||Hello my name is Dave and yes I'm a
bean counter. No I didn't say alcoholic, that's a soft drink not a
beer in my hand, and this is not a meeting of Alcoholics Anonymous.
For those of you that don't know a bean counter is slang sometimes
used to refer to a bookkeeper.
I've searched the web for good free
bookkeeping and accounting tutorials and courses and came to the
conclusion that they're hard to find so this is my attempt to try and
fill the void. What qualifies me to attempt this task ? I guess you can
tell it's not my fancy dress code. I have over 30 years experience in
business and even taught at a small business college for a couple of
years. My method of passing on knowledge is to make the subject easy to
understand and to use simple examples and terminology to illustrate the
concepts being presented. If you're anything like me I learn a lot easier
when I can see an example of what we're talking about. Tell me and show
This free bookkeeping tutorial and
course is geared to business owners, managers, and individuals who have
not had any formal bookkeeping training or on the job experience and need
or want to learn the basics of bookkeeping. In other words, this tutorial
is for beginners (newbies) or those needing a quick refresher and is only
an introduction into the world of accounting. They say a little knowledge
is a dangerous thing. Well my goal is to make you dangerous.
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A menu of all the bookkeeping lessons is presented at the top and bottom
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the prior lesson or on to the next lesson. In addition, some Lessons
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This Introduction discusses the
types of business organizations, types of business activities, users of
financial information, bookkeeping systems, accounting rules, and the
cash and accrual basis of accounting.
Lesson 1 The Bookkeeping Language
introduces you to some of the terminology and definitions used in the
accounting and bookkeeping language.
Lesson 2 Property and Property
Rights explains Property & Property Rights, the Accounting
Equation, double entry bookkeeping, and how business transactions affect
Lesson 3 Debits and Credits
introduces and explains Debits and Credits and how they affect the
Accounting Equation and are used to record business
Lesson 4 Recording Business
Transactions explains and uses examples to illustrate how business
transactions are properly analyzed, recorded, and summarized.
Lesson 5 The General Ledger and
Journals explains what General Ledger and Journals are, how they're
used, and what bookkeeping purposes they serve.
Lesson 6 Financial Statements
explains what financial statements are, how they're created, and how
Lesson 7 Review of Major Concepts
reviews the major definitions, concepts, and bookkeeping records
previously discussed and necessary for an understanding of
Why Learn Bookkeeping ?
Why would you want to learn bookkeeping and keep up to date financial
records anyway ? Can't you hire an accountant to come after the end of
the year and get your check book and shoe box and do your taxes ? Sure
you can ! And yes you will have adequately fulfilled your taxpayer
obligations. But in order to run a business and know what, where, and
when to take corrective actions requires business information. How do you
get and where do you find this information ? You don't if you don't keep
accurate and current records about your business financial activities
Users of Financial
Who needs financial information about a business besides the owner(s)
Users can be grouped into two broad
categories namely internal users and external users. Internal users are
the managers and the owners and employees who actually work for the
business. External users include lenders and other creditors (suppliers),
investors, customers, and governmental regulatory and taxing
Why do they need financial information
Users need this information to make knowledgeable decisions. Lenders and
other creditors want to make sure that they will be paid back for the
credit that they have extended to a business. By analyzing financial
information, they at least have something to base their lending or credit
decision on. The days of the "friendly" banker are gone. You need to
provide them with financial information as a basis for their loan
decisions. A "good ole boy" handshake won't cut it now. Similarly,
customers want to make sure that the business they're buying products or
services from is going to be around and not be in such a poor financial
position as to have to close its doors. Other users have their own
reasons for using this financial information.
Since users require financial
information to base their decisions on, let's determine what is required
to fill this need.
Let's begin with a definition for
Accounting is the art of analyzing, recording, summarizing,
reporting, reviewing, and interpreting financial information.
