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Bookkeeping Kit For Dummies
Bookkeeping Kit For Dummies
Bookkeeping Kit For Dummies
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Bookkeeping Kit For Dummies

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The easy way to get a handle on bookkeeping

Accurate and complete bookkeeping is crucial to any business owner, but it's also important to those who work with the business, such as investors, financial institutions, and employees. Bookkeeping For Dummies provides the easy and painless way to master this critical skill.

You'll get clear and concise information on keeping track of transactions, figuring out balance sheets, keeping ledgers or journals, creating financial statements, and operating accounts for businesses, along with practices and examples to hone your skills. Plus, the bonus CD includes samples of bookkeeping forms, working papers, letters, resources, and spreadsheets.

  • Keeping track of transactions
  • Figuring out the balance sheet
  • Keeping a ledger and journal
  • Creating financial statements
  • Operating accounts for businesses
  • Recognizing assets and liabilities
  • Up-to-date tax information
  • Changes in small business regulations
  • Additional and complementary examples
  • Demonstration problems
  • True/false and multiple-choice questions and scenarios

Whether you're a professional or a student looking to expand your skills, Bookkeeping Kit For Dummies is a one-stop resource for anyone interested in this ever-growing occupation.

LanguageEnglish
PublisherWiley
Release dateJan 9, 2012
ISBN9781118237700
Bookkeeping Kit For Dummies
Author

Lita Epstein

An Adams Media author.

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    Bookkeeping Kit For Dummies - Lita Epstein

    Introduction

    Bookkeepers manage all the financial data for small companies. If you subscribe to the idea that information is power (which I do), you’ll agree that the bookkeeper has a tremendous amount of power within a company. Information tracked in the books helps business owners make key decisions involving sales planning and product offerings and manage many other financial aspects of their business.

    If it weren’t for the hard work of bookkeepers, companies wouldn’t have any clue about what happens with their financial transactions. Without accurate financial bookkeeping, a company owner wouldn’t know how many sales the company made, how much cash it collected, or how much cash it paid for the products sold to customers during the year. He also wouldn’t know how much cash he paid to employees or spent on other business needs throughout the year.

    Accurate and complete financial bookkeeping is crucial to any business owner, but it’s also important to those who work with the business, including investors, financial institutions, and employees. People both inside (managers, owners, and employees) and outside the business (investors, lenders, and employees in government agencies) all depend on the bookkeeper’s accurate recording of financial transactions.

    Yes, the bookkeeper’s job is crucial and requires certain skills and talents. Bookkeepers must be detailed-oriented, enjoy working with numbers, and be meticulous about accurately entering those numbers in the books. They must be vigilant about keeping a paper trail and filing all needed backup information about the financial transactions entered into the books.

    Whether you’re a business owner keeping the books yourself or an employee keeping the books for a small business owner, your job is critical for the smooth financial operation of the company.

    About This Book

    In Bookkeeping Kit For Dummies, I introduce you to the key aspects of bookkeeping and how to set up and use your financial books. I walk you through the basics of bookkeeping, starting with the process of setting up your company’s books and developing

    check.png A list of your company’s accounts, called the Chart of Accounts

    check.png Your company’s General Ledger, which summarizes all the activity in a company’s accounts

    check.png Your company’s journals, which give details about all your financial transactions

    Then I take you through the process of recording all your transactions — sales, purchases, and other financial activity. I also talk about how to manage payroll, governmental reporting, and external financial reporting.

    Finally, I show you how to start the yearly cycle all over again by closing out the necessary accounts for the current year and opening up any new ones for the next year. Along the way, I include practice exercises that help you get a feel for the various bookkeeping tasks.

    Yes, bookkeeping is a continuous cycle that runs from making, recording, and posting financial transactions to testing and adjusting/correcting your books to preparing financial reports and getting ready to start the process all over again for the next year.

    You find out all about this cycle, starting with Chapter 2 and following the bookkeeping journey through closing out the year and getting ready for the next year in Chapter 22.

    Conventions Used in This Book

    I use QuickBooks Pro 2011 throughout this book. This program is the basic level of QuickBooks for use in your business; you can also find online and more-advanced versions. I point out features not available in QuickBooks Pro.

    Additionally, I use a few formatting conventions to make the text easy for you to navigate:

    check.png New words are italicized and accompanied by an easy-to-understand definition.

    check.png Bold text highlights keywords in bulleted lists and indicates the active parts of numbered steps.

    check.png Websites appear in monofont. During the book’s layout, some URLs may have broken over two lines. Where this break happens, I haven’t added any extra characters such as hyphens; just type the address into your browser exactly as you see it.

