Bookkeeping For Dummies

375 Pages·2006·7.894 MB·English

by  Lita Epstein

01_598481 ffirs.qxd 10/24/05 8:05 PM Page iii
Bookkeeping
FOR
DUMmIES
‰
by Lita Epstein,MBA
01_598481 ffirs.qxd 10/24/05 8:05 PM Page iv
Bookkeeping For Dummies®
Published by
Wiley Publishing, Inc.
111 River St.
Hoboken, NJ 07030-5774
www.wiley.com
Copyright © 2006 by Wiley Publishing, Inc., Indianapolis, Indiana
Published by Wiley Publishing, Inc., Indianapolis, Indiana
Published simultaneously in Canada
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or
by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permit-
ted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written
permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the
Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax [phone].
Requests to the Publisher for permission should be addressed to the Legal Department, Wiley Publishing,
Inc., 10475 Crosspoint Blvd., Indianapolis, IN 46256, 317-572-3447, fax [phone], or online at
http://www.wiley.com/go/permissions.
Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for the
Rest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com and related trade
dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United
States and other countries, and may not be used without written permission. All other trademarks are the
property of their respective owners. Wiley Publishing, Inc., is not associated with any product or vendor
mentioned in this book.
LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: THE PUBLISHER AND THE AUTHOR MAKE NO REP-
RESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE
CONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUT
LIMITATION WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CRE-
ATED OR EXTENDED BY SALES OR PROMOTIONAL MATERIALS. THE ADVICE AND STRATEGIES CON-
TAINED HEREIN MAY NOT BE SUITABLE FOR EVERY SITUATION. THIS WORK IS SOLD WITH THE
UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OR
OTHER PROFESSIONAL SERVICES. IF PROFESSIONAL ASSISTANCE IS REQUIRED, THE SERVICES OF A
COMPETENT PROFESSIONAL PERSON SHOULD BE SOUGHT. NEITHER THE PUBLISHER NOR THE
AUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM. THE FACT THAT AN ORGANIZATION
OR WEBSITE IS REFERRED TO IN THIS WORK AS A CITATION AND/OR A POTENTIAL SOURCE OF FUR-
THER INFORMATION DOES NOT MEAN THAT THE AUTHOR OR THE PUBLISHER ENDORSES THE INFOR-
MATION THE ORGANIZATION OR WEBSITE MAY PROVIDE OR RECOMMENDATIONS IT MAY MAKE.
FURTHER, READERS SHOULD BE AWARE THAT INTERNET WEBSITES LISTED IN THIS WORK MAY HAVE
CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN IT IS READ.
For general information on our other products and services, please contact our Customer Care
Department within the U.S. at 800-762-2974, outside the U.S. at 317-572-3993, or fax [phone].
For technical support, please visit www.wiley.com/techsupport.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may
not be available in electronic books.
Library of Congress Control Number: 2005934501
ISBN-13: 978-0-7645-9848-7
ISBN-10: 0-7645-9848-1
Manufactured in the United States of America
10 9 8 7 6 5 4 3 2 1
1B/RQ/RR/QV/IN
http://avaxhome.ws/blogs/ChrisRedfield
01_598481 ffirs.qxd 10/24/05 8:05 PM Page v
About the Author
Lita Epstein,who earned her MBA from Emory University’s Goizueta
Business School, enjoys helping people develop good financial, investing,
and tax planning skills.
While getting her MBA, Lita worked as a teaching assistant for the financial
accounting department and ran the accounting lab. After completing her
MBA, she managed finances for a small nonprofit organization and for the
facilities management section of a large medical clinic.
She designs and teaches online courses on topics such as investing for
retirement, getting ready for tax time, and finance and investing for women.
She’s written more than ten books, including Streetwise Retirement Planning
and Trading For Dummies.
Lita was the content director for a financial services Web site, MostChoice.com,
and managed the Web site Investing for Women. As a Congressional press
secretary, Lita gained firsthand knowledge about how to work within and
around the Federal bureaucracy, which gives her great insight into how
government programs work. In the past, Lita has been a daily newspaper
reporter, magazine editor, and fundraiser for the international activities of
former President Jimmy Carter through The Carter Center.
