DIVISION OF ECONOMIC DEVELOPMENT REGIONAL BUSINESS DEVELOPMENT OFFICE

Paper Bookkeeping

Thursday, May 3, 2007

1:00 PM – 4:00 PM

REGIONAL BUSINESS DEVELOPMENT OFFICE NAVAJO NATION SHOPPING CENTER

SUITE 2 SHIPROCK, NEW MEXICO

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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.

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Navajo Nation Department of Economic Development (DED)

Paper Bookkeeping

Paper Bookkeeping1:00 PM - 5:00 PM

Thursday, May 3, 2007

Please Sign In and Be Seated

We Will Begin Shortly

WELCOME

WelcomeShiprock - Regional Business

Development Office (RBDO)Randolph Sells,

Program Manager

Henry Silentman, Economic Development

Specialist

Rose Morgan, Senior Economic

Development Specialist

Sally Begay, Senior 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

Your CompanyUS Government

Recordkeeping for the IRS

Tax Preparation (IRS)Audits

Government

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Recordkeeping for the IRS

IRS Recordkeeping RequirementsClearly shows your income and expensesIt will enable you to file a correct returnOrderlyTraceable

Government

Overview

Lender RequirementsHonest Representation of Revenue, Expenses, Profit, and Cash FlowRMA – Risk Management Association, formerly Roberts Management Association

Lenders

Overview

May require a specific method of accountingRecord of transactionOrderly transfer of funds

CustomersSuppliers

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Overview

Management toolDecision-MakingIdentify problemsFinancial statementsForecasting

Your Company

Vocabulary

JournalDebit CreditLedgerAccountReconciliation

Cash vs. Accrual

-- Impact of Events Recognized as They Occur

-- Impact of Events Not Recognized until Cash is Paid or Received

AccrualCash

Accounting/Bookkeeping Systems

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Debit vs. Credit

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

CreditDebit

“T” Account

$125.00

$25.0004/10

$100.00

Bal 04/15

Bal 04/01

CreditDebitCash Account

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“T” Account

$55.00

$25.0004/11

Bal 04/15

Bal 04/01 $30.00

CreditDebitCity Market Account

Kinds of TransactionsCash SalesCredit SalesAccounts ReceivableAccounts PayableReceiptsPaymentsPayrollPurchasesDepreciationAccounting Entries (Adjusting Entries)

Transaction

DateAccount Number (X2, if double-entry)Amount (X2, if double-entry)Memo

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Chart of Accounts

What do you want your Chart of Accounts to Include?

The ability to track accounts you want to trackSales Accounts for each line of products or range of serviceDo not track each product’s sales

Chart of Accounts

Assets – (100s)Liabilities – (200s)Owner Equity – (300s)Revenue – (400s)Cost of Goods Sold (500s)Expenses – (600s)

Journal

Diary of the business’s financial activityDouble-entry vs. Single-entry“Cash Disbursement Journal”“General Ledger”

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Double-Entry vs. Single-Entry

-- “The Basis of a True Accounting System”

-- Checks and Balances-- Reconciliation

-- Reconciliation – Errors easy to find

-- Records only Active Account

-- Two journal entries for each transaction

-- One journal entry for each transaction

Double-EntrySingle-Entry

Accounting/Bookkeeping Systems

“T” Account

$125.00

$25.0004/10

$100.00

Bal 04/15

Bal 04/01

CreditDebitCash Account

“T” Account

$55.00

$25.0004/11

Bal 04/15

Bal 04/01 $30.00

CreditDebitCity Market Account

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“T” Account

CreditDebit

“T” Account

Debit = Credit

“T” Account

$39.00

$86.00

04/22

$125.00

Bal 04/30

Bal 04/15

CreditDebitCash Account

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“T” Account

$16.00

$39.0004/22

Bal 04/30

Bal 04/15 $55.00

CreditDebitCity Market Account

Ledger

A record of transactions specific to one account (i.e. Cash account, Accounts Payable account)Chart of accounts

Account Reconciliation

What is Reconciliation/Posting?Why do we Reconcile?How Often do we Reconcile?Single Entry vs. Double EntryTrial Balance – Sum of totals from all ledger accountsAdjusting Entries

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Adjusting Entries

End-of-Period adjustmentsMay require assistance of an accountantRequires judgment and some accounting knowledgeRecord the adjusting entries in the general journalat the end of the accounting period

Transactions Requiring Adjusting Entries

Prepaid InsuranceDepreciationInventory (FIFO, LIFO)Accrued WagesAdjustments for Bad DebtsRefresh the Ledger Account Balance for Accounts Receivable and Accounts Payable

Financial Statements

Balance SheetIncome StatementCash Flow Statement

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Balance Sheet

Snapshot of your company’s net worth at one point in timeResources Owned (Assets)Resources Owed (Liabilities)Investment and Past Profits (Owner Equity)Assets = Liabilities + Owner Equity

Income Statement

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

A Summary of inflows and outflows of cash during a period of timeReports Cash Receipts and Cash PaymentsFind the Cash position at a certain point in timeCombines Income and Balance Sheet (Asset) Accounts Activity

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Bilagaana Trading Co.

