Bookkeeping For Dummies® All-In-One Published by John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774 www.wiley.com Copyright © 2015 by John Wiley & Sons, Inc., Hoboken, New Jersey 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 permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Trademarks: Wiley, For Dummies, the Dummies Man logo, Dummies.com, Making Everything Easier, and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc., and may not be used without written permission All other trademarks are the property of their respective owners John Wiley & Sons, Inc., is not associated with any product or vendor mentioned in this book LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: THE PUBLISHER AND THE AUTHOR MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUT LIMITATION WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES OR PROMOTIONAL MATERIALS THE ADVICE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR EVERY SITUATION THIS WORK IS SOLD WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OR OTHER PROFESSIONAL SERVICES IF PROFESSIONAL ASSISTANCE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL PERSON SHOULD BE SOUGHT NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM THE FACT THAT AN ORGANIZATION OR WEBSITE IS REFERRED TO IN THIS WORK AS A CITATION AND/OR A POTENTIAL SOURCE OF FURTHER INFORMATION DOES NOT MEAN THAT THE AUTHOR OR THE PUBLISHER ENDORSES THE INFORMATION THE ORGANIZATION OR WEBSITE MAY PROVIDE OR RECOMMENDATIONS IT MAY MAKE FURTHER, READERS SHOULD BE AWARE THAT INTERNET WEBSITES LISTED IN THIS WORK MAY HAVE CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN IT IS READ For general information on our other products and services, please contact our Customer Care Department within the U.S at 877-762-2974, outside the U.S at 317-572-3993, or fax 317-5724002 For technical support, please visit www.wiley.com/techsupport Wiley publishes in a variety of print and electronic formats and by print-on-demand Some material included with standard print versions of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Library of Congress Control Number: 2015945390 ISBN: 97-811-1909421-0 ISBN 97-811-1909395-4 (ePub); ISBN 97-811-1909417-3 (ePDF) Bookkeeping For Dummies® All-In-One Visit www.dummies.com/cheatsheet/bookkeepingaio to view this book's cheat sheet Table of Contents Cover Introduction About This Book Foolish Assumptions Icons Used in This Book Beyond the Book Where to Go From Here Book I: Keeping the Books Chapter 1: Basic Bookkeeping Bookkeepers: The Record Keepers of the Business World Delving into Bookkeeping Basics Recognizing the Importance of an Accurate Paper Trail Using Bookkeeping’s Tools to Manage Daily Finances Running Tests for Accuracy Finally Showing Off Your Financial Success Wading through Bookkeeping Lingo Pedaling through the Accounting Cycle Tackling the Big Decision: Cash-basis or Accrual Accounting Seeing Double with Double-Entry Bookkeeping Differentiating Debits and Credits Chapter 2: Charting the Accounts Getting to Know the Chart of Accounts Starting with the Balance Sheet Accounts Tracking the Income Statement Accounts Setting Up Your Chart of Accounts Chapter 3: The General Ledger The Eyes and Ears of a Business Developing Entries for the Ledger Posting Entries to the Ledger Adjusting for Ledger Errors Using Computerized Transactions to Post and Adjust in the General Ledger Chapter 4: Keeping Journals Establishing a Transaction’s Point of Entry When Cash Changes Hands Managing Sales Like a Pro Keeping Track of Purchases Dealing with Transactions that Don’t Fit Posting Journal Information to Accounts Simplifying Your Journaling with Computerized Accounting Chapter 5: Controlling Your Records Putting Controls on Your Business’s Cash Keeping the Right Paperwork Protecting Your Business Against Internal Fraud Insuring Your Cash through Employee Bonding Chapter 6: Computer Options for Bookkeeping Surveying Your Software Options Setting Up Your Computerized Books Chapter 7: Financial Statements and Accounting Standards Reviewing the Basic Content of Financial Statements Contrasting Profit and Cash Flow from Profit Gleaning Key Information from Financial Statements Keeping in Step with Accounting and Financial Reporting Standards Book II: Accounting and Financial Reports Chapter 1: Financial Report Basics Figuring Out Financial Reporting Checking Out Types of Reporting Introducing the Annual Report Digging Deeper into the Annual Report Summarizing the Financial Data Chapter 2: Reporting Profit Introducing Income Statements Finding Profit Getting Particular about Assets and Operating Liabilities Summing Up the Diverse Financial Effects of Making Profit Reporting Extraordinary Gains and Losses Correcting Common Misconceptions About Profit Closing Comments Chapter 3: Exploring Business Structures Flying Solo: Sole Proprietorships