Basic Bookkeeping Techniques

1. Module 9 Basic Bookkeeping Techniques

2. Contents of this Module: • Purpose of this module • The Benefits ofAccurate Bookkeeping • Income Statements andBalance Sheets • The Synoptic JOURNAL or Ledger What is Bookkeeping? Bookkeeping is defined as the recording and documentation of the financial transactions of a business.

3. Purpose of this Bookkeeping Module: • To understand where Bookkeeping fits into the process of creating Financial Statements. • To understand how accurate records can be utilized as a management tool leading to sound business decisions. • To create an understanding of the mechanics of a maintaining a SYNOPTIC LEDGER. …Most retail, wholesale and service businesses make sales and receive and spend money every day. They should keep records like Daily Cash Sheets, Accounts Receivable, and Accounts Payable. A SYNOPTIC JOURNAL, or LEDGER, combines all of the aforementioned records into one comprehensive record keeping resource.

4. Why Does a Business Keep Financial Records? • To manage the money of the business, particularly if there is a significant amount of cash flow on a day-to-day basis. • To track the daily, weekly and monthly financial performance of the business. Is the business making money? • To identify and address problems at an early stage. • To provide the bookkeeper or accountant for the business with all critical financial information. • To make INFORMED DECISIONS!

5. Management by Numbers ‘Telephones, hotels, insurance – it’s all the same. If you know the numbers inside out, you know the company inside out.’ - Harold Geenen, CEO of ITT Corp

6. Worksheet #1: Data-driven Decision-making • Review the information in worksheet #1 • How would you answer the questions, given the information available? • Make any additional calculations that you think might be helpful • What other information would you like to have in order to make a decision?

7. Your Bookkeeping Friends • Tools you can use to make bookkeeping easier

8. Keys to Effective Bookkeeping • Establish a system that is: • Uncomplicated, logical, and user-friendly • Thorough and accurate • Easily accessible • Consistent with the size and nature of your business • Integrated into your daily business routine

9. Process

10. Financial Statements: • The Income Statement and the Balance Sheet are the two principal documents that, together, are called the financial statements. • They are intertwined with the Cash Flow Statement and together complete the financial picture of the business. • They enable you to understand what is going on with the business and make decisions accordingly. • The information for all 3 documents begins with the Synoptic Ledger.

11. Financial Statements: Key Financial Statements • INCOME STATEMENT: • Income • Expenses • Profit • BALANCE SHEET: • Assets • Liabilities • Equity • CASH FLOW STATEMENT: • Cash In • Cash Out • Cash Balance • SYNOPTIC LEDGER: • Transactions • Adjusting entries

12. The Income Statement: • Identifies all Revenue and Expenses over a specified time (usually a month or year) to show Profit or Loss for the period. • Expenses are incurred to create revenue, and are not always cash expenditures. (Example: depreciation.) • Not every cash expenditure by the business is an expense, and those that are not expenses will not appear on the Income Statement. (Example: payment of loan principal to a bank.)

13. Worksheet #2: The Income Statement Please go to Worksheet #2 … to review the Income Statement:

14. The Balance Sheet: • Shows the exact financial position of the business at a specific date, usually the end of a month/year. • Identifies: • Assets - what the business owns • Liabilities - what the business owes • Owner’s Equity - the net capital available to the owner. • Represents the COST of the Assets, Liabilities and Equity, NOT their VALUE. • The Balance sheet must always balance: Assets = Liabilities + Owner‘s Equity

15. The BALANCE Sheet Liabilities • Assets = liabilities + equity Assets Equity

16. Worksheet #3: The Balance Sheet Look at the Worksheet #3 Balance Sheet:

17. Double-Entry Bookkeeping • Each bookkeeping entry: • Involves a minimum of 2 accounts • DEBITSmust = CREDITS Credit Debit

18. 5 Types of Accounts • ‘double-entry’ accounting: • 2 sides to every bookkeeping entry! • Increase in ‘Debit’ matched by increase in ‘Credit’ B.S. I.S.

19. Debit & Credit Balances Revenue Expenses Credit balance Debit balance Liabilities Assets Equity

20. The Synoptic Ledger: • Accounts across the top • Debit column on left, Credit column on right • Line by line recording of all business transactions. • Can be considered the ‘finished product’ of Bookkeeping. • May be turned over to an accountant to develop the Financial Statements.

21. Using The Synoptic Ledger • The amount of every transaction is entered in the Synoptic Ledger TWICE. (Double Entry Bookkeeping.) • Each entry has a Debit [Dr] and a Credit[Cr]. • Sum of Debits = Sum of Credits

22. Synoptic Ledger Transactions • ACCOUNTS COMMONLY INVOLVED IN LEDGER ENTRIES:

23. Example: Asset <-> Asset • Moving assets from one account to another • Paying out cash is a CREDIT • Deposit in bank is a DEBIT

24. Example: Asset <-> Revenue Revenue Asset • Receiving cash for sales of different products • Cash in is a DEBIT • Sales revenue in is a CREDIT

25. Example: Asset <-> Liability Liability Asset • Purchasing materials on credit from supplier • Material in is a DEBIT • Increase in money owed is a CREDIT

26. Example: Asset <-> Expense Expense Asset • Paying a supplier with a bank cheque • Money out is a CREDIT • Paying an expense is a DEBIT I understand!!

27. Worksheet #4 & 5: Synoptic Journal – Jan-11 • Review the transactions listed in worksheet #4 • Add these transactions to the synoptic journal • Use either Worksheet #5 or electronic version

28. Worksheets #6 & 7: Financial Statements – Jan-11 • How have financial statements changed as a result of synoptic ledger entries?

29. Worksheet #8 & 9: Synoptic Journal – Feb-11 • For each transaction listed in worksheet #8: • Review the transaction description • Find the transaction on Worksheet #9: Synoptic Ledger. • Determine whether or not the transaction entry in the Synoptic Ledger is correct. • If it is incorrect, change it to a correct entry. • Hints: • Some entries are in the wrong accounts. • Some are the right accounts, but wrong numbers. • Some are wrong accounts and wrong numbers. • Some are correct.

30. Worksheets #10 & 11: Financial Statements – Feb-11 • How have financial statements changed as a result of synoptic ledger entries? • What aspects of the business appear to require attention? • What decisions would you make based on the available information?

31. Wrap Up: • Bookkeeping is a powerful tool for managing a business. • The owner/manager of a business should know how much money the business has, how much it is owed and how much it owes. Bookkeeping provides this information. • Keep records up to date and easily accessible. • Remember Bookkeeping is just simple arithmetic. Business owners/managers can do it by themselves without requiring the help of an accountant.