At the beginning of April, Matt Bilagaana opened a trading post selling Jewelry.

Matt Bilagaana had had some accounting at the local college and he is going to do his own bookkeeping.

Chart of Accounts forBilagaana Trading Co.

ASSETS

110 Cash120 Squash Blossoms, Inventory125 Rings, Inventory 130 Pre-Paid Insurance

LIABILITIES

210 Nakai Trading Co.211 Ohtsáad Trading Co.

OWNER EQUITY

310 Matthew Bilagaana, Capital311 Matthew Bilagaana, Drawing

REVENUE

410 Sales, Squash Blossoms411 Sales, Rings

COST OF GOODS SOLD

510 Cost of Goods Sold, Squash Blossoms520 Cost of Goods Sold, Rings

EXPENSES

610 Advertising Expense620 Miscellaneous630 Rent Expense640 Utilities Expense615 Insurance Expense635 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

Bookkeeping – a logical method for organizing your small business’s finances

Uses of bookkeeping data

How to apply your new skills

Analyze a transactionIdentify the affected accountsIdentify how the accounts are affectedUse “T” accounts to visualize transactionUse the memo field to record information effectively

Useful WebsitesSmall business assistance, useful tips and suggestions for a wide variety of small business issues

www.sba.gov

Federal tax forms, Small business accounting guidelines,

www.irs.gov

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More Useful Websites

Small business information website. Resource provider through its small business owner’s toolkit by CCH, Inc.

www.toolkit.cch.com

Small business resource websitewww.businesstown.

Even More Useful Websites

Canadian Website for small business bookkeeping or bookkeeper referral

www.bookkeeperlist.com

Questionsand

Discussion

Practice problem for the

“Paper Bookkeeping” Workshop

Chart of Accounts for Bilagaana Trading Co. ASSETS 110 Cash 120 Squash Blossoms, Inventory (beginning

10 Squash Blossoms @ $200 each) 125 Rings, Inventory (beginning 10 Rings @

$25 each) 130 Pre-Paid Insurance LIABILITIES 210 Nakai Trading Co. 211 Ohtsáad Trading Co. 04/01 Bal. $1,200 OWNER EQUITY 310 Matthew Bilagaana, Capital 311 Matthew Bilagaana, Drawing

REVENUE 410 Sales, Squash Blossoms 411 Sales, Rings COST OF GOODS SOLD 510 Cost of Goods Sold, Squash Blossoms 520 Cost of Goods Sold, Rings EXPENSES 610 Advertising Expense 620 Miscellaneous 630 Rent Expense 640 Utilities Expense 615 Insurance Expense 635 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