    Foolish Assumptions

    While writing this book, I made some key assumptions about who you are and why you’ve picked up this book to get a better understanding of bookkeeping. I assume that you’re

    check.png A business owner who wants to know how to do your own books: You have a good understanding of business and its terminology but have little or no knowledge of bookkeeping and accounting.

    check.png A person who does bookkeeping or plans to do bookkeeping for a small business and needs to know more about how to set up and keep the books: You have some basic knowledge of business terminology but don’t know much about bookkeeping or accounting.

    check.png A staff person in a small business who’s just been asked to take over the company’s bookkeeping duties: You need to know more about how transactions are entered into the books, how to prove out transactions to be sure you’re making entries correctly and accurately, and how to prepare financial reports by using the data you collect.

    What You’re Not to Read

    Throughout Bookkeeping Kit For Dummies, I’ve included some gray shaded boxes of information that may be fun and/or helpful but that isn’t essential to your understanding of the topic at hand. If you’re short on time, you can skip these sidebars without losing vital information. You can also bypass text marked with a Technical Stuff icon; these bits go into more detail than is necessary for your grasp on the key aspects of how to keep the books.

    How This Book Is Organized

    Bookkeeping Kit For Dummies is divided into seven parts to make it easy to access. Here’s how it breaks down:

    Part I: Basic Bookkeeping: Why You Need It

    In Part I, I discuss the importance of bookkeeping, explain how it works, and help you get started with setting up your company’s books. I also touch on the terms that are unique to bookkeeping and tell you how to set up the road map for your books, the Chart of Accounts.

    Part II: Keeping a Paper Trail

    In Part II, I explain how you enter your financial transactions in the books, how you post transactions to your General Ledger (the granddaddy of your bookkeeping system), and how you track all the transaction details in your journals. I also give tips for developing a good internal control system for managing your books and your company’s cash and talk about your options if you decide to computerize your bookkeeping.

    Part III: Tracking Day-to-Day Business Operations with Your Books

    In Part III, I show you how to monitor your day-to-day business operations, including recording sales, purchases, and any adjustments to those sales and purchases, such as discounts and returns. In addition, I talk about the basics of setting up and managing employee payroll as well as all the government paperwork you need to complete as soon as you decide to hire employees.

    Part IV: Preparing the Books for Year’s (or Month’s) End

    In Part IV, I introduce you to the process of preparing your books for closing out the accounting period, whether you’re closing out the books at the end of a month or the end of a year. The closing-out process involves making key adjustments to record depreciation of your assets, and calculating and recording your interest payments and receipts in your books. This part also covers various aspects of proving out your books, from checking your cash and testing the balance of your books to making any needed adjustments or corrections.

    Part V: Reporting Results and Starting Over

    In Part V, I tell you how to use all the information in your books to prepare reports that show how well your company did during the month, quarter, or year. I also lay out all the paperwork you have to deal with, including year-end government reports and IRS forms. Finally, I show you how to close out the books at year-end and get ready for the next year.

    Part VI: The Part of Tens

    The Part of Tens is the hallmark of the For Dummies series. In this part, I highlight the top ten accounts you need to know how to manage and the ten ways you can efficiently manage your business’s cash by using your books.

    Part VII: Appendixes

    In this part, I give you a glossary of accounting terms used throughout the book, and I outline how to use this book’s CD.

    Icons Used in This Book

    For Dummies books use little pictures, called icons, to flag certain chunks of text that either you shouldn’t want to miss or you’re free to skip. The icons in Bookkeeping Kit For Dummies are as follows:

    tip.eps Look to this icon for ideas on how to improve your bookkeeping processes and use the information in the books to manage your business.

    remember.eps This icon marks anything I want you to recall about bookkeeping after you’re finished reading this book.

    warning_bomb.eps This icon points out any aspect of bookkeeping that comes with dangers or perils that may hurt the accuracy of your entries or the way in which you use your financial information in the future. I also use this icon to mark certain things that can get you into trouble with the government, your lenders, your vendors, your employees, or your investors.

    example.eps In the practice sections, I often provide sample problems and explanations, highlighted by this icon, to give you an idea of how to tackle the rest of the practice.

    checkitout.eps This icon points you to documents and forms you can find on the book’s accompanying CD. If you are reading this text in an electronic format, please go to the table of contents for access to the additional content.

