Basics of Bookkeeping, Journal, and Ledger

Basics of Bookkeeping

• Bookkeeping records business transactions in a systematic and chronological manner
• It adheres to procedures and principles and records transactions in the date order
• A bookkeeper records, maintains, and updates business records using account titles.
• Bookkeepers use the Book of Accounts to record business transactions

The Book of Accounts

• The book of accounts are composed of the Journal and Ledger
• The journal is the book of original entry
• The ledger is the book of final entry

General Journal and Ledger

• The general journal is the most basic journal
• It provides columns for date, account titles, explanations, folio or references and separate columns for debit and credit entries
• The general ledger is a group of all accounts that can be found in the chart of accounts
• These accounts are reflected in the trial balance as a summary of all financial activities that have taken place as recorded in the general journal and subsidiary

Subsidiary Ledger

• A subsidiary ledger is a group of accounts directly associated with the general ledger
• This record maintains individual accounts for customers and vendors whose cash is not being used as a medium of exchange when purchasing or selling merchandise

Accounts Receivable Ledger

• This ledger records all credit sales made by a business
• It segregates into one location a record of all amounts invoiced to customers

Accounts Payable Ledger

• Contains detail for all invoices received from suppliers
• This ledger is used as a subsidiary ledger, from which summary-level information is periodically posted to the general ledger
• Having a separate accounts payable ledger keeps a large amount of detailed payables transactions from cluttering up the general ledger

Debit and Credit Entries

• The left-hand side entry is known as “Value Received,
• Cash or non-cash items received must be recorded in the debit column, which increases the debit balance
• The right-hand side entry is known as “Value Parted With."
• Cash or non-cash items given must be recorded in the credit column, meaning the credit balance has increased

The Rules of Debit and Credit

• Debit is abbreviated as DR, while Credit is abbreviated as CR
• Mastering the normal balance of each account title used in recording is essential
• Steps to determine account balances include:
  • Add all the debit side to generate total debit
  • Add all the credit side to generate total credit
  • Subtract total debit to the total credit
  • Determine the balance of each account

T-Account

• This is the fastest way of posting journal entries to the ledger by
• It is divided into two sides, the left (debit) and right (credit)
• The debit side shows the value received
• The credit side shows the value parted with

Five Major Accounts

• Asset: Resources with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit
• Liability: Something a person or company owes, usually money, settled over time through the transfer of economic benefits
• Owner's Equity: Shareholders' equity (or owners equity' for privately held companies); a degree of residual ownership in a firm or asset after subtracting all liabilities associated with that asset
• Revenue: Money brought into a company by its business activities
• Expense: The cost of operations that a company incurs to generate revenue

Trial Balance

• A list of all ledger accounts with closed or final balances on a certain period
• Arranged according to the assets, liabilities, capital, revenue, and expense
• The debit and credit column totals must be equal, indicating financial statement balance

Adjusting Entries

• An adjusting entry updates financial data already recorded
• It helps capture all financial events within the accounting cycle/period of time
• Basic sources for adjusting entries include:
  • Depreciation expense
  • Deferred expenses of prepaid expenses
  • Deferred income of unearned income
  • Accrued expenses of accrued liabilities
  • Accrued income or accrued assets

Depreciation

• Allocates the cost of an asset to an expense over the accounting periods that make up the asset's useful life
• Examples of assets subject to depreciation include store, office, building, and transportation equipment
• Straight-line method formula: Annual Depreciation = (Acquisition Cost – Salvage or Residual Value) / Useful Life -Acquisition Cost is the actual cost of the asset acquired -Salvage Value is the selling price of the asset upon reaching the useful life -Useful Life is the economic or productive life of the asset written in months or years

Deferred/Prepaid Expenses

• Items initially recorded as assets that are expected to become expenses over time or through business operations
• Recognized by amortizing weekly, semi-monthly, or monthly

Deferred/Unearned Income

• Items initially recorded as liabilities but are expected to become income over time or through business operations

Profit/Loss Identification

• The bookkeeper records all transactions with monetary value which are then converted into key financial reports
• These key financial reports include:
  • Statement of financial position (balance sheet)
  • Statement of comprehensive income (income statement)
  • Statement of cash flows
  • Statement of changes in equity

Net Income/Loss Equation

• Net Income/Loss = Service Income - Total Expenses