Bookkeepers Bootcamp 2nd Edition

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101 BOOKKEEPERS’ BOOT CAMP: Get a Grip on Accounting Basics ANGIE MOHR, CA, CMA Set up efficient bookkeeping systems to save time Prepare financial statements crucial to business success Maintain proper records to keep your business running smoothly BUSINESS SERIES 101 SMALL BUSINESS for numbers 2nd edition

description

A new edition of a best-seller since 2003, this book gives you the essential financial knowledge you need when running your small business.

Transcript of Bookkeepers Bootcamp 2nd Edition

Page 1: Bookkeepers Bootcamp 2nd Edition

101BOOKKEEPERS’BOOT CAMP:

Get a Grip on Accounting

BasicsANGIE MOHR, CA, CMA

• Set up effi cient bookkeeping systems to save time

• Prepare fi nancial statements crucial to business success

• Maintain proper records to keep your business running smoothly

B U S I N E S S S E R I E S

101SMALL BUSINESS

for

numbers

EA

N

Business/Small Business

$18.95 USD/$19.95 CAD

ISBN: 978-1-77040-044-3

www.self-counsel.com

Bookkeeping can be the difference between bankruptcy and success!

Bookkeepers’ Boot Camp is the fi rst book in the Numbers 101 series. It will show you the essentials of record

keeping for a small business and why it’s necessary to track information. The book will give you a greater understanding of the purpose and process of record keeping and a deeper understanding of your business and how it works.

This book teaches you how to sort through the masses of information and paperwork, how to record what is important for your business, and how to use that infor-mation to grow your business for success!

This book includes a self-test to help you understand and reinforce what you have learned. The following topics are discussed:

• Managing the paper fl ow

• Understanding the balance sheet: defi ning what your business owns and what it owes

• Learning the basics regarding the income statement and cash fl ow statement

• Recording the sales cycle

• Learning how to account for inventory

• Monitoring your budget and cash fl ow to ensure that future cash requirements will be met

• Understanding the transactions between the company and its owners: loans, bonuses, dividends, payments made personally, and company payment of personal bills

About the author

Angie Mohr is a chartered accountant and certifi ed management accountant who has written other books in the Numbers 101 for Small Business series published by Self-Counsel Press (such as Financial Manage-ment 101 and Finance & Grow Your New Business). She is the managing director of Mohr & Company Chartered Accountants and Business Consultants. Mohr can be heard regularly on the radio with small-business survival tips, and she is also a newspaper business columnist.

Angie Mohr

2ndedition

BOOKKEEPERS’ BOOT CAMP

2nd edition

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Angie Mohr, CA, CMA

BOOKKEEPERS’ BOOT CAMP:Get a Grip on Accounting Basics

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Angie Mohr, CA, CMA

Self-Counsel Press(a division of)International Self-Counsel Press Ltd.USA Canada

BOOKKEEPERS’ BOOT CAMP:Get a Grip on Accounting Basics

101forSMALL BUSINESS

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Copyright © 2003, 2010 by International Self-Counsel Press Ltd.

All rights reserved.

No part of this book may be reproduced or transmitted in any form by any means — graphic, electronic, or mechanical — without permission in writing from the publisher, except by a reviewer who may quote brief passages in a review.

Self-Counsel Press acknowledges the fi nancial support of the Government of Canada through the Can-ada Book Fund (CBF) for our publishing activities.

First edition: 2003; Reprinted: 2004 (2); 2006; 2007

Second edition: 2010

Library and Archives Canada Cataloguing in Publication

Mohr, Angie Bookkeepers' boot camp: get a grip on accounting basics / Angie Mohr. — 2nd ed.

ISBN 978-1-77040-044-3

1. Bookkeeping. 2. Small business--Accounting. I. Title. HF5636.M63 2010 657'.9042 C2010-900023-4

Self-Counsel Press(a division of)

International Self-Counsel Press Ltd.

