Basic Bookkeeping Techniques Module 9 16/2/11 Basic Bookkeeping Techniques

Contents of this Module: Purpose of this module The Benefits of Accurate Bookkeeping Income Statements and Balance Sheets The Synoptic JOURNAL or Ledger What is Bookkeeping? Bookkeeping is defined as the recording and documentation of the financial transactions of a business.

Purpose of this Bookkeeping Module: To understand where Bookkeeping fits into the process of creating Financial Statements. To understand how accurate records can be utilized as a management tool leading to sound business decisions. To create an understanding of the mechanics of a maintaining a SYNOPTIC LEDGER. …Most retail, wholesale and service businesses make sales and receive and spend money every day. They should keep records like Daily Cash Sheets, Accounts Receivable, and Accounts Payable. A SYNOPTIC JOURNAL, or LEDGER, combines all of the aforementioned records into one comprehensive record keeping resource.

Why Does a Business Keep Financial Records? To manage the money of the business, particularly if there is a significant amount of cash flow on a day-to-day basis. To track the daily, weekly and monthly financial performance of the business. Is the business making money? To identify and address problems at an early stage. To provide the bookkeeper or accountant for the business with all critical financial information. To make INFORMED DECISIONS!

Management by Numbers ‘Telephones, hotels, insurance – it’s all the same. If you know the numbers inside out, you know the company inside out.’ - Harold Geenen, CEO of ITT Corp

Worksheet #1: Data-driven Decision-making Review the information in worksheet #1 How would you answer the questions, given the information available? Make any additional calculations that you think might be helpful What other information would you like to have in order to make a decision?

Your Bookkeeping Friends Tools you can use to make bookkeeping easier

Keys to Effective Bookkeeping Establish a system that is: Uncomplicated, logical, and user-friendly Thorough and accurate Easily accessible Consistent with the size and nature of your business Integrated into your daily business routine

Process Report Synoptic Ledger Record Capture Transactions Receipt Invoice Cheque book Bank account Cash register Note book Calendar Record Synoptic Ledger Report Income Statement Balance Sheet

Financial Statements: The Income Statement and the Balance Sheet are the two principal documents that, together, are called the financial statements. They are intertwined with the Cash Flow Statement and together complete the financial picture of the business. They enable you to understand what is going on with the business and make decisions accordingly. The information for all 3 documents begins with the Synoptic Ledger.

Financial Statements: Key Financial Statements INCOME STATEMENT: Income Expenses Profit BALANCE SHEET: Assets Liabilities Equity CASH FLOW STATEMENT: Cash In Cash Out Cash Balance The Income Statement and the Balance Sheet are the two principal documents that, together, are called the financial statements. They are intertwined with the Cash Flow Statement and together complete the financial picture of the business. They enable you to understand what is going on with the business and make decisions accordingly. The information for all 3 documents begins with the Synoptic Ledger. SYNOPTIC LEDGER: Transactions Adjusting entries

The Income Statement: Identifies all Revenue and Expenses over a specified time (usually a month or year) to show Profit or Loss for the period. Expenses are incurred to create revenue, and are not always cash expenditures. (Example: depreciation.) Not every cash expenditure by the business is an expense, and those that are not expenses will not appear on the Income Statement. (Example: payment of loan principal to a bank.)

Worksheet #2: The Income Statement Please go to Worksheet #2 … to review the Income Statement: NOTES to the TRAINER: Participants will have seen a similar Income Statement in the Cash Flow Module. This is a much simpler version. Note: It is and Income Statement for: “The Year to December 31, 2010” It encompasses a time period of one [1] year. If you wrote: “Year to February 28, 2011” you are talking about covering 2 months [of the 12-month year], not one [1]. Discuss examples of fixed and variable costs. Discuss profitability. It is not possible to determine whether or not a business is profitable without an Income Statement. It is not possible to determine how much in taxes to pay without an Income Statement. Point out that Income Statements usually have 2 columns, the current period [in this case, the first month of 2011: Year to January 2011] on the left side of the page; and, the immediately preceding year, for comparison on the right. Point out that the “line items” are Totals drawn from The Synoptic Ledger – it is not possible to write up an Income Statement without a Synoptic Ledger. Point out the fact that Income Statements and Balance Sheets are typically produced by trained accountants or bookkeepers. They could do the bookkeeping too, but that is often very expensive. Besides, the daily bookkeeping is an important management tool and it should be compiled by the owners/managers and utilized to manage the business. The Synoptic Ledger is not difficult to do on a daily basis, especially for most micro and small businesses – thus it should be prepared by those responsible for managing the business.

