Canada-Indonesia Private Sector Enterprise Development [ CIPSED ] Project CIPSED Project State...

Canada-Indonesia Private Sector Enterprise Development [CIPSED] Project

CIPSED Project State University of Gorontalo [UNG]Entrepreneurship ToT Program

Revised:

Basic Bookkeeping TechniquesBasic Bookkeeping Techniques

Module 9 16/2/11

CIPSED Project & State University of Gorontalo [UNG]Entrepreneurship ToT Program

Contents of this Module:Contents of this Module:

• PURPOSE of this MODULE

• The BENEFITS of ACCURATE BOOKKEEPING

• INCOME STATEMENTS and BALANCE SHEETS

• The SYNOPTIC JOURNAL or LEDGER

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What is Bookkeeping? Bookkeeping is defined as the recording and documentation of the financial transactions of a business.


Purpose of this Bookkeeping Purpose of this Bookkeeping Module:Module:• To understand where Bookkeeping fits into the process of creating Financial Statements.

• To understand how accurate records can be utilized as a management tool leading to sound business decisions.

• To create an understanding of the mechanics of a maintaining a SYNOPTIC LEDGER.

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…Most retail, wholesale and service businesses make sales and receive and spend money every day. They should keep records like Daily Cash Sheets, Accounts Receivable, and Accounts Payable. A SYNOPTIC JOURNAL, or LEDGER, combines all of the aforementioned records into one comprehensive record keeping resource.


Why Does a Business Keep Financial Records?Why Does a Business Keep Financial Records?

• To manage the money of the business, particularly if there is a significant amount of cash flow on a day-to-day basis.

• To track the daily, weekly and monthly financial performance of the business. Is the business making money?

• To identify and address problems at an early stage.

• To provide the bookkeeper or accountant for the business with all critical financial information.

• To make INFORMED DECISIONS!

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Management by NumbersManagement by Numbers

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

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Worksheet #1: Data-driven Worksheet #1: Data-driven Decision-makingDecision-making• REVIEW THE INFORMATION IN WORKSHEET #1

• HOW WOULD YOU ANSWER THE QUESTIONS, GIVEN THE INFORMATION AVAILABLE?◦Make any additional calculations that you think might be helpful

◦What other information would you like to have in order to make a decision?

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Your Bookkeeping FriendsYour Bookkeeping Friends

• TOOLS YOU CAN USE TO MAKE BOOKKEEPING EASIER

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Keys to Effective BookkeepingKeys to Effective Bookkeeping

• ESTABLISH A SYSTEM THAT IS:◦Uncomplicated, logical, and user-friendly◦Thorough and accurate◦Easily accessible◦Consistent with the size and nature of your business◦Integrated into your daily business routine

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ProcessProcess

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Financial Statements:Financial Statements:

• The Income Statement and the Balance Sheet are the two principal documents that, together, are called the financial statements.

• They are intertwined with the Cash Flow Statement and together complete the financial picture of the business.

• They enable you to understand what is going on with the business and make decisions accordingly.

• The information for all 3 documents begins with the Synoptic Ledger.

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Financial Statements:Financial Statements:

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INCOME STATEMENT:-Income-Expenses-Profit

BALANCE SHEET:-Assets-Liabilities-Equity

CASH FLOW STATEMENT:-Cash In-Cash Out-Cash Balance

SYNOPTIC LEDGER:-Transactions-Adjusting entries

Key Financial Statements


The Income Statement:The Income Statement:

• Identifies all Revenue and Expenses over a specified time (usually a month or year) to show Profit or Loss for the period.

• Expenses are incurred to create revenue, and are not always cash expenditures. (Example: depreciation.)

• Not every cash expenditure by the business is an expense, and those that are not expenses will not appear on the Income Statement. (Example: payment of loan principal to a bank.)

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Worksheet #2: The Income StatementWorksheet #2: The Income Statement

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Please go to Worksheet #2 … to review the Income Statement:


The Balance Sheet:The Balance Sheet:• Shows the exact financial position of the business at a specific date, usually the end of a month/year.

• Identifies:◦Assets - what the business owns◦Liabilities - what the business owes◦Owner’s Equity - the net capital available to the owner.

• Represents the COST of the Assets, Liabilities and Equity, NOT their VALUE.