1704 North State Street 1481 Charlotte Road Bellingham, WA 98225 North Vancouver, BC V7J 1H1 USA Canada

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PART I: THE BASICS 1 1 Getting Started 3

The Numbers 101 for Small Business Series 4Bookkeepers’ Boot Camp 5How to Use This Book 5

2 A Brief Look at the Origins of Bookkeeping 7Double-Entry Bookkeeping 8

3 Important Concepts 9Generally Accepted Accounting Principles (GAAP) 9Stewardship 10Accrual Accounting 10Debits and Credits 11Accountants versus Bookkeepers 11

Bookkeeper 11Accountant 11

Accounting Jargon 12The Use of Estimates 12The Importance of Bookkeeping 12

4 Setting up the Record Keeping System 14What Kinds of Paper Do I Need to Keep? 14

Invoices 14Statements of account 15Deposit slips 15Supplier invoices 15Check stubs or copies 16Purchase orders 16Bank statements 16

Contents

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Canceled checks 16How Do I Account for My Source Documents? 16Where Do I Record This Information? 17

Journals and ledgers 17What Kind of Bookkeeping System Should I Get? 18

Manual journal and ledger 18Computerized bookkeeping systems 20

5 The Balance Sheet 23The Purpose of the Balance Sheet 23The Components of the Balance Sheet 24

Assets 24Capital assets 27Other assets 27

Liabilities 28Current liabilities 28Long-term liabilities 30

Equity 30Capital stock 30Capital contributions 31Retained earnings 31Dividends 31

6 The Income Statement 34The Purpose of the Income Statement 34What’s on My Income Statement? 37Interpreting the Income Statement 38The Statement of Retained Earnings: A Tag-Along 40

7 The Cash Flow Statement 42Categorizing Cash Flows 42Back to the Balance Sheet: The Basis of the Cash Flow Statement 43Putting It All Together 47What Is the Cash Flow Statement Telling Me? 47

PART 2: INTERMEDIATE TOPICS 51 8 Recording the Sales Cycle 53

What Makes up the Sales Cycle? 53

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Contents vii

Recording Cash Sales 54Real life 54Accounting world 55

Recording Credit Sales 56Real life 56Accounting world 56

Sales Discounts 56Recording Cash Receipts 57

Real life 57Accounting world 57Partial payments 57

Preparing Invoices 58Preparing Statements of Account 58Bad Debts: Analyzing Them and Writing Them off 59

Screen your customers 59Set credit limits 60Make your credit terms clear 60Follow up with monthly statements 60Call your customers when they are overdue 60Get professional help 60Pursue the debt in small claims court 61Writing off the debt 61

9 Recording the Purchases Cycle 62Purchasing Inventory 62Purchasing Supplies 64Common Cost of Goods Sold Categories 64Common Expense Categories 65Setting up the Accounts Payable Sub-ledger 67Cash Payments 68

Real life 68Accounting world 68

10 Inventory 69Inventory Tracking Systems 69Types of Inventory 69Inventory in a Manufacturing Environment 70

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Inventory Costing Methods 71Specifi c identifi cation method 72First-in, fi rst-out (FIFO) 72Last-in, fi rst-out (LIFO) 72Weighted average cost 72

Year-End Valuation 73Setting up the Inventory Count 73

11 Capital Assets 77What’s in the Cost of My Capital Assets? 77

Satellite costs 78Trade-ins 78

Depreciation: An Overview 79Land 79Buildings 79Equipment 79Tools 79Offi ce equipment 79Signage 79Computer hardware 79Computer software 79Vehicles 80

Concepts Involved in Depreciation 80Useful life 80Salvage value 80

Methods of Depreciation 80Straight-line 80Declining balance 80Sum-of-the-years-digits (SYD) 81

Accounting for Depreciation 81Accounting for Sales of Capital Assets 82

12 Leases and Loans 84Lease Transactions: An Overview 84Accounting for Operating Leases 85Accounting for Capital Leases 86

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Accounting for Loans 87Reconciling the Loan Balance 88

13 Transactions between the Company and Its Owners 89Shareholder Loans 89You Pay for a Business Expense out of Your Own Pocket 91The Company Pays for a Personal Expense 91What Happens If I Run My Business out of My House? 91

Step 1: How much space? 92Step 2: Calculating the expenses 92Capital improvements 93Repairs that affect the whole house 93Repairs that affect only the personal square footage 93Repairs that affect only the business square footage 93