Let's also define what bookkeeping is
and is not. I hate to admit this but I'm going to tell a true story about
myself in high school. I thought I was fairly smart back in my high
school days and took all the college prep classes. My high school offered
bookkeeping classes but I had no clue as to what that course was about. I
thought bookkeeping was a course on how to properly organize and stack
the reading books in the proper place and shelves in the library using
that Dewey decimal code. That is keeping the books isn't it ? Well kinda,
but that's not the bookkeeping you're going to learn here. Bookkeeping is
one of the components of accounting. Think of accounting as the mom and
bookkeeping as one of her children.
Bookkeeping is the process of
recording and classifying business financial transactions (activities).
In simple language-maintaining the records of the financial activities of
a business or an individual. Bookkeeping's objective is simply to record
and summarize financial transactions into a usable form that provides
financial information about a business or an individual.
Accountants normally plan and set up the
accounting and bookkeeping system for a business and turn over the day to
day record keeping to the owner or one of his/her employees. In this age
of computers, more and more of the daily bookkeeping is being done using
bookkeeping software and computers although some businesses still
maintain manual records. Due to the reasonable cost of computers and
software, I recommend an automated (computer) bookkeeping system. In
order to illustrate and understand what is actually being recorded and
summarized by a computer bookkeeping system (behind the scenes) my
lessons will illustrate the manual method of recording a company's
||Before we start our formal
training, I need to present some preliminary information that you
should be familiar with. The objective is to give you a little
business background information before we dive right in to the
Types Of Business
One of the first decisions that a person(s) needs to make is how the
company should be structured. The four basic legal forms of ownership for
small businesses are a Sole Proprietorship, Partnership, Corporation, and
Limited Liability Company. There are advantages and disadvantages as well
as income tax ramifications associated with each type of organization. We
aren't going to delve in to this area but a brief description of the
different types of organization and what they are is needed.
- Sole Proprietorship
Most small business start out as sole proprietorships. These firms are
owned by one person who is normally active in running and managing the
A partnership is two or more people who share the ownership of a single
business. In order to avoid misunderstandings about how profits/losses
are shared , who's responsible for what, and other management,
ownership, and operating decisions the partners normally have a formal
legal partnership agreement.
A corporation is an organization that is made up of many owners who
normally are not active in the decision making and operations of the
business. These owners are called shareholders or stockholders. Their
ownership interest is represented by certificates of ownership (stock)
issued by the corporation.
Two types of corporations:
- Regular or "C" Corporation
Earnings are taxed to the corporation. Shareholders not personally
liable for income taxes unless dividends are paid.
A special type of corporation allowed by the Internal Revenue Service
(IRS) that passes or transfers its earnings to the individual
shareholders who personally pay the income taxes.
- Limited Liability Company
The LLC is a relatively new type of business structure that combines
the benefits of a partnership and corporation.
Factors To Consider
Some Factors and a brief description of what to consider when choosing a
type of organization:
- Tax Consequences - Federal and
What taxes do you have to pay to the federal and state taxing
Is the business organization a pass-through (income only taxed once) or
is the income taxed twice ?
- Ease and cost of formation and
recurring registration fees
What documents do you need to file and what are the initial and
recurring costs for the type of organization ?
- Degree of control
Do you want to call all the "shots" ?
As a sole owner you get to.
- Liability (personal)
Do your personal assets need protection from legal liability ?
Are you willing to be liable for others (partners) ?
- Ability to get money (capital)
Do you need other investors to get your business "off the ground"
- Type of Business
If your type of profession requires a special license, is it limited to
what type of organization that can be selected ?
All the different types of organizations
listed above have some unique methods and rules for accounting for their
transactions associated with their equity (ownership) accounts. This
tutorial in order to keep it simple and since many small businesses start
out organized as sole proprietorships will focus on bookkeeping for a
Types Of Business Activity
Our society is made up of all kinds of different types of businesses.
Some sell products directly to the consumer and are known as retailers.
Other businesses called wholesalers warehouse and sell large quantities
of products to the retailers who in turn sell it to us (consumer).
