Salary $17600 Monthly - 76 Accountant Jobs in Accounting & Bookkeeping Services - Montreal - CANADA
Accounting Executive Jobs in Montreal in Accounting & Bookkeeping Services , Montreal - CANADA ✓ Salary 17600 USD Monthly ✓ Hiring Immediately. Entry Level & Experienced jobs. View Local Openings & Apply.
- Job Title: Accountant - BookkeeperNY ACCOUNTING SERVICES is assisting a local client in recruiting for a current Accounting Clerk or Bookkeepers in The city.. As an Accounting Clerk you will compute, classify, and record numerical data to keep office financial records complete. You may also perform any combination of routine calculating, journal entry, general ledger, posting, and verifying primary financial data for use in maintaining accounting records. Accounting Clerks will also check the accuracy of figures, calculations, and postings pertaining to business transactions recorded by other associates. If you meet the qualifications listed below please Apply Now!
Responsibilities for this Accounting Clerk job include:
- Check figures, postings, and documents for correct entry, mathematical accuracy, and proper codes
- Classify, record, and summarize numerical and financial data to compile and keep financial records, using journal entries and general ledgers or computers
- Debit, credit, and total accounts on computer spreadsheets and databases, using specialized accounting software
- Operate 10-key calculators, and copy machines to perform calculations and produce documents
Receive, record, and process cash, checks, and vouchers
- Comply with federal, state, and company policies, procedures, and regulations
- Compile statistical, financial, accounting or auditing reports and tables pertaining to such matters as cash receipts, expenditures, accounts payable and receivable, and profits and losses
- Reconcile or note and report discrepancies found in records
2-3 years experience
Excellent Excel Skills
Job Description for Bookkeeping, Accounting, or Auditing Clerk
Bookkeeping, accounting, and auditing clerks work primarily in office settings, including within the accounting and payroll departments of organizations, to maintain various ledgers, review and deposit checks, and process accounts receivable, accounts payable, expense accounts, and revenue-related accounts.
These clerks may be responsible for analyzing accounts receivable aging reports and informing supervisors regarding delinquent accounts, and a high school diploma or equivalent may be a minimum requirement for this position while relevant experience is also necessary. Some employers may require certification from a college or trade school and provide on-the-job training to new employees. They may report to accountants or CPAs and must be able to use accounting software, such as QuickBooks, and Microsoft Office programs.
Bookkeeping, accounting, and auditing clerks may perform Excel spreadsheet data entry on a regular basis, as well as bank and account reconciliation, and must be able to multitask and pay close attention to detail. They should be able to work with minimal supervision as well as in a team environment, and may respond to questions from customers or internal clients via email or phone. Some may attend regular training classes as required by their employers.
Bookkeeping, Accounting, or Auditing Clerk Tasks
- Process and validate incoming payments, enter data, and resolve discrepancies as they arise.
- Provide general filing, clerical, and other help.
- Make, track, and report deposits.
- Create reports and audits, verify accuracy, and reconcile errors.
MONTREAL NY’s Bookkeeping Services
Montreal’s Largest Dedicated Bookkeeping Firm
Our professional staff devotes itself to providing bookkeeping services in a timely, accurate manner, showing respect and awareness of the confidentiality and individual needs of our clientele.
Initial Set-up and Clean up
Annual 1099 and W-9 Processing
Monthly Financial Statements Preparation
Works with a Wide Range of Clients
Bookkeeping for Businesses
Find out how we can help you get control of your business finances.
Bookkeeping for Not For Profits
Learn more about our discounted offers for not for profits.
Bookkeeping For Individuals
Get assistance with your personal financial records.
Bookkeeping Training and Consulting
We train everybody from individuals to company teams.
Bookkeeping for International Businesses
Initial setup of New Businesses in the US or expansion of your company to the US NYet.
Startups, Incubator Companies for Funding
We help you follow GAAP in preparation of getting your start-up funded.
Online Store & Shopping Cart Integration
Manage your online store with an accurate accounting system.
Provides a full set of bookkeeping services, including, but not limited to:
Bookkeeping for Businesses
Learn how we can get your business finances under control.
As Montreal’s largest independent bookkeeping firm NY Bookkeeping Services (NY) has the staff and experience to help you to grow your business. NY can help you to setup a new business or cleanup and existing company that has not had professional help. We can setup the reporting and systems needed to understand your business better.
Your NY Bookkeeper can create a budget and projections so that you can forecast and plan properly. NY can help with Sales Tax, Payroll Setup and Integration of your existing systems or help to streamline your bookkeeping systems with the correct checks and balances for Best Practices. NY works with your CPA to assure that he/she is able to provide the best tax planning based on accurate bookkeeping and reporting.
NY’s Bookkeeping Services supports ALL accounting programs including:
- Sage 76, 100
- Financial Force
- Mircosoft Dynamics
- Oracle Netsuite
Bookkeeping For Not For Profits
See how NY specializes in NFP needs.
NY’s Bookkeeping Services has bookkeepers that are dedicated to Not For Profit (NFP) bookkeeping and are fully versed in the special needs of Non-Profits bookkeeping. We can help track your ratios for breaking down the Program, Administrative and Program expenses NY Bookkeepers can make sure that your chart of accounts is setup to make preparing your 990 or 1042-S filings easy for your CPA to file. NY Bookkeepers will work with you and your CPA for your yearly audit to make sure it runs smoothly. NY offers discounted rates for NFPs.
Some examples of programs we support:
- Donor Perfect
- QuickBooks NFP
Bookkeeping For Individuals
Get your personal finances in order.
Whether you are a High Net Worth Individual with Investments to track or just need someone to make sure you are staying organized and on budget your NY Bookkeeper can help. We can help you setup a simply process to keep track of your spending and will help you to utilize the available applications that make sense for you.
Some examples of programs we support:
Bookkeeping for International Businesses
Get your business setup in the U.S.
NY’s Bookkeeping Services can help you to set up your business as a US Entity. Whether you are a new business wanting to setup a NY Company or just thinking about it NY can help. For new companies NY can be your office address until you are ready to take office space or can be your Accounting & Finance offices to while you setup your new business. We request that you setup an email address for us at your domain name (Accounting@yourdomain) NY will never appear as a separate company in our support of your company.
We will always represent ourselves as the bookkeeping and accounting part of your company. NY can help you setup payroll and help to navigate the requirements for new businesses operating in the US. NY can refer you to a list of CPA’s we have work with in the past or can work with any CPA that you prefer. We work with ALL licensed CPA’s.
Bookkeeping for Startups
Get help with your funding efforts.
NY’s Bookkeeping Services works with Startups and Internet Companies to help them while they work towards funding. NY handles the setup and day to day bookkeeping needs as well as provides the financial reporting needed by your Investment Advisors.
NY can work with your financial advisors to provide the reporting and recordkeeping needed to help you obtain Seed Capitalization.
Shopping Cart Integration & Online Store
We manage your online store with an accurate accounting system.
NY’s Bookkeeping Services provides support for Shopping Cart Integration. NY will work with your IT and Web Designer to make sure that your Online Store will work correctly with your Accounting Program.
NY will work with your Web Designer to provide the correct reporting to analyze your business and to provide the reporting needed by you and the government agencies for tax reporting.
- All shopping carts
Bookkeeping Training & Consulting
Get training in bookkeeping, QuickBooks, Excel and more.
NY also provides accounting programs training and consulting. We work with you and your staff to ensure that you have the best possible systems, procedures, and bookkeeping programs or apps working for you and your business.
Not every company needs (or can afford) a full-time or outside bookkeeping staff. But every company needs (and can’t afford not to have) a robust accounting system to maintain financial health and provide reporting on business performance.
Our mission is to provide professional bookkeeping services as well as app integration to businesses whose current needs are not being adequately met. We optimize the business performance of our clientele by providing them with the necessary tools to assess their financial position at any given point in time. Our professional staff devotes itself to providing bookkeeping services in a timely, accurate manner, showing respect and awareness of the confidentiality and individual needs of our clientele. NY is committed to ensuring the highest level of excellence to all who avail themselves of our service.
Audit and Assurance Services
For Now and What’s Next
Corporate leaders today navigate a complex and constantly changing set of needs related to accounting regulations, financial statement audits and attestation. You need technical expertise to get the job done, but ideally an expert who cares about your long-term goals.
Frazier & Deeter’s brand promise is Investing in Relationships to Make a Difference. We bring this long-term mindset to our client and associate relationships and it shows in the long-term, strong relationships we have with our clients.
Our team provides deep expertise regarding:
- Audits, compilations and reviews
- Employee benefit plan (ERISA) audits
- Fraud detection
- Forecasts, budgets, and cash flow projections
- Internal audit services
- Technology consulting
- SOC examinations (formerly SAS 70)
- SOX readiness and compliance
A streamlined, pragmatic approach to accounting services
We offer a wide range of accounting and financial reporting services to serve the needs of companies of all sizes and industries. Our award-winning firm is registered with the Public Company Accounting Oversight Board and participates in the AICPA peer review program, so you can rest easy that we can help you resolve your accounting questions and move ahead.
· The NY Approach
We utilize a risk-sensitive approach with consideration of:
- Specific abilities of your internal accounting staff
- Any financial disclosure requirements
- All federal, state and regulatory compliance issues
By assessing the level of sophistication of your financial operations, we can minimize excessive fees and redundancies. Examining a company’s operations with a fresh perspective enables our team to make observations and recommendations that are substantive, relevant and practical.
· Internal Control Review
This procedure concentrates on the control structure that produces your company’s financial information and not on the financial information itself. It is a thorough assessment of strengths and weaknesses, with particular focus on how these weaknesses could adversely affect the company’s ability to record, process, summarize and report financial information.
· Agreed-Upon Procedures
This is the process of applying specific procedures to an area of a financial statement or within a specific accounting cycle.
A member of our team meets with you to determine what specific business goals you are trying to accomplish. You then receive an outline of recommended procedures necessary to achieve those goals. All agreed-upon procedures are then performed.
· Ratio Analysis
The services are based upon comparisons with prior years, as well as with comparable industry competitors. This information assists management in focusing on the company’s financial strengths and weaknesses and can offer another way to interpret current financial information.
Top-tier auditors focused on long-term relationships
We are a nationally-ranked, Top 100 accounting firm offering assurance practices led by some of the country’s most-respected CPAs. Your NYteam is focused first and foremost on developing a solid relationship; and is set apart by our extensive experience with public, private and benefit plan audit experience.
· Overview of an Audit
An audit provides the highest level of assurance that your company’s financial statements fairly and accurately represent your financial position, and ensures operations and cash flows are in accordance with U.S. generally accepted accounting principles.
An audit must be conducted by a third-party CPA independent of your company and requires full disclosure of all necessary financial statements, as well as:
- Confirmation of third-party accounts
- Physical inspections and observations
- Testing of selected transactions through review of supporting documents
· Recognized PCAOB Intelligence
NYis recognized as a leader in audit methodology and quality controls.
NY is one of the few CPA firms in the United States to have former members of the Public Company Accounting and Oversight Board (PCAOB) leading our audit and assurance practice. These members were instrumental in writing policies and evaluating firms across the nation, and have used that expertise to standardize our superior approach to auditing.
· International Affiliations with PKF International
We are members of PKF International, a global network of CPA and consulting firms that is regarded as one of the leading firms in the industry. As a member of PKF, we provide you with access to the top talent and resources at participating firms in 176 countries.
· PCAOB Report and AICPA Peer Review
In addition to maintaining our registered membership with the Public Company Accounting and Oversight Board (PCAOB), we routinely undergo regulatory inspections, as well as, a Peer Reviews and internal inspections.
Take Your Financial Reporting to the Next Level
Our CPAs provide financial assurance compilations and reviews on request. Our extensive team renders reports on a monthly, quarterly or annual basis based on information provided by your management. Receiving streamlined data in the proper financial statement format simplifies progress comparison and makes it easy for your management to identify patterns or potential issues.
Should your business need to provide multiple degrees of assurance to outside groups, our review or audit services may be necessary to validate the reliability of your financial statements.
Employee Benefit Plan Audit
Navigating Change and Mitigating Risk
Failure to comply with the continually changing requirements for employee benefits can result in substantial penalties for your company. Your best approach for navigating these myriad responsibilities is the support of a highly qualified advisory team. All NYplan auditors are dedicated ERISA specialists who help you monitor, manage and mitigate issues in the benefits segment of your financial statements.
Our team also assists with plan design issues, plan operation and compliance and other general employee benefit areas. Working closely with your human resources and benefits group, our ERISA specialists strive to improve the plan’s administrative processes wherever possible.
Specialization in the Employee Benefit Plan Industry
The Department of Labor has advised plan sponsors to use only auditors who specialize in plan audits in order to reduce the extremely high error rates of unqualified auditors. In a typical year, our team of ERISA specialists performs nearly 200 plan audits for some of the country’s largest employers.
