Bookkeeper Business Blueprint Welcome! Bookkeeper Business Blueprint Bookkeeping Knowledge - Module 3 Introduction & Recap & Preview

Knowledge Module 2 Recap Chart of Accounts Bookkeeping Principles Accrual v. Cash Basis Bookkeeping Debits & Credits Introduction

Knowledge Module 3 Preview Debits & Credits Deep Dive Balance Sheet: Current Assets Professional Ethics Application: Bank (Cash) Reconciliation (Module 3.5)

Bookkeeper Business Blueprint Welcome! Bookkeeper Business Blueprint Bookkeeping Knowledge - Module 3 Lesson 1: Debits & Credits Deep Dive

Debits & Credits -- T-Account Debits ALWAYS go on the LEFT Credits ALWAYS go on the RIGHT To help visualize this, this profession has developed T-accounts: ACCOUNT NAME DEBITS CREDITS

Debits & Credits Banks have us thinking backward because to them a debit it good and to us it’s bad Just the opposite a credit to them is bad while it’s good to us However, we are not looking at it from their point of view

Normal Debits & Credits

Debit & Credit Quick Tips Cash received; debit cash Cash paid-out; credit cash Revenue earned; credit revenue Expenses incurred; debit expense

Think of DRs & CRs as... Every transaction has at least one debit and one credit. The totals of the debits and credits to every single transaction MUST BALANCE to the penny.

Debits and Credits in Action Rosemary’s Transactions: Deposits money in her bank for seed $ Purchases a computer Collects money for providing dietary advice Pays the first electric bill for the store Orders more herbal supplies inventory Pays a one year insurance premium in full

Rosemary’s Trx #1: Deposit Seed $ Money deposited INCREASES Assets (cash) DEBITS cash Deposits from owners are Equity contributions / Paid In Capital Assets = Liabilities + S/H Equity (Cash) (Paid-In Capital) +$10,000 = +$10,000

Cash (Asset) Account Debit Credit $10,000

Paid In Capital (Equity) Account Debit Credit $10,000

Rosemary’s Trx #2: Purchase Computer Money going out DECREASES Cash (asset) Computer is an asset and INCREASES Equipment (asset) In essence, move from one asset to another (one-side of the AE) Assets = Liabilities + S/H Equity (Cash) -$1,000 (Equipment) +$1,000

Cash (Asset) Account Debit Credit $1,000

Equipment (Asset) Account Debit Credit $1,000

Rosemary’s Trx #3: $ For Service Provided to Patient Revenues INCREASE Equity Revenues INCREASE Assets (Cash or Accounts Receivable A/R) Assets = Liabilities + S/H Equity (Cash) (Revenue) +$100 = +$100

Cash (Asset) Account Debit Credit $100

Revenue Account Debit Credit $100

If in Journal Entry Form: debit: Cash $100 credit: Revenue $100

Rosemary’s Trx #4: Pays Electric Bill Assets = Liabilities + S/H Equity (Cash) (Expense) -$240 = -$240

Cash Account Debit Credit $240

Utilities (Expense) Account Debit Credit $240

Rosemary’s Trx #5: Orders Herbal Supplies Assets = Liabilities + S/H Equity (Cash) -$800 = +$800

Cash Account Debit Credit $800

Inventory (Asset) Account Debit Credit $800

If in Journal Entry Form: debit: Inventory $800 credit: Cash $800

Rosemary’s Trx #6: Pays Insurance Premium for Entire Year Assets = Liabilities + S/H Equity (Cash) -$1,200 = (Prepaid Expenses) +$1,100 (Expense) $100

If in Journal Entry Form: debit: Prepaid Expense $1,100 credit: Cash $1,200 debit: Insurance (Exp) $100

Bookkeeper Business Blueprint Welcome! Bookkeeper Business Blueprint Bookkeeping Knowledge - Module 3 Lesson 2: Balance Sheet - Current Assets

Assets = Liabilities + Stockholder’s Equity The Balance Sheet Assets = Liabilities + Stockholder’s Equity One of the ‘Big 3’ financial statements Measures financial situation at a specific point in time (e.g. October 31st) Indicates: what you Own (assets) / who you Owe (liabilities) / what’s left Over (equity) Count the cost (historical cost principle) is heavily employed here We will focus on assets in module 3 and liabilities and equity in module 4 Indicates the financial health of your client