    Where to Go From Here

    Can you feel the excitement? You’re now ready to enter the world of bookkeeping! Because of the way Bookkeeping Kit For Dummies is set up, you can start anywhere you want.

    If you need the basics or if you’re a little rusty and want to refresh your knowledge of bookkeeping, start with Part I. However, if you already know bookkeeping basics, are familiar with the key terminology, and know how to set up a Chart of Accounts, consider diving in at Part II.

    If you’ve set up your books already and feel comfortable with the basics of bookkeeping, you may want to start with Part III and its info on how to enter various transactions. On the other hand, if your priority is using the financial information you’ve already collected, check out the financial reporting options in Part V.

    Part I

    Basic Bookkeeping: Why You Need It

    9781118116456-pp0101.eps

    In this part . . .

    Not sure why bookkeeping is important? In this part, I explain the basics of how bookkeeping works and help you get started with the task of setting up your books.

    This part also exposes you to terms that you may already know but that have a unique meaning in the world of bookkeeping, such as ledger, journal, posting, debit, and credit. Finally, I start you on your bookkeeping journey by showing you how to set up the road map for your books, the Chart of Accounts.

    Chapter 1

    So You Want to Do the Books

    In This Chapter

    arrow Introducing bookkeeping and its basic purpose

    arrow Maintaining a paper trail

    arrow Managing daily business finances

    arrow Making sure everything’s accurate

    arrow Putting on a financial show

    Few small business owners actually hire accountants to work full time. For a small business, that expense is probably too great, so the owner instead hires a bookkeeper who serves as the company accountant’s eyes and ears. In return, the accountant helps the bookkeeper develop good bookkeeping practices and reviews his or her work periodically (usually monthly).

    In this chapter, I provide an overview of a bookkeeper’s work. If you’re just starting a business, you may be your own bookkeeper for a while until you can afford to hire one, so think of this chapter as your to-do list.

    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 sweat the small stuff, such as keeping detailed records of every penny spent; you just want to quickly build a business in which you can make lots of money.

    Well, slow down there — this isn’t a race! If you don’t carefully plan your bookkeeping operation and figure out exactly how and what financial detail you want to track, you’ll have absolutely no way to measure the success (or failure, unfortunately) of your business efforts.

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

    tip.eps Bookkeeping can become your best friend for managing your financial assets and testing your business strategies, so don’t shortchange it. Take the time to develop your bookkeeping system with your accountant before you even open your business’s doors and make your first sale.

    Picking your accounting method

    You can’t keep books unless you know how you want to go about doing so. The two basic accounting methods you have to choose from are cash-basis accounting and accrual accounting. The key difference between these two accounting methods is the point at which you record sales and purchases in your books. If you choose cash-basis accounting, you record transactions when cash changes hands only. If you use accrual accounting, you record a transaction when it’s completed, even if cash doesn’t change hands. I talk about the pros and cons of each type of accounting method in Chapter 2.

    Understanding assets, liabilities, and equity

    Every business has three key financial parts it must keep in balance: assets, liabilities, and equity. Assets include everything the company owns, such as cash, inventory, buildings, equipment, and vehicles. Liabilities include everything the company owes to others, such as vendor bills, credit card balances, and bank loans. Equity includes the claims owners have on the assets based on their portion of ownership in the company.

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

    Assets = Liabilities + Equity

    Because it’s so important, I talk a lot about how to keep your books in balance throughout this book. You can find an initial introduction to this concept in Chapter 2.

    Introducing debits and credits

    To keep the books, you need to revise your thinking about two common financial terms: debits and credits. Most nonbookkeepers and nonaccountants think of debits as subtractions from their bank accounts. The opposite is true with credits — people usually see these as additions to their accounts, in most cases in the form of refunds or corrections in favor of the account holders.

    Well, forget all you thought you knew about debits and credits. Debits and credits are totally different animals in the world of bookkeeping. Because keeping the books involves a method called double-entry bookkeeping, you have to make a least two entries — a debit and a credit — into your bookkeeping system for every transaction. Whether that debit or credit adds or subtracts from an account depends solely upon the type of account.

    I know all this debit, credit, and double-entry stuff sounds confusing, but I promise it becomes much clearer as you work through this book. I start explaining this critical yet somewhat confusing concept in Chapter 2. I also give you a chance to practice getting the numbers in the correct columns with practice exercises and answers in many chapters.