NYis a charter member of the American Institute of Certified Public Accountants’ (“AICPA”) Employee Benefit Plan Audit Quality Center (“EBPAQC”). Membership requires a firm to staff dedicated ERISA audit partners and team members and to meet continuing professional education requirements specific with employee benefit plans for staff who manage ERISA audits and quality control programs for ERISA audits.
Avoiding Common Benefit Plan Errors
Learn to recognize common errors that occur when choosing an employee benefits plan; establish recommended internal control measures to prevent errors; and identify the major causes.
· Assurance Services
- Audits (Full Scope and Limited Scope) of qualified defined contribution and defined benefit employee benefit plans as required by ERISA 103(a)(3)(A) and 29CFR 2520.103-1(b)
- Audits of plans requiring filing of Form 11K
- Audits of welfare benefit plans with a 761(c)(9) or other trust arrangements
- Audits of 403(b) plans
- Plan controls recommendations and management communication
- Required governance communication
· Consulting & Compliance Services
- Preparation and review of Form 5760 and Form 5330
- Plan compliance reviews and audits
- Full HR department compliance reviews
- Plan design and development
- Assistance with plan operational issues and correction
- Plan compliance review
- Plan fiduciary review
- Plan mergers and termination
- Fee and other plan benchmarking
- HR best practices and administrative process improvement
- Tax and tax planning services
- Assistance with both IRS and DOL audits
Streamlining Financial Performance Reports
An audit is not always necessary to validate your financial reporting. For simple reporting of your financial position to third parties, such as regulatory agencies or creditors, a financial review provides inquiry and analytical procedures applied to financial data without the need for outside verification.
This procedure differs from a compilation in two ways — our team must be independent of your company, and all appropriate disclosures must be included in the reviewed financial statements. A review is a mid-tier assurance procedure that provides more reliance than a compilation but is not as invasive as an audit.
A financial statement review may also be useful to business owners who are not actively involved in managing their companies; and receive reporting with limited assurance that material modifications to the financial statements are not necessary.
A Service Organization’s Symbol of Strong Internal Controls
NY Process, Risk & Governance (PRG) Practice Group provides customized risk management solutions to improve efficiency and add value. We deliver assurance and consulting services to clients large and small and also have extensive expertise in IT risk management.
A Service Organization Controls (SOC) examination helps service organizations identify and enhance a competitive edge. A SOC examination (formerly SAS 70) proves your commitment to maintaining internal controls by providing third-party attestation to the reliability of the design, implementation and operating effectiveness of your controls. A SOC examination can reduce impact on your internal resources by minimizing the need for external audits and can identify improvements to strengthen your operations.
SOC Reporting Overview
Learn the differences between a SOC 1 and SOC 2 report, as well as how to choose which is right for your organization. Plus, get insights into the trust principals that are the basis for SOC reporting, such as data privacy.
Understanding and Leveraging the New Standards of SOC 2 Reports
Learn about the challenges and advantages of the updated “Common Criteria” for SOC 2 reporting, including the Trust Services Principles and Criteria related to Security, Availability, Processing Integrity, Confidentiality and/or Privacy.
Forensic Accounting and Fraud Investigation
Supporting Litigation for Fraudulent Financial Activity
We offer a full suite of forensic accounting services, including those designed to prevent and detect fraud. We integrate accounting, auditing and investigative skills to reveal fraud and support all aspects of litigation.
Our team of CPA professionals includes many certified fraud examiners (CFEs). This department is led by a highly experienced CFE who is also a licensed private investigator. The NYfraud team can help you investigate sensitive situations, as well as support your efforts through final prosecution or civil litigation, with experienced expert witness services.
· Expert Witness & Investigation Services
Our forensic and investigative services uncover occupational fraud and abuse, from asset misappropriation to bribery and corruption and money laundering. Some cases require us to provide dispute analysis and litigation support, and we have extensive experience serving as expert witnesses.
· Fraud Risk & Internal Controls Assessment
We help you identify process and control weaknesses that can lead to fraud or abuse. We not only identify and evaluate areas of risk, but also recommend management and control systems and operational improvements to minimize future risk.
We provide risk assessment and fraud awareness training and give you the tools and knowledge to be proactive. By setting up fraud prevention programs, our clients can increase awareness and detect potential fraud schemes before they cause damage.
· Specialty Services
- Analysis of business disputes
- Cross examination & opposing expert critiques
- Expert witness testimony
- Calculation of financial & economic damages
- Forensic audits
- Fraud prevention measures
- Operational & efficiency reviews
- Technology audits
- Forensic accounting investigation of:
- Fraud & white collar crime
- Theft & embezzlement
- Investment & securities fraud
Supporting Your Internal Compliance Resources
If your company’s internal resources lack the capacity, objectivity or specialized technical skills to address evolving business needs, Frazier & Deeter’s Process, Risk & Governance advisors can help you across a broad spectrum of operational, compliance, IT and Financial audit needs. We support the overall Enterprise Risk Management efforts of companies with varying needs, including Emerging Growth, High Growth, Public and Pre-IPO organizations.
Outsourcing & Co-Sourcing of Internal Audit
Learn how our experienced PRG professionals can help you maintain tight internal controls through outsourcing — management, staffing and execution; or co-sourcing — bringing individual expertise to augment an in-house internal audit team.
· Internal Audit Co-sourcing & Outsourcing
Our PRG professionals are available to help you meet all internal audit requirements. We can:
- Provide audit professionals with extensive internal audit experience to deliver your audit needs
- Supplement your current Internal Audit function to address issues of capacity or technical knowledge
- Satisfy third party regulatory requirements
- Design improved internal processes and controls
- Assist in implementing consistent policies and procedures company-wide
- Work with business process auditors to ensure adequate understanding of business risks
· SOX Readiness and Compliance
A Sarbanes-Oxley Section 404 effort is executed in multiple stages. Our team is overseen by several members that have worked at the Public Company Accounting Oversight Board (the PCAOB) and provides comprehensive guidance or assistance in any stage of the project:
- Planning and scoping
- Documenting significant processes and controls
- Evaluating internal control effectiveness
- Identifying issues and designing corrective actions
- Implementing solutions and remediation efforts
- Internal control reporting
· Quality Assurance Reviews (QAR) & Transformation
Conforming to the Institute of Internal Auditor’s International Standards for the Professional Practice of Internal Auditing (IISPPA) is a critical requirement.
Our PRG professionals perform a detailed analysis of every aspect of your Internal Audit department, including its organizational structure, technical competency and staff performance. We provide recommendations and strategies that improve performance and increase value to the organization.
· Business Process Improvement
Our professionals design and implement solutions to improve internal and external business performance. We examine technology, resources, processes and procedures, adopting and implementing best practices in accordance with the needs of the organization.
· Audit Committee Advisory Services
Our professionals optimize the effectiveness of communication with Audit Committees by:
- Providing guidance on emerging audit, risk management and governance topics
- Increasing awareness of audit and risk management concepts that improve corporate governance results
- Communicating regulatory best practices
· Internal Audit Tools & Technology
As the organization evolves, the need often emerges to update tools, methodologies and technologies. We offer an informed and objective team to help you identify relevant risks, assist in the design and testing of your controls to address those risks and effectively report results to management.
· FCPA Program Design
· Foreign Corrupt Practices Act Training
· Bookkeeping Services
Bookkeeping Preparation Bookkeeping Planning Bookkeeping Problems
· Business Services
Small Business Accounting Payroll Part-Time CFO Services
· QuickBooks Services
Why Quickbooks QuickBooks Setup QuickBooks Training
· Individual Services
|Help for Busy Individuals!!!|
If you are too busy with work and family to effectively handle your finances, Atlanta Bookkeeping Solutions is here to help. Stop the collections calls and paying late fees. We want to help you keep more money in your pocket.
We provide the following services for individuals:
- bill payments
Stress No More!! We are here to make your life easier!!
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Small Business Accounting
|As a small business owner you have more important things to do than to keep your own books. We take care of your books for you, so you can get back to the job of running your business and generating profits.|
Each month or quarter we'll do the following things for you...
These tasks form the solid foundation of your small business bookkeeping system. You can customize the package of services you receive by adding payroll, tax preparation, or any of our other services.
Reconciling your business checking account each month allow us to keep your bank account, accounting, and taxes up-to-date.
Having us reconcile your account each month allows you to...
An income statement, otherwise known as a profit and loss statement, basically adds an itemized list of all your revenues and subtracts an itemized list of all your expenses to come up with a profit or loss for the period.
An income statement allows you to...
A balance sheet gives you a snapshot of your business' financial condition at a specific moment in time.
A balance sheet helps you...
Balance sheets, along with income statements, are the most basic elements in providing financial reporting to potential lenders such as banks, investors, and vendors who are considering how much credit to grant you.
Maintaining a Clean General Ledger
The general ledger is the core of your company's financial records. These records constitute the central "books" of your system. Since every transaction flows through the general ledger, a problem with your general ledger throws off all your books.
Having us review your general ledger system each month allows us to hunt down any discrepancies such as double billings or any unrecorded payments. Then we'll fix the discrepancies so your books are always accurate and kept in tip top shape.
We are always available to spend time with you so you fully understand how to interpret and utilize the financial information we provide. Our consultations are already included in our price, so please feel free to call us whenever you have a question or concern.
If you'd like to receive a Free Consultation on our Small Business Accounting Service, please complete this form.
|When it comes to paying employees, laws and the IRS have made the payroll function a time consuming nightmare for the small business owner.|
Small business owners spend an average of eight hours a month performing payroll functions. That's 12 full days a year that could be spent generating sales, prospecting new business opportunities, improving products or services, or servicing customers.
We offer payroll solutions that meet your business's needs and enable you to spend time doing what you do best--running your company.
Why Outsource Your Payroll...
Get the Payroll Solution That Best Fits Your Needs.
1. Comprehensive Payroll Services
2. After-the-Fact-Payroll Services
3. Online Payroll Processing
Custom Payroll Reports Service
How much do we charge?
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Bookkeeping and Accounting - A Beginning Tutorial
Bookkeeping and Accounting
Bookkeeping in a business firm is the basis of the firm's accounting system. Bookkeepers are responsible for recording and classifying the accounting transactions of the business firm and techniques involving recording those transactions.
If you are a small business owner, you either have to set up your own accounting system or you have to hire someone to set it up for you. If you are self-employed and it is a one-person business, you will do it yourself. If you are hiring staff and anticipate a lot of growth, you may hire a controller to handle your financial management and accounting. If your business is going to grow but you anticipate slow growth, you may simply hire an accountant or bookkeeper to handle the accounting system.
What Does the Accountant do?
Where the bookkeeper records and classifies the financial transactions of the company, the accountant takes the next steps and analyzes, reviews, reports, and interprets financial information for the company.
What Does a Controller do?
The controller is actually a company's chief accounting officer. He/she is responsible for setting up and maintaining the company's accounting system. The controller is responsible for financial and managerial accounting; in other words, responding to the firm's accounting data in an appropriate and responsible manner. A controller is usually hired as a business gets larger.
Bookkeeping With and Without a Computer Program
This tutorial on bookkeeping teaches you basic bookkeeping without using a computer program. Why do you need to know that since there are so many computer programs out there you can use? Have you ever heard the saying, "Garbage in, garbage out?" You have to understand the basic bookkeeping behind what you enter into the computer program in order to enter in the correct information. A later tutorial will deal with using a computer program to handle bookkeeping for your business organization.
2. Should you use Single or Double Entry Bookkeeping?
Single-Entry bookkeeping is much like keeping your check register. You record transactions as you pay bills and make deposits into your company account. This works only if yours is a small company with a low volume of transactions.
If your company is of any size and complexity, you will want to set up a double-entry bookkeeping system. Two entries, at least, are made for each transaction. A debit is made to one account and a credit is made to another accounting. That is the key to double-entry accounting.
3. Should you use Cash or Accrual Accounting?
One of the first decisions you have to make when setting up your bookkeeping system is whether or not to use a cash or accrual accounting system. If you are operating a small, one-person business from home or even a larger consulting practice from a one-person office, you might want to stick with cash accounting. If you use cash accounting, you record your transaction when cash actually changes hands. Cash can be anything from actual money to electronic funds transfer. Sometimes firms start their business using cash accounting and switch to accrual accounting as they grow.
If you are going to offer your customers credit or if you are going to request credit from your suppliers, then you have to use an accrual accounting system. Using accrual accounting, you record purchases or sales immediately, even if the cash doesn't change hands until a later time, such as in the case of Accounts Payable or Accounts Receivable.
4. The Basics - Understanding Assets, Liabilities, and Equity
Before you set up your bookkeeping system, you have to understand the firm's basic accounts - assets, liabilities and equity. Assets are those things the company owns such as its inventory and accounts receivables. Liabilities are those things the company owes such as what they owe to their suppliers (accounts payable), bank and business loans, mortgages, and any other debt on the books. Equity is the ownership the business owner and any investors have in the firm.