Hey, the Business Uses My Car Too! 94Business mileage 94

What about Other Personal Assets Used for Business? 95Caveat 95

Setting up the Management Bonus 96Dividends 97

14 Remittances to the Government 98What Are Government Remittances? 99US Remittances to the Government 99

Employment taxes 99State sales tax 100Other remittances to the government 100

Canadian Remittances to the Government 100Payroll taxes 100Goods and Services Tax (GST) 101Other remittances to the government 102

Reconciling the Remittance Accounts 102

15 Maintaining a Petty Cash System 104Setting up the Petty Cash Fund 104Using Your Petty Cash 105Reconciling the Petty Cash Fund 105Replenishing the Petty Cash Fund 107

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16 Reconciling the Bank 109The Bank Statement Arrives 109

Outstanding checks 109Outstanding deposits 110Bank charges 110Automatic monthly payments 110Bank errors 110

The Reconciliation Process 111Items on the bank statement that are not in the ledger 112Items in your ledger that are not on your bank statement 112

What Happens If I Still Can’t Reconcile? 112Example of the Bank Reconciliation Process 113

17 When the Damn Thing Just Won’t Balance 115The Process of Reconciliation 115Backward Posting 116Transposition Error 116Addition Error 117

18 When Your Books Are Already a Mess 119Introduction 119Step 1: Organize the Mess 120Step 2: Inventory the Documents 120Step 3: Gather Missing Documents 121Step 4: Enter the Accounting Transactions 121Step 5: Reconcile to the Bank Statements 122Step 6: Create a Monthly Financial Statement Package 122Step 7: Organize your Bookkeeping for the Future 123

PART 3: ADVANCED ISSUES 125 19 The Role of the External Accountant 127

Choosing an Accountant 127The Role of the Accountant 128

Starting your business 129Year end 129Employee evaluation and compensation 129Internal controls 129

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Management operating plan 129What the Accountant Needs from You at Year End 130The Process of Creating Financial Statements 130Corporate Income Tax Returns 131Posting the Adjusting Journal Entries 132Rolling Forward the Year 132How Do You Know When You’re Outgrowing Your Accountant? 133

20 Budgeting: Planning for the Future 134But How Do I Know What’s Going to Happen in the Future? 134Setting up the 12-Month Budget 135Aren’t I Just Making up Fake Numbers? 136Changes to the Company’s Operations 136Rolling, Rolling, Rolling, Keep That Budget Rolling 138

21 Monitoring Cash Flow: How Not to Run out of Money 139What Is Cash Flow? 139What’s the Difference between Cash Flow and Net Income? 139How Do I Know When My Business Is Going to Run out of Money? 140Building Your Company’s War Chest 140How Can I Stretch My Company’s Cash Further? 141Barter: A Small-Business Owner’s Secret Weapon 142

Accounting for barter transactions 143The Future: How to Avoid the Cash Crunch before It Hits 144

22 A Brief Look at Foreign Currency 145Occasional Foreign Currency Transactions 145The Foreign Currency Bank Account 146Revaluation at Year End 147Reconciling the Foreign Currency Bank Account 147Foreign Currency Risk 147

23 Tax Planning 149Minimizing Tax versus Avoiding Tax 149What Is Tax Integration? 150Why You Need to Understand Tax Brackets 150

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Deferring Tax Owing versus Getting Rid of It Altogether 151Owner/Manager Remuneration: Getting Money out of Your Business 152

24 Graduation 153Boot Camp Test 154Boot Camp Test Answers 166

Appendix A — Glossary 175

Appendix B — Resources for the Growing Business 183

Figure1 The Operating Cycle 54

Samples1 General Journal 182 General Ledger 193 Balance Sheet 254 Partnership Equity Statement 335 Statement of Income 366 Statement of Retained Earnings 407 Comparative Balance Sheet 448 Balance Sheet with Difference 469 Cash Flow Statement 4810 Statement of Account 5911 Accounts Payable Report 6712 Inventory Count Sheet 7413 Bank Reconciliation 112

Worksheets1 Inventory Count Sheet 762 Petty Cash Control Sheet 1063 Budget Template 137

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Laws are constantly changing. Every effort is made to keep this publica-tion as current as possible. However, the author, the publisher, and the vendor of this book make no representations or warranties regarding the outcome or the use to which the information in this book is put and are not assuming any liability for any claims, losses, or damages arising out of the use of this book. The reader should not rely on the author or the publisher of this book for any professional advice. Please be sure that you have the most recent edition.