Businesses like myself provide and sell services to other businesses and
individuals. Some businesses even tackle the task of actually producing
(make) the products and are called manufacturers.
Many of these businesses are required to
maintain and account for inventories of the products that they stock or
have on hand. Again this being an introductory tutorial we are not going
to cover the practices and procedures used in accounting for inventories.
Those wanting to learn about inventories need to refer to my So, you
want to learn Bookkeeping! - Merchandise Inventory Tutorial. That
being the case, the examples in this tutorial will deal with a service
type of business.
Believe it or not, a business needs to select an annual tax year. Your
two main choices are a calendar or fiscal tax year. A
Calendar Tax Year is 12 consecutive months beginning January 1 and ending
December 31. A Fiscal Tax Year is 12 consecutive months ending on the
last day of any month except December 31. The calendar tax year is used
by most businesses.
A reason a business might choose a
fiscal tax year is that they could select an ending month for their
fiscal year when business activity is low. This makes the process of what
is called closing the books a little easier. Also if a business has
inventories, there would be less they would have to count.
For us yanks, our Internal Revenue
Service (IRS) has guidelines for what accounting periods can be used
based on the types of business organizations such as a corporation, sole
proprietorship, partnership, etc. Normally, choosing a calendar year is a
Types Of Bookkeeping
A business also needs to determine the type of bookkeeping system that
will be used for recording their business transactions. Many small
businesses start out using the single entry system.
- Single Entry System
The single entry system is an "informal" accounting/bookkeeping system
where a user of this system makes only one entry to enter a
business financial transaction. It generally includes a daily summary
of cash receipts and a monthly record of receipts and disbursements
A checkbook, for example, is a single
entry bookkeeping system where one entry is made for each deposit or
check written. Receipts are entered as a deposit and a source of revenue.
Checks and withdrawals are entered as expenses. If a manual system is
used, in order to determine your revenues and expenses you have to
prepare worksheets to summarize your income and categorize and summarize
your different types of expenses. Bookkeeping software and spreadsheets
are also available to do this for you.
The emphasis of this system is placed on
determining the profit or loss of a business.
It got its name because you record each
transaction only once as either revenue (deposit) or as an expense
(check). Since each entry is recorded only once, debits and
credits (recording method required for the double entry system)
are not used to record a financial event.
For those interested, the Internal
Revenue Service's Publication 583 - "Starting a Business and Keeping
Records" has a detailed example of a single entry type of
While the single entry system may be
acceptable for tax purposes, it does not provide a business with
all the financial information needed to adequately report the
financial affairs of a business. In the near future, we'll probably see
the single entry system follow the same path as the dinosaur -
- Double Entry System
The double entry system is the standard system used by
businesses and other organizations to record financial transactions.
Since all business transactions consist of an exchange of one thing for
another, double entry bookkeeping using debits and credits, is
used to show this two-fold effect. Debits and credits are the device
that provide the ability to record the entries twice and are explained
in more detail later in this tutorial.
The double entry system also has
built-in checks and balances. Due to the use of debits and credits, the
double-entry system is self-balancing. The total of the debit values
recorded must equal the total of the credit values recorded.
This system, when used along with the
accrual method of accounting, is a complete accounting system and
focuses on the income statement and balance sheet. This system has
worldwide support as the system to use by businesses for recording their
It got its name because each transaction
is recorded in at least two places (accounts) using debits and credits.
Another decision faced by a new business is what
accounting/bookkeeping method is going to be used to track revenues
and expenses. An accounting method is just a set of rules used to
determine when and how income and expenses are reported.
If inventories are a major part of a
business, the decision is made for the business owner by the Internal
Revenue Service (IRS). Some business will be required to use the accrual
method of accounting while others may be granted an exception and allowed
to use the cash basis along with some special rules.
You're more than likely to encounter
both the term method and basis used when this topic is
discussed. In some cases you'll see the term cash method used and
other cases see the term cash basis used. Likewise you'll see the
term accrual method used and the term accrual basis used.