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

2. Reconcile the journal 3. Reconcile the cash account. Beginning

balance on April 1 is $0. 4. Post the transactions to the ledger

accounts

5. Trial Balance 6. Adjusting entries 7. Prepare the monthly financial statements

General JOURNAL Page ____ of ____

POST REF

DEBIT CREDIT

1 Apr 01 120 - Squash Blossoms - Inventory $2,000.00 1

2 211 - Ohstáad Trading Co. $1,200.00 2

3 310 - Matthew Bilagaana, Capital $800.00 3

4 bought squash blossoms on credit; adjusting entry 4

5 Apr 01 125 - Rings, Inventory $250.00 5

6 310 - Matthew Bilagaana, Capital $250.00 6

7 Adjusting Entry for Inventory Investment 7

8 Apr 02 101 - Cash $12,750.00 8

9 310 - Matthew Bilagaana, Capital $12,750.00 9

10 received cash from owner 10

11 Apr 03 630 - Rent $600.00 11

12 101 - Cash $600.00 12

13 April Rent 13

14 Apr 05 615 - Insurance Expense $100.00 14

15 130 - Pre-Paid Insurance $500.00 15

16 101 - Cash $600.00 16

17 Apr 06 101 - Cash $1,000.00 17

18 410 Sales - Squash Blossoms $1,000.00 18

19 Apr 09 620 - Miscellaneous Expense $50.00 19

20 101 - Cash $50.00 20

21 Apr 11 120 - Squash Blossoms - Inventory $400.00 21

22 101 - Cash $400.00 22

23 Apr 13 125 - Rings, Inventory $200.00 23

24 210 - Nakai Trading Co. $200.00 24

25 Apr 13 101 - Cash $200.00 25

26 411 - Sales, Rings $200.00 26

27 Apr 16 640 - Utilities Expense $100.00 27

28 101 - Cash $100.00 28

DATE DESCRIPTION

29 Apr 18 610 - Advertising Expense $150.00 29

30 101 - Cash $150.00 30

31 Apr 20 211 - Ohstáad Trading Co. $500.00 31

32 101 - Cash $500.00 32

33 Apr 20 101 - Cash $2,500.00 33

34 410 - Sales, Squash Blossoms $2,500.00 34

35 Apr 25 120 - Squash Blossoms - Inventory $1,600.00 35

36 101 - Cash $1,600.00 36

37 Apr 27 125 - Rings, Inventory $125.00 37

38 101 - Cash $125.00 38

39 Apr 27 101 - Cash $1,800.00 39

40 410 - Sales, Squash Blossoms $1,500.00 40

41 411 - Sales, Rings $300.00 41

42 Apr 30 311 - Matthew Bilagaana, Drawing $400.00 42

43 101 - Cash $400.00 43

44 Apr 30 101 - Cash $200.00 44

45 411 - Sales, Rings $200.00 45

46 May 01 310 - Matthew Bilagaana, Capital $400.00 46

47 311 - Matthew Bilagaana, Drawing $400.00 47

48 May 01 510 - Cost of Goods Sold, Squash Blossoms $1,000.00 48

49 120 - Squash Blossoms, Inventory $1,000.00 49

50 May 01 520 - Cost of Goods Sold, Rings $350.00 50

51 125 - Rings, Inventory $350.00 51

52 52

53 53

54 54

55 55

56 56

57 57

58 58

59 59

60 60

101 12004/01 $0 04/01 $2,00004/02 $12,750 04/11 $400

04/03 $600 04/25 $1,60004/05 $600 05/01 $1,000

04/06 $1,00004/09 $5004/11 $400

04/13 $20004/16 $10004/18 $15004/20 $500

04/20 $2,50004/25 $1,60004/27 $125

04/27 $1,80004/30 $400

04/30 $200

05/01 $13,925 05/01 $3,000

125 13004/01 $250 04/01 $004/13 $200 04/05 $50004/27 $125

05/01 $350

05/01 $225 05/01 $500.00

210 21104/01 $0 04/01 $1,20004/13 $200 04/20 $500

05/01 $200 05/01 $700

310 31104/01 $800 04/01 $004/01 $250 04/30 $40004/02 $12,750 05/01 $400

05/01 $400

05/01 $13,400 05/01 $0

Bilagaana Trading Co."T"accounts - April 2007

Nakai Trading Co. Ohtsáad Trading Co.

Matthew Bilagaana, Capital Matthew Bilagaana, Drawing

Cash Squash Blossoms, Inv.

Rings, Inv. Prepaid Insurace

410 41104/01 $0 04/01 $004/06 $1,000 04/10 $20004/20 $2,500 04/27 $30004/27 $1,500 04/30 $200

05/01 $5,000 05/01 $700

510 52004/01 $0 04/01 $005/01 $1,000 05/01 $350

05/01 $1,000 05/01 $350

610 62004/01 $0 04/01 $004/18 $150 04/09 $50

05/01 $150 05/01 $50

630 64004/01 $0 04/01 $004/03 $600 04/16 $100

05/01 $600 05/01 $100

615 63504/01 $0 04/01 $004/05 $100

05/01 $100 05/01 $0

Advertising Expense Miscellaneous Expense

Insurance Expense Supplies Expense

Rent Expense Utilities Expense

Sales, Squash Blossoms Sales, Rings

CGS, Squash Blossoms Cost of Goods Sold, Rings

101 Cash Account JOURNAL Page ____ of ____

POST REF

DEBIT CREDIT

1 Apr 02 101 - Cash $12,750.00 1

2 Apr 03 101 - Cash $600.00 2

3 Apr 05 101 - Cash $600.00 3

4 Apr 06 101 - Cash $1,000.00 4

5 Apr 09 101 - Cash $50.00 5

6 Apr 11 101 - Cash $400.00 6

7 Apr 13 101 - Cash $200.00 7

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 $2,500.00 11

12 Apr 25 101 - Cash $1,600.00 12

13 Apr 27 101 - Cash $125.00 13

14 Apr 27 101 - Cash $1,800.00 14

15 Apr 30 101 - Cash $400.00 15

16 Apr 30 101 - Cash $200.00 16

17 $18,450.00 $4,525.00 17

18 18

19 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

DATE DESCRIPTION

Trial Balance as of 05-01-07 JOURNAL Page ____ of ____

POST REF

DEBIT CREDIT

1 May 01 101 - Cash $13,925.00 1

2 120 - Squash Blossoms, Inventory $3,000.00 2

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

10 411 - Sales, Rings $700.00 10

11 510 - Cost of Goods Sold, Squash Blossoms $1,000.00 11

12 520 - 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 19

20 $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

DATE DESCRIPTION

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

DECREASES INCREASES

INCOME

DECREASES INCREASES

Chart of Accounts Assets – (100s) Liabilities – (200s) Owner Equity – (300s) Revenue – (400s) Cost of Goods Sold – (500s) Expenses – (600s)

ASSETS

INCREASES DECREASES

LIABILITIES

DECREASES INCREASES

COST OF GOODS SOLD

INCREASES DECREASES