Balancing the Books
In order to balance your books, you have to keep careful track of these items and be sure the transactions that deal with assets, liabilities, and equity are recorded correctly and in the right place. There is a key formula you can use to make sure your books always balance. That formula is called the accounting equation:
Assets = Liabilities + Equity
The accounting equation means that everything the business owns (assets) is balanced against claims against the business (liabilities and equity). Liabilities are claims based on what you owe vendors and lenders. Owners of the business have claims against the remaining assets (equity).
Initial Bookkeeping Terms Related to the Accounting Equation
Let's take a closer look at assets, liabilities, and equity so you will have a complete understanding of what comprises each one.
- Assets: If you look you look at the format of a balance sheet, you will see the asset, liability, and equity accounts. Asset accounts usually start with the cash account and the NYetable securities account. Then, inventory, accounts receivable, and fixed assets such as land, buildings, and plant and equipment are listed. Those are tangible assets. You can actually touch them. Firms also have intangible assets such as customer goodwill.
- Liabilities: The liability accounts on a balance sheet include both current and long-term liabilities. Current liabilities are usually accounts payable and accruals. Accounts payable are usually what the business owes to its suppliers, credit cards, and bank loans. Accruals will consist of taxes owed including sales tax owed and federal, state, social security, and Medicare tax on the employees which are generally paid quarterly.
- Equity: The equity accounts include all the claims the owners have against the company. Clearly, the business owner has an investment and it may be the only investment in the firm. If the firm has taken on other investment, that is considered here as well.
5. Income Statement Basics - Revenue, Expenses, Costs
If you look at the balance sheet in Step 4, you learn about assets, liabilities and equity. If you move on to the income statement, you learn about revenue, expenses, and costs.
Revenue is all the income a business receives in selling its products or services. Costs, also called cost of goods sold, is all the money a business spends to buy or manufacture the goods or services it sells to its customers. The Purchases account tracks goods purchased. Expenses are all the money that is spent to run the company that is not specifically related to a product or service being sold. An example of an expense account is Salaries and Wages.
A bookkeeper is responsible for identifying the accounts in which transactions should be recorded. For example, if the business makes a cash sale to a customer and your business uses double-entry bookkeeping, you would record the cash received in the asset account called Cash and the sale would be recorded in the revenue account called Sales. Here is another example of a bookkeeping entry for a cash sale. This one throws in another variable - what the bookkeeper has to do when sales tax is involved.
Introduction; Bookkeeping: Past and Present
Double-Entry, Debits and Credits
General Ledger Accounts
Debits and Credits in the Accounts
Liability and Stockholders' Equity Accounts
Income Statement Accounts
Recording Transactions; Bank Reconciliation
Adjusting Entries; Reversing Entries
Balance Sheet; Income Statement; Balance Sheet and Income Statement are Linked
Cash Flow Statement
Statement of Stockholders' Equity; Closing Cut-Off; Importance of Controls
Introduction to Bookkeeping
The term bookkeeping means different things to different people:
- Some people think that bookkeeping is the same as accounting. They assume that keeping a company's books and preparing its financial statements and tax reports are all part of bookkeeping. Accountants do not share their view.
- Others see bookkeeping as limited to recording transactions in journals or daybooks and then posting the amounts into accounts in ledgers. After the amounts are posted, the bookkeeping has ended and an accountant with a college degree takes over. The accountant will make adjusting entries and then prepare the financial statements and other reports.
- The past distinctions between bookkeeping and accounting have become blurred with the use of computers and accounting software. For example, a person with little bookkeeping training can use the accounting software to record vendor invoices, prepare sales invoices, etc. and the software will update the accounts in the general ledger automatically. Once the format of the financial statements has been established, the software will be able to generate the financial statements with the click of a button.
- At mid-size and larger corporations the term bookkeeping might be absent. Often corporations have accounting departments staffed with accounting clerks who process accounts payable, accounts receivable, payroll, etc. The accounting clerks will be supervised by one or more accountants.
Our explanation of bookkeeping attempts to provide you with an understanding of bookkeeping and its relationship with accounting. Our goal is to increase your knowledge and confidence in bookkeeping, accounting and business. In turn, we hope that you will become more valuable in your current and future roles.
Note: We provide a Bookkeeping Cheat Sheet, a Guide to Bookkeeping Concepts, a Bookkeeping Basics Video Seminar, a Bookkeeping Quick Test, Bookkeeping Tests for Prospective Employees, and Bookkeeping Flashcards for members of AccountingCoach PRO.
Bookkeeping: Past and Present
Bookkeeping in the Old Days
Prior to computers and software, the bookkeeping for small businesses usually began by writing entries into journals. Journals were defined as the books of original entry. In order to reduce the amount of writing in a general journal, special journals or daybooks were introduced. The special or specialized journals consisted of a sales journal, purchases journal, cash receipts journal, and cash payments journal.
The company's transactions were written in the journals in date order. Later, the amounts in the journals would be posted to the designated accounts located in the general ledger. Examples of accounts include Sales, Rent Expense, Wages Expense, Cash, Loans Payable, etc. Each account's balance had to be calculated and the account balances were used in the company's financial statements. In addition to the general ledger, a company may have had subsidiary ledgers for accounts such as Accounts Receivable.
Handwriting the many transactions into journals, rewriting the amounts in the accounts, and manually calculating the account balances would likely result in some incorrect amounts. To determine whether errors had occurred, the bookkeeper prepared a trial balance. A trial balance is an internal report that lists 1) each account name, and 2) each account's balance in the appropriate debit column or credit column. If the total of the debit column did not equal the total of the credit column, there was at least one error occurring somewhere between the journal entry and the trial balance. Finding the one or more errors often meant spending hours retracing the entries and postings.
After locating and correcting the errors the bookkeeping phase was completed and the accounting phase began. It began with an accountant preparing adjusting entries so that the accounts reflected the accrual basis of accounting. Adjusting entries were necessary for the following reasons:
- additional revenues and assets may have been earned but were not recorded
- additional expenses and liabilities may have been incurred but were not recorded
- some of the amounts that had been recorded by the bookkeeper may have been prepayments which are no longer prepaid
- depreciation and other non-routine adjustments needed to be computed and recorded
After all of the adjustments were made, the accountant presented the adjusted account balances in the form of financial statements.
After each year's financial statements were completed, closing entries were needed. The purpose of closing entries is to get the balances in all of the income statement accounts (revenues, expenses) to be zero before the start of the new accounting year. The net amount of the income statement account balances would ultimately be transferred to the proprietor's capital account or to the stockholders' retained earnings account.
The electronic speed of computers and accounting software gives the appearance that many of the bookkeeping and accounting tasks have been eliminated or are occurring simultaneously. For example, the preparation of a sales invoice will automatically update the relevant general ledger accounts (Sales, Accounts Receivable, Inventory, Cost of Goods Sold), update the customer's detailed information, and store the information for the financial statements as well as other reports.
The accounting software has been written so that every transaction must have the debit amounts equal to the credit amounts. The electronic accuracy also eliminates the errors that had occurred when amounts were manually written, rewritten and calculated. As a result, the debits will always equal the credits and the trial balance will always be in balance. No longer will hours be spent looking for errors that occurred in a manual system.
CAUTION: While the accounting software is amazingly fast and accurate in processing the information that is entered, the software is unable to detect whether some transactions have been omitted, have been entered twice, or if incorrect accounts were used. Fraudulent transactions and amounts could also be entered if a company fails to have internal controls.
After the sales invoices, vendor invoices, payroll and other transactions have been processed for each accounting period, some adjusting entries are still required. The adjusting entries will involve:
- revenues and assets that were earned, but not yet entered into the software
- expenses and liabilities that were incurred, but not yet entered into the software
- prepayments that are no longer prepaid
- recording depreciation expense, bad debts expense, etc.
The adjusting entries will require a person to determine the amounts and the accounts. Without adjusting entries the accounting software will be producing incomplete, inaccurate, and perhaps misleading financial statements.
After the financial statements for the year are released, the software will transfer the balances from the income statement accounts to the sole proprietor's capital account or to the stockholders' retained earnings account. This allows for the following year's income statement accounts to begin with zero balances. (The balance sheet accounts are not closed as their balances are carried forward to the next accounting year.)
Bookkeeping (and accounting) involves the recording of a company's financial transactions. The transactions will have to be identified, approved, sorted and stored in a manner so they can be retrieved and presented in the company's financial statements and other reports.
Here are a few examples of some of a company's financial transactions:
- The purchase of supplies with cash.
- The purchase of merchandise on credit.
- The sale of merchandise on credit.
- Rent for the business office.
- Salaries and wages earned by employees.
- Buying equipment for the office.
- Borrowing money from a bank.
The transactions will be sorted into perhaps hundreds of accounts including Cash, Accounts Receivable, Loans Payable, Accounts Payable, Sales, Rent Expense, Salaries Expense, Wages Expense Dept 1, Wages Expense Dept 2, etc. The amounts in each of the accounts will be reported on the company's financial statements in detail or in summary form.
With hundreds of accounts and perhaps thoCanadands of transactions, it is clear that once a person learns the accounting software there will be efficiencies and better information available for managing a business.
There are two main methods of accounting (or bookkeeping):
- Accrual method
- Cash method
The accrual method of accounting is the preferred method because it provides:
- a more complete reporting of the company's assets, liabilities, and stockholders' equity at the end of an accounting period, and
- a more realistic reporting of a company's revenues, expenses, and net income for a specific time interval such as a month, quarter or year.
As a result, US GAAP requires most corporations to use the accrual method of accounting.
The following table compares the accrual and cash methods of accounting:
Cash basis vs. accrual basis accounting
The cash basis and accrual basis of accounting are two different methods used to record accounting transactions. The core underlying difference between the two methods is in the timing of transaction recordation. When aggregated over time, the results of the two methods are approximately the same. A brief description of each method follows:
- Cash basis. Revenue is recorded when cash is received from customers, and expenses are recorded when cash is paid to suppliers and employees.
- Accrual basis. Revenue is recorded when earned and expenses are recorded when consumed.
The timing difference between the two methods occurs because revenue recognition is delayed under the cash basis until customer payments arrive at the company. Similarly, the recognition of expenses under the cash basis can be delayed until such time as a supplier invoice is paid. To apply these concepts, here are several examples:
- Revenue recognition. A company sells $10,000 of green widgets to a customer in March, which pays the invoice in April. Under the cash basis, the seller recognizes the sale in April, when the cash is received. Under the accrual basis, the seller recognizes the sale in March, when it issues the invoice.
- Expense recognition. A company buys $760 of office supplies in May, which it pays for in June. Under the cash basis, the buyer recognizes the purchase in June, when it pays the bill. Under the accrual basis, the buyer recognizes the purchase in May, when it receives the supplier's invoice.
The cash basis is only available for use if a company has no more than $5 million of sales per year (as per the IRS). It is easiest to account for transactions using the cash basis, since no complex accounting transactions such as accruals and deferrals are needed. Given its ease of use, the cash basis is widely used in small businesses. However, the relatively random timing of cash receipts and expenditures means that reported results can vary between unusually high and low profits.
The accrual basis is used by all larger companies, for several reasons. First, its use is required for tax reporting when sales exceed $5 million. Also, a company's financial statements can only be audited if they have been prepared using the accrual basis. In addition, the financial results of a business under the accrual basis are more likely to match revenues and expenses in the same reporting period, so that the true profitability of an organization can be discerned. However, unless a statement of cash flows is included in the financial statements, this approach does not reveal the ability of a business to generate cash.
Note: Some small companies may be allowed to use the cash method of accounting and in turn may experience an income tax benefit. Since our website does not provide income tax information, you should seek tax advice from a tax professional or from IRS.gov.
Revenues and Receivables
Under the accrual method, revenues are to be reported in the accounting period in which they are earned (which may be different from the period in which the money is received).
To illustrate the reporting of revenues under the accrual method, let's assume that the hypothetical business Servco provides a service to a customer on December 27. Servco prepares a sales invoice for the agreed upon amount of $1,000. The invoice is dated December 27 and states that the amount is due in 30 days.
Under the accrual method, on December 27 Servco:
- has earned revenue of $1,000, and
- has earned a receivable of $1,000.
If Servco uses accounting software to prepare the invoice, the following will be recorded automatically as of December 27:
- the income statement account Service Revenues will be increased by $1,000, and
- the asset Accounts Receivable will be increased by $1,000
In addition to updating the general ledger accounts (which are used in preparing the financial statements), the software will update and store the customer's information for generating an aging of accounts receivable and a statement of each customer's activity.
Expenses and Payables
Under the accrual method, expenses should be reported on the income statement in the period in which they best match with the revenues. If a cause and effect relationship is not obvious, the expense should be reported on the income statement when the cost is used up or expires. In any event, the payment of cash is not the primary factor for determining the accounting period in which an expense is reported on the income statement.