They both refer to the same concept and are used
- Cash Method
The cash method or basis of accounting recognizes
revenues (earnings) in the period the cash is received and expenses in
the period when the cash payments are made. Actually, two types of cash
methods (basis) of accounting exist:
- strict cash method
- modified cash method
A strict cash method follows the cash
flow exactly. A modified cash method includes some elements from the
accrual method of accounting and provides special methods for handling
items such as inventory and cost of goods sold, payroll tax expenses and
liabilities, and recording and depreciating property and
Many small businesses, whether they know
it or not, are actually using a modified cash method.
By concentrating on recording revenues
and expenses, the purpose of the cash or modified cash method of
accounting is on determining the net income or loss for a period based on
the cash received and the cash spent.
Information, such as the amounts billed
to customers for products and/or services and not paid, and the amounts
billed by suppliers for their products and/or services and not paid is
not normally recorded and maintained in the "books" using the cash
Many small businesses start out using
the cash basis rather than the accrual basis of accounting.
Use of the cash basis generally is not
considered to be in conformity with generally accepted accounting
principles (GAAP). Is this necessarily bad ? No, if no need is foreseen
for what are called audited financial statements there's no need for
concern. In most cases, audited statements are only required for the "big
boys" (companies whose ownership interests are publicly traded). The
"little guys" like the ma and pa shops don't need to worry. Still, when
possible, a business should strongly consider using the accrual method of
- Accrual Method
The accrual method or basis of accounting records income
in the period earned and records expenses and capital expenditures such
as buildings, land, equipment, and vehicles in the period
The purpose of the accrual method of
accounting is to properly match income and expenses in the correct
In order to accomplish this, the accrual
method of accounting records revenue as earned when the product and/or
service is shipped or rendered and invoiced (billed) to customers.
Likewise, expenses and capital expenditures are recorded as incurred when
the product and or service is shipped or rendered and invoiced (billed)
by the supplier.
Information, such as the amounts billed
to customers for products and/or services and not paid, and the amounts
billed by suppliers for their products and/or services and not paid is
recorded and maintained in the "books" using the accrual method. This
is the accounting method that is required to be used in order to conform
to generally accepted accounting principles (GAAP) in preparing financial
statements for external users.
Difference Between The Two
The difference between the two methods used for recording revenues and
expenses results from when the business transaction is recorded in the
"books" (timing). A business using the accrual method will record
revenues and expenses in their "books" before a business using the cash
method. In other words, unlike the cash method, they don't
wait until they get paid by the customer or wait until they pay a
supplier to record the transaction.
Comment: I've heard that
"forewarned is fore armed" so here goes. Cash Flow and
Profits are two different "animals". Due to the timing difference
as to when revenue and expenses are recorded and when the cash resulting
from the revenue and expenses is actually received or paid out , a
business using the accrual method of accounting and reporting a "hefty"
profit does not necessarily mean that they have the cash to pay their
Even though the accrual method provides
a better measure of profit and loss, many small businesses still use the
cash basis of accounting. I think with the advent of easier to use
computer accounting and bookkeeping software, we'll see more businesses
adopting the accrual basis of accounting.
Relationship Between the Type of
Bookkeeping System Used and the Accounting Method Used
What if any is the relationship between the type of bookkeeping system
used and the method of accounting ?
The Single Entry bookkeeping
system is used along with the Cash Method of accounting.
Debits and Credits are not used to record financial
The Double Entry bookkeeping
system can be used with both the Cash and Accrual methods
Debits and Credits are used to record financial events.
So You Know
You can use a different accounting method, the cash method or the
accrual method, for each business that you set up.
Also, you can keep two sets of books,
one on the cash basis and the other on the accrual basis, for the same
business. You do; however, have to select one of the methods for tax
purposes and continue to use it in the future. This is perfectly legal.
