by Lita Epstein,MBA Bookkeeping FOR DUMmIES ‰ 01_598481 ffirs.qxd 10/24/05 8:05 PM Page iii More free books @ www.BingEbook.com Bookkeeping For Dummies ® Published by Wiley Publishing, Inc. 111 River St. Hoboken, NJ 07030-5774 www.wiley.com Copyright © 2006 by Wiley Publishing, Inc., Indianapolis, Indiana Published by Wiley Publishing, Inc., Indianapolis, Indiana Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permit- ted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600. Requests to the Publisher for permission should be addressed to the Legal Department, Wiley Publishing, Inc., 10475 Crosspoint Blvd., Indianapolis, IN 46256, 317-572-3447, fax 317-572-4355, or online at http://www.wiley.com/go/permissions. Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries, and may not be used without written permission. All other trademarks are the property of their respective owners. Wiley Publishing, Inc., is not associated with any product or vendor mentioned in this book. 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Library of Congress Control Number: 2005934501 ISBN-13: 978-0-7645-9848-7 ISBN-10: 0-7645-9848-1 Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 1B/RQ/RR/QV/IN 01_598481 ffirs.qxd 10/24/05 8:05 PM Page iv More free books @ www.BingEbook.com About the Author Lita Epstein, who earned her MBA from Emory University’s Goizueta Business School, enjoys helping people develop good financial, investing, and tax planning skills. While getting her MBA, Lita worked as a teaching assistant for the financial accounting department and ran the accounting lab. After completing her MBA, she managed finances for a small nonprofit organization and for the facilities management section of a large medical clinic. She designs and teaches online courses on topics such as investing for retirement, getting ready for tax time, and finance and investing for women. She’s written more than ten books, including Streetwise Retirement Planning and Trading For Dummies. Lita was the content director for a financial services Web site, MostChoice.com, and managed the Web site Investing for Women. As a Congressional press secretary, Lita gained firsthand knowledge about how to work within and around the Federal bureaucracy, which gives her great insight into how government programs work. In the past, Lita has been a daily newspaper reporter, magazine editor, and fundraiser for the international activities of former President Jimmy Carter through The Carter Center. 01_598481 ffirs.qxd 10/24/05 8:05 PM Page v More free books @ www.BingEbook.com Dedication To my father, Jerome Kirschbrown, who taught me the importance of accounting, bookkeeping, and watching every detail. 01_598481 ffirs.qxd 10/24/05 8:05 PM Page vii More free books @ www.BingEbook.com Author’s Acknowledgments I want to take this opportunity to thank all the people who have helped make this book a reality. In particular, I want to thank the wonderful folks at Wiley who shepherded this project to completion — Stacy Kennedy and Kelly Ewing, as well as my copy editor, Elizabeth Rea. I also want to thank my technical advisor, Shellie Moore, who is a CPA and made sure that all the bookkeeping and accounting details were accurate. Finally, I want to thank my agent Jessica Faust at BookEnds, who helps find all my book projects. 01_598481 ffirs.qxd 10/24/05 8:05 PM Page ix More free books @ www.BingEbook.com Publisher’s Acknowledgments We’re proud of this book; please send us your comments through our Dummies online registration form located at www.dummies.com/register/. Some of the people who helped bring this book to market include the following: Acquisitions, Editorial, and Media Development Project Editor: Kelly Ewing Acquisitions Editor: Stacy Kennedy Copy Editor: Elizabeth Rea General Reviewer: Shellie Moore Editorial Manager: Michelle Hacker Editorial Supervisor and Reprint Editor: Carmen Krikorian Editorial Assistants: Hanna Scott, Nadine Bell Cover Photos: © Corbis Cartoons: Rich Tennant ( www.the5thwave.com) Composition Services Project Coordinators: Adrienne Martinez, Kathryn Shanks Layout and Graphics: Carl Byers, Andrea Dahl, Stephanie D. Jumper Proofreaders: Leeann Harney, Jessica Kramer, Carl William Pierce, TECHBOOKS Production Services Indexer: TECHBOOKS Production Services Publishing and Editorial for Consumer Dummies Diane Graves Steele, Vice President and Publisher, Consumer Dummies Joyce Pepple, Acquisitions Director, Consumer Dummies Kristin A. Cocks, Product Development Director, Consumer Dummies Michael Spring, Vice President and Publisher, Travel Kelly Regan, Editorial Director, Travel Publishing for Technology Dummies Andy Cummings, Vice President and Publisher, Dummies Technology/General User Composition Services Gerry Fahey, Vice President of Production Services