Bookkeeping For Dummies
Overview
Concise, easy-to-understand information on every aspect of bookkeeping
Bookkeeping For Dummies is a clear guide to tracking transactions, figuring out balance sheets, keeping ledgers or journals, creating financial statements, and operating accounts for businesses. This necessary resource offers relevant, up-to-date tax information and small business laws, so you'll have everything you need to conquer small business bookkeeping tasks. Looking for the latest on QuickBooks Online software, government reporting requirements, and keeping your data secure on the cloud? This new edition has you covered. Make sure your financial records and plans are accurate and complete—without taking too much time away from your business.
- Understand all components of a financial cycle
- Track business transactions and prepare financial reports correctly
- Save time and money by simplifying tax preparation
- Keep your data secure with QuickBooks Online and other cloud-based tools
Bookkeeping For Dummies is the perfect crash course for small business owners or employees who are tasked with bookkeeping duties.
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About The Author
Lita Epstein, MBA, is a financial writer who focuses on career growth and business topics. She earned her MBA from Emory University and her BA from Rutgers University. Lita has written more than 50 books, including Reading Financial Reports For Dummies.
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bookkeeping for dummies
CHEAT SHEET
Bookkeepers manage all the financial data for small companies. Accurate and complete financial bookkeeping is crucial to any business owner, as all of a company's functions depend on the bookkeeper’s accurate recording of financial transactions.Bookkeepers are generally entrusted with keeping the Chart of Accounts, the General Ledger, and the company journals, which give details about all financial transactions.
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Bookkeeper 2014 is a cost-effective choice for bookkeeping software if you’re just starting up and don’t have sophisticated bookkeeping or accounting needs. You can prepare invoices, pay bills, write checks, manage inventory, track receivables, bill customers, and prepare payroll. But there is no online version offered, and it only receives minor updates periodically.
Bookkeeping
Bookkeeping, the methodical way in which businesses track their financial transactions, is rooted in accounting. Accounting is the total structure of records and procedures used to record, classify, and report information about a business’s financial transactions. Bookkeeping involves the recording of that financial information into the accounting system while maintaining adherence to solid accounting principles.
Bookkeepers manage all the financial data for small companies. Accurate and complete financial bookkeeping is crucial to any business owner, as all of a company's functions depend on the bookkeeper’s accurate recording of financial transactions.Bookkeepers are generally entrusted with keeping the Chart of Accounts, the General Ledger, and the company journals, which give details about all financial transactions.
Small business owners don't like to be tied to a desk. With today's new mobile applications for accounting, they no longer have to worry about finding time to sit down and do the books.
Today, with the right accounting and bookkeeping software, a business owner can check his or her accounts online using mobile apps.
Your bookkeeping system is built on a few key elements fundamental to keeping your books in order. With these building blocks, any bookkeeper can set up a solid system for tracking all the business’s transactions. Here are these important components:
Chart of Accounts: List of all accounts in the books; the r
Cafeteria plans have nothing to do with offering a lunch spot for your employees. Cafeteria plans are benefit plans that offer employees a choice of benefits based on cost. Employees can pick and choose from those benefits and put together a benefit package that works best for them within the established cost structure.
In bookkeeping, the current ratio compares your current assets to your current liabilities. This ratio provides a quick glimpse of your company’s cash flow — its ability to pay its bills. The formula for calculating this important ratio is as follows:
Current assets ÷ Current liabilities = Current ratio
The following is an example of a current ratio calculation:
$5,200 ÷ $2,200 = 2.
Taxes aren’t the only thing you need to worry about when figuring out your state obligations after hiring employees. Every state (except Texas) requires employers to carry workers’ compensation insurance, which covers your employees in case they’re injured on the job. Texas doesn’t require this insurance but permits employees injured on the job to sue their employers in civil court to recoup the costs of injuries.
Bookkeeping
Most businesses empty cash registers each night and put any cash not being deposited in the bank that night into a safe. Some businesses today aren’t even using traditional cash registers. They use portable devices to take orders and then a cash drawer to manage cash receipts and disbursements. Even if your business is using something other than a traditional cash register, the basics of cash handling remain the same.
Almost every dime that comes into your business flows through your business’s checking account (at least that’s what should happen). Whether it’s cash collected at your cash registers, payments received in the mail, cash used to fill the cash registers, petty cash accounts, payments sent out to pay business obligations, or any other cash need, this cash enters and exits your checking account.