It's when you keep two sets of books to hide your true earnings when the
Accounting and Bookkeeping
Let's muddy the water about the single and double entry accounting method
at least as to how it relates to using bookkeeping and accounting
Single or Double Entry ?
Accounting and bookkeeping software programs actually allow the user to
make a single (one) entry and the software handles creating the debit and
credit entries "behind the scenes". The double-entry system is still
there, but it's hidden from the user. The one exception is the general
journal where the user does enter debits and credits.
Let's look at a sample transaction of
invoicing (billing) a customer to illustrate what I'm talking about.. An
invoice to a customer is created and printed and the resulting
transaction is automatically recorded in the "books" as an
increase to the amounts owed by customers and an increase to revenues
(sales) using debits and credits.
Wow, since it's automatic, does that
mean we don't need to learn about debits and credits later ? Only in your
dreams. Although an airplane can be flown on auto-pilot, would you want
to be on that plane without a trained pilot ? The same applies to using
accounting and bookkeeping software. You need a properly trained
bookkeeper or accountant that is also familiar with the software product
in order to properly use the software. That ole saying "GIGO" (Garbage In
- Garbage Out) definitely applies here.
Let's also muddy the water regarding the
cash method and accrual method of accounting.
Some accounting software allows you to convert data back and forth
between a cash basis and accrual basis of accounting. As I stated
earlier, you do have to select one of the methods for tax purposes and
continue to use it in the future.
What's the Recommended Type of
Bookkeeping System and Accounting Method ?
Most accountants when asked will
recommend that a business use the double entry bookkeeping system
and the accrual basis or method of accounting which is based on the
revenue realization principle and a principle called the
matching concept. The revenue realization principle states
that revenue should be recorded when actually earned.
Don't tell me accountants actually
play matchmakers or promote a dating service! No the matching
principle is recording the revenues earned during a period
using the revenue realization principle and matching (offsetting)
the revenues with the expenses incurred in generating this revenue.
Why is this so important ? All businesses small and large need
information to determine how well or badly they are performing;
however, if this information is misleading it could lead to false
conclusions and unnecessary actions. Show me what you
The following sample business
transactions for a mowing and landscaping company will be used to
illustrate the accrual basis of accounting/matching concept and the cash
basis of accounting.
January xxxx Billed $30,000 To Customers
For Services Performed & Completed In January XXXX
January xxxx Received Payments From Customers of $15,000
January xxxx Billed $12,000 by Outside Contractors For Services Performed
& Completed In January XXXX
January xxxx Paid Outside Contractors $8,000
February xxxx Received Payments From
Customers of $15,000
February xxxx Paid Outside Contractors $4,000
Possible Conclusions From The Cash
- Made money in January and
- Our company is making more
profit on the same amount of revenues. We had revenues of $15,000
in both January & February but made a bigger profit in
- In February, we must have
implemented some expense saving measures or got cheaper prices on
our contracted services.
Are any of these conclusions valid
? No not a one ! The "real" world as illustrated by the
accrual method shows we had a great January and made $18,000
but February was terrible. We celebrated our great January and sat
on our "you know what" and didn't go out and get additional
business and mow some more yards and do some more
Rules of The Accounting
In addition to the revenue realization and matching principles or
concepts, accounting and bookkeeping is guided by some additional
||Why Have Rules ?
All games such as football, baseball, basketball, etc. have rules.
Why ? So that everyone plays the game the same way. Playing the
Accounting "Game" is no different. What if owners and managers could
prepare their business's financial statements the way they felt like
If a business was wanting a loan or
credit, they would have a tendency to overstate the value of their assets
and the value of their business. If it came to taxes (we don't like to
have to pay them), let's expense and write off everything. As for
measuring performance (profitability) and comparing businesses in the
same industry, you'd have no idea as to who was actually doing well and
who wasn't. You couldn't even compare your own business from year to
year. As to coming up with a reasonable value for what a business was
worth, your guess would be as good as mine.