Joining Forces: Partnerships Seeking Protection with Limited Liability Companies Shielding Your Assets: S and C Corporations Investigating Private Companies Understanding Public Companies Entering a Whole New World: How a Company Goes from Private to Public Chapter 4: The Balance Sheet: Assets, Liabilities, and Equity Understanding the Balance Equation Introducing the Balance Sheet Ogling Assets Looking at Liabilities Navigating the Equity Maze Chapter 5: The Income Statement Introducing the Income Statement Delving into the Tricky Business of Revenues Acknowledging Expenses Sorting Out the Profit and Loss Types Calculating Earnings per Share Chapter 6: The Statement of Cash Flows Digging into the Statement of Cash Flows Checking Out Operating Activities Investigating Investing Activities Understanding Financing Activities Recognizing the Special Line Items Adding It All Up Chapter 7: Getting a Financial Report Ready Recognizing Top Management’s Role Reviewing the Purposes of Financial Reporting Keeping Current with Accounting and Financial Reporting Standards Making Sure Disclosure Is Adequate Putting a Spin on the Numbers (Short of Cooking the Books) Going Public or Keeping Things Private Dealing with Information Overload Statement of Changes in Owners’ Equity Chapter 8: Accounting Alternatives Setting the Stage Taking Financial Statements with a Grain of Salt Explaining the Differences Calculating Cost of Goods Sold Expense and Inventory Cost Recording Depreciation Expense Scanning Revenue and Expense Horizons Book III: Day-to-Day Bookkeeping Chapter 1: Buying and Tracking Your Purchases Keeping Track of Inventory Practice: Working with Inventory and Calculating Cost of Goods Sold Buying and Monitoring Supplies Staying on Top of Your Bills Practice: Calculating Discounts Answers to Problems on Buying and Tracking Your Purchases Chapter 2: Counting Your Sales Collecting on Cash Sales Practice: Recording Sales in the Books Selling on Credit Practice: Sales on Store (Direct) Credit Proving Out the Cash Register Practice: Proving Out Tracking Sales Discounts Practice: Recording Discounts Recording Sales Returns and Allowances Practice: Tracking Sales Returns and Allowances Monitoring Accounts Receivable Practice: Aging Summary Accepting Your Losses Answers to Counting Your Sales Chapter 3: Employee Payroll and Benefits Setting the Stage for Staffing: Making Payroll Decisions Collecting Employee Taxes Determining Net Pay Practice: Payroll Tax Calculations Surveying Your Benefits Options Preparing Payroll and Posting It in the Books Practice: Payroll Preparation Finishing the Job Depositing Employee Taxes Outsourcing Payroll and Benefits Work Answers to Problems on Employee Payroll and Benefits Chapter 4: Employer-Paid Taxes and Government Payroll Reporting Paying Employer Taxes on Social Security and Medicare Completing Unemployment Reports and Paying Unemployment Taxes Practice: Calculating FUTA Tax Carrying Workers’ Compensation Insurance Maintaining Employee Records Answers to Problems on Employer-Paid Taxes and Government Payroll Reporting Book IV: Preparing for Year’s End Chapter 1: Depreciating Your Assets Defining Depreciation Reducing the Value of Assets Tackling Taxes and Depreciation Setting Up Depreciation Schedules Recording Depreciation Expenses Chapter 2: Paying and Collecting Interest Deciphering Types of Interest Handling Interest Income Delving into Loans and Interest Expenses Chapter 3: Proving Out the Cash Why Prove Out the Books? Making Sure Ending Cash Is Right Closing the Cash Journals Using a Temporary Posting Journal Reconciling Bank Accounts Posting Adjustments and Corrections Chapter 4: Closing the Journals Prepping to Close: Checking for Accuracy and Tallying Things Up Posting to the General Ledger Checking Out Computerized Journal Records Chapter 5: Checking Your Accuracy Working with a Trial Balance Testing Your Balance Using Computerized Accounting Systems Developing a Financial Statement Worksheet Replacing Worksheets with Computerized Reports Chapter 6: Adjusting the Books Adjusting All the Right Areas Testing Out an Adjusted Trial Balance Changing Your Chart of Accounts Book V: Accounting and Managing Your Business Chapter 1: Managing Profit Helping Managers: The Fourth Vital Task of Accounting Internal Profit Reporting Presenting a Profit Analysis Template Answering Critical Profit Questions Taking a Closer Look at the Lines in the Profit Template Using the Profit Template for Decision-Making Analysis Tucking Away Some Valuable Lessons Closing with a Boozy Example Chapter 2: Budgeting Exploring the Reasons for Budgeting Additional Benefits of Budgeting Is Budgeting Worth Its Costs? Realizing That Not Everyone Budgets Watching Budgeting in Action Considering Capital Expenditures and Other Cash Needs Chapter 3: Cost Accounting Looking Down the Road to the Destination