In addition to following wage and salary guidelines set for your business, when calculating payroll, you, the bookkeeper, must also be familiar with how to calculate the employee taxes that must be deducted from each employee’s paycheck. These taxes include Social Security; Medicare; and federal, state, and local withholding taxes.
Bookkeeping
After you decide that you want to hire employees for your business, you must be ready to deal with a lot of government paperwork. Even before you sign your first employee, you need to start filing government forms related to hiring.
If you plan to hire staff, you must first apply for an Employer Identification Number, or EIN.
Bookkeeping
You have a lot of leeway regarding the level of wages and salary you pay your employees, but you still have to follow the rules laid out by the U.S. Department of Labor. When deciding on wages and salaries, you have to first categorize your employees. Employees fall into one of two categories:
Exempt employees are exempt from the Fair Labor Standards Act (FLSA), which sets rules for minimum wage, equal pay, overtime pay, and child labor laws.
Every business is owned by somebody. Equity accounts track owners’ contributions to the business as well as their share of ownership. For a corporation, ownership is tracked by the sale of individual shares of stock because each stockholder owns a portion of the business. In smaller companies that are owned by one person or a group of people, equity is tracked using Capital and Drawing accounts.
Bookkeeping
In most companies that don’t use computerized bookkeeping programs, a transaction’s original point of entry into the bookkeeping system is through a system of journals.
Each transaction goes in the appropriate journal in chronological order. The entry should include information about the date of the transaction, the accounts to which the transaction was posted, and the source material used for developing the transaction.
Bookkeeping
When you were an employee, you probably noticed that every company you ever worked for waited until the last possible day to provide you with your W-2s. Now that you’re preparing these documents for your employees, you have a better understanding of your employers’ delay — it takes time to put W-2s together. Preparing these forms can be a very time-consuming task, especially if you want to make sure they’re correct.
After you complete all your tax forms for individual employees, contractors, and vendors, you’re left with two annual summary reports that must be filed with the federal government:
Form 940, Employer’s Annual Federal Unemployment Tax Return contains an annual summary of your federal unemployment tax payments.
Bookkeeping
States collect their unemployment taxes on a quarterly basis, and many states allow you to pay your unemployment taxes online. Check with your state to find out how to file and make unemployment tax payments.
Skipping out on state taxes isn’t a good idea. If you don’t pay your state taxes, you may end up with a lien filed against your business.
Bookkeeping
After you close the Cash Receipts journal, the next step is to close the Cash Disbursements journal. Any adjustments related to outgoing cash receipts, such as bank credit-card fees, should be added to the Cash Disbursements journal.
Before you close the journal, you must also be certain that any bills paid at the end of the month have been added to the Cash Disbursements journal.
Each state sets its own unemployment tax rate. Many states also charge additional fees for administrative costs and job-training programs. The percentage an employer must pay isn’t a set amount but instead is a percentage range. The employee income amount upon which this percentage is charged also varies from state to state.
If your trial balance isn’t correct, you need to work backward in your closing process to find the source of the mathematical error. When you need to find errors after completing a trial balance that fails, follow these four basic steps to identify and fix the problem. And remember, this is why all bookkeepers and accountants work with pencils, not pens — pencils make erasing mistakes and making corrections much easier.
The IRS used to accept employee taxes using a Federal Tax Deposit Coupon, numbered Form 8109 and 8109-B. This form of payment became no longer accepted as of December 31, 2010. The IRS recommends that all businesses use the Electronic Federal Tax Payment System.
You can find out more about getting set up on this system by calling the IRS at 800-434-7338.
Bookkeeping
Running payroll for employees paid based on commission can involve the most complex calculations. To show you a number of variables, this example shows you how to calculate a commission check based on a salesperson who sells $60,000 worth of products during one month.
For a salesperson on a straight commission of 10 percent, you calculate pay using this formula:
Total amount sold x Commission percentage = Gross pay
$60,000 x 0.
If you’ve been entering transactions manually, you create a trial balance by listing all the accounts with their ending debit or credit balances. After preparing the list, you total both the debit and credit columns. If the totals at the bottom of the two columns are the same, the trial is a success, and your books are in balance.
