Bookkeepers' Boot Camp

“You can't know how your business is doing until you record it.” Bookkeepers’ Boot Camp is the first book in the Numbers 101 for Small Business series. It shows small business owners the essentials of record keeping, and why it's crucial to a business’s success to track financial data. The book gives business owners a greater understanding of the purpose and process of record keeping and a deeper understanding of their businesses. Mohr has helped hundreds of small business owners who didn't understand the importance of record keeping and always put it off until “later.” These business owners were almost literally buried under a pile of papers, overwhelmed by the immensity of the task at hand. Mohr shows business owners how to sort through the masses of information and paperwork, record what is important, and how to use that information to grow a business for success! Eighty percent of all small businesses started this year will be gone in 5 years. As Mohr says, starting a small business can be “like driving a car in a foreign country where you don't know what the road signs are telling you.” Numbers 101 for Small Business is a new series of easy-tounderstand guides for small business owners, covering such topics as bookkeeping, analyzing and tracking financial information, starting a business, growing a business, and exiting a business. Using real life examples, Mohr teaches small business owners how to beat the odds and turn their ideas into successful, growing companies.
PART I: THE BASICS 1 1 Getting Started 3 The Numbers 101 for Small Business Series 4 Bookkeepers’ Boot Camp 5 How to Use This Book 5 2 A Brief Look at the Origins of Bookkeeping 7 Double-Entry Bookkeeping 8 3 Important Concepts 9 Generally Accepted Accounting Principles (GAAP) 9 Stewardship 10 Accrual Accounting 10 Debits and Credits 11 Accountants versus Bookkeepers 11 Bookkeeper 11 Accountant 11 Accounting Jargon 12 The Use of Estimates 12 The Importance of Bookkeeping 12 4 Setting up the Record Keeping System 14 What Kinds of Paper Do I Need to Keep? 14 Invoices 14 Statements of account 15 Deposit slips 15 Supplier invoices 15 Check stubs or copies 16 Purchase orders 16 Bank statements 16 Contents 101for SMALL BUSINESS numbers vi Bookkeepers’ boot camp: Get a grip on accounting basics Canceled checks 16 How Do I Account for My Source Documents? 16 Where Do I Record This Information? 17 Journals and ledgers 17 What Kind of Bookkeeping System Should I Get? 18 Manual journal and ledger 18 Computerized bookkeeping systems 20 5 The Balance Sheet 23 The Purpose of the Balance Sheet 23 The Components of the Balance Sheet 24 Assets 24 Capital assets 27 Other assets 27 Liabilities 28 Current liabilities 28 Long-term liabilities 30 Equity 30 Capital stock 30 Capital contributions 31 Retained earnings 31 Dividends 31 6 The Income Statement 34 The Purpose of the Income Statement 34 What’s on My Income Statement? 37 Interpreting the Income Statement 38 The Statement of Retained Earnings: A Tag-Along 40 7 The Cash Flow Statement 42 Categorizing Cash Flows 42 Back to the Balance Sheet: The Basis of the Cash Flow Statement 43 Putting It All Together 47 What Is the Cash Flow Statement Telling Me? 47 PART 2: INTERMEDIATE TOPICS 51 8 Recording the Sales Cycle 53 What Makes up the Sales Cycle? 53 Contents vii Recording Cash Sales 54 Real life 54 Accounting world 55 Recording Credit Sales 56 Real life 56 Accounting world 56 Sales Discounts 56 Recording Cash Receipts 57 Real life 57 Accounting world 57 Partial payments 57 Preparing Invoices 58 Preparing Statements of Account 58 Bad Debts: Analyzing Them and Writing Them off 59 Screen your customers 59 Set credit limits 60 Make your credit terms clear 60 Follow up with monthly statements 60 Call your customers when they are overdue 60 Get professional help 60 Pursue the debt in small claims court 61 Writing off the debt 61 9 Recording the Purchases Cycle 62 Purchasing Inventory 62 Purchasing Supplies 64 Common Cost of Goods Sold Categories 64 Common Expense Categories 65 Setting up the Accounts Payable Sub-ledger 67 Cash Payments 68 Real life 68 Accounting world 68 10 Inventory 69 Inventory Tracking Systems 69 Types of Inventory 69 Inventory in a Manufacturing Environment 70 viii Bookkeepers’ boot camp: Get a grip on accounting basics Inventory Costing Methods 71 Specifi c identifi cation method 72 First-in, fi rst-out (FIFO) 72 Last-in, fi rst-out (LIFO) 72 Weighted average cost 72 Year-End Valuation 73 Setting up the Inventory Count 73 11 Capital Assets 77 What’s in the Cost of My Capital Assets? 