Welcome to The Bookkeeping Master's How to do Bookkeeping Course. This course will cover the basics of bookkeeping and accounting, which will include definitions of financial terms (such as capital, asset, liability, etc), an explanation of double entry bookkeeping and other insights into accounting principles. The course will consist of both written and audio and video content. This bookkeeping course is for free, any donations will be appreciated - click here to donate securely.
How to do Bookkeeping Part 1
Before learning about double entry bookkeeping and how to keep accounts/book for a business, it is best to learn some of the bookkeeping and accounting terminology. The first part of this free bookkeeping course will define commonly used bookkeeping and accounting terms.
What is an Accountant?
An accountant usually refers to the person who will calculate the overall annual profitability of an entity (business, charity, company, etc.) and the amount of governmental tax that is owed. Sometimes an accountant is referred to as a 'Tax Accountant' or 'Year-End Accountant'. The majority of entities will use an accountant for profitability and tax calculations, usually an in-depth understanding of accounting techniques, accounting principles and current tax law is needed to make these calculations accurately.
Okay... So, what is a Bookkeeper?
A bookkeeper usually refers to the individual that keeps the financial records (accounts or books) of an entity. This involves recording the day-to-day financial transactions of a business, such as, recording the entities payments and receipts from bank statements, raising sales invoices, recording purchase invoices and making records for any cash payments and receipts. Some bookkeepers also help calculate VAT.
Is there a Difference between a Business and Company?
In most countries, a business refers to an entity that trades as a sole trader - a person that has exclusive ownership of a business, all the profits are his/hers and he/she is liable for all business debts. A company usually refers to an entity that trades as a limited company - a company that is owned by share holders and directors. Individuals are only liable for the amount of debt equivalent to their investment. There are also other entities such as partnerships, limited partnerships and charities.
What do you Need to keep Accounts?
Without well-kept and accurate accounts, it is not possible to calculate the profitability of an entity... You won't know how much money you are making!
Up to date accounts help business owners and company directors make financial decisions about the entity. To plan for future performance you need to know current and past performance. Accounts can provide owners with details on current and past sales, stock and profitability, monies owed to the entity, monies owed by the entity, bank balances, cash flow and other crucial financial information.
By law, it is likely that the entity will have to declare profitability and pay tax. This cannot be done without well kept and accurate accounts.
Bank managers and investors will need to review business or company accounts before providing a loan or investment
How to do Bookkeeping Part 2
This second section of The Bookkeeping Master's How to do Bookkeeping course, will continue to cover commonly used accounting lingo. The terminology defined in this section is slightly less basic. As with all the sections of the free bookkeeping course, please watch and listen to the bookkeeping videos as well as read the content.
What is Capital?
Capital or 'invested capital' refers to the amount of funds invested into the entity by the business owner. For example, when Lisa started Business A she invested £1000 to purchase stock and pay for some business expenses. The capital invested in Business A is £1000. When Mike started Business B he invested £2000. Since then he has invested another £500. The capital invested in Business B is £2500.
What is a liability?
A liability is money owed by the business to other entities. Business A owes Lisa £1000 due to her capital investment. Business B owes Mike £2500 due to his capital investment. As the businesses owe money to their owners, capital is a liability. Other liabilities could include bank loans, bank overdrafts and business credit cards. A common liability is creditor liability, the money owed to suppliers for purchases on credit.
What is an asset?
Just as a liability is what the business owes, an asset is something than is owed to the business or something that will make money for the business. Debtors are a common asset in most businesses, customers that owe money to the business who have purchased on credit. Other assets include items that create or make money for the business such as stock and equipment. Often anything of value that can be resold is also an asset, office furniture, computers, owned cars/vans, etc. Other items that cannot be resold or are of very little value are generally expenses, these could include, power, rent, stationary, postage, wages, etc.
What are Drawings?
In a business, drawings is the term used for profits that the owner has used to pay himself/herself a wage. Generally any money taken from the business for personal use is considered drawings.
What are Dividends?
In a company, dividends is the term used for profits that have been paid out to the directors and shareholders.
How to do Bookkeeping Part 3
The third section of The Bookkeeping Master's How to do Bookkeeping course will cover how to actually record the financial transactions of a business, using the double entry bookkeeping system/method.
Debits and Credits
In double entry bookkeeping, each recorded transaction (or posting) is recorded twice, hence the name, double entry. Every transaction will have a debit entry and a credit entry. Doing so, allows for transparent accounts and allows for a clear audit trial and trial balance (these reports are covered in another course!).
First you will need to know what transactions are booked as debits and what transactions as credits. The simplest way I know of to remember this is the PEARLS acronym...
P - Purchases
E - Expenses
A - Assets
R - Revenue
L - Liabilities
S - Sales
Now you know what type of transactions are booked as debits and as credits, I can now provide some insight into recording financial transactions using double entry bookkeeping. With any transaction, there are two elements to the transaction, one a debit and one a credit. Let's look at an example of recording a £50 bank receipt from the sale of an item or sale of a service provided. We will need to record the money received into the bank account as well as the sale. The sale is a credit, so £50 would be credited to the sales account. The corresponding entry will need to be a debit entry, the £50 would be recorded in the bank account as a debit entry, assets are debit entries.
DR (Debit) - Bank Current Account £50
CR (Credit) - Sales Account £50
Here are two more examples. The first example is of a transfer of money from the bank current account to the bank savings account, the second is the payment of rent.
DR - bank savings account £100 (asset, money in)
CR - bank current account £100 (money out)
DR - rent account £500 (expense)
CR - bank account £500 (money out)
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