Assets = Liabilities + Owner‘s Equity The Balance Sheet: Shows the exact financial position of the business at a specific date, usually the end of a month/year. Identifies: Assets - what the business owns Liabilities - what the business owes Owner’s Equity - the net capital available to the owner. Represents the COST of the Assets, Liabilities and Equity, NOT their VALUE. The Balance sheet must always balance: Assets = Liabilities + Owner‘s Equity

The BALANCE Sheet Liabilities Assets Equity Assets = liabilities + equity

Worksheet #3: The Balance Sheet Look at the Worksheet #3 Balance Sheet: NOTES for the Trainer: Assets = Liabilities + Owners equity. Link the Balance Sheet to the Income Statement: e.g. Net Profits after Taxes becomes Current Retained Earnings. Point out aspects of the Balance Sheet that help decision making: e.g. shows cash available, debt owed, A/R, A/P, asset value, how much equity exists in the business, etc. Again, emphasize that no Balance Sheet can be developed without a completed Synoptic Ledger [and an Income Statement]. Emphasize that the ultimate goal of Bookkeeping is the creation of Financial Statements which are the true management tools. Note: again, that accountants typically develop Balance Sheets, Income Statements and the General Ledger.

Double-Entry Bookkeeping Each bookkeeping entry: Involves a minimum of 2 accounts DEBITS must = CREDITS Credit Debit

5 Types of Accounts ‘double-entry’ accounting: Asset Cash Liability 2 sides to every bookkeeping entry! Increase in ‘Debit’ matched by increase in ‘Credit’ Account Type Example DR CR Asset Cash Liability Loan Equity Owner’s investment Revenue Sales Expense Wages B.S. I.S.

Debit & Credit Balances Expenses Revenue Debit balance Liabilities Credit balance Assets Equity

The Synoptic Ledger: Accounts across the top Debit column on left, Credit column on right Line by line recording of all business transactions. Can be considered the ‘finished product’ of Bookkeeping. May be turned over to an accountant to develop the Financial Statements. The Synoptic Ledger is a line by line recording of all business transactions. For the business person, the Synoptic Ledger can be considered the ‘finished product’ of Bookkeeping. May be turned over to an accountant to develop the Financial Statements. Since most would-be entrepreneurs start small businesses, the majority of the balance of this module is devoted to the Synoptic Ledger.

Using The Synoptic Ledger The amount of every transaction is entered in the Synoptic Ledger TWICE. (Double Entry Bookkeeping.) Each entry has a Debit [Dr] and a Credit [Cr]. Sum of Debits = Sum of Credits The amount of every transaction is entered in the Synoptic Ledger TWICE. (Double Entry Bookkeeping.) Each entry has a Debit [Dr] and a Credit [Cr]. Sum of Debits must equal sum of Credits Bookkeeping can easily get confusing so the approach used here is designed to keep things simple.

Synoptic Ledger Transactions ACCOUNTS COMMONLY INVOLVED IN LEDGER ENTRIES: ASSET LIABILITY EQUITY REVENUE EXPENSE

Example: Asset <-> Asset Moving assets from one account to another Paying out cash is a CREDIT Deposit in bank is a DEBIT

Example: Asset <-> Revenue Receiving cash for sales of different products Cash in is a DEBIT Sales revenue in is a CREDIT

Example: Asset <-> Liability Purchasing materials on credit from supplier Material in is a DEBIT Increase in money owed is a CREDIT

Example: Asset <-> Expense Paying a supplier with a bank cheque Money out is a CREDIT Paying an expense is a DEBIT I understand!!

Worksheet #4 & 5: Synoptic Journal – Jan-11 Review the transactions listed in worksheet #4 Add these transactions to the synoptic journal Use either Worksheet #5 or electronic version

Worksheets #6 & 7: Financial Statements – Jan-11 How have financial statements changed as a result of synoptic ledger entries?

Worksheet #8 & 9: Synoptic Journal – Feb-11 For each transaction listed in worksheet #8: Review the transaction description Find the transaction on Worksheet #9: Synoptic Ledger. Determine whether or not the transaction entry in the Synoptic Ledger is correct. If it is incorrect, change it to a correct entry. Hints: Some entries are in the wrong accounts. Some are the right accounts, but wrong numbers. Some are wrong accounts and wrong numbers. Some are correct.

Worksheets #10 & 11: Financial Statements – Feb-11 How have financial statements changed as a result of synoptic ledger entries? What aspects of the business appear to require attention? What decisions would you make based on the available information?

Wrap Up: Bookkeeping is a powerful tool for managing a business. The owner/manager of a business should know how much money the business has, how much it is owed and how much it owes. Bookkeeping provides this information. Keep records up to date and easily accessible. Remember Bookkeeping is just simple arithmetic. Business owners/managers can do it by themselves without requiring the help of an accountant.