    Charting your bookkeeping course

    You can’t just enter transactions in the books willy-nilly. You need to know where exactly those transactions fit into the larger bookkeeping system. That’s where your Chart of Accounts comes in; it’s essentially a list of all the accounts your business has and what types of transactions go into each one. I talk more about the Chart of Accounts in Chapter 3.

    Recognizing the Importance of an Accurate Paper Trail

    Keeping the books is all about creating an accurate paper trail. You want to track all your company’s financial transactions so that if a question comes up at a later date, you can turn to the books to figure out what went wrong.

    remember.eps An accurate paper trail is the only way to track your financial successes and review your financial failures, tasks that are vitally important in order to grow your business. You need to know what works successfully so you can repeat it in the future and build on your success. On the other hand, you need to know what failed so you can correct it and avoid making the same mistake again.

    All your business’s financial transactions are summarized in the General Ledger, and journals keep track of the tiniest details of each transaction. You can make your information gathering more effective by using a computerized accounting system, which gives you access to your financial information in many different formats. Controlling who enters this financial information into your books and who can access it afterward is smart business and involves critical planning on your part. I address all these concepts in the following sections.

    Maintaining a ledger

    The granddaddy of your bookkeeping system is the General Ledger. In this ledger, you keep a summary of all your accounts and the financial activities that took place involving those accounts throughout the year.

    You draw upon the General Ledger’s account summaries to develop your financial reports on a monthly, quarterly, or annual basis. You can also use these account summaries to develop internal reports that help you make key business decisions. I talk more about developing and maintaining the General Ledger in Chapter 4. You get a chance to practice ledger entries, too.

    Keeping journals

    Small companies conduct hundreds, if not thousands, of transactions each year. If every transaction were kept in the General Ledger, that record would become unwieldy and difficult to use. Instead, most companies keep a series of journals that detail activity in their most active accounts.

    For example, almost every company has a Cash Receipts journal in which to keep the detail for all incoming cash and a Cash Disbursements journal in which to keep the detail for all outgoing cash. Other journals can detail sales, purchases, customer accounts, vendor accounts, and any other key accounts that see significant activity.

    You decide which accounts you want to create journals for based on your business operation and your need for information about key financial transactions. I talk more about the importance of journals, the accounts commonly journalized, and the process of maintaining journals in Chapter 5. Getting used to journal entries can be a challenge, so I give you a chance to practice them as well.

    Consider computerizing

    Many companies today use computerized accounting systems to keep their books. You should consider using one of these systems rather than trying to keep your books on paper. You’ll find your bookkeeping takes less time and is probably more accurate with a computerized system.

    tip.eps In addition to increasing accuracy and cutting the time you take to do your bookkeeping, computerized accounting also makes designing reports easier. You can then use these reports to help make business decisions. Your computerized accounting system stores detailed information about every transaction, so you can group that detail in any way that may assist your decision making. I talk more about computerized accounting systems in Chapter 6.

    Instituting internal controls

    Every business owner needs to be concerned with keeping tight controls on company cash and how it’s used. One way to institute this control is by placing internal restrictions on who has access to enter information into your books and who has access to use that information.

    You also need to carefully control who has the ability to accept cash receipts and who has the ability to disburse your business’s cash. Separating duties appropriately helps you protect your business’s assets from error, theft, and fraud. I talk more about controlling your cash and protecting your financial records in Chapter 7.

    Using Bookkeeping’s Tools to Manage Daily Finances

    After you set up your business’s books and put your internal controls in place, you’re ready to use the systems you established to manage the day-to-day operations of your business. You’ll quickly see how a well-designed bookkeeping system can make your job of managing your business’s finances much easier.

    Maintaining inventory

    If your company keeps inventory on hand or in warehouses, tracking the costs of the products you plan to sell is critical for managing your profit potential. If you see inventory costs trending upward, you may need to adjust your own prices in order to maintain your profit margin. You certainly don’t want to wait until the end of the year to find out how much your inventory cost you. I talk more about how to use your bookkeeping system to manage inventory in Chapter 8.

    Tracking sales

    Everyone wants to know how well their sales are doing. If you keep your books up-to-date and accurate, you can get those numbers very easily on a daily basis. You can also watch sales trends as often as you think necessary, whether that’s daily, weekly, or monthly.

