial reporting systems of businesses. Different principles have been established for different types of business entities, such for-profit and not-for-profit companies, governments and other enterprises.

GAAP are not cut and dried, however. They're guidelines and as such are often open to interpretation. Estimates have to be made at times, and they require good faith efforts towards accuracy. You've surely heard the phrase "creative accounting" and this is when a company pushes the envelope a little (or a lot) to make their business look more profitable than it might actually be. This is also called massaging the numbers. This can get out of control and quickly turn into accounting fraud, which is also called cooking the books. The results of these practices can be devastating and ruin hundreds and thousands of lives, as in the cases of Enron, Rite Aid and others.

I promise, this will be the last dry post on accounting, but I cannot stress enough that proper accounting will keep you out of the hot seat.

Again, make sure to subscribe, 2016 is the year that you can change your destiny.

Start creating a career online and get out of the rat race. Click here for ideas on how to do it.

The Basics

Basic Accounting Principles

Going off of my last post, I have gotten some feedback that indicates that accounting is one of those areas of contention for new start ups, so I will hit on the subject in a little more detail.

Professor of Accounting at the University of Michigan, William A Paton, is defined as having one basic function: "facilitating the administration of economic activity. This function has two closely related phases:

1)      Measuring and arraying economic data;

2)      Communicating the results of this process to interested parties."

Ok, before you tune me out, I know that was a little dry, but I can’t stress that your business is going to comprise of many “dry” things that project your business forward.

As an example, a company's accountants (if you are a solo act, this is you) periodically measure the profit and loss for a month, a quarter or a fiscal year and publish these results in a statement of profit and loss that's called an income statement.  These statements include elements such as accounts receivable (what's owed to the company) and accounts payable (what the company owes). It can also get pretty complicated with subjects like retained earnings and accelerated depreciation.

Much of accounting though, especially if you are just starting out, is mostly concerned with basic bookkeeping. This is the process that records every transaction; every bill paid, every dime owed, every dollar and cent spent and accumulated. 

But the owners of the company, which can be individual owners or millions of shareholders are most concerned with the summaries of these transactions, contained in the financial statement.

The financial statement summarizes a company's assets. A value of an asset is what it cost when it was first acquired. The financial statement also records what the sources of the assets were. Some assets are in the form of loans that have to be paid back. Profits are also an asset of the business.

Where this comes into play in the very beginning is when you are trying to create business accounts at a bank, get loans, or lines of credit from suppliers.

In what's called double-entry bookkeeping, the liabilities are also summarized. Obviously, a company wants to show a higher amount of assets to offset the liabilities and show a profit. The management of these two elements is the essence of accounting. javascript:void(0);

There is a system for doing this; not every company or individual can devise their own systems for accounting; the result would be chaos!

I know, I know, it bores me at times too. I just noticed that this was an area that new business start ups have a problem with, so I am doing what I do best, informing the masses. If you can use this information, great, if not, keep reading future posts they aren’t all this dry.

I have actually had a few start ups and when I first created my business, it lasted about three years, all because of not keeping accurate accounting records, so I can’t stress enough that if you haven’t got a good accounting system in place, start one immediately.

The shoe box of receipts in the bottom of the closet doesn’t work when your business actually starts bringing in revenue.

Make sure to to subscribe to the RSS feed so you don't miss a post. There are new changes, freebies and more coming in 2016. Come be a part of it. In the mean time, if you need extra help geting started with making money online, check this out.

Love Your Accountant

 

Even if you are great with numbers, you should still have an accountant or CPA go over your numbers just to double check. Remember, these people are trained to find things that you may overlook.

The accountant is the person that generally gets overlooked in a business until tax time comes, but a good relationship with a great accountant all year round can and will be an asset to your business.

It doesn’t matter if your business is just you and a computer working from the library, (My business model for almost a year) or if you run a corporation with multiple employees, your accountant will help keep the numbers straight and the IRS off of your back.

What Is Accounting Anyway?

Anyone who's worked in an office at some point or another has had to go to accounting. They're the people who pay and send out the bills that keep the business running.

They do a lot more than that, though. Sometimes referred to as "bean counters" they also keep their eye on profits, costs and losses. Unless you're running your own business and acting as your own accountant, you'd have no way of knowing just how profitable - or not - your business is without some form of accounting system in place.

No matter what business you're in, even if all you do is balance a checkbook, that's still accounting. It's part of even a kid's life. Saving an allowance, spending it all at once - these are accounting principles.

Every business and every individual needs to have some kind of accounting system in place. Otherwise, the finances can get away from you; we wouldn’t know what we've spent, or whether we can expect a profit or a loss from the business.

Staying on top of accounting, whether it's for a multi-billion dollar business or for a personal checking account is a necessary activity on a daily basis if you're smart. Not doing so can mean anything from a bounced check or posting a loss to a company's shareholders. Both scenarios can be equally devastating.

Accounting is basically information, and this information is published periodically in business as a profit and loss statement, or an income statement.

I, myself, have always had issues with numbers; long story going back to 7^th grade and a teacher that didn’t like me much…but I digress. Anyway, in business, it is important to know the numbers but it is also one of those jobs in your business that you can turn over to a professional and concentrate on whatever it is that you do that makes your business money.

Remember that anytime you are doing something in your business that takes you away from what it is that brings in the money, you are losing money.

That being said, the next few posts are going to be about accounting, because even if you have the best accountant in the world, you still want to have an idea of where every dollar goes.