of Costs Are Costs Really That Important? Becoming More Familiar with Costs Assembling the Product Cost of Manufacturers Puffing Profit by Excessive Production Chapter 4: Filing and Paying Business Taxes Finding the Right Business Type Tackling Tax Reporting for Sole Proprietors Filing Tax Forms for Partnerships Paying Corporate Taxes Taking Care of Sales Taxes Obligations Chapter 5: Prepping the Books for a New Accounting Cycle Finalizing the General Ledger Conducting Special Year-End Bookkeeping Tasks Starting the Cycle Anew About the Authors Cheat Sheet Advertisement Page Connect with Dummies End User License Agreement Figure 5-2: Set a password for controlling data in closed accounts Carrying over balance sheet accounts Unlike income statement accounts, you never zero out the accounts listed on a balance sheet — that’s Assets, Liabilities, and Equity Instead, you note your ending balances for each of these accounts so you can prepare a balance sheet, and you carry forward the data in the accounts into the next accounting period The balance sheet just gives you a snapshot of the financial state of your company as of a particular date in time From one accounting cycle to the next, your assets and (unfortunately) liabilities remain, and you also need to maintain the information about how much equity your investors have put into the company Conducting Special Year-End Bookkeeping Tasks Before you start the process of closing the books for the year, print a summary of your account information from your computerized accounting system If you make an error while closing the books, you can always use this printout to backtrack and fix any problems QuickBooks provides a Year-End Guide Checklist (see Figure 5-3) to help you keep track of all the year-end activities you need to The checklist also includes links to help screens that explain how to all the year-end closing tasks You can check off each task as you complete it and save the check marks to keep track of your progress during the closing process Image courtesy of Intuit Figure 5-3: QuickBooks’s Year-End Guide Checklist walks you through year-end tasks After you complete all your year-end tasks, you can condense and back up all your accounting data for the year being closed Most computerized accounting systems have a process for condensing and archiving data For example, QuickBooks’s Clean Up Company Data wizard guides you through the process (see Figure 5-4) Image courtesy of Intuit Figure 5-4: QuickBooks’s Clean Up Company Data wizard simplifies condensing and backing up your data Checking customer accounts As you prepare your books for the end of an accounting cycle, review your customer accounts Unless it’s the end of the year, you don’t close the Accounts Receivable account, and when you start a new accounting cycle, you certainly want to carry over any balance still due from customers Reviewing customer accounts for possible bad-debt expenses before closing your books at the end of the accounting cycle is a good idea (Book III Chapter talks about bad debt in greater detail.) Now is the time to be more critical of past-due accounts You can use any bad debt to reduce your tax bite, so if you believe that a customer isn’t likely to make good on a past-due account, write off the loss Assessing vendor accounts The end of an accounting period is the perfect time to review your vendor accounts to be sure they’re all paid in full and ready for the new cycle Also, make sure you’ve entered into your vendor accounts any bills that reflect business activity in the period being closed; otherwise, expenses from the period may not show up in the appropriate year-end financial statements Review any outstanding purchase orders to be sure that your vendor accounts aren’t missing orders that have been completed but not yet billed by the vendor For example, if you received inventory on December 23 but the vendor won’t bill for that inventory until January, you should record the bill in December to reflect the receipt of that inventory during that tax year Deleting accounts The closing process at the end of an accounting year is a good time to assess all your open accounts and verify that you still need them If an account has no transactions in it, you’re free to delete it at any time However, you should wait until the end of the year to delete any accounts that you don’t think you’ll need in the next year If you’re assessing accounts at the end of an accounting period that isn’t also the end of the year, just make a list of the accounts to be deleted and wait for the year-end If you use a computerized accounting system, be aware that deleting an account deletes all past transactions in that account as well So if you want to delete an account at the end of the year, you should mark the account as inactive instead so that you don’t lose the information but new