Notice to Readers

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So many ingredients are essential to the creation of a book. Without the convergence of a great publisher, editor, family, and friends, this book would most certainly still be a pile of papers stacked in my living room.

Thanks go to Richard, Judy, and everyone at Self-Counsel Press who supported this project from the beginning and saw it all the way through.

Many thanks to all of my clients, both in my accounting practice and of our online products and services. You have taught me so much over the years. I hope that this book lives up to your expectations. I wrote it for you.

For their general support, encouragement, and the occasional beer, I would like to thank Dave Sturgeon, Andrew Pyper, John Weir, Hay-ley Chandler, Ali Sammel, Tim and April Bartlett, Lindsay Mund, and Yesenia Torres.

Most of all, I would like to thank my family, without whose support, babysitting, and hugs, this book would not have been possible. I dedicate this book to my husband, Jeff, and my two perfect angels, Alex and Erika.

Acknowledgments

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THE BASICS

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1P A R T

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The statistics are mind numbing. In North America, 80 percent of all small businesses started this year will be gone in fi ve years. Of the lucky 20 percent to have survived, another 80 percent will be gone in ten years. That’s a whopping 96 percent failure rate over ten years.

Would you start a small business if you were told that you have a 96 percent chance of failure? Not many people would. But every day, hundreds of people think they will beat the odds. They may be former employees, students, housewives, or others who have never had any business training but are sure that their product or service is so fantastic, so completely unique, that they are destined to succeed.

These are the people who walk through the doors of my accounting and consulting practice every day. They want to know how to make a lot of money, how to leverage their businesses, how to go public. I begin

Getting Started

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to talk to them about their plans for book-keeping for the business (“Oh, my wife will sort all that out”), what is in their business plan (“Oh, I’ll pull one of those together if the bank is looking for one”), and what their break-even point is (“We don’t have to worry about any of that; this product is going to sell millions!”). They want to fl y before they’ve learned to crawl. They do not understand that business management is a separate skill from doing whatever it is that their business does. For example, hairdress-ers think that because they are good at cut-ting hair, they can own and manage a salon. Lawyers think that because they are good at putting together a brief, they can run a ten-lawyer law practice.

Am I being hard on small business? Not at all. Small business is the engine of the world economy. Even Microsoft and Ford started in someone’s basement or garage. However, people all over the world have

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found it diffi cult to do so, as most books on the subject are either dry textbooks or too general to be of any use.

This problem was the genesis of the Numbers 101 for Small Business series of books. The series functions as an easy-to-understand reference for small-business owners, and covers such topics as book-keeping, analyzing, and tracking fi nancial information, as well as the complexities of starting, growing, and exiting a business. The series is distilled from the workshops, radio broadcasts, and one-to-one training sessions I have conducted in my accounting fi rm over the years. You, the small-business owner, will fi nd within this series everything you need to base your business on sound fi nan-cial and management principles. Through-out this book, you will meet Joe and his wife, Becky. Joe owns a small business called

an idealized and unrealistic view of how to operate a business, and most discount the importance of the basics. With the advent of bookkeeping software such as Simply Accounting and QuickBooks, many entrepre-neurs have come to believe that these pro-grams will magically do their bookkeeping for them. Because these people lack basic accounting skills, they are unable to ana-lyze their business results and have no idea what’s working and what’s not. It’s like driving a car in a foreign country where they can’t understand what the road signs are telling them.

The Numbers 101 for Small Business Series Over the years, my clients have asked me to recommend good books on small-business management and accounting. I have always

Joe gets up when the alarm goes off at 5:45 a.m. His once-tiny plumbing business has grown substantially over the last year, and Joe always feels as if he’s in catch-up mode. He knows he has a lot of work to do today. A presentation will be made to a potential customer at 9:30 a.m., a meeting with his banker has been set up for 11:00 a.m., he must personally pick up a product from a supplier at 2:00 p.m., and at 3:30 p.m., he must deal with a cranky customer who is not happy with the quality of Joe’s work.