• The Balance sheet must always balance:

ASSETS = LIABILITIES + OWNER‘S EQUITY

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The BALANCE SheetThe BALANCE Sheet

• ASSETS = LIABILITIES + EQUITY

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EquityAssets

Liabilities


Worksheet #3: The Balance SheetWorksheet #3: The Balance Sheet

Look at the Worksheet #3 Balance Sheet:

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Double-Entry BookkeepingDouble-Entry Bookkeeping

• EACH BOOKKEEPING ENTRY:◦Involves a minimum of 2 accounts◦DEBITS must = CREDITS

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Debit Credit


5 Types of Accounts5 Types of Accounts

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Account Type Example DR CR

Asset CashLiability LoanEquity Owner’s investmentRevenue SalesExpense Wages

• ‘DOUBLE-ENTRY’ ACCOUNTING:◦2 sides to every bookkeeping entry!◦Increase in ‘Debit’ matched by increase in ‘Credit’

B.S.

I.S.


Debit & Credit BalancesDebit & Credit Balances

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EquityAssets

Liabilities

Expenses Revenue Creditbalance

Debitbalance


The Synoptic Ledger:The Synoptic Ledger:

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• Accounts across the top

◦Debit column on left, Credit column on right

• Line by line recording of all business transactions.

• Can be considered the ‘finished product’ of Bookkeeping.

◦May be turned over to an accountant to develop the Financial Statements.


Using The Synoptic LedgerUsing The Synoptic Ledger

• The amount of every transaction is entered in the Synoptic Ledger TWICE. (Double Entry Bookkeeping.)

• Each entry has a Debit [Dr] and a Credit [Cr].• Sum of Debits = Sum of Credits

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• ACCOUNTS COMMONLY INVOLVED IN LEDGER ENTRIES:

Synoptic Ledger TransactionsSynoptic Ledger Transactions

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ASSET ASSET

ASSET LIABILITY

ASSET EQUITY

ASSET REVENUE

ASSET EXPENSE

EXPENSE LIABILITY

LIABILITY LIABILITY

EQUITY EQUITY


Example: Asset <-> AssetExample: Asset <-> Asset

• MOVING ASSETS FROM ONE ACCOUNT TO ANOTHER◦Paying out cash is a CREDIT◦Deposit in bank is a DEBIT

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Example: Asset <-> RevenueExample: Asset <-> Revenue

• RECEIVING CASH FOR SALES OF DIFFERENT PRODUCTS◦Cash in is a DEBIT◦Sales revenue in is a CREDIT

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Asset Revenue


Example: Asset <-> LiabilityExample: Asset <-> Liability

• PURCHASING MATERIALS ON CREDIT FROM SUPPLIER◦Material in is a DEBIT◦Increase in money owed is a CREDIT

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Asset Liability


Example: Asset <-> ExpenseExample: Asset <-> Expense

• PAYING A SUPPLIER WITH A BANK CHEQUE◦Money out is a CREDIT◦Paying an expense is a DEBIT

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I understand!!

Asset Expense


Worksheet #4 & 5: Synoptic Worksheet #4 & 5: Synoptic Journal – Jan-11Journal – Jan-11• REVIEW THE TRANSACTIONS LISTED IN WORKSHEET #4

• ADD THESE TRANSACTIONS TO THE SYNOPTIC JOURNAL◦Use either Worksheet #5 or electronic version

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Worksheets #6 & 7: Financial Worksheets #6 & 7: Financial Statements – Jan-11Statements – Jan-11• HOW HAVE FINANCIAL STATEMENTS CHANGED AS A RESULT OF SYNOPTIC LEDGER ENTRIES?

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Worksheet #8 & 9: Synoptic Worksheet #8 & 9: Synoptic Journal – Feb-11Journal – Feb-11• FOR EACH TRANSACTION LISTED IN WORKSHEET #8:1. Review the transaction description

2. Find the transaction on Worksheet #9: Synoptic Ledger.

3. Determine whether or not the transaction entry in the Synoptic Ledger is correct.

4. If it is incorrect, change it to a correct entry.

• HINTS:◦ Some entries are in the wrong accounts.◦ Some are the right accounts, but wrong numbers.◦ Some are wrong accounts and wrong numbers.◦ Some are correct.

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Worksheets #10 & 11: Financial Worksheets #10 & 11: Financial Statements – Feb-11Statements – Feb-11• HOW HAVE FINANCIAL STATEMENTS CHANGED AS A RESULT OF SYNOPTIC LEDGER ENTRIES?

• WHAT ASPECTS OF THE BUSINESS APPEAR TO REQUIRE ATTENTION?◦What decisions would you make based on the available information?

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Wrap Up:Wrap Up:

• Bookkeeping is a powerful tool for managing a business.

• The owner/manager of a business should know how much money the business has, how much it is owed and how much it owes. Bookkeeping provides this information.

• Keep records up to date and easily accessible.

• Remember Bookkeeping is just simple arithmetic. Business owners/managers can do it by themselves without requiring the help of an accountant.

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