To illustrate, let's assume that Servco uses a temporary help agency at a cost of $200 in order to assist in earning revenues on December 27. The invoice from the temp agency is received on December 27, but it will not be paid until January 4.
Under the accrual method, on December 27 Servco:
- has incurred an expense of $200, and
- has incurred a liability of $200.
If accounting software is used to record the temp agency invoice, the following will occur automatically as of December 27:
- the income statement account Temporary Help Expense will be increased by $200, and
- the liability Accounts Payable will be increased by $200.
When Servco issues its check on January 4:
- the asset Cash will be decreased by $200, and
- the liability Accounts Payable will be decreased by $200.
If Servco had only the two transactions described above, its net income under the accrual method for the day of December 27 will consist of the following:
- Earned revenue of $1,000
- Incurred an expense of $200
- Earned a net income of $800 ($1,000 of revenues minus $200 of expenses).
- No revenue, expense or net income would have been reported on the December income statement.
- The revenues of $1,000 might be reported in February if the customer paid in 35 days.
- The expense of $200 will be reported in January when Servco pays the temp agency.]
Obviously, the accrual method does a better job of reporting what occurred on December 27, the date that Servco actually provided the services and incurred the expense.
Double-Entry, Debits and Credits
Except for some very small companies, the standard method for recording transactions is double-entry. Double-entry bookkeeping or double-entry accounting means that every transaction will involve at least two accounts. To illustrate, here are a few transactions and the two accounts that will be affected:
Note: Double-entry bookkeeping means that every transaction will involve a minimum of two accounts.
Debits and Credits
The words debit and credit have been associated with double-entry bookkeeping and accounting for more than 760 years. Here are the meanings of those words:
debit: an entry on the left side of an account
credit: an entry on the right side of an account
The debit and credit rule in double-entry bookkeeping can be stated several ways:
- For each and every transaction, the total amount entered on the left side of an account (or accounts) must be equal to the total amount entered on the right side of another account (or accounts).
- For each and every transaction, the total of the debit amounts must be equal to the total of the credit amounts.
- Debits must equal credits.
Debit Amount = Credit amounts
Debits = credits
Dependable accounting software will be written/coded to enforce the rule of debits equal to credits. In other words, a transaction will be accepted and processed only if the amount of the debits is equal to the amount of the credits.
The accuracy of accounting software will also ensure that the accounts and the trial balance will always be in balance. Here is an example of a partial trial balance:
Even though the accounting software has eliminated the clerical errors that occurred because amounts were handwritten and the account balances were calculated manually, some other errors can still occur. Here are some errors that will not be detected by the accounting software:
- An entire transaction (both the debit amount and the credit amount) was omitted.
- An entire transaction was entered twice.
- An incorrect amount was entered both as a debit and as a credit.
- An incorrect account was debited.
- An incorrect account was credited.
Even with the above errors, the trial balance will remain in balance. The reason is that the total of the debit balances will still be equal to the total of the credit balances.
To assist in visualizing the effect of recording a debit or credit amount and the resulting balances of general ledger accounts, it is helpful to draw a T-account,
Debit amounts will be entered on the left side of the T-account, and credit amounts will be entered on the right side. The title of the account will appear at the top of each "T".
Since every transaction will involve at least two accounts, we recommend that you always begin by drawing two T-accounts. For example, if a company pays its rent of $2,000 for the current month, the transaction could be depicted with the following T-accounts:
Note that one T-account (Rent Expense) has a debit of 2,000 and that one T-account (Cash) has a credit amount of 2,000. Hence, the transaction had debits equal to credits.
General Ledger Accounts
The accounts that are used to sort and store transactions are found in the company's general ledger. The general ledger is often arranged according to the following seven classifications. (A few examples of the related account titles are shown in parentheses.)
- Assets (Cash, Accounts Receivable, Land, Equipment)
- Liabilities (Loans Payable, Accounts Payable, Bonds Payable)
- Stockholders' equity (Common Stock, Retained Earnings)
- Operating revenues (Sales, Service Fees)
- Operating expenses (Salaries Expense, Rent Expense, Depreciation Expense)
- Non-operating revenues and gains (Investment Income, Gain on Disposal of Truck)
- Non-operating expenses and losses (Interest Expense, Loss on Disposal of Equipment)
Balance Sheet Accounts
The first three classifications are referred to as balance sheet accounts since the balances in these accounts are reported on the financial statement known as the balance sheet.
- Balance sheet accounts
- Stockholders' (or Owner's) equity
The balance sheet accounts are also known as permanent accounts (or real accounts) since the balances in these accounts will not be closed at the end of an accounting year. Instead, these account balances are carried forward to the next accounting year.
Income Statement Accounts
The four remaining classifications of accounts are referred to as income statement accounts since the amounts in these accounts will be reported on the financial statement known as the income statement.
- Income statement accounts
- Operating revenues
- Operating expenses
- Non-operating revenues and gains
- Non-operating expenses and losses
The income statement accounts are also known as temporary accounts since the balances in these accounts will be closed at the end of the accounting year. Each income statement account is closed in order to begin the next accounting year with a zero balance.
The year-end balances from all of the income statement accounts will be combined and entered as a single net amount in Retained Earnings (a balance sheet account within stockholders' equity) or in a proprietor's capital account.
Note: If an account has not had any activity in the current or recent periods, it is often omitted from the current general ledger.
Chart of Accounts
The chart of accounts is simply a list of all of the accounts that are available for recording transactions. This means that the number of accounts in the chart of accounts will be greater than the number of accounts in the general ledger. (The reason is that accounts with zero balances and no recent entries are often omitted from the general ledger until there is a transaction for the account.)
The chart of accounts is organized similar to the general ledger: balance sheet accounts followed by the income statement accounts. However, the chart of accounts does not contain any entries or account balances.
The chart of accounts allows you to find the name of an account, its account number, and perhaps a brief description. It is important to expand and/or alter the chart of accounts to accommodate the changes to an organization and when there is a need for improved reporting of information.
In some accounting software, the chart of accounts is also used to designate where an account will be reported in the financial statements.
Debits and Credits in the Accounts
If you already understand debits and credits, the following table summarizes how debits and credits are used in the accounts.
Debit and Credit Definitions
Business transactions are events that have a monetary impact on the financial statements of an organization. When accounting for these transactions, we record numbers in two accounts, where the debit column is on the left and the credit column is on the right.
- A debit is an accounting entry that either increases an asset or expense account, or decreases a liability or equity account. It is positioned to the left in an accounting entry.
- A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is positioned to the right in an accounting entry.
Debit and Credit Canadage
Whenever an accounting transaction is created, at least two accounts are always impacted, with a debit entry being recorded against one account and a credit entry being recorded against the other account. There is no upper limit to the number of accounts involved in a transaction - but the minimum is no less than two accounts. The totals of the debits and credits for any transaction must always equal each other, so that an accounting transaction is always said to be "in balance." If a transaction were not in balance, then it would not be possible to create financial statements. Thus, the use of debits and credits in a two-column transaction recording format is the most essential of all controls over accounting accuracy.
There can be considerable confusion about the inherent meaning of a debit or a credit. For example, if you debit a cash account, then this means that the amount of cash on hand increases. However, if you debit an accounts payable account, this means that the amount of accounts payable liability decreases. These differences arise because debits and credits have different impacts across several broad types of accounts, which are:
- Asset accounts. A debit increases the balance and a credit decreases the balance.
- Liability accounts. A debit decreases the balance and a credit increases the balance.
- Equity accounts. A debit decreases the balance and a credit increases the balance.
The reason for this seeming reversal of the use of debits and credits is caused by the underlying accounting equation upon which the entire structure of accounting transactions are built, which is:
Assets = Liabilities + Equity
Thus, in a sense, you can only have assets if you have paid for them with liabilities or equity, so you must have one in order to have the other. Consequently, if you create a transaction with a debit and a credit, you are usually increasing an asset while also increasing a liability or equity account (or vice versa). There are some exceptions, such as increasing one asset account while decreasing another asset account.
If you are more concerned with accounts that appear on the income statement, then these additional rules apply:
- Revenue accounts. A debit decreases the balance and a credit increases the balance.
- Expense accounts. A debit increases the balance and a credit decreases the balance.
- Gain accounts. A debit decreases the balance and a credit increases the balance.
- Loss accounts. A debit increases the balance and a credit decreases the balance.
If you are really confused by these issues, then just remember that debits always go in the left column, and credits always go in the right column. There are no exceptions.
Debit and Credit Rules
The rules governing the use of debits and credits are as follows:
- All accounts that normally contain a debit balance will increase in amount when a debit (left column) is added to them, and reduced when a credit (right column) is added to them. The types of accounts to which this rule applies are expenses, assets, and dividends.
- All accounts that normally contain a credit balance will increase in amount when a credit (right column) is added to them, and reduced when a debit (left column) is added to them. The types of accounts to which this rule applies are liabilities, revenues, and equity.
- The total amount of debits must equal the total amount of credits in a transaction. Otherwise, an accounting transaction is said to be unbalanced, and will not be accepted by the accounting software.
Debits and Credits in Common Accounting Transactions
The following bullet points note the use of debits and credits in the more common business transactions:
- Sale for cash: Debit the cash account | Credit the revenue account
- Sale on credit: Debit the accounts receivable account | Credit the revenue account
- Receive cash in payment of an account receivable: Debit the cash account | Credit the accounts receivable account
- Purchase supplies from supplier for cash: Debit the supplies expense account | Credit the cash account
- Purchase supplies from supplier on credit: Debit the supplies expense account | Credit the accounts payable account
- Purchase inventory from supplier for cash: Debit the inventory account | Credit the cash account
- Purchase inventory from supplier on credit: Debit the inventory account | Credit the accounts payable account
- Pay employees: Debit the wages expense and payroll tax accounts | Credit the cash account
- Take out a loan: Debit cash account | Credit loans payable account
- Repay a loan: Debit loans payable account | Credit cash account
Debit and Credit Examples
Arnold Corporation sells a product to a customer for $1,000 in cash. This results in revenue of $1,000 and cash of $1,000. Arnold must record an increase of the cash (asset) account with a debit, and an increase of the revenue account with a credit. The entry is:
Arnold Corporation also buys a machine for $15,000 on credit. This results in an addition to the Machinery fixed assets account with a debit, and an increase in the accounts payable (liability) account with a credit. The entry is:
|Machinery - Fixed Assets||14,000|
Other Debit and Credit Issues
A debit is commonly abbreviated as dr. in an accounting transaction, while a credit is abbreviated as cr. in an accounting transaction.
Debits and credits are not used in a single entry system. In this system, only a single notation is made of a transaction; it is usually an entry in a check book or cash journal, indicating the receipt or expenditure of cash. A single entry system is only designed to produce an income statement.
Debits and Credits in the Accounts
If you already understand debits and credits, the following table summarizes how debits and credits are used in the accounts.
If you are not familiar with debits and credits or if you want a better understanding, we will provide a few insights to help you. We will also provide links to our visual tutorial, quiz, puzzles, etc. that will further assist you.
Accounting Equation Can Help
The accounting equation is a central part of bookkeeping and accounting. It can also provide insights into debits and credits. The basic accounting equation is:
Assets = Liabilities + Stockholders' equity (if a corporation)
Assets = Liabilities + Owner's equity (if a sole proprietorship)
With double-entry accounting, the accounting equation should always be in balance. In other words, not only will debits be equal to credits, but the amount of assets will be equal to the amount of liabilities plus the amount of owner's equity.
The accounting equation is also the framework of the balance sheet, one of the main financial statements. Hence the balance sheet must also be in balance.
We will use the accounting equation to explain why we sometimes debit an account and at other times we credit an account.
Assets are on the left side of the accounting equation.
Asset account balances should be on the left side of the accounts.
In the accounting equation you can see that assets are on the left side of the equation:
Earlier you learned that debit means left side. Recall our T-account that showed debits on the left side:
Hence, asset accounts such as Cash, Accounts Receivable, Inventory, and Equipment should have debit balances.
Liabilities are on the right side of the accounting equation.
Liability account balances should be on the right side of the accounts.
In the accounting equation you can see that liabilities are on the right side of the equation:
Earlier you learned that credit means right side. Recall our T-account that showed credits on the right side:
Thus liability accounts such as Accounts Payable, Notes Payable, Wages Payable, and Interest Payable should have credit balances.
Stockholders' equity is on the right side of the accounting equation.
Stockholders' equity account balances should be on the right side of the accounts.
In the accounting equation you can see that stockholders' equity is on the right side of the equation:
Again, credit means right side and our T-account showed credits on the right side. This means that stockholders' equity accounts such as Common Stock, Retained Earnings, and M J Smith, Capital should have credit balances.
To demonstrate the debits and credits of double-entry with a transaction, let's assume that a new corporation is formed and the stockholders invest $100,000 in exchange for shares of common stock. There are two effects of this transaction:
- The corporation receives cash, which is recorded as a corporation asset.
