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Bookkeeping Basics: Learn and Master

      Imagine you’re going into a wonderful island for your vacation. Along the way, you realized that you really don’t know how to get there. So you take a peek in your bag hoping that you have brought a map but unfortunately, you really don’t bring one.  Yeah, I know. You never get the chance to have that super-deluxe-glamorous vacation and capture those please-like-me-photos for your Facebook. It ruined your day or maybe, your whole week (month, really?) because of that.

      It’s like having your business not getting to that thing called “success” because you don’t have that map that will guide you there. You can’t measure how much your money right now, how much you’ve really collected from your customers and how much you’ve paid to your supplier. But worry no more; we can have those maps called “books of accounts” through “bookkeeping.”

      So, what is bookkeeping?

Bookkeeping is the process of recording data relating to accounting transactions in the accounting books.  It is procedural and largely concerned with development and maintenance of accounting records. It may look simple but it is the foundation of accounting.

Always remember this line:  “Garbage in, garbage out.”

      Do not expect that the wrong input recorded will produce a correct output.
So before diving in the ocean of accounting, let me tell you some basic in bookkeeping which are the following:

Basic Things to do in Bookkeeping

1.Choosing between Cash-basis or Accrual Method

      One of the major accounting decision must be made is whether keeping the books using cash-basis or accrual method. Cash-basis method primarily tracks the flow of cash. Recording of income is when the cash actually received while recording of expense is when the cash actually disbursed.  In accrual method, the recognition of income is when earned and not necessarily when the cash was received while the expenses were recognized when incurred and not necessarily when the cash was disbursed.

      During initial setup, many businesses actually use cash-basis method because it is easier but as the business grows and become more complex, it is advisable to use the accrual method in order to account the business more accurately.

Never use the cash-basis method if:
1.If you purchase and accept payment on credit
2.You have inventory that carried period-to-period  such as month-to-month and year-to-year

2.Know what is asset, liabilites, equity, income and expense and books of accounts

      Always remember this equation. (Don’t worry, it’s not Algebra.)

ASSETS = LIABILITIES + EQUITY

      Assets are resources controlled by the entity as a result of past transactions or events and from which future economic benefits are expected to flow to the entity.
Ex. Cash, marketable securities, equipment, inventory and buildings.

      Liabilities are present obligations of the entity arising from past transactions or events the settlement of which is expected to result in an outflow from entity of resources embodying economic benefits.
Ex. Accounts payable, loans payable and savings deposit

      Equity is the residual interest in the assets of the entity after deducting all of its liabilities.
Ex. Shareholders equity and retained earnings

      Income is increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that results in increase in equity, other than contribution.
Ex. Service income, sales and rental income

      Expense is decrease in economic benefit during the accounting period in the form of an outflow or decrease in asset or increase in liability that results in decrease in equity, other than distribution of the equity participants.
Ex. Purchase, interest expense and commission expense

      Being familiar with these accounts is very important especially in setting up your chart of accounts. Check some other materials in the internet so you can have a clearer picture about this.

      Books of accounts are normally comprised of the following:

1.Cash receipt journal (for cash receipt transaction like  collected payment from customer)

2.Cash  disbursement journal (for cash disbursement like payment to supplier)

3.Purchase journal ( purchases on account/ on credit)

4.Sales journal (sales on account/on credit)

5.General journal (non-cash transaction)

6.General Ledger (for account balances)


3.Don’t keep your records unattended. Always update.

      Recording transaction in your books once in a blue moon is a BIG NO.  In order for you to make a sound decision for your business, you need time relevant information.  Keeping your records updated will give you a clearer picture of your business status whether your sales is skyrocketing or you are in brink of bankruptcy. Also, setting up your budget is just a minute away.  It may sound hard but setting a schedule will be very big help. Along the way, it will become just a part of your routine.

4.Always review your work.

      After all, you need to check whether you accounted all the transactions accurately and balanced.

Remember:  One of the golden rules in accounting is always make your account balances balanced.

      Most of the time, many bookkeepers always start their checking in cash account since it is one of the fast moving account in accounting and of course, a very important key in running a business. It is the lifeblood of a business. Doing working trial balance will be a very big help in identifying errors.  Make adjustments for those errors identified through adjusting entries.

5.Prepare your financial statements

      Financial statements are the means by which the information accumulated and processed in financial accounting is periodically communicated to the users.

      A complete set of financial statements comprises the following components:

1.Statement of Financial Position (Balance Sheet)
2.Income Statement
3.Statement of Comprehensive Income
4.Statement of  Changes in Equity
5.Statement of Cash Flows
6.Notes to Financial Statements

      Although there are many financial statements like those I mentioned above, many businesses especially those small ones focused more in Balance Sheet and Income Statement since these reports shows the bigger picture of the business status like the financial position and financial performance.

6.Keep your records organized and safe and do data backup ALWAYS.

      This is a must. You don’t want your efforts be in vain, right? So, make sure you always keep your records safe from any calamity like floods, fire, earthquake, etc. in order to avoid trouble in your business. Making your data available anytime will help you in keeping your business in the right track and making your next big move successful.

      In the end, mastering these basics will guide your bookkeeping successful and reliable for your business.

What is Accounting and How it Can Help You?

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Debit, credit, asset, liability, equity. 

Maybe right now, you are wondering what these words were all about. Luckily, you have a smart friend and he told you, "Those words are accounting terminologies." But instead of feeling relieved, it gives you more curiosity and you asked this question:

What is accounting?

From this moment on, let your friend rest for a while and I will be the one who will give you an overview about this thing.

Though it may sounds cliché but what is accounting all about?

How it can helps us in our daily lives?

First and foremost, let’s define accounting.

The American Institute of Certified Public Accountants define accounting as follows:

"an art of recording, classifying and summarizing in a significant manner and terms of money, transactions and events which are in part at least of a financial character and interpreting the results thereof."

Accounting is important because it identifies, measures and communicates information about entities in order to make a sound decision.

Generally, accounting profession has three main areas namely as:

1) Public accounting - rendering independent and expert financial services to the public e.g. auditing, tax services and management advisory services

2)Private accounting - being part of the entity and assisting management in planning and controlling business operations

3) Government accounting - concerned about the utilization of government funds and resources

In general, there are different kinds of user of financial information such as:

a) Investors - They are most likely concerned with the risk and profit for their investments.

b) Lenders/Creditors - concerned whether their loans and receivable offered will be paid when due

c) Employees - whether the entity can provide remuneration, and other employee benefits due to its stability and profitability

d) Customers - concerned about the continuance of the entity

e) Government and agencies - concerned about compliance and utilization of resources of the entity

f) Public - contribution to the economy

As time goes by, accounting become complex due to different transactions emerging. In order to account these transaction, accountants formulate rules, procedures and practices which is now known as generally accepted accounting principles (GAAP.)

Generally accepted accounting principles are made mostly from agreement rather than being develop from theories and concepts. The principles are mostly developed from basis of experience, reasons, custom, usage and practical necessity.

But aside from GAAP, accounting was also practice in line with the accounting standards (AS) and Financial Reporting Standards (FRS) in order to avoid confusions and achieve uniformity in presentations. 

In conclusion, accounting is a great tool not only in business but also in our personal lives for us to face the overwhelming challenges of financial world.