Before We Start the Party, We need to discuss... The Balance Sheet Before We Start the Party, We need to discuss... Current v. non-current assets and liabilities: Current asset: turned into cash or used within one year of the balance sheet date (October 31st) Current liability: must be paid back within one year of the balance sheet date (October 31st) Non-current asset: not expected to be turned into cash or used within one year of the balance sheet date Non-current liability: not required or expected to be paid back within one year of the balance sheet date

Before We Start the Party, We need to discuss... The Balance Sheet Before We Start the Party, We need to discuss... Permanent v. temporary accounts (chart of accounts) Permanent accounts: do not close...balance continues into perpetuity (balance sheet accounts except owner’s draws / dividends) Temporary accounts: close...typically at year-end (income statement accounts: this is how it flows into equity on the balance sheet and accounting equation) Savings account example (principal & interest earned)

The Balance Sheet: Current Assets Most common current assets include: Cash: checking, savings, petty Accounts receivable (A/R) Inventory Supplies Prepaid Insurance

Balance Sheet: Current Assets / Cash don’t think this needs too much detail it’s king and the lifeblood of every business vast majority of every transaction will involve help your client to manage its flow bank reconciliation in next lesson

Balance Sheet: Current Assets A/R who owes your client manage it well or the biz dies subsidiary ledger aging / collections allowance for doubtful accounts / bad debt association on the income statement

Accounts Receivable / Bad Debt Expense & Allowance for Doubtful Accounts A/R is used in the accrual (preferred) method of accounting A/R and the associated sale / revenue is recorded when the transaction is complete opposed to when cash is collected Not used under the cash basis and typically not used for income tax reporting A/R is your client extending credit to their customers for services or goods they provide Is “normal” in a lot of business settings

Accounts Receivable / Bad Debt Expense & Allowance for Doubtful Accounts Bad Debt Expense is the account used to show “write-offs” of customers who do NOT pay Most of your clients will use the specific identification method of writing off bad debt This means you write off the bad debt when it’s know that your client’s customer will not pay (As a total aside: using the word “client”) relationship vs transaction based

Accounts Receivable / Bad Debt Expense & Allowance for Doubtful Accounts Allowance for doubtful accounts is an estimate of bad debt expense Based on historical bad debt write-off as a % of accounts receivable You will not see this account used real often unless you’re in specific industries OR when full-blown accrual financial statements are required (As a total aside: using the word “client”) relationship vs transaction based

Balance Sheet: Current Assets:Inventory merchandise bought by your client for the purpose of being sold to customers is an asset presented on the balance sheet under “current assets” like fixed assets, inventory is reported based on its cost - NOT the retail value clients tow the line between having too much inventory (cash-suck) and too little inventory (lost sales)

What is Cost of Goods Sold (COGS)? this is the cost of merchandise that was actually sold to a customer (it’s no longer inventory) a direct cost presented on the Income Statement total cost of goods sold is the inventory cost + any other costs to get merchandise in/out of inventory (shipping) cost of goods and inventory are linked through the sales process

Inventory / Cost of Goods Sold cost of goods sold method you will use (most likely) is “first-in / first-out” or FIFO as we call it in the “biz” there are other cost methods including: last-in / last-out or LIFO and Average cost. in order to make inventory and cost of goods sold 100% accurate this requires a physical inventory count at predetermined intervals if your client is inventory-intensive, you will be more involved helping manage inventory and COGS

Inventory / Cost of Goods Sold inventory management is critical in these types of businesses as it typically is one of the largest assets and costs theft of inventory obsolescence of inventory efficiency in managing inventory levels is critical

Balance Sheet: Prepaid Expenses pre-pay for an expense that lasts longer than 1 month goes along with the matching principle most common is insurance can be any expense that’s paid in advance

Bookkeeper Business Blueprint Welcome! Bookkeeper Business Blueprint Bookkeeping Knowledge - Module 3 Lesson 3: Professional Ethics

Professional Ethics Confidentiality Security of client data Competency Duty of care Integrity

Ethical Considerations Situation: Your client, Robin Banks, is trying to get a loan from the bank. The financial statements are a bit “iffy”. To fix the problem, Robin Banks client wants you to post-date some payment transactions. After all, these payments won’t be cashed until after the close, so what’s the harm?

If You Do What Robin wants, does that present complete & accurate financial statements?

Ben Robinson, CPA ben@learntobeabookkeeper.com 1-800-616-1790 Summary / Get In Touch Ben Robinson, CPA ben@learntobeabookkeeper.com 1-800-616-1790