Joe makes his daily rounds after stopping at Starbucks for a double hit of espresso. He telephones his wife, Becky, from his cell phone to remind her to pull the invoices to discuss with the customer that afternoon. Becky stays home and helps Joe run the business. She answers the phone, does the fi ling, and deals with the mountains of paperwork that the business generates.

At 6:00 p.m., when Joe has fi nished his rounds for the day, he pulls the truck into his driveway, slings his jacket over his shoulder, and checks in with Becky. He tells his wife that the banker wants to see fi nancial state-ments for the business to see if they are making money. Neither Joe nor Becky really knows if they are winning or losing. Becky adds up all the receipts at the end of the year for the income tax returns. As she tells him about the phone calls she received during the day and the bank statement that appears to be wrong, Joe digs through his pants pockets and pulls out piles of crumpled receipts: the day’s record keeping. Becky tries to put them in some semblance of order, wondering if there’s a better way to track the business results.

CASE STUDY

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Getting started 5

(appropriately) Joe’s Plumbing. Becky does the back-offi ce work for the business: an-swering phones, invoicing, bookkeeping, and banking. You will learn how Joe worked with his accountant to strengthen his busi-ness and make it more profi table and risk proof. You will fi nd samples of fi nancial documents and other useful tools that you can customize to your business needs. More information and tools can be found on my website: www.numbers101.com.

Bookkeepers’ Boot CampBookkeepers’ Boot Camp, the book you are reading now, is the fi rst book in the Numbers 101 for Small Business series. It deals with the essentials of record keeping for a small busi-ness and will show you why it’s necessary for you to track fi nancial information. By the end of this book, you will have a greater understanding of the purpose and process of record keeping and a deeper understanding of your business and how it works.

I wish you the best in your business. You have taken a signifi cant fi rst step in under-standing your business better. Drop me a line at [email protected] and let me know how your business is doing. I’d love to hear from you!

How to Use This BookBookkeepers’ Boot Camp is broken into three sections:

1. The BasicsChapters 2 through 7 start with the funda-mentals of record keeping. This section is a great place to start for those who are just beginning to learn bookkeeping. It’s also a great refresher for those who have been

doing it for a while. You will learn the basic methods of record keeping for a growing business and the statements that make up the fi nancials.

2. Intermediate TopicsChapters 8 through 18 show you the “meat and potatoes” of bookkeeping. You will learn how to record the sales and purchases cycles, account for the everyday transactions that a business undertakes, as well as learn how to balance the bank account and what to do if you can’t reconcile it.

3. Advanced IssuesNow that you are all warmed up and have a good handle on the regular fi nancial work-ings of your business, it’s time to sink your teeth into more advanced topics. In Chapters 19 through 23, you will learn how to deal with foreign currency, tax planning, budget-ing, and the role of the external accountant. Following these chapters comes Chapter 24: Graduation, an integrated self-test you can take to see if you really know your stuff!

Throughout the book, you will fi nd some useful samples of fi nancial documents, as well as a listing of terminology and defi ni-tions in Appendix A. Appendix B lists some useful websites, publications, and other tools for small businesses.

Do you have to read everything in the order in which it appears? Of course not (unless you are fanatical like me and have a deep-rooted need to follow things in the order intended). You can review the Table of Contents and just jump right in wherever you feel that you will get the most benefi t. I do recommend, however, that you eventu-ally read the entire book, even if you already

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www.numbers101.com for more resource links and other cool tools for businesses. There is a place to sign up for our free e-newsletter, chock full of useful informa-tion for business owners. There is also a link to my email. Please feel free to drop me a line and let me know what you liked and didn’t like about this book. It will help us develop future editions so that we can meet the needs of entrepreneurs better.

Now, if you’re ready, grab a fresh cup of coffee, and let’s begin!

have some bookkeeping experience. You may fi nd that you gain some new philo-sophical or mechanical perspectives on your business.

Once you are fi nished Bookkeepers’ Boot Camp, you are ready for the next challenge: Financial Management 101: Get a Grip on Your Business Numbers. This book is the second in the Numbers 101 for Small Business series. Fi-nancial Management 101 builds on your basic bookkeeping knowledge so that you can track and interpret your fi nancial statements and manage your business more effectively.

I hope you enjoy Bookkeepers’ Boot Camp. Please also visit my website at