- The corporation issues shares of common stock. The amount received for the shares will be recorded as part of the corporation's stockholders' equity.
Here's how the transaction will impact the accounting equation and the company's balance sheet:
Here is what will occur in the general ledger accounts:
If this transaction is entered in a general journal, it would appear as follows:
Revenues increase stockholders' equity (which is on the right side of the accounting equation).
Therefore the balances in the revenue accounts will be on the right side.
To illustrate, let's assume that a company provides a service and bills the customer $400 with the amount due in 30 days. Two things occur:
- Revenues of $400 are earned and that causes stockholders' equity to increase.
- The company earns the right to receive $400. This increases the company's asset account Accounts Receivable.
Here's the effect on the accounting equation and the company's balance sheet as a result of earning the revenues:
Here is what occurs in the general ledger accounts:
Note: Even though stockholders' equity will increase, the transaction is recorded in the account Service Revenues. The reason is that we want the amount of revenues to be reported on the current period's income statement. (In other words, we temporarily credit Service Revenues instead of crediting the stockholders' equity account Retained Earnings. At the end of the accounting year, the balances in all of the income statement accounts will be closed/transferred to Retained Earnings.)
If this transaction were entered in a general journal, it would appear as follows:
Expenses decrease stockholders' equity (which is on the right side of the accounting equation).
Therefore expense accounts will have their balances on the left side.
To reduce the normal credit balance in stockholders' equity accounts, a debit will be needed. Hence, the accounts such as Rent Expense, Advertising Expense, etc. will have their balances on the left side.
For example, when a company pays cash of $176 for advertising materials that are distributed immediately at a local event, two things occur:
- An expense of $176 occurred and the expense will cause stockholders' equity to decrease.
- The company has reduced its asset Cash by $176.
The effect on the accounting equation and the company's balance sheet is:
The effect on the company's general ledger accounts is shown here:
Note: Even though this expense causes stockholders' equity to decrease, the transaction is recorded in the account Advertising Expense. The reason is that we want the current period's income statement to report this expense. (In other words, we temporarily debit Advertising Expense instead of debiting the stockholders' equity account Retained Earnings. At the end of the accounting year, all of the balances in the income statement accounts will be closed/transferred to Retained Earnings.)
If this transaction were entered in a general journal, it would appear as follows:
A few tips about debits and credits:
- When cash is received, debit Cash.
- When cash is paid out, credit Cash.
- When revenues are earned, credit a revenue account.
- When expenses are incurred, debit an expense account.
Here are some common transactions with the appropriate debits and credits:
QuickMBA / Accounting / Debits and Credits
Debits and Credits
In double entry accounting, rather than using a single column for each account and entering some numbers as positive and others as negative, we use two columns for each account and enter only positive numbers. Whether the entry increases or decreases the account is determined by choice of the column in which it is entered. Entries in the left column are referred to as debits, and entries in the right column are referred to as credits.
Two accounts always are affected by each transaction, and one of those entries must be a debit and the other must be a credit of equal amount. Actually, more than two accounts can be used if the transaction is spread among them, just as long as the sum of debits for the transaction equals the sum of credits for it.
The double entry accounting system provides a system of checks and balances. By summing up all of the debits and summing up all of the credits and comparing the two totals, one can detect and have the opportunity to correct many common types of bookkeeping errors.
To avoid confusion over debits and credits, avoid thinking of them in the way that they are used in everyday language, which often refers to a credit as increasing an account and a debit as decreasing an account. For example, if our bank credits our checking account, money is added to it and the balance increases. In accounting terms, however, if a transaction causes a company's checking account to be credited, its balance decreases. Moreover, crediting another company account such as accounts payable will increase its balance. Without further explanation, it is no wonder that there often is confusion between debits and credits.
The confusion can be eliminated by remembering one thing. In accounting, the verbs "debit" and "credit" have the following meanings:
"Enter in the left column of" Credit
"Enter in the right column of"
Thats all. Debit refers to the left column; credit refers to the right column. To debit the cash account simply means to enter the value in the left column of the cash account. There are no deeper meanings with which to be concerned.
The reason for the apparent inconsistency when comparing everyday language to accounting language is that from the bank customer's perspective, a checking account is an asset account. From the bank's perspective, the customer's account appears on the balance sheet as a liability account, and a liability account's balance is increased by crediting it. In common use, we use the terminology from the perspective of the bank's books, hence the apparent inconsistency.
Whether a debit or a credit increases or decreases an account balance depends on the type of account. Asset and expense accounts are increased on the debit side, and liability, equity, and revenue accounts are increased on the credit side. The following chart serves as a graphical reference for increasing and decreasing account balances:
Assets = Liabilities + Owner's Equity
Cash = + Debit - Credit
A/P = - Debit + Credit
Retained Earnings = - Debit+Credit
Expense = + Debit - Credit
Revenue = - Debit + Credit
The previous chapter showed how transactions caused financial statement amounts to change. “Before” and “after” examples were used to develop the illustrations. Imagine if a real business tried to keep up with its affairs this way! Perhaps a giant NYer board could be set up in the accounting department. As transactions occurred, they would be communicated to the department and the NYer board would be updated. Chaos would quickly rule. Even if the business could manage to figure out what its financial statements were supposed to contain, it probably could not systematically describe the transactions that produced those results. Obviously, a system is needed.
It is imperative that a business develop a reliable accounting system to capture and summarize its voluminous transaction data. The system must be sufficient to fuel the preparation of the financial statements, and be capable of maintaining retrievable documentation for each and every transaction. In other words, some transaction logging process must be in place.
In general terms, an accounting system is a system where transactions and events are reliably processed and summarized into useful financial statements and reports. Whether this system is manual or automated, the heart of the system will contain the basic processing tools: accounts, debits and credits, journals, and the general ledger. This chapter will provide insight into these tools and the general structure of a typical accounting system.
The records that are kept for the individual asset, liability, equity, revenue, expense, and dividend components are known as accounts. In other words, a business would maintain an account for cash, another account for inventory, and so forth for every other financial statement element. All accounts, collectively, are said to comprise a firm’s general ledger. In a manual processing system, imagine the general ledger as nothing more than a notebook, with a separate page for every account. Thus, one could thumb through the notebook to see the “ins” and “outs” of every account, as well as existing balances. The following example reveals that cash has a balance of $63,000 as of January 12. By examining the account, one can see the various transactions that caused increases and decreases to the $76,000 beginning- of-month cash balance.
In many respects, this Cash account resembles the “register” one might keep for a wallet-style checkbook. A balance sheet on January 12 would include cash for the indicated amount (and, so forth for each of the other accounts comprising the entire financial statements). Notice that column headings for this illustrative Cash account included “increase” and “decrease” labels. In actuality, these labels would instead be “debit” and “credit.” The reason for this distinction will become apparent in the following discussion.
Debits and Credits
References to debits and credits are quite common. A business may indicate it is “crediting” an account. “Debit” cards may be used to buy goods. Debits and credits (abbreviated “dr” and “cr”) are unique accounting tools to describe the change in a particular account that is necessitated by a transaction. In other words, instead of saying that cash is “increased” or “decreased,” it is said that cash is “debited” or “credited.” This method is again traced to Pacioli, the Franciscan monk who is given credit for the development of our enduring accounting model. Why add this complexity — why not just use plus and minus like in the previous chapter? There is an ingenious answer to this question that will soon be discovered!
Understanding the answer to this question begins by taking note of two very important observations:
(1) every transaction can be described in debit/credit form
(2) for every transaction, debits = credits
The Fallacy of a “+/-” System
The second observation above would not be true for an increase/decrease system. For example, if services are provided to customers for cash, both cash and revenues would increase (a “+/+” outcome). On the other hand, paying an account payable causes a decrease in cash and a decrease in accounts payable (a “-/-” outcome). Finally, some transactions are a mixture of increase/decrease effects; using cash to buy land causes cash to decrease and land to increase (a “-/+” outcome). In the previous chapter, the “+/-” nomenclature was used for the various illustrations. Take time to review the comprehensive illustration that was provided in Chapter 1, and notice that various combinations of pluses and minuses were needed.
As one can tell by reviewing the illustration, the “+/-” system lacks internal consistency. Therefore, it is easy to get something wrong and be completely unaware that something has gone amiss. On the other hand, the debit/credit system has internal consistency. If one attempts to describe the effects of a transaction in debit/credit form, it will be readily apparent that something is wrong when debits do not equal credits. Even modern computerized systems will challenge or preclude any attempt to enter an “unbalanced” transaction that does not satisfy the condition of debits = credits.
The debit/credit rules are built upon an inherently logical structure. Nevertheless, many students will initially find them confusing, and somewhat frustrating. This is a bit similar to learning a new language. As such, memorization usually precedes comprehension. Take time now to memorize the “debit/credit” rules that are reflected in the following diagrams. Going forward, one needs to have instant recall of these rules, and memorization will allow the study of accounting to continue on a much smoother pathway. Full comprehension will follow in short order.
As shown at left, asset, expense and dividend accounts each follow the same set of debit/credit rules. Debits increase these accounts and credits decrease these accounts. These accounts normally carry a debit balance. To aid recall, rely on this mnemonic: D-E-A-D = debits increase expenses, assets, and dividends.
Liability, revenue, and equity accounts each follow rules that are the opposite of those just described. Credits increase liabilities, revenues, and equity, while debits result in decreases. These accounts normally carry a credit balance.
It is now apparent that transactions and events can be expressed in “debit/credit” terminology. In essence, accountants have their own unique shorthand to portray the financial statement consequence for every recordable event. This means that as transactions occur, it is necessary to perform an analysis to determine (a) what accounts are impacted and (b) how they are impacted (increased or decreased). Then, debits and credits are applied to the accounts, utilizing the rules set forth in the preceding paragraphs.
Usually, a recordable transaction will be evidenced by a source document. A disbursement will be supported by the issuance of a check. A sale might be supported by an invoice issued to a customer. A time report may support payroll costs. A tax statement may document the amount paid for taxes. A cash register tape may show cash sales. A bank deposit slip may show collections of customer receivables. Suffice it to say, there are many potential source documents, and this is just a small sample. Source documents usually serve as the trigger for initiating the recording of a transaction. The source documents are analyzed to determine the nature of a transaction and what accounts are impacted. Source documents should be retained (perhaps in electronic form) as an important part of the records supporting the various debits and credits that are entered into the accounting records. To illustrate, assume that Jill Aoki is an architect. Concurrent with delivering completed blueprints to one of her clients, she also prepared and presented an invoice for $2,760. The invoice is the source document evidencing the completed work for which payment is now due. Therefore, Accounts Receivable is to be increased (debited) and Revenues must be increased (credited). When her client pays, the resulting bank deposit receipt will provide evidence for an entry to debit Cash (increased) and credit Accounts Receivable (decreased).
A properly designed accounting system will have controls to make sure that all transactions are fully captured. It would not do for transactions to slip through the cracks and go unrecorded. There are many such safeguards that can be put in place, including use of prenumbered documents and regular reconciliations. For example, an individual might maintain a checkbook for recording cash disbursements. A monthly reconciliation should be performed to make sure that the checkbook accounting system has correctly reflected all disbursements. A business must engage in similar activities to make sure that all transactions and events are recorded correctly. Good controls are essential to business success. Much of the work performed by a professional accountant relates to the design, implementation, and evaluation of properly functioning control systems.
An Account’s Balance
The balance of a specific account can be determined by considering its beginning (of period) balance, and then netting or offsetting all of the additional debits and credits to that account during the period. Earlier, an illustration for a Cash account was presented. That illustration was developed before the introduction of debits and credits. However, accounts are maintained by using the debit/ credit system. The Cash account is repeated below, except that the increase/decrease columns have been replaced with the more traditional debit/credit column headings. A typical Cash account would look similar to this illustration:
Bear in mind that each of the debits and credits to Cash shown in the preceding illustration will have some offsetting effect on another account. For instance, the $10,000 debit on January 2 would be offset by a $10,000 credit to Accounts Receivable. The process by which this occurs will become clear in the following sections of this chapter.
A Common Misunderstanding About Credits
Many people wrongly assume that credits always reduce an account balance. However, a quick review of the debit/credit rules reveals that this is not true. Where does this notion come from? Probably because of the common phrase “we will credit your account.” This wording is often used when one returns goods purchased on credit. Carefully consider that the account (with the store) is on the store’s books as an asset account (specifically, an account receivable). Thus, the store is reducing its accounts receivable asset account (with a credit) when it agrees to credit the account. On the customer’s books one would debit (decrease) a payable account (liability).
On the other hand, some may assume that a credit always increases an account. This incorrect notion may originate with common banking terminology. Assume that Matthew made a deposit to his account at Monalo Bank. Monalo’s balance sheet would include an obligation (“liability”) to Matthew for the amount of money on deposit. This liability would be credited each time Matthew adds to his account. Thus, Matthew is told that his account is being “credited” when he makes a deposit.