    Use the information collected by your bookkeeping system to monitor sales, review discounts offered to customers, and track the return of products. All three elements are critical to gauging the success of the sales of your products.

    I talk more about how to use the bookkeeping system for tracking sales, discounts, and returns in Chapter 9, where you can also find exercises to practice using your bookkeeping system.

    Handling payroll

    Payroll can be a huge nightmare for many companies. Payroll requires you to comply with a lot of government regulation and fill out a lot of government paperwork. You also have to worry about collecting payroll taxes and paying employer taxes. And if you pay employee benefits, you have yet another layer of record keeping to deal with.

    I talk more about managing payroll and government requirements in Chapters 10 and 11. I also talk about year-end payroll obligations in Chapter 20. Bonus: The CD accompanying this book has samples of the forms you need to file with the government. If you are reading this text in an electronic format, please go to the table of contents for access to the additional content.

    Running Tests for Accuracy

    All the time it takes to track your transactions isn’t worth it if you don’t periodically test to be sure you’ve entered those transactions accurately. The old adage Garbage in, garbage out holds very true for bookkeeping: If the numbers you put into your bookkeeping system are garbage, the reports you develop from those numbers will be garbage as well.

    Proving out your cash

    The first step in testing out your books includes proving that your cash transactions are accurately recorded. This process involves checking a number of difference transactions and elements, including the cash taken in on a daily basis by your cashiers and the accuracy of your checking account. I talk about all the steps necessary to take to prove out your cash in Chapter 14.

    Testing your balance

    After you prove out your cash (see Chapter 14), you can check that you’ve recorded everything else in your books just as precisely. Review the accounts for any glaring errors and then test whether or not they’re in balance by doing a trial balance. You can find out more about trial balances in Chapter 16.

    Doing bookkeeping corrections

    You may not find your books in balance the first time you do a trial balance, but don’t worry. Finding your books in balance on the first try is rare. In Chapter 17, I explain common adjustments that may be necessary as you prove out your books at the end of an accounting period, and I also explain how to make the necessary corrections.

    Finally Showing Off Your Financial Success

    Proving out your books and ensuring their balance means you finally get to show what your company has accomplished financially by developing reports to present to others. It’s almost like putting your business on a stage and taking a bow — well . . . at least you hope you’ve done well enough to take a bow.

    If you’ve taken advantage of your bookkeeping information and reviewed and consulted it throughout the year, you should have a good idea of how well your business is doing. You also should have taken any course corrections to ensure that your end-of-the-year reports look great.

    Preparing financial reports

    Most businesses prepare at least two key financial reports, the balance sheet and the income statement, that they can show to company outsiders, including the financial institutions from which the company borrows money and the company’s investors.

    remember.eps The balance sheet is a snapshot of your business’s financial health as of a particular date. The balance sheet should show that your company’s assets are equal to the value of your liabilities and your equity. It’s called a balance sheet because it’s based on the balanced formula I present earlier in the chapter:

    Assets = Liabilities + Equity

    The income statement summarizes your company’s financial transactions for a particular time period, such as a month, quarter, or year. This financial statement starts with your revenues, subtracts the costs of goods sold, and then subtracts any expenses incurred in operating the business. The bottom line of the income statement shows how much profit your company made during the accounting period. If you haven’t done well, the income statement shows how much you’ve lost.

    I explain how to prepare a balance sheet in Chapter 18, and I talk more about developing an income statement in Chapter 19.

    Paying taxes

    Most small businesses don’t have to pay taxes. Instead, their profits are reported on the personal tax returns of the company owners, whether that’s one person (a sole proprietorship) or two or more people (a partnership). Only companies that have incorporated — become a separate legal entity in which investors buy stock (which I explain further in Chapter 21) — must file and pay taxes. (Partnerships and LLCs don’t pay taxes unless they’ve filed a special form to be taxed as a corporation, but they do have to file information returns, which detail how much the company made and how much profit each owner earned plus any costs and expenses incurred.)

    I talk more about business structures and how they’re taxed in Chapter 21. You can find forms for filing taxes included with this book.

    Chapter 2

    Getting Down to Bookkeeping Basics

    In This Chapter

    arrow Keeping business records

    arrow Navigating the accounting cycle

    arrow Choosing between cash-basis and accrual accounting

    arrow Deciphering double-entry bookkeeping

    All businesses need to keep track of their financial transactions; that’s why bookkeeping and bookkeepers are so important. Without accurate records, how can you tell whether your business is making a profit or taking a loss?