Testing your books starts with counting your cash. Why start with cash? Because the accounting process starts with transactions, and transactions occur when cash exchanges hands either to buy things you need to run the business or to sell your products or services.
Before you can even begin to test whether the books are right, you need to know if your books have captured what’s happened to your company’s cash and if the amount of cash shown in your books actually matches the amount of cash you have on hand.
Adjustments to your books call for a trial balance, the adjusted trial balance, to ensure that your adjustments are correct and ready to be posted to the General Ledger.
You track all the adjusting entries on a worksheet; you only need to do this worksheet if you’re doing your books manually. It’s not necessary if you’re using a computerized accounting system.
Bookkeeping is, among other things, a step-by-step process that lets you methodically track the transactions in your company’s books. Monitoring a transaction every step of the way helps bookkeepers keep an eye on the bottom line at all times. Check out the following keys to bookkeeping success:
Transactions: Make purchases or sales of items to run your business and start the process of bookkeeping.
Not all sales involve the collection of cash; many stores allow customers to buy products on store credit using a store credit card. (This is not a bank-issued credit card here; in that case, the bank, not the store or company making the sale, is the one who has to worry about collecting from the customer.)
Instead, store credit comes into play when a customer is allowed to take a store’s products without paying immediately because he has an account that’s billed monthly.
Did you know that the United States is the only industrialized nation that does not require companies to use international accounting standards? The U.S. does have an established method of setting accounting rules. U.S. corporations must complete their financial reports based on the Generally Accepted Accounting Principles (GAAP), which are established by the Financial Accounting Standards Board (FASB).
Every business has investors. Even a small mom and pop grocery store requires money upfront to get the business on its feet. Investments are reflected on the balance sheet as equity. The line items that appear in a balance sheet’s Equity section vary depending upon whether or not the company is incorporated. (Companies incorporate primarily to minimize their personal legal liabilities.
Every business needs unexpected cash on almost a weekly basis. Whether it’s money to pay the postman when he brings a letter or package COD, money to buy a few emergency stamps to get the mail out, or money for some office supplies needed before the next delivery, businesses need to keep some cash on hand, called petty cash, for unexpected expenses.
Bookkeeping
Deciding how frequently you’ll pay employees is an important point to work out before hiring staff. Most businesses choose one or more of these four pay periods:
Weekly: Employees are paid every week, and payroll must be done 52 times a year.
Biweekly: Employees are paid every two weeks, and payroll must be done 26 times a year.
Businesses used to have to spend thousands of dollars on expensive cash register systems connected to their computer systems in order to collect cash and adjust inventory at the time of sale. These are called point of sale programs.
Just to give you a little background — in case you're not familiar with how point of sale programs and inventory management coexist — there are two ways to track inventory: One is the periodic method, and the second is the perpetual method.
For each contractor and vendor you pay over the course of the year, instead of preparing a W-2, you must complete Form 1099, Miscellaneous Income. The 1099 is an information form used to report income, interest payments, and dividend payments. To transmit the 1099 to the federal government, you use Form 1096, Annual Summary and Transmittal of U.
To ensure that cashiers don’t pocket a business’s cash, at the end of each day, cashiers must prove out (show that they have the right amount of cash in the register based on the sales transactions during the day) the amount of cash, checks, and charges they took in during the day.
This process of proving out a cash register actually starts at the end of the previous day, when cashier John Doe and his manager agree to the amount of cash left in the John’s register drawer.
QuickBooks offers the best of both worlds: an easy user interface (for the novice) and extensive bookkeeping and accounting features (for the experienced bookkeeper or accountant). More small business owners today use QuickBooks than any other small business accounting software package.
It is the number one software on the Top Ten Reviews site as well.
Sage 50 is an excellent software package for your bookkeeping and accounting needs, but it’s definitely not recommended if you’re a novice. You need to be familiar with accounting jargon just to use the Sage 50 system, and its interface isn’t as user-friendly as the ones for Bookkeeper and QuickBooks.
The user interface took much longer to learn and was not as intuitive as QuickBooks, even for someone who knows accounting jargon.
Bookkeeping
After you complete your W-2s and distribute them to employees, you still haven’t seen the last of government paperwork. At this point, you total the numbers and fill out another form that looks very much like the W-2 — the W-3, Transmittal of Wage and Tax Statements.
The W-3 is essentially the cover sheet for the information you send to the Social Security Administration.