Debbie Stailey, Director of Composition Services 01_598481 ffirs.qxd 10/24/05 8:05 PM Page x More free books @ www.BingEbook.com Contents at a Glance Introduction 1 Part I: Basic Bookkeeping: Why You Need It 7 Chapter 1: So You Want to Do the Books 9 Chapter 2: Getting Down to Bookkeeping Basics 19 Chapter 3: Outlining Your Financial Roadmap with a Chart of Accounts 31 Part II: Keeping a Paper Trail 47 Chapter 4: Ledgers: A One-Stop Summary of Your Business Transactions 49 Chapter 5: Keeping Journals 67 Chapter 6: Computer Options for Your Bookkeeping 87 Chapter 7: Controlling Your Books, Your Records, and Your Money 97 Part III: Tracking Day-to-Day Operations with Your Books 115 Chapter 8: Buying and Tracking Your Purchases 117 Chapter 9: Counting Your Sales 129 Chapter 10: Employee Payroll and Benefits 145 Chapter 11: Employer-Paid Taxes and Government Payroll Reporting 169 Part IV: Preparing the Books for Year’s (or Month’s) End 185 Chapter 12: Depreciating Your Assets 187 Chapter 13: Paying and Collecting Interest 199 Chapter 14: Proving Out the Cash 211 Chapter 15: Closing the Journals 225 Chapter 16: Checking Your Accuracy — By Trial and Hopefully No Error 237 Chapter 17: Adjusting the Books 247 Part V: Reporting Results and Starting Over 257 Chapter 18: Developing a Balance Sheet 259 Chapter 19: Producing an Income Statement 271 Chapter 20: Completing Year-End Payroll and Reports 285 Chapter 21: Satisfying the Tax Man 299 Chapter 22: Prepping the Books for a New Accounting Cycle 317 02_598481 ftoc.qxd 10/24/05 8:03 PM Page xi More free books @ www.BingEbook.com Part VI: The Part of Tens 323 Chapter 23: Top Ten Ways to Manage Your Business Cash with Your Books 325 Chapter 24: Top Ten Most Important Accounts for Any Bookkeeper 329 Appendix: Glossary 333 Index 337 02_598481 ftoc.qxd 10/24/05 8:03 PM Page xii More free books @ www.BingEbook.com Table of Contents Introduction 1 About This Book 1 Conventions Used in This Book 2 Foolish Assumptions 2 What You’re Not to Read 3 How This Book Is Organized 3 Part I: Basic Bookkeeping: Why You Need It 3 Part II: Keeping a Paper Trail 4 Part III: Tracking Day-to-Day Operations with Your Books 4 Part IV: Preparing the Books for Year’s (or Month’s) End 4 Part V: Reporting Results and Starting Over 4 Part VI: The Part of Tens 5 Icons Used in This Book 5 Where to Go From Here 5 Part I: Basic Bookkeeping: Why You Need It 7 Chapter 1: So You Want to Do the Books . . . . . . . . . . . . . . . . . . . . . . . . . .9 Delving in to Bookkeeping Basics 9 Picking your accounting method 10 Understanding assets, liabilities, and equity 10 Introducing debits and credits 11 Charting your bookkeeping course 11 Recognizing the Importance of an Accurate Paper Trail 12 Maintaining a ledger 12 Keeping journals 12 Consider computerizing 13 Instituting internal controls 13 Using Bookkeeping’s Tools to Manage Daily Finances 14 Maintaining inventory 14 Tracking sales 14 Handling payroll 15 Running Tests for Accuracy 15 Proving out your cash 15 Testing your balance 16 Doing bookkeeping corrections 16 Finally Showing Off Your Financial Success 16 Preparing financial reports 16 Paying taxes 17 02_598481 ftoc.qxd 10/24/05 8:03 PM Page xiii More free books @ www.BingEbook.com Chapter 2: Getting Down to Bookkeeping Basics . . . . . . . . . . . . . . . . .19 Bookkeepers: The Record Keepers of the Business World 19 Wading through Basic Bookkeeping Lingo 20 Accounts for the balance sheet 21 Accounts for the income statement 21 Other common terms 22 Pedaling through the Accounting Cycle 23 Tackling the Big Decision: Cash-basis or Accrual Accounting 25 Waiting for funds with cash-basis accounting 25 Recording right away with accrual accounting 27 Seeing Double with Double-entry Bookkeeping 27 Differentiating Debits and Credits 30 Chapter 3: Outlining Your Financial Roadmap with a Chart of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Getting to Know the Chart of Accounts 31 Starting with the Balance Sheet Accounts 33 Tackling assets 34 Laying out your liabilities 37 Eyeing the equity 39 Tracking the Income Statement Accounts 40 Recording the money you make 40 Tracking the Cost of Sales 41 Acknowledging the money you spend 42 Setting Up Your Chart of Accounts 43 Part II: Keeping a Paper Trail 47 Chapter 4: Ledgers: A One-Stop Summary of Your Business Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 The Eyes and Ears of a Business 49 Developing Entries for the Ledger 50 Posting Entries to the Ledger 57 Adjusting for Ledger Errors 63 Using Computerized Transactions to Post and Adjust in the General Ledger 64 Chapter 5: Keeping Journals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67 Establishing a Transaction’s Point of Entry 67 When Cash Changes Hands 68 Keeping track of incoming cash 68 Following outgoing cash 71 Bookkeeping For Dummies xiv 02_598481 ftoc.qxd 10/24/05 8:03 PM Page xiv More free books @ www.BingEbook.com [...]