transactions can’t be entered into the account inadvertently Starting the Cycle Anew You certainly don’t want to close the doors of your business as you prepare all your year-end reports, such as the financial statements and governmental reports — after all, that can be a two- to three-month process So you need to continue making entries for the new year as you close the books for the previous year If you the books manually, you probably need easy access to two sets of books: the current year and the previous year In a manual bookkeeping system, you just start new journal pages for each of the active accounts If you have some accounts that aren’t very active, rather than start a new page, you can leave some space for adjustments or corrections, draw a line, and start the transactions for the new year on the same page If you keep your books by using a computerized accounting system, you can zero out the necessary accounts to start the new year while leaving the data for the previous year in the passwordprotected, closed accounts You can still make changes to those closed accounts, but access is limited to people who know the password — most likely you, your accountant, and your bookkeeping manager Part of closing out your books is starting new files for each of your accounts Most businesses keep two years of data, the current year and the previous year, in the on-site office files and put older files into storage As you start a new year, box up your two-year-old files for storage and use the newly empty drawers for the new year’s new files For example, suppose you’re creating files for 2015 Keep the 2014 files easily accessible in file cabinet drawers in your office, but box up the 2013 files for storage Then keep your 2014 files in the drawers where the 2013 files had been There’s no hard and fast rule about file storage You may find that you need to access some files regularly and therefore don’t want to put them in storage No problem Pull out any files related to ongoing activity and keep them in the office so you don’t have to run to the storage area every time you need the files For example, if you have an ongoing legal case, you should keep any files related to that matter out of storage and easily accessible About the Authors Lita Epstein earned her MBA from Emory University’s Goizueta Business School She 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 accounting and bookkeeping and starting your own business She’s written more than 35 books, including Bookkeeping For Dummies, Reading Financial Reports for Dummies, Trading For Dummies, The Business Owner’s Guide to Reading and Understanding Financial Statements, and Financial Decision Making Lita was the content director for a financial services website 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 John A Tracy (Boulder, Colorado) is Professor of Accounting, Emeritus, at the University of Colorado in Boulder Before his long tenure at Boulder, he was on the business faculty for four years at the University of California in Berkeley Early in his career he was a staff accountant with Ernst & Young John is the author of several books on accounting and finance, including How To Read a Financial Report, The Fast Forward MBA in Finance, and Cash Flow For Dummies and Small Business Financial Management Kit For Dummies with his son, Tage C Tracy John received his BSC degree from Creighton University He earned his MBA and PhD degrees at the University of Wisconsin in Madison He is a CPA (inactive status) in Colorado Publisher’s Acknowledgments Acquisitions Editor: Stacy Kennedy Project Editor: Corbin CollinsSusan Hobbs Copy Editor: Susan Hobbs Technical Editor: Carla DeWitt Art Coordinator: Alicia B South Production Editor: Kinson Raja Project Manager: Jennifer Ehrlich Cover Image: Getty Images/mark wragg To access the cheat sheet specifically for this book, go to www.dummies.com/cheatsheet/bookkeepingaio Find out "HOW" at Dummies.com Take Dummies with you everywhere you go! Go to our Website Like us on Facebook Follow us on Twitter Watch us on YouTube Join us on LinkedIn Pin us on Pinterest Circle us on google+ Subscribe to our newsletter Create your own Dummies book cover Shop Online WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... Basic Bookkeeping In This Chapter Introducing bookkeeping Managing daily business finances Keeping business records Navigating the accounting cycle Choosing between cash-basis and accrual accounting... Activities Investigating Investing Activities Understanding Financing Activities Recognizing the Special Line Items Adding It All Up Chapter 7: Getting a Financial Report Ready Recognizing Top Management’s... Recognizing the Importance of an Accurate Paper Trail Using Bookkeeping s Tools to Manage Daily Finances Running Tests for Accuracy Finally Showing Off Your Financial Success Wading through Bookkeeping