01_598481 ffirs.qxd 10/24/05 8:05 PM Page vii
Dedication
To my father, Jerome Kirschbrown, who taught me the importance of
accounting, bookkeeping, and watching every detail.
01_598481 ffirs.qxd 10/24/05 8:05 PM Page ix
Author’s Acknowledgments
I want to take this opportunity to thank all the people who have helped make
this book a reality. In particular, I want to thank the wonderful folks at Wiley
who shepherded this project to completion — Stacy Kennedy and Kelly Ewing,
as well as my copy editor, Elizabeth Rea. I also want to thank my technical
advisor, Shellie Moore, who is a CPA and made sure that all the bookkeeping
and accounting details were accurate. Finally, I want to thank my agent
Jessica Faust at BookEnds, who helps find all my book projects.
01_598481 ffirs.qxd 10/24/05 8:05 PM Page x
Publisher’s Acknowledgments
We’re proud of this book; please send us your comments through our Dummies online registration
form located at www.dummies.com/register/.
Some of the people who helped bring this book to market include the following:
Acquisitions, Editorial, and Composition Services
Media Development
Project Coordinators: Adrienne Martinez,
Project Editor: Kelly Ewing Kathryn Shanks
Acquisitions Editor: Stacy Kennedy Layout and Graphics: Carl Byers, Andrea Dahl,
Stephanie D. Jumper
Copy Editor:Elizabeth Rea
Proofreaders: Leeann Harney, Jessica Kramer,
General Reviewer: Shellie Moore
Carl William Pierce, TECHBOOKS
Editorial Manager:Michelle Hacker Production Services
Editorial Supervisor and Reprint Editor: Indexer: TECHBOOKS Production Services
Carmen Krikorian
Editorial Assistants: Hanna Scott, Nadine Bell
Cover Photos: © Corbis
Cartoons: Rich Tennant (www.the5thwave.com)
Publishing and Editorial for Consumer Dummies
Diane Graves Steele, Vice President and Publisher, Consumer Dummies
Joyce Pepple, Acquisitions Director, Consumer Dummies
Kristin A. Cocks, Product Development Director, Consumer Dummies
Michael Spring, Vice President and Publisher, Travel
Kelly Regan,Editorial Director, Travel
Publishing for Technology Dummies
Andy Cummings,Vice President and Publisher, Dummies Technology/General User
Composition Services
Gerry Fahey,Vice President of Production Services
Debbie Stailey,Director of Composition Services
02_598481 ftoc.qxd 10/24/05 8:03 PM Page xi
Contents at a Glance
Introduction.................................................................1
Part I: Basic Bookkeeping: Why You Need It..................7
Chapter 1: So You Want to Do the Books........................................................................9
Chapter 2: Getting Down to Bookkeeping Basics.........................................................19
Chapter 3: Outlining Your Financial Roadmap with a Chart of Accounts.................31
Part II: Keeping a Paper Trail......................................47
Chapter 4: Ledgers: A One-Stop Summary of Your Business Transactions..............49
Chapter 5: Keeping Journals...........................................................................................67
Chapter 6: Computer Options for Your Bookkeeping..................................................87
Chapter 7: Controlling Your Books, Your Records, and Your Money........................97
Part III: Tracking Day-to-Day Operations
with Your Books .......................................................115
Chapter 8: Buying and Tracking Your Purchases.......................................................117
Chapter 9: Counting Your Sales....................................................................................129
Chapter 10: Employee Payroll and Benefits................................................................145
Chapter 11: Employer-Paid Taxes and Government Payroll Reporting...................169
Part IV: Preparing the Books for Year’s
(or Month’s) End .....................................................185
Chapter 12: Depreciating Your Assets.........................................................................187
Chapter 13: Paying and Collecting Interest.................................................................199
Chapter 14: Proving Out the Cash................................................................................211
Chapter 15: Closing the Journals..................................................................................225
Chapter 16: Checking Your Accuracy — By Trial and Hopefully No Error.............237
Chapter 17: Adjusting the Books..................................................................................247
Part V: Reporting Results and Starting Over...............257
Chapter 18: Developing a Balance Sheet.....................................................................259
Chapter 19: Producing an Income Statement.............................................................271
Chapter 20: Completing Year-End Payroll and Reports.............................................285
Chapter 21: Satisfying the Tax Man..............................................................................299
Chapter 22: Prepping the Books for a New Accounting Cycle..................................317
02_598481 ftoc.qxd 10/24/05 8:03 PM Page xii
Part VI: The Part of Tens...........................................323
Chapter 23: Top Ten Ways to Manage Your Business Cash with Your Books.........325
Chapter 24: Top Ten Most Important Accounts for Any Bookkeeper.....................329
Appendix: Glossary...................................................333
Index.......................................................................337
02_598481 ftoc.qxd 10/24/05 8:03 PM Page xiii
Table of Contents
Introduction...................................................................1
About This Book................................................................................................1
Conventions Used in This Book......................................................................2
Foolish Assumptions.........................................................................................2
What You’re Not to Read..................................................................................3
How This Book Is Organized............................................................................3
Part I: Basic Bookkeeping: Why You Need It........................................3