Asset accounts are one of the three major classifications of balance sheet accounts:
- Stockholders' equity (or owner's equity)
The ending balances in the balance sheet accounts will be carried forward to the next accounting year. Hence the balance sheet accounts are called permanent accounts or real accounts.
The asset accounts are usually listed first in the company's chart of accounts and in the general ledger. In the general ledger the asset accounts will normally have debit balances.
The balances in some of the asset accounts will be combined and presented as a single amount when the balance sheet is prepared. For example, if a company has ten checking accounts, the balances will be combined and the total amount will be reported on the balance sheet as the asset Cash.
Assets include the things or resources that a company owns, that were acquired in a transaction, and have a future value that can be measured. Assets also include some costs that are prepaid or deferred and will become expenses as the costs are used up over time.
Here are some examples of asset accounts:
- Short-term Investments
- Accounts Receivable
- Allowance for Doubtful Accounts (a contra-asset account)
- Accrued Revenues/Receivables
- Prepaid Expenses
- Long-term Investments
- Furniture and Fixtures
- Accumulated Depreciation (a contra-asset account)
Descriptions of asset accounts
The following are brief descriptions of some common asset accounts.
Cash includes currency, coins, checking account balances, petty cash funds, and customers' checks that have not yet been deposited. A company is likely to have a separate general ledger account for each checking account, petty cash fund, etc. but will combine the amounts and will report the total as Cash (or Cash and Cash Equivalents) on the balance sheet.
Short-term or temporary investments may include certificates of deposit, bonds, notes, etc. that will mature in less than one year. It may also include investments in the common or preferred stock of another corporation if the stock can be easily sold on a stock exchange.
Accounts receivable is a right to receive an amount as the result of delivering goods or services on credit. Under the accrual method of accounting, Accounts Receivable is debited at the time of a credit sale. Later, when the customer pays the amount owed, the company will credit Accounts Receivable (and will debit Cash).
Allowance for Doubtful Accounts
The Allowance for Doubtful Accounts is a contra-asset account since its balance is intended to be a credit balance (or a zero balance). When the balance in this account is combined with the balance in Accounts Receivable, the resulting amount is known as the net realizable value of the receivables. The Allowance for Doubtful Accounts is used under the allowance method of reporting bad debts expense.
Under the accrual method of accounting, revenues are to be reported when goods or services have been delivered even if a sales invoice has not been generated. This account will report the amounts that a company has a right to receive but the sales invoices have yet to be prepared or entered in Accounts Receivable.
These are future expenses that have already been paid. The amounts appear as assets until the costs have been used up or expire. A common example of a prepaid expense is the payment for vehicle insurance. To illustrate this, let's assume that on December 29, a new company pays $6,000 for the insurance covering its vehicles for the six-month period that will begin on January 1. As of December 31, the entire $6,000 will be a prepaid expense because none of the cost has expired. Since none of the cost expired in December, there is no insurance expense in December. The insurance expense will begin in January at a rate of $1,000 per month. This is depicted in the following charts which are available on Google search.
*The expense is the amount that is expiring during the month.
**The prepaid amounts are the unexpired amounts and should be the balance in the asset account Prepaid Expenses or Prepaid Insurance at the end of each of the months.
Inventory is the cost of goods that have been purchased or manufactured and have not yet been sold.
Supplies could be office supplies, manufacturing supplies, packaging supplies or other supplies that are on hand. The cost of the supplies that remain on hand is reported as an asset.
This account or asset category will be reported on the balance sheet immediately following current assets. It may include investments in the common stock, preferred stock, and bonds of another corporation. It also includes real estate being held for sale and also the money that is restricted for a long-term purpose such as a building project or the repurchase of bonds payable. The cash surrender value of a life insurance policy owned by a company is also reported under this asset heading.
This account represents the property portion of the balance sheet heading "Property, plant and equipment." It reports the cost of land used in a business. Since land is assumed to last indefinitely, the cost of land is not depreciated.
This account will report the cost of the building used in the business. The cost of buildings will be depreciated over their useful lives.
This account reports the cost of the machinery and equipment used in the business. The cost of equipment will be depreciated over the equipment's useful life.
This account reports the cost of trucks, trailers, and automobiles used in the business. The cost of vehicles is to be depreciated over the vehicles' useful lives.
Furniture and Fixtures
This account reports the cost of desks, chairs, shelving, etc. that are used in the business. The cost of furniture and fixtures is to be depreciated over the useful lives.
Accumulated Depreciation is known as a contra asset account because it has a credit balance instead of a debit balance that is typical for asset accounts. Whenever Depreciation Expense is debited for the periodic depreciation of the buildings, equipment, vehicles, etc. the account Accumulated Depreciation is credited. The credit balance in Accumulated Depreciation will continue to grow until an asset is sold or scrapped. However, the maximum amount of the credit balance is the cost of the asset(s).
Liability and Stockholders' Equity Accounts
A company's liability accounts appear in the chart of accounts, general ledger, and balance sheet immediately following the asset accounts. In the general ledger, the liability accounts will usually have credit balances.
Note: Liabilities are a company's obligations. They are the amounts that the company owes. Liabilities also include amounts received from customers in advance of being earned.
Here are some examples of liability accounts:
- Short-term Loans Payable
- Current Portion of Long-term Debt
- Accounts Payable
- Accrued Expenses
- Unearned or Deferred Revenues
- Installment Loans Payable
- Mortgage Loans Payable
Descriptions of liability accounts
The following are brief descriptions of some common liability accounts.
Short-term Loans Payable
This account will report the amount of loans which will be due within one year of the date of the balance sheet.
Current Portion of Long-term Debt
This account or line description reports the principal portion of a long-term debt that will have to be paid within one year of the date of the balance sheet. (The portion of the debt that is not due within one year is reported as a noncurrent liability.)
Accounts Payable is the account containing the amounts owed to suppliers for invoices that have been approved and entered for payment. The balance in this account reports the amount of those invoices which are unpaid.
Under the accrual method, the amounts in this account are owed but have not yet been recorded in Accounts Payable. This account could include the vendor invoices awaiting processing, employee wages and benefits earned but not yet recorded, and other expenses incurred but not yet recorded.
Unearned or Deferred Revenues
Unearned revenues reports the amounts received in advance of having been earned. For example, if a law firm requires that a client pay $4,000 in advance for future legal work, the law firm will record the cash of $4,000 and also the liability to deliver $4,000 of legal services. The law firm cannot report the $4,000 as revenue until it is earned. This liability account could have the title Unearned Revenues or Deferred Legal Fees. As the legal services are performed and therefore are earned, the law firm will reduce the liability account and will report the amount as revenues.
Installment Loans Payable
Installment loans are loans that require a series of payments. A common example is a three-year automobile loan that requires monthly payments. The principal due within one year of the balance sheet date will be reported as a current liability and the remainder of the principal owed will be reported as a noncurrent liability. (The future interest is not recorded as a liability, since it is not due or payable as of the date of the balance sheet.)
Mortgage Loans Payable
Mortgage loans are usually long-term loans with real estate pledged as collateral. The principal due within one year of the balance sheet will be reported as a current liability and the remainder of the principal owed is reported as a noncurrent liability. (The future interest is not recorded as a liability, since it is not due or payable as of the date of the balance sheet.)
Stockholders' Equity Accounts
The stockholders' equity accounts of a corporation will appear in the chart of accounts, general ledger, and balance sheet immediately following the liability accounts. In the general ledger most of the stockholders' equity accounts will have credit balances. The following are brief descriptions of typical stockholders' equity accounts.
Paid-in capital is a subheading within stockholders' equity which indicates the amount paid to the corporation at the time that shares of stock were issued. Paid-in capital is also referred to as permanent capital. Every corporation will have common stock and a small percentage of corporations will have preferred stock in addition to common stock.
The paid-in capital accounts report the amounts received when the corporation's stock was issued. Often there are two accounts for the common stock:
- Par value of the common stock, and
- Paid-in capital in excess of the par value of the common stock
If a corporation also issued preferred stock, there will also be two additional accounts.
If a corporation's common stock has a par value or a stated value, only the par or stated value of the shares issued will be recorded in this account. However, if a corporation's common stock has neither a par value nor a stated value, the entire amount received by the corporation at the time that the shares were issued will be recorded in this account.
Paid-in Capital in Excess of Par Value - Common Stock
When a corporation issues common stock, the amount received minus the par value or stated value is recorded in this account. (The par value of common stock is recorded in the account Common Stock.)
Generally, the amount of a corporation's retained earnings is the cumulative amount of earnings (net income) since the corporation was formed minus the cumulative amount of dividends that have been declared since the corporation was formed.
The current accounting period's earnings (or net income) will be added to this account and the current period's dividends will be deducted.
Note: Revenues will cause retained earnings to increase, while expenses will cause retained earnings to decrease.
Retained earnings is a component of stockholders' equity, but it is separate from paid-in capital. Hence, the amounts reported under retained earnings are not considered to be permanent capital.
Income Statement Accounts
The income statement accounts are categorized in a variety of ways. Here are the classifications we will be using:
- Operating revenues
- Operating expenses
- Other revenues and gains
- Other expenses and losses
The amounts in these accounts at the end of an accounting year will not be carried forward to the subsequent year. Rather, the balances in the income statement accounts will be transferred to Retained Earnings (for a corporation) or to the owner's capital account (for a sole proprietorship). This will allow for all of the income statement accounts to begin each accounting year with zero balances. This explains why the income statement accounts are referred to as temporary accounts.
Operating revenues are the amounts earned from carrying out the company's main activities. For example, the sales of merchandise are a retailer's operating revenues.
A few examples of accounts for recording operating revenues include:
- Sales Revenues
- Service Revenues
- Fees Earned
- Sales - Product Line #1
- Sales - Product Line #2
The revenue accounts are expected to have credit balances (since revenues cause the stockholders' or owner's equity to increase). Contra revenue accounts such as Sales Returns and Allowances and Sales Discounts will have debit balances.
Under the accrual method of accounting, revenues are reported as of the date the goods are sold or the services have been performed. If a service is provided on December 27, but the customer is allowed to pay in February, the revenues are reported on the income statement that includes December 27.
At the end of the accounting year, the balance in each of the accounts for recording operating revenues will be closed in order to start the next accounting year with a zero balance.
Operating expenses are the expenses incurred in earning operating revenues. For example, advertising expense is one of the operating expenses of a retailer.
A few of the many accounts used to record operating expenses include:
- Cost of Goods Sold
- Cost of Goods Sold - Product Line #1
- Salaries Expense
- Fringe Benefit Expense
- Rent Expense
- Utilities Expense
- Utilities Expense - Store #45
- Depreciation Expense - Buildings
- Depreciation Expense - Equipment
- Repairs Expense
The accounts for operating expenses should have debit balances.
Under the accrual method of accounting, the expenses should be reported in the same accounting period as the related revenues. If that is not certain, then an expense should be reported in the accounting period in which its cost expires or is used up.
Expenses are often organized by function such as manufacturing, selling, and general administrative. At other times expenses will be organized by responsibility such as Department #1, Sales Region #5, Warehouse #2, Legal Department, etc.
At the end of the accounting year, the balance in each of the accounts used for recording operating expenses will be closed in order to start the next accounting year with a zero balance.
Non-Operating Revenues and Gains
Revenues earned outside of a company's main business activities are referred to as non-operating revenues or as other revenues. For example, the interest earned by a retailer on its idle cash balances is part of non-operating or other revenues.
Gains often occur when a company sells an asset that was used in the business, and the cash received was greater than the asset's carrying amount on the company's books. For example, if a company car is sold for $10,000 and its book value is $9,000, there will be a gain of $1,000.
The accounts that report non-operating revenues, other revenues, and gains are expected to have credit balances since they cause stockholders' equity to increase.
Non-Operating Expenses and Losses
The expenses incurred in order to earn non-operating revenues are reported as non-operating expenses or other expenses. In addition, interest expense for a retailer is a non-operating expense or other expense. (On the other hand, the interest expense paid by a bank for the use of depositors' money is one of the bank's operating expenses.)
Losses are reported when a company disposes of a long-term asset for the cash, and the amount of cash received is less than the book value of the asset. For example, if a company car is sold for $7,760 and its book value is $9,000, a loss of $1,760 will be reported. Another example of a loss is the loss from a lawsuit.
The accounts for non-operating expenses and losses will have debit balances since they cause stockholders' equity to decrease.
With sophisticated accounting software and inexpensive computers, it is no longer practical for most businesses to manually enter transactions into journals and then to post to the general ledger accounts and subsidiary ledger accounts. Today, software such as QuickBooks* will update the relevant accounts and provide more information with a minimum of data entry.
*QuickBooks is a registered tradeNY of Intuit Inc. AccountingCoach LLC is not affiliated with Intuit Inc. and does not receive any affiliate NYeting commissions from Intuit.
In this section we will highlight how the accounting software will capture financial transactions and then automatically update the general ledger and store the information for management's future use.
