Bookkeeping For Dummies

Jane E. Kelly, Paul Barrow, Lita Epstein

• Publisher: For Dummies
• Year: 2016
• ISBN:
  9781119189121
• Edition: 4
• Topic: Business
• Subtopic: Bookkeeping & Budgets
• Index: Business

Britain's number-one guide to mastering the art and science of bookkeeping

Accurate bookkeeping is crucial to the success of every business—but few people relish in this highly detailed task. Luckily, this new edition of Bookkeeping For Dummies simplifies every aspect of financial record keeping, walking you through the basic skills you need to make numbers your minion. From tracking transactions and keeping ledgers to producing balance sheets and year-end reports, this straight-talking guide takes the intimidation out of bookkeeping and shows you how to make it your best friend in business.

Fully updated to include the latest coverage of accounting practices and bookkeeping software, this new edition of Bookkeeping For Dummies features tons of practical exercises to get you up and running with what you need to keep your books balanced, your finances in order and the tax inspector off your back.

• Find updated bookkeeping templates and resources available via download
• Manage day-to-day records like sales and purchases
• Produce Profit and Loss Statements and Balance Sheets
• Prepare year-end documents with confidence and ease

From the importance of keeping a paper trail to the best ways to keep payroll rolling—and everything in between—this is the ideal resource for anyone looking to learn the bookkeeping ropes.

Part I

Basic Bookkeeping: Why You Need It

Find more about bookkeeping and other topics for free at www.dummies.com.

In this part …

Discover why bookkeeping is so important, and get started with the task of setting up your books.

Become familiar with bookkeeping jargon, such as ledger, journal, posting, debit and credit.

Find out about the all-important Chart of Accounts and how you can set this up to customise your business accounts.

Look at different business types and understand why it’s important to set up the correct one.

Chapter 1

So You Want to Do the Books

In This Chapter

Introducing bookkeeping and its basic purpose

Maintaining a paper trail

Managing daily business finances

Making sure that everything’s accurate

Many small business owners, while they enjoy working in their chosen field using the skills they know and love, don’t always like to perform ‘bookkeeping’ duties. Most company owners prefer to employ the skills of a qualified bookkeeper. Some may, perhaps, prefer to give their bagfuls of receipts to their accountant and simply hope that a useful set of accounts comes out of the end of the accounting sausage machine!

In this chapter, we help to demystify the role of a bookkeeper. It may be that you’re just starting off in business and, as a result, can’t afford the services of a bookkeeper just yet! Think of this chapter as a checklist of jobs that need to be done.

Delving into Bookkeeping Basics

Like most businesspeople, you probably have great ideas for running your own business and just want to get started. You don’t want to be distracted by the small stuff, like keeping detailed records of every penny you spend; you just want to build a business with which you can make lots of money.

Well, slow down there – you’re not in a race! If you don’t carefully plan your bookkeeping system and figure out exactly how and what financial details you want to track, you’ve absolutely no way to measure the success (or failure, unfortunately) of your business efforts.

Bookkeeping, when done properly, gives you an excellent measure of how well you’re doing and also provides lots of information throughout the year. This information allows you to test the financial success of your business strategies and make any necessary course corrections early in the year to ensure that you reach your year-end profit goals.

Looking at basic accounting methods

You can’t keep books unless you know how to go about doing so. The two basic accounting methods are cash-based accounting and accrual accounting. The key difference between the two methods is the point at which you record sales and purchases in your books:

• If you choose cash-based accounting, you only record transactions when cash changes hands.
• If you use accrual accounting, you record a transaction on its completion, even if cash doesn’t change hands.

For example, suppose that your business buys products to sell from a supplier but doesn’t actually pay for those products for 30 days. If you’re using cash-based accounting, you don’t record the purchase until you actually lay out the cash to the supplier. If you’re using accrual accounting, you record the purchase when you receive the products, and you also record the future debt in an account called Trade Creditors.

There are specific criteria for who can use cash-based accounting. For example, if you’re a sole trader or partnership and your turnover is expected to be below £82,000, you’re able to use cash-based accounting and submit your self-assessment returns on that basis. However, if you’re a limited company or run a limited liability partnership, you won’t be able to operate the cash-based scheme and will need to use accrual based methods. For more detailed criteria, see www.gov.uk and type ‘cash basis’ in the search box.

We talk about the pros and cons of each type of accounting method in Chapter 2.

Understanding assets, capital and liabilities

Every business has three key financial parts that must be kept in balance: assets, capital and liabilities. Of course, for some of you these may be alien concepts, so maybe a quick accounting primer is in order.

We use buying a house with a mortgage as an example. The house you’re buying is an asset, that is, something of value that you own. In the first year of the mortgage you don’t own all of it but, by the end of the mortgage period (typically 25 years), you will. The mortgage is a liability, or a debt that you owe. As the years roll on and you reduce the mortgage (liability), your capital or ownership of the asset increases. That’s it in a nutshell.

• Assets include everything the business owns, such as cash, stock, buildings, equipment and vehicles.
• Capital includes the claims that owners have on the assets based on their portion of ownership in the business.
• Liabilities include everything the business owes to others, such as supplier bills, credit card balances and bank loans.

The formula for keeping your books in balance involves these three elements:

Another way of explaining this is to say that all of...