Part II: Keeping a Paper Trail.................................................................4
Part III: Tracking Day-to-Day Operations
with Your Books...................................................................................4
Part IV: Preparing the Books for Year’s (or Month’s) End..................4
Part V: Reporting Results and Starting Over........................................4
Part VI: The Part of Tens.........................................................................5
Icons Used in This Book...................................................................................5
Where to Go From Here....................................................................................5
Part I: Basic Bookkeeping: Why You Need It....................7
Chapter 1:So You Want to Do the Books . . . . . . . . . . . . . . . . . . . . . . . . . .9
Delving in to Bookkeeping Basics...................................................................9
Picking your accounting method.........................................................10
Understanding assets, liabilities, and equity.....................................10
Introducing debits and credits.............................................................11
Charting your bookkeeping course.....................................................11
Recognizing the Importance of an Accurate Paper Trail...........................12
Maintaining a ledger..............................................................................12
Keeping journals....................................................................................12
Consider computerizing.......................................................................13
Instituting internal controls.................................................................13
Using Bookkeeping’s Tools to Manage Daily Finances...............................14
Maintaining inventory...........................................................................14
Tracking sales........................................................................................14
Handling payroll....................................................................................15
Running Tests for Accuracy...........................................................................15
Proving out your cash...........................................................................15
Testing your balance.............................................................................16
Doing bookkeeping corrections...........................................................16
Finally Showing Off Your Financial Success.................................................16
Preparing financial reports...................................................................16
Paying taxes...........................................................................................17
02_598481 ftoc.qxd 10/24/05 8:03 PM Page xiv
xiv
Bookkeeping For Dummies
Chapter 2:Getting Down to Bookkeeping Basics . . . . . . . . . . . . . . . . .19
Bookkeepers: The Record Keepers of the Business World........................19
Wading through Basic Bookkeeping Lingo...................................................20
Accounts for the balance sheet...........................................................21
Accounts for the income statement....................................................21
Other common terms............................................................................22
Pedaling through the Accounting Cycle.......................................................23
Tackling the Big Decision: Cash-basis or Accrual Accounting..................25
Waiting for funds with cash-basis accounting...................................25
Recording right away with accrual accounting.................................27
Seeing Double with Double-entry Bookkeeping..........................................27
Differentiating Debits and Credits.................................................................30
Chapter 3:Outlining Your Financial Roadmap
with a Chart of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Getting to Know the Chart of Accounts........................................................31
Starting with the Balance Sheet Accounts...................................................33
Tackling assets.......................................................................................34
Laying out your liabilities.....................................................................37
Eyeing the equity...................................................................................39
Tracking the Income Statement Accounts...................................................40
Recording the money you make..........................................................40
Tracking the Cost of Sales....................................................................41
Acknowledging the money you spend................................................42
Setting Up Your Chart of Accounts...............................................................43
Part II: Keeping a Paper Trail .......................................47
Chapter 4:Ledgers: A One-Stop Summary
of Your Business Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
The Eyes and Ears of a Business...................................................................49
Developing Entries for the Ledger................................................................50
Posting Entries to the Ledger........................................................................57
Adjusting for Ledger Errors...........................................................................63
Using Computerized Transactions to Post
and Adjust in the GeneralLedger..............................................................64
Chapter 5:Keeping Journals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Establishing a Transaction’s Point of Entry.................................................67
When Cash Changes Hands...........................................................................68
Keeping track of incoming cash...........................................................68
Following outgoing cash.......................................................................71