77 Satellite costs 78 Trade-ins 78 Depreciation: An Overview 79 Land 79 Buildings 79 Equipment 79 Tools 79 Offi ce equipment 79 Signage 79 Computer hardware 79 Computer software 79 Vehicles 80 Concepts Involved in Depreciation 80 Useful life 80 Salvage value 80 Methods of Depreciation 80 Straight-line 80 Declining balance 80 Sum-of-the-years-digits (SYD) 81 Accounting for Depreciation 81 Accounting for Sales of Capital Assets 82 12 Leases and Loans 84 Lease Transactions: An Overview 84 Accounting for Operating Leases 85 Accounting for Capital Leases 86 Contents ix Accounting for Loans 87 Reconciling the Loan Balance 88 13 Transactions between the Company and Its Owners 89 Shareholder Loans 89 You Pay for a Business Expense out of Your Own Pocket 91 The Company Pays for a Personal Expense 91 What Happens If I Run My Business out of My House? 91 Step 1: How much space? 92 Step 2: Calculating the expenses 92 Capital improvements 93 Repairs that affect the whole house 93 Repairs that affect only the personal square footage 93 Repairs that affect only the business square footage 93 Hey, the Business Uses My Car Too! 94 Business mileage 94 What about Other Personal Assets Used for Business? 95 Caveat 95 Setting up the Management Bonus 96 Dividends 97 14 Remittances to the Government 98 What Are Government Remittances? 99 US Remittances to the Government 99 Employment taxes 99 State sales tax 100 Other remittances to the government 100 Canadian Remittances to the Government 100 Payroll taxes 100 Goods and Services Tax (GST) 101 Other remittances to the government 102 Reconciling the Remittance Accounts 102 15 Maintaining a Petty Cash System 104 Setting up the Petty Cash Fund 104 Using Your Petty Cash 105 Reconciling the Petty Cash Fund 105 Replenishing the Petty Cash Fund 107 x Bookkeepers’ boot camp: Get a grip on accounting basics 16 Reconciling the Bank 109 The Bank Statement Arrives 109 Outstanding checks 109 Outstanding deposits 110 Bank charges 110 Automatic monthly payments 110 Bank errors 110 The Reconciliation Process 111 Items on the bank statement that are not in the ledger 112 Items in your ledger that are not on your bank statement 112 What Happens If I Still Can’t Reconcile? 112 Example of the Bank Reconciliation Process 113 17 When the Damn Thing Just Won’t Balance 115 The Process of Reconciliation 115 Backward Posting 116 Transposition Error 116 Addition Error 117 18 When Your Books Are Already a Mess 119 Introduction 119 Step 1: Organize the Mess 120 Step 2: Inventory the Documents 120 Step 3: Gather Missing Documents 121 Step 4: Enter the Accounting Transactions 121 Step 5: Reconcile to the Bank Statements 122 Step 6: Create a Monthly Financial Statement Package 122 Step 7: Organize your Bookkeeping for the Future 123 PART 3: ADVANCED ISSUES 125 19 The Role of the External Accountant 127 Choosing an Accountant 127 The Role of the Accountant 128 Starting your business 129 Year end 129 Employee evaluation and compensation 129 Internal controls 129 Contents xi Management operating plan 129 What the Accountant Needs from You at Year End 130 The Process of Creating Financial Statements 130 Corporate Income Tax Returns 131 Posting the Adjusting Journal Entries 132 Rolling Forward the Year 132 How Do You Know When You’re Outgrowing Your Accountant? 133 20 Budgeting: Planning for the Future 134 But How Do I Know What’s Going to Happen in the Future? 134 Setting up the 12-Month Budget 135 Aren’t I Just Making up Fake Numbers? 136 Changes to the Company’s Operations 136 Rolling, Rolling, Rolling, Keep That Budget Rolling 138 21 Monitoring Cash Flow: How Not to Run out of Money 139 What Is Cash Flow? 139 What’s the Difference between Cash Flow and Net Income? 139 How Do I Know When My Business Is Going to Run out of Money? 140 Building Your Company’s War Chest 140 How Can I Stretch My Company’s Cash Further? 141 Barter: A Small-Business Owner’s Secret Weapon 142 Accounting for barter transactions 143 The Future: How to Avoid the Cash Crunch before It Hits 144 22 A Brief Look at Foreign Currency 145 Occasional Foreign Currency Transactions 145 The Foreign Currency Bank Account 146 Revaluation at Year End 147 Reconciling the Foreign Currency Bank Account 147 Foreign Currency Risk 147 23 Tax Planning 149 Minimizing Tax versus Avoiding Tax 149 What Is Tax Integration? 150 Why You Need to Understand Tax Brackets 150 xii Bookkeepers’ boot camp: Get a grip on accounting basics Deferring Tax Owing versus Getting Rid of It Altogether 151 Owner/Manager Remuneration: Getting Money out of Your Business 152 24 Graduation 153 Boot Camp Test 154 Boot Camp Test Answers 166 Appendix A — Glossary 175 Appendix B — Resources for the Growing Business 183 Figure 1 The Operating Cycle 54 Samples 1 General Journal 18 2 General Ledger 19 3 Balance Sheet 25 4 Partnership Equity Statement 33 5 Statement of Income 36 6 Statement of Retained Earnings 40 7 Comparative Balance Sheet 44 8 Balance Sheet with Difference 46 9 Cash Flow Statement 48 10 Statement of Account 59 11 Accounts Payable Report 67 12 Inventory Count Sheet 74 13 Bank Reconciliation 112 Worksheets 1 Inventory Count Sheet 76 2 Petty Cash Control Sheet 106 3 Budget Template 137