So, to put all businesses on the same
playing field, the accounting profession has established some rules and
Two notable accounting rule making and
standards setting organizations are the United States' Financial
Accounting Standards Board (FASB) and the International Accounting
Standards Board (IASB). The current accounting rules and standards are
continually reviewed, studied, changed, and added to in order to make
financial presentations more consistent, comparable, meaningful, and
The following are some of the rules used
to "play" the Accounting "Game":
- Accrual Concept (discussed
Supports the idea that income and expenses should be measured and
recorded at the time major efforts or accomplishments occur rather than
when cash is received or paid.
- Revenue Realization Concept
The revenue recognition principle requires companies to record revenue
when it is realized or realizable and actually earned. In other words,
at the time the goods are actually sold or the services are
- Matching Concept (discussed
The Matching Principle goes hand in hand with the Revenue Realization
Principle. The matching principle is recording the revenues earned
during a period using the revenue realization principle and matching
(offsetting) the revenues with the expenses incurred in generating this
- Accounting Period Concept
This assumption assumes that business operations can be recorded and
separated into different time periods such as months, quarters, and
years. This is required in order to provide timely information that is
used to compare present and past performance.
- Money Measurement Concept
This assumption assumes accounting measures transactions and events in
money and only transactions that can be monetized (stated in a monetary
unit such as the dollar) are recorded and presented in financial
statements. Simply stated, money is the common denominator (measurement
unit) used for reporting financial information.
- Business Entity Concept
This assumption requires every business to be accounted for separately
from the owner. Personal and business-related transactions are kept
apart from each other. In other words, the separate personal
transactions of owners and others are not commingled with the reporting
of the economic activity of the business. One of the first
recommendations almost all accountants tell a client is to at least
establish a business checking account and to use it to only record
their business transactions.
- Going Concern Concept
This assumption assumes that a business will continue operating and
will not close or be sold. It assumes that a business will be in
operation for a long time. Based on this assumption, actual costs
instead of liquidation values are used for presenting financial
information. This assumption is abandoned in the event that a business
is actually going out of business.
- Cost Concept
This principle requires that most assets are recorded at their original
acquisition cost and except for a relatively few exceptions (marketable
securities) no adjustment is made for increases in market value. In
other words, the value of an asset is never "written up" even though
the asset may actually be worth more than its cost. On the other hand,
the cost is sometimes "written down" for example marketable securities
and inventory. See Conservatism Concept.
- Conservatism Concept
Revenues and gains are recognized slower and expenses and losses are
recognized quicker. Accountants have a tendency to stray away from
painting too rosy a picture. In other words, if in doubt, err to the
side of caution. While accountants don't want to misinform users of
financial information, they also don't want to be sued.
- Consistency Concept
The same accounting methods should be applied from period to period and
all changes to more acceptable methods should be well explained and
justified. Deviations in measured outcomes from period to period should
be the result of deviations in performance not changes in
Information must be measured and reported in a similar manner by all
types of businesses. This allows comparison of the financial statements
of different entities (businesses) or comparisons for the same entity
(business) over different periods.
- Materiality Concept
The significance and importance of an item should be considered in
order to determine what is reported. Insignificant events need not be
measured and recorded.
- Cost-Benefit Convention
The benefit of providing the financial information should also be
weighed against the cost of providing it.
- Industry Practices Convention
When customary industry practices exists they should be followed and
used for financial reporting.
Want a more in depth discussion
concerning the rules of accounting and Generally Accepted Accounting
Principles ? More About Rules
All lessons and examples in the
remainder of this tutorial are all based on the accrual method of
accounting, the double entry method of bookkeeping, and the
sole proprietor type of business organization.
Let's see if
you learned a few terms and anything about the rules for playing
the accounting "game". Nothing difficult here, just a few matching
exercises that review the rules of accounting and some basic
||I'm not going to ring the bell on
you, but when you're ready feel free to move on to the next lesson
where we "watch the grass grow" and learn some accounting