    In this chapter, I cover the key parts of bookkeeping by introducing you to the language of bookkeeping, familiarizing you with how bookkeepers manage the accounting cycle, and showing you how to understand the most difficult type of bookkeeping — double-entry bookkeeping.

    Bookkeepers: The Record Keepers of the Business World

    Bookkeeping, the methodical way in which businesses track their financial transactions, is rooted in accounting. Accounting is the total structure of records and procedures used to record, classify, and report information about a business’s financial transactions. Bookkeeping involves the recording of that financial information into the accounting system while adhering to solid accounting principles.

    Bookkeepers are the ones who toil day in and day out to ensure that transactions are accurately recorded. Bookkeepers need to be very detail oriented and love to work with numbers, because numbers and the accounts they go into are just about all these people see all day. Bookkeepers aren’t required to be certified public accountants (CPAs).

    Many small businesspeople who are just starting up their businesses initially serve as their own bookkeepers until the business is large enough to hire someone dedicated to keeping the books. Few small businesses have accountants on staff to check the books and prepare official financial reports; instead, they have bookkeepers on staff who serve as the outside accountants’ eyes and ears. Most businesses do seek an accountant with a CPA certification.

    In many small businesses today, a bookkeeper enters the business transactions on a daily basis while working inside the company. At the end of each month or quarter, the bookkeeper sends summary reports to the accountant, who then checks the transactions for accuracy and prepares financial statements.

    In most cases, the accounting system is initially set up with the help of an accountant to be sure it uses solid accounting principles. That accountant periodically stops by the office and reviews the system’s use to be sure transactions are being handled properly.

    warning_bomb.eps Accurate financial reports are the only way you can know how your business is doing. These reports are developed by using the information you, as the bookkeeper, enter into your accounting system. If that information isn’t accurate, your financial reports are meaningless. As the old adage goes, Garbage in, garbage out.

    Basic Bookkeeping Lingo

    Before you can take on bookkeeping and start keeping the books, the first things you must get a handle on are key accounting terms. What follows is a list of terms that all bookkeepers use on a daily basis.

    Note: This section isn’t an exhaustive list of all the unique terms you need to know as a bookkeeper. For full coverage of bookkeeping terminology, turn to the glossary in Appendix A.

    Accounts for the balance sheet

    Here are a few terms you want to know about the balance sheet:

    check.png Balance sheet: The financial statement that presents a snapshot of the company’s financial position (assets, liabilities, and equity) as of a particular date in time. It’s called a balance sheet because the things owned by the company (assets) must equal the claims against those assets (liabilities and equity).

    On an ideal balance sheet, the total assets should equal the total liabilities plus the total equity. If your numbers fit this formula, the company’s books are in balance. (I discuss the balance sheet in greater detail in Chapter 18.)

    check.png Assets: All the things a company owns, such as cash, buildings, land, tools, equipment, vehicles, and furniture, in order to successfully run its business.

    check.png Liabilities: All the debts the company owes, such as bonds, loans, and unpaid bills.

    check.png Equity: All the money invested in the company by its owners. In a small business owned by one person or a group of people, the owner’s equity is shown in a Capital account. In a larger business that’s incorporated, owner’s equity is shown in shares of stock. Another key Equity account is Retained Earnings, which tracks all company profits that have been reinvested in the company rather than paid out to the company’s owners. Small, unincorporated businesses track money paid out to owners in a Drawing account, whereas incorporated businesses dole out money to owners by paying dividends (a portion of the company’s profits paid by share of common stock for the quarter or year).

    Accounts for the income statement

    These important terms related to the income statement are worth knowing:

    check.png Income statement: The financial statement that presents a summary of the company’s financial activity over a certain period of time, such as a month, quarter, or year. The statement starts with Revenue earned, subtracts out the Costs of Goods Sold and the Expenses, and ends with the bottom line — Net Profit or Loss. (I show you how to develop an income statement in Chapter 19.)

    check.png Revenue: All money collected in the process of selling the company’s goods and services. Some companies also collect revenue through other means, such as selling assets the business no longer needs or earning interest by offering short-term loans to employees or other businesses. (I discuss how to track revenue in Chapter 9.)

    check.png Costs of goods sold: All money spent to purchase or make the products or services a company plans to sell to its customers. (I talk about purchasing goods for sale to customers in Chapter 8.)

    check.png Expenses: All

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