When accounting software is used to enter the invoices received from suppliers (vendor invoices), the software will update Accounts Payable and will require that the account or accounts that should be debited be entered as well. The accounting software's vendor files also allow a company to prepare purchase orders, receiving tickets and to pay the vendors' invoices.
A company should have internal controls so that only legitimate invoices are recorded and paid.
When the accounting software is used to write checks, the software will automatically credit the Cash account and will require that another account be designated for the debit. An additional benefit is that the amounts will move electronically and the account balances will be automatically calculated with speed and accuracy.
Again, a company should have internal controls to ensure that only legitimate payments are processed.
Sales on credit
When the accounting software is used to prepare a sales invoice for a customer who purchased on credit, the customer's detail will be updated, the general ledger account Sales will be credited and the general ledger account Accounts Receivable will be debited. Statements for each customer and an aging of all of the accounts receivable can be printed with the click of a button.
Another source of financial transactions is the company's payroll. While many companies process payroll on their accounting software, others opt to outsource payroll to companies such as ADP, Paychex, Intuit, or local firms.
(AccountingCoach is not affiliated with any of these companies and it does not receive affiliate NYeting commissions from any of them.)
To learn more about payroll use any of the following links:
- Questions and Answers (Q&A)
- Crossword Puzzles
The purpose of the bank reconciliation is to be certain that the financial statements are reporting the correct amount of cash and the proper amounts for any related accounts (since every transaction affects a minimum of two accounts).
The bank reconciliation process involves:
- Comparing the following amounts
- The balance on the bank statement
- The balance in the company's general ledger account. (The account title might be Cash - checking.)
- Determining the reasons for the difference in the amounts shown in 1.
The common reasons for a difference between the bank balance and the the general ledger book balance are:
- Outstanding checks (checks written but not yet clearing the bank)
- Deposits in transit (company receipts that are not yet deposited in the bank)
- Bank service charges and other bank fees
- Check printing charges
- Errors in entering amounts in the company's general ledger
The outstanding checks and deposits in transit do not involve errors by either the company or the bank. Since these items are already recorded in the company's accounts, no additional entries to the company's general ledger accounts will be needed.
Bank charges, check printing fees and errors in the company's accounts do require the company to make accounting entries. The company should make the entries before the financial statements are prepared since a minimum of two accounts have the incorrect balances (due to double-entry accounting). Here is an entry for a bank service charge that was listed on the bank statement:
Bank fees expense 76 USD
CASH – CHECKING ACCOUNT 76 USD
If the reconciliation reveals that an incorrect amount has been recorded in the company's Cash account, perhaps the easiest way to correct the error is to remove the incorrect amount and then enter the correct amount.
Accounting software is likely to include a feature for reconciling the bank statement.
Why adjusting entries are needed
In order for a company's financial statements to be complete and to reflect the accrual method of accounting, adjusting entries must be processed before the financial statements are issued. Here are three situations that describe why adjusting entries are needed:
Not all of a company's financial transactions that pertain to an accounting period will have been processed by the accounting software as of the end of the accounting period. For example, the bill for the electricity used during December might not arrive until January 10. (The reason for the 10-day lag is that the electric utility reads the meters on January 1 in order to compute the electricity actually used in December. Next the utility has to prepare the bill and mail it to the company.)
Sometimes a bill is processed during the accounting period, but the amount represents the expense for one or more future accounting periods. For example, the bill for the insurance on the company's vehicles might be $6,000 and covers the six-month period of January 1 through June 30. If the company is required to pay the $6,000 in advance at the end of December, the expense needs to be deferred so that $1,000 will appear on each of the monthly income statements for January through June.
Something similar to Situation 2 occurs when a company purchases equipment to be used in the business. Let's assume that the equipment is acquired, paid for, and put into service on May 1. However, the equipment is expected to be used for ten years. If the cost of the equipment is $120,000 and will have no salvage value, then each month's income statement needs to report $1,000 for 120 months in order to report depreciation expense under the straight-line method.
These three situations illustrate why adjusting entries need to be entered in the accounting software in order to have accurate financial statements. Unfortunately the accounting software cannot compute the amounts needed for the adjusting entries. A bookkeeper or accountant must review the situations and then determine the amounts needed in each adjusting entry.
Steps for Recording Adjusting Entries
Some of the necessary steps for recording adjusting entries are
- You must identify the two or more accounts involved
- One of the accounts will be a balance sheet account
- The other account will be an income statement account
- You must calculate the amounts for the adjusting entries
- You will enter both of the accounts and the adjustment in the general journal
- You must designate which account will be debited and which will be credited.
Types of Adjusting Entries
We will sort the adjusting entries into five categories.
Types of Adjusting Journal Entries
Accrual accounting requires a business to record revenues and expenses in the period in which they are earned or incurred, regardless of when payment occurs. When payment occurs on a date that is different from the date on which a company actually earns or incurs a revenue or expense, the company creates an adjusting journal entry to record the revenue or expense in the appropriate period. There are four types of adjusting journal entries used in a small business.
Accrued revenue occurs when you make a sale and collect payment at a later date. An adjusting entry to record accrued revenue increases the revenue account and the accounts receivable account by the amount of the sale. Accounts receivable shows the amount customers owe you. For example, assume your small business sold a $100 product in the current period and will collect payment in the next period. You create an adjusting journal entry in the current period that adds $100 to your revenue account and adds $100 to accounts receivable.
Under the accrual method of accounting, a business is to report all of the revenues (and related receivables) that it has earned during an accounting period. A business may have earned fees from having provided services to clients, but the accounting records do not yet contain the revenues or the receivables. If that is the case, an accrual-type adjusting entry must be made in order for the financial statements to report the revenues and the related receivables.
If a business has earned $5,000 of revenues, but they are not recorded as of the end of the accounting period, the accrual-type adjusting entry will be as follows:
An accrued expense is one that you incur but have not yet paid. An adjusting entry to record an accrued expense increases the expense account that corresponds to the expense incurred and increases the appropriate payable account. A payable account shows the amount you owe other parties. For example, if your small business accrues a $5,000 expense for salaries in the current period and will pay your employees in the next period. You add $5,000 to the salaries expense account and to the salaries payable account in an adjusting journal entry.
Under the accrual method of accounting, the financial statements of a business must report all of the expenses (and related payables) that it has incurred during an accounting period. For example, a business needs to report an expense that has occurred even if a supplier's invoice has not yet been received.
To illustrate, let's assume that a company utilized a worker from a temporary personnel agency on December 27. The company expects to receive an invoice on January 2 and remit payment on January 9. Since the expense and the payable occurred in December, the company needs to accrue the expense and liability as of December 31 with the following adjusting entry:
Deferred, or unearned, revenue occurs when you receive cash up front for services you will provide in the future. As you provide the services to earn the revenue, you create an adjusting entry that increases the revenue account and reduces the unearned revenue account by the amount earned. For example, assume your small business collected $100 at the beginning of the month to provide a monthly service. At the end of the month, you create an adjusting entry that adds $100 to the revenue account and reduces unearned revenue by $100.
Under the accrual method of accounting, the amounts received in advance of being earned must be deferred to a liability account until they are earned.
Let's assume that Servco Company receives $4,000 on December 10 for services it will provide at a later date. Prior to issuing its December financial statements, Servco must determine how much of the $4,000 has been earned as of December 31. The reason is that only the amount that has been earned can be included in December's revenues. The amount that is not earned as of December 31 must be reported as a liability on the December 31 balance sheet.
If $3,000 has been earned, the Service Revenues account must include $3,000. The remaining $1,000 that has not been earned will be deferred to the following accounting period. The deferral will be evidenced by a credit of $1,000 in a liability account such as Deferred Revenues or Unearned Revenues.
The adjusting entry for this deferral depends on how the receipt of $4,000 was recorded on December 10. If the receipt of $4,000 was recorded with a credit to Service Revenues (and a debit to Cash), the December 31 adjusting entry will be:
A deferred, or prepaid, expense is one for which you paid cash up front at an earlier date but which you have not yet incurred. As you incur the expense, you create an adjusting entry that increases the appropriate expense account and reduces the prepaid expense account. For example, if your small business prepaid $1,000 for rent at the beginning of the month. You create an adjusting entry at the end of the month that adds $1,000 to the rent expense account and reduces the prepaid rent account by $1,000.
. Deferred expenses
Under the accrual method of accounting, any payments for future expenses must be deferred to an asset account until the expenses are used up or have expired.
To illustrate, let's assume that a new company pays $6,000 on December 27 for the insurance on its vehicles for the six-month period beginning January 1. For December 27 through 31, the company should have an asset Prepaid Insurance or Prepaid Expenses of $6,000.
In each of the months January through June, the company must reduce the asset account by recording the following adjusting entry:
Depreciation is associated with fixed assets (or plant assets) that are used in the business. Examples of fixed assets are buildings, machinery, equipment, vehicles, furniture, and other constructed assets used in a business and having a useful life of more than one year. (However, land is not depreciated.)
Depreciation allocates the asset's cost (minus any expected salvage value) to expense in the accounting periods in which the asset is used. Hence, office equipment with a useful life of 5 years and no salvage value will mean monthly depreciation expense of 1/76 of the equipment's cost. A building with a useful life of 25 years and no salvage value will result in a monthly depreciation expense of 1/300 of the building's cost.
The first two categories of adjusting entries that we had discussed above were:
- Accrued revenues
- Accrued expenses
These categories are also referred to as accrual-type adjusting entries or simply accruals. Accrual-type adjusting entries are needed because some transactions had occurred but the company had not entered them into the accounts as of the end of the accounting period. In order for a company's financial statements to include these transactions, accrual-type adjusting entries are needed.
In all likelihood, an actual transaction (that required an accrual-type adjusting entry) will get routinely processed and recorded in the next accounting period. This presents a potential problem in that the transaction could get entered into the accounting records twice: once through the adjusting entry and also when it is routinely processed in the subsequent accounting period. The purpose of reversing entries is to remove the accrual-type adjusting entries.
Reversing entries will be dated as of the first day of the accounting period immediately following the period of the accrual-type adjusting entries. In other words, for a company with accounting periods which are calendar months, an accrual-type adjusting entry dated December 31 will be reversed on January 2.
To illustrate, let's assume that the company had accrued repairs expenses with the following adjusting entry on December 31:
Repair Expense = 7600
Accrued Liabilities = 7600
This accrual-type adjusting entry was needed so that the December repairs would be reported as 1) part of the expenses on the December income statement, and 2) a liability on the December 31 balance sheet.
On January 2, the following reversing entry is recorded in order to remove the accrual-type adjusting entry of December 31:
Accrued Liabilities = 7600
Repair Expense = 7600
The reversing entry removes the liability established on December 31 and also puts a credit balance in the Repairs Expense account on January 2. When the vendor's invoice is processed in January, it can be debited to Repairs Expenses (as would normally happen). If the vendor's invoice is $6,000 the balance in the account Repairs Expenses will show a $0 balance after the invoice is entered. (The $6,000 credit from the reversing entry on January 2, plus the $6,000 debit from the vendor's invoice equals $0.) Zero is the correct amount because the expense of $6,000 belonged in December and was reported in December as the result of the December 31 adjusting entry.
Some accounting software will allow you to indicate the adjusting entries you would like to have reversed automatically in the next accounting period.
The balance sheet is one of the four main financial statements of a business:
- Balance Sheet
- Income Statement
- Cash Flow Statement
- Statement of Stockholders' Equity
The balance sheet reports a company's assets, liabilities, and stockholders' equity as of a moment in time. (The other three financial statements report amounts for a period of time such as a year, quarter, month, etc.) The balance sheet is also known as the statement of financial position and it reflects the accounting equation:
Assets = Liabilities + Stockholders' Equity.
Bankers will look at the balance sheet to determine the amount of a company's working capital, which is the amount of current assets minus the amount of current liabilities. They will also review the assets and the liabilities and compare these amounts to the amount of stockholders' equity.
When a balance sheet reports at least one additional column of amounts from an earlier balance sheet date, it is referred to as a comparative balance sheet.
Balance Sheet Classifications
Typically, companies issue a classified balance sheet. This means that the amounts are presented according to the following classifications:
Descriptions of the balance sheet classifications
The following are brief descriptions of the classifications usually found on a company's balance sheet.
Generally, current assets include cash and other assets that are expected to turn to cash within one year of the date of the balance sheet. Examples of current assets are cash and cash equivalents, short-term investments, accounts receivable, inventory and prepaid expenses.
This classification is the first of the noncurrent or long-term assets. Included are long-term investments in other companies, the cash surrender value of life insurance, bond sinking funds, real estate held for sale, and cash that is restricted for construction of plant and equipment.
Property, plant and equipment
This category of noncurrent assets includes the cost of land, buildings, machinery, equipment, furniture, fixtures, and vehicles used in the operations of a business. Except for land, these assets will be depreciated over their useful lives.