More than 50 different types of accounting software programs are on the market, and all are designed to computerize your bookkeeping. The more sophisticated ones target specific industry needs, such as food services or utilities, and can cost thousands of dollars.
To check out those options, visit Find Accounting Software, where you can browse for accounting software that’s grouped by industry — 34 industries to be exact, from Agriculture to Food Distribution to Utilities.
Eventually, you have to pay for both the inventory and the supplies you purchase for your business. In most cases, the bills are posted to the Accounts Payable account when they arrive, and they’re paid when due.
A large chunk of the cash paid out of your Cash account is in the form of the checks sent out to pay bills due in Accounts Payable, so you need to have careful controls over the five key functions of Accounts Payable:
Entering the bills to be paid into the accounting system
Preparing checks to pay the bills
Signing checks to pay the bills
Sending out payment checks to vendors
Reconciling the checking account
In your business, it’s likely that the person who enters the bills to be paid into the system also prepares the payment checks, but the other tasks should be done by someone else.
Most benefits are tax-exempt, or not taxed. Healthcare and retirement benefits are the most common of this type of benefit. In fact, accident and health benefits and retirement benefits make up the largest share of employers’ pay toward employees’ benefits.
Luckily, not only are these benefits tax-exempt, but anything an employee pays toward them can be deducted from the gross pay, so the employee doesn’t have to pay taxes on that part of his salary or wages.
Depreciation calculations for tax purposes are a completely different animal than the calculations used to record depreciation for accounting purposes. You can use Straight-Line depreciation to calculate your depreciation expense for tax purposes, but most businesses prefer to write off the highest expense legally permissible and reduce their tax bills by the greatest amount.
Bookkeeping
In bookkeeping, the acid test or quick ratio evaluates your company’s current assets and liabilities, but it’s a stricter test of cash flow than the similar current ratio. Many lenders prefer the acid test ratio when deciding whether to give you a loan because of that strictness; it doesn’t include the inventory account in the calculation.
Although bookkeepers are the ones who record what happens to your business’s cash, they aren’t the only ones who control where that cash goes. Controlling your company’s money is important; a business’s cash can be a pretty tempting siren for employees who aren’t accountable to the right checks and balances. Follow these suggestions to limit any one person’s access to your company’s money:
Separate cash handlers.
With so many accounting apps on the market, it can be hard to figure out which one can best meet your business needs. Read on for some tips on choosing the best mobile apps for bookkeeping on the go.
Your existing accounting program: If you want to do bookkeeping on the go, the most important thing to consider when selecting a program for managing your business' accounts is whether or not mobile bookkeeping is available.
Bookkeeping
Each and every account has its purpose in bookkeeping, but all accounts certainly aren’t created equal. For most companies, some accounts are more essential than others, so in case you’re having trouble knowing where to start your account setup and what’s necessary, this list looks at the top must-have accounts for bookkeepers.
Bookkeeping
Many business owners think of bookkeeping as a necessary evil, but in reality, if you make effective use of the data you collect, bookkeeping can be your best buddy when it comes to managing your cash. The key to taking advantage of what bookkeeping has to offer is understanding the value of basic bookkeeping principles and using information collected.
Bookkeeping
Have you gone into a store or restaurant lately and had your order handled with a tablet or other mobile device? That's the new trend in retail. Such systems help improve control over the tracking of sales and the management of cash as well as the collection of data that can be used to generate future marketing and promotions based on customer purchases.
You may think of depreciation as something that happens to your car as it loses value. In fact, most new cars depreciate 20 to 30 percent or even more as soon as you drive them off the lot. But when you’re talking about accounting, the definition of depreciation is a bit different.
Essentially, accountants use depreciation as a way to allocate the costs of a fixed asset over the period in which the asset is useable to the business.
Businesses don’t depreciate all assets. Low-cost items or items that aren’t expected to last more than one year are recorded in expense accounts rather than asset accounts. For example, office supplies are expense items and not depreciated, but that office copier, which you’ll use for more than one year, is recorded in the books as a fixed asset and depreciated each year.
You’re probably thinking that proving out the books sounds like a huge task that takes lots of time. You’re right — it’s a big job, but it’s also a very necessary one to do periodically so you can be sure that what’s recorded in your accounting system realistically measures what’s actually going on in your business.
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