... Book Is Organized Bookkeeping For Dummies is divided into six parts, which I outline in the following sections Part I: Basic Bookkeeping: Why You Need It In Part I, I discuss the importance of bookkeeping, explain how it works, and help you get started with setting up your company’s books I also touch on the terms that are unique to bookkeeping and tell you how to set up the roadmap for your books, the... this icon for ideas on how to improve your bookkeeping processes and use the information in the books to manage your business This icon marks anything I want you to recall about bookkeeping after you’re finished reading this book This icon points out any aspect of bookkeeping that comes with dangers or perils that may hurt the accuracy of your entries or the way in which you use your financial information... how to do a particular bookkeeping function Where to Go from Here Can you feel the excitement? You’re now ready to enter the world of bookkeeping! Because of the way Bookkeeping For Dummies is set up, you can start anywhere you’d like If you need the basics or if you’re a little rusty and want to refresh your knowledge of bookkeeping, start with Part I However, if you already know bookkeeping basics,... www.BingEbook.com 6 Bookkeeping For Dummies If you’ve set up your books already and feel comfortable with the basics of bookkeeping, you may want to start with Part III and how to enter various transactions On the other hand, if your priority is using the financial information you’ve already collected, check out the financial reporting options in Part V More free books @ www.BingEbook.com Part I Basic Bookkeeping: ... most cases in the form of refunds or corrections in favor of the account holders Well, forget all you thought you knew about debits and credits Debits and credits are totally different animals in the world of bookkeeping Because keeping the books involves a method called double-entry bookkeeping, you have to make a least two entries — a debit and a credit — into your bookkeeping system for every transaction... book to get a better understanding of bookkeeping I assume that you are: More free books @ www.BingEbook.com Introduction ߜ A business owner who wants to know how to do your own books You have a good understanding of business and its terminology but have little or no knowledge of bookkeeping and accounting ߜ A person who does bookkeeping or plans to do bookkeeping for a small business and needs to know... good bookkeeping practices and reviews his or her work periodically (usually monthly) In this chapter, I provide an overview of a bookkeeper’s work If you’re just starting a business, you may be your own bookkeeper for a while until you can afford to hire one, so think of this chapter as your to-do list Delving in to Bookkeeping Basics Like most business people, you probably have great ideas for running... there — this isn’t a race! If you don’t carefully plan your bookkeeping operation and figure out exactly how and what financial detail you want to track, you’ll have absolutely no way to measure the success (or failure, unfortunately) of your business efforts More free books @ www.BingEbook.com 10 Part I: Basic Bookkeeping: Why You Need It Bookkeeping, when done properly, gives you an excellent gauge... books @ www.BingEbook.com 4 Bookkeeping For Dummies Part II: Keeping a Paper Trail In Part II, I explain how you enter your financial transactions in the books, how you post transactions to your General Ledger (the granddaddy of your bookkeeping system), and how you track all the transaction details in your journals I also give tips for developing a good internal control system for managing your books... or taking a loss? In this chapter, I cover the key parts of bookkeeping by introducing you to the language of bookkeeping, familiarizing you with how bookkeepers manage the accounting cycle, and showing you how to understand the most difficult type of bookkeeping — double-entry bookkeeping Bookkeepers: The Record Keepers of the Business World Bookkeeping, the methodical way in which businesses track . Epstein,MBA Bookkeeping FOR DUMmIES ‰ 01_ 5984 81 ffirs.qxd 10 /24/05 8:05 PM Page iii More free books @ www.BingEbook.com Bookkeeping For Dummies ® Published by Wiley Publishing, Inc. 11 1 River St. Hoboken,. Control Number: 20059345 01 ISBN -13 : 978-0-7645-9848-7 ISBN -10 : 0-7645-9848 -1 Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 1B/RQ/RR/QV/IN 01_ 5984 81 ffirs.qxd 10 /24/05 8:05 PM Page. Month’s) End 18 5 Chapter 12 : Depreciating Your Assets 18 7 Chapter 13 : Paying and Collecting Interest 19 9 Chapter 14 : Proving Out the Cash 211 Chapter 15 : Closing the Journals 225 Chapter 16 : Checking