Intangible assets include goodwill, tradeNYs, patents, copyrights and other non-physical assets that were acquired at a cost. The amount reported is their cost to acquire minus any amortization or write-down due to impairment. Valuable tradeNYs and logos that were developed by a company through years of advertising are not reported because they were not purchased from another person or company.
This category often includes costs that have been paid but are being expensed over a period greater than one year. Examples include bond issue costs and certain deferred income taxes.
Current liabilities are obligations of a company that are payable within one year of the date of the balance sheet (and will require the use of a current asset or will be replaced with another current liability).
Current liabilities include loans payable that will be due within one year of the balance sheet date, the current portion of long-term debt, accounts payable, income taxes payable and liabilities for accrued expenses.
These are also referred to as long-term liabilities. In other words, these obligations will not be due within one year of the balance sheet date. Examples include portions of automobile loans, portions of mortgage loans, bonds payable, and deferred income taxes.
This section of the balance sheet consists of the following major sections:
- Paid-in capital (the amounts paid by investors when the original shares of a corporation were issued)
- Retained earnings (the earnings of the corporation since it began minus the amounts that were distributed in the form of dividends to the stockholders)
- Treasury stock (a subtraction that represents the amount paid to repurchase the corporation's own stock)
Additional information on the balance sheet
To learn more about the balance sheet use any of the following links:
- Questions and Answers (Q&A)
- Crossword Puzzles
The income statement is also known as the statement of operations, the profit and loss statement, or P&L. It presents a company's revenues, expenses, gains, losses and net income for a specified period of time such as a year, quarter, month, 13 weeks, etc.
Income Statement Formats
There are two formats for presenting a company's income statement:
The difference in formats has to do with the number of subtractions and subtotals that appear on the income statement before getting to the company's bottom line net income.
Multiple-step income statement
Note that in the following multi-step income statement, there are three subtractions:
- The first subtraction results in the subtotal gross profit.
- The second subtraction results in the subtotal operating income.
- The third subtraction provides the bottom line net income.
Single-step income statement
In the single-step format, the income statement will have only one subtraction—all of the expenses (both operating and non-operating) are subtracted from all of the revenues (both operating and non-operating). In this format, there is no subtotal for gross profit or operating income. The bottom line, net income, results from a single subtraction (a single step) as shown here:
Balance Sheet and Income Statement are Linked
As we had discussed earlier, revenues cause stockholders' equity to increase while expenses cause stockholders' equity to decrease. Therefore, a positive net income reported on the income statement (which is the result of revenues being greater than expenses) will cause stockholders' equity to increase. A negative net income will cause stockholders' equity to decrease.
The income statement accounts are temporary accounts because their balances will be closed at the end of each accounting year to the stockholders' equity account Retained Earnings. (The balances in a sole proprietorship's income statement accounts will be closed to the owner's capital account.)
The link between the balance sheet and income statement is helpful for bookkeepers and accountants who want some assurance that the amount of net income appearing on the income statement is correct. If you verify the ending balances in the relatively few balance sheet accounts, you can have confidence that the income statement has the proper net income. Hence, you are wise to establish a routine to verify all of the balance sheet amounts.
Note: This technique does not guarantee that the details within the income statement are perfect.
Here is our suggestion for reviewing the balance sheet amounts.
Another review that should be done routinely is to compare each item on the income statement to the same item on an earlier income statement. For example, the amounts for the 5-month period of the current year should be compared to the 5-month period of the previous year. If budgets are prepared, also compare this year's 5-month period to the budgeted amounts for the 5-month period.
The same holds for the balance sheet: compare the recent amounts to the amounts on the balance sheets from a year earlier and from a month earlier.
Cash Flow Statement
While the balance sheet and the income statement are the most frequently referenced financial statements, the statement of cash flows or cash flow statement is a very important financial statement.
The cash flow statement is important because the income statement and balance sheet are normally prepared using the accrual method of accounting. Hence the revenues reported on the income statement were earned but the company may not have received the money from its customers. (Many times companies allow customers to pay in 30 days or 76 days and often customers pay later than the agreed upon terms.) Similarly the expenses that are reported on the income statement have occurred, but the company may not have paid for the expense in the same period. In order to understand how cash has changed, and because many believe that "cash is king" the cash flow statement should be distributed and read at the same time as the income statement and balance sheet.
Format of the Cash Flow Statement
Within the cash flow statement, the cash receipts or cash inflows are reported as positive amounts. The cash paid out or cash outflows are reported as negative amounts.
The following table provides various ways for you to think of the positive and negative amounts that are shown on the cash flow statement:
The net total of all of the positive and negative amounts reported on the cash flow statement should equal the change in the amount of the company's cash and cash equivalents. (The company's cash and cash equivalents are reported on its balance sheets.)
The cash inflows and cash outflows which explain the change in a company's cash and cash equivalents are reported in three main sections of the cash flow statement:
- Operating activities
- Investing activities
- Financing activities
In addition to the three main sections, the cash flow statement requires the following disclosures:
- the amount of interest paid
- the amount of income taxes paid
- exchanges of major items that did not involve cash (such as exchanging land for common stock, converting bonds into common stock, etc.).
- Operating activities
The cash flows reported in the operating activities section of the cash flow statement can be presented using one of two methods:
- Direct method
- Indirect method
The direct method is recommended by the FASB. However, a survey of 760 annual reports of large U.S. corporations revealed that only about 1% had used the recommended direct method. Nearly all of the U.S. corporations in the survey used the indirect method. Hence, we will limit our discussion to the indirect method.
Indirect method, Cash Flows from Operating Activities
When the indirect method is used, the first section of the cash flow statement, Cash Flows from Operating Activities, begins with the company's net income (which is the bottom line of the income statement). Since the net income was computed using the accrual method of accounting, it needs to be adjusted in order to reflect the cash received and paid.
The very first adjustment involves depreciation. The amount of Depreciation Expense reported on the income statement had reduced the company's net income, but the depreciation entry did not involve cash. (The journal entry for the current period's depreciation was a debit to Depreciation Expense and a credit to Accumulated Depreciation. Cash was not used.) Since the depreciation expense reduced net income, but did not use any cash, the amount of depreciation expense is added back to the net income amount.
Net income $19000
Add back – depreciation expense $ 9000
So far, the Cash Flows from Operating Activities is $28,000
Any amortization or depletion expense is also added back.
Next, the operating activities will adjust the net income to reflect the changes in the amounts of current assets and current liabilities during the accounting period. For example, if accounts receivable increased from $9,760 to $9,800 during the period, we conclude that the company did not collect cash for all of the sales revenues shown on the income statement. Not collecting all of the sales amounts (or seeing accounts receivable increase) is viewed as negative for the company's cash. Hence the $300 increase in accounts receivable is shown as a negative adjustment of $300:
So far, the Cash Flows from Operating Activities is $27,700
If accounts payable increased from $3,100 to $3,376 during the period, that indicates that the company did not pay all of its expenses. Not paying the bills is good for the company's cash. Hence, the $276 increase in accounts payable will be shown as a positive amount:
So far, the Cash Flows from Operating Activities is $27,976
The changes in the current asset and the current liability accounts are reported as adjustments to the company's net income in the operating activities section—except that the change in short-term notes payable will be reported in the financing activities section.
- Investing activities
The purchasing and selling of long-term assets are reported in the second section of the cash flow statement, investing activities.
The cash flows that involve long-term assets include:
- The cash received from selling long-term assets. These are reported as positive amounts.
- The cash used to purchase long-term assets. These are reported as negative amounts.
- Financing activities
The changes in the noncurrent liabilities, stockholders' (or owner's) equity, and short-term loans are reported in the financing activities section of the cash flow statement.
The positive amounts in the financing activities section could indicate that cash was received from:
- Issuing bonds payable
- Borrowing through other long-term loans
- Issuing shares of stock
- Borrowing through short-term loans
The negative amounts indicate that cash was used for:
- Retiring (paying off) long-term debt
- Purchasing shares of the company's stock (treasury stock)
- Paying dividends to stockholders
- Repaying short-term loans
At the bottom of the cash flow statement, the net totals of the three sections are reconciled with the change in the cash and cash equivalents that are reported on the company's balance sheet.
The reporting requirements for the cash flow statement also include disclosing the amounts paid for interest and income taxes and significant noncash investing and financing activities. (Two examples of noncash investing and financing activities are converting bonds to common stock and exchanging bonds payable for land.)
Statement of Stockholders' Equity
The fourth financial statement is the statement of stockholders' equity. This statement lists the changes to the stockholders' equity section of the balance sheet during the current accounting period. A comparative statement of stockholders' equity will also report the amounts for the previous period.
To see examples of the statement of stockholders' equity we recommend that you identify a few U.S. corporations with stock that is publicly traded. On each corporation's website, select Investor Relations and then select each corporation's Form 10-K (the annual report to the Securities and Exchange Commission). Go to the section of the 10-K which presents the corporation's financial statements and view the statement of stockholders' equity.
At a minimum of once per year, companies must prepare financial statements. In addition companies often prepare quarterly and monthly financial statements which are referred to as interim financial statements.
For any of the financial statements to be accurate it is necessary to have a proper cut-off. This means including all of a company's business transactions in the proper accounting period. For example, the electricity bill arriving on January 10 might be the cost of the electricity that was actually used in December. (The time lag resulted from the utility company reading the electric meters and preparing and mailing the bill.) Hence under the accrual method of accounting, the bill received on January 10 needs to be included in December's expenses and must also be reported by the company as a liability as of December 31. Similarly, the hourly payroll processed during the first few days in January and paid on January 6 is likely to include the cost of employees working during the last few days in December. The cost of the hours worked through December 31 must be included in the company's December expenses and in the liabilities as of December 31.
As you read the previous paragraph, you may have been reminded of our discussion of adjusting entries. That's because the adjusting entries are part of each period's closing process. The adjusting entries are prepared in order to report a company's revenues and expenses in the proper accounting period.
The closing process
To achieve a proper cut-off and to distribute the financial statements in a timely manner, it is helpful to have a timeline (or PERT chart) that indicates the necessary steps in the closing process. The timeline will indicate what needs to be done and the sequence in which things need to occur. It will also reveal what is preventing the financial statements from being distributed sooner.
In addition, a checklist of the closing tasks should be prepared and distributed to the appropriate employees as to what is required, who is responsible, and the day it is due.
If some journal entries must be written every month, it is helpful to assign journal entry numbers to these standard journal entries or recurring journal entries. For example, a company may designate JE33 (Journal Entry #33) to be the recurring accrual of expenses that have occurred but have not yet been recorded in Accounts Payable as of the end of a month. Perhaps the timeline/checklist will indicate that JE33 must be submitted by the accounts payable clerk six days after each month ends. The company may also have its computer automatically prepare JE34 which is the entry that automatically reverses the previous month's accrual entry JE33.
Some recurring journal entries will have the same amount each month. For example, a company's JE10 might be $10,800 every month of the year for the company's depreciation expense. (Some companies will refer to the entries that have the same amounts and accounts every month as standard entries.)
Another recurring entry may involve the same accounts each month, but the amounts will vary from month to month. For example, a company's JE03 might be the recurring monthly entry for bad debts expense. The company has determined in advance that the amount of JE03 will be 0.002 of the company's monthly credit sales. Since the amount of sales is different every month, the amounts on JE03 will be different each month.
Having entry numbers and standard entries should help to make the monthly closings more routine and efficient.
Importance of Controls
The use of accounting software has eliminated some of the tedious tasks previously associated with bookkeeping. This could result in fewer people involved in the bookkeeping, accounting and administrative tasks. A side effect of fewer people handling more tasks is the potential for concealing some dishonest activity. For example, if the person who processes the cash receipts is also the person that records the amounts in customers' accounts, stealing some cash will be easier than if the tasks were separated. Having a third person mailing statements to customers with instructions to report any discrepancies to a fourth person will further safeguard the company's assets.
Accountants refer to the practices and policies for safeguarding assets as internal controls. Very large corporations may have a staff of internal auditors that ensure there are controls in place (including the separation of duties) so that fraud and misappropriation will not occur. Small companies or organizations with a small staff are therefore at a disadvantage. Nonetheless owners and managers of even the smallest companies and organizations must be aware of the need for internal controls. Here is a partial list of some internal controls that smaller organizations can implement:
- Separate the handling of cash from the person processing accounts receivable.
- Have the bank statement reconciled by someone who does not process the receipts or record the amounts in the general ledger cash account.
- Have the owner of a small company approve all purchase orders.
- Have the owner of a small company review all payments and sign all checks.
- Have all credit memos to customers be approved by the owner.
We are not experts in internal controls, but we realize their importance. We strongly recommend that you seek assistance from your professional accountant regarding internal controls that are appropriate for your business or organization.
You should consider our materials to be an introduction to selected accounting and bookkeeping topics, and realize that some complexities (including differences between financial statement reporting and income tax reporting) are not presented. Therefore, always consult with accounting and tax professionals for assistance with your specific circumstances.