Introduction to Bookkeeping from the Top Down

In this lesson we’re going to review the job market for bookkeepers and accountants

• start with the big picture using Facebook

• relate Facebook to the balance sheet equation that we will talk about in a future lesson

• provide the basis of double entry bookkeeping

• pose the question why there are three financial statements, which we will answer in later lessons

In this module we will provide some background to the example that we’re going to use throughout the course. We will use a fictitious company called Thai Teak Concepts, a company that imports teak furniture from Thailand and sells it in the U.S.

In this module we will look at the checkbook register for our company for the first month and see if we can tell how the company is doing and show that the checkbook doesn’t really show you revenues and expenses. Therefore, we can’t tell how the company is doing and will need to learn double-entry bookkeeping.

In this lesson we will do the following:

• define what is bookkeeping

• show the typical give-and-take of transactions

• take a closer look at the give-and-take between a company and vendors

• take a closer look at the give-and-take between a company and customers

• show what is the basis for double entry bookkeeping

• provide a simple example for you to understand the balance sheet equation

In this lesson we will first review double entry bookkeeping then

• define assets

• liabilities

• equity

• revenues

• expenses

In this lesson we will show how the give and take for transactions show up on separate financial statements and will show how the three financial statements all fit together

In this lesson we’re going to transfer all of the transactions we saw on the checkbook to a spreadsheet to illustrate the give-and-take of transactions on the balance sheet equation. We will show the spreadsheet and all of the additional accounts that we need to use besides cash to record transactions in double entry bookkeeping. Then, we will show where all of the numbers on the financial statements come from on the spreadsheet.

In this lesson we’re going to demonstrate how to record transactions for our fictitious company Thai teak concepts. We will show how you to record the following:

· the owner’s investment in the business and how to record:

· Travel expenses that are charged on a credit card

· a security deposit paid for an office lease

· the purchase of inventory on account

· the payment of a shipping fee for inventory

· the payroll for an employee

· a customer’s paying in advance for a product

· the company portion of the employee FICA

· advertising expenses that are paid for the month

· rent expense that’s paid for the month

· how to pay the electricity and heat expense that’s paid for the month

· a loan from a bank

· the purchase and payment of office furniture

· and finally, the purchase and payment for computer equipment

In this lesson we will illustrate the second month of transactions for our fictitious company Thai teak concepts. We will illustrate how to record the following:

· the travel expense charges on the credit card

· the payment of last month’s credit card bill

· the purchase of more inventory in Thailand

· the sale of the inventory

· a credit card fee

· the cost of goods sold of the inventory sold

· the Cost of goods sold of the shipping

· collection of cash from the credit card company

· payment to the employee

· the company portion of the employee FICA

· the payment for the inventory purchased in the previous month

· the payment for the shipping fee for the current month shipment of inventory

· the payment for advertising expenses

· the payment for the loan

· the payment for office rent

· the payment for heat and electricity

· the depreciation of the furniture and computer equipment

· and finally, we income taxes that we owe for the month

In this lesson we’re going to illustrate with a diagram the first month’s transactions for our fictitious company Thai teak concepts, and we’re going to show the impact of these transactions directly on the three financial statements. So, I hope this gives you an even deeper understanding of how transactions are recorded. By showing the impact of transactions several different ways, we’re hoping you will form a deeper understanding of accrual accounting concepts, which will help you learn the basic bookkeeping concepts of debits and credits.So, we will illustrate what happens when

· the owner invests in the business

· you charge travel expense on a credit card

· you pay a security deposit for an office lease

· you purchase inventory on account

· you pay a shipping fee for inventory

· you pay the employee

· customers pay you in advance for a product

· the company records its portion of the employee’s Social Security tax

· you pay advertising expenses for the month

· you pay rent expense for the month

· you pay electricity and heat for the month

· you borrow from a bank

· you purchase and pay for office furniture

· and you purchase and pay for computer equipment

In this lesson we’re going to illustrate the transactions for the second month of our fictitious company Thai teak concepts. We will diagram the transaction and show the impact on the three financial statements. We will illustrate the following:

· travel expense charged on a credit card

· payment of last month’s credit card bill

· purchase of inventory

· the sale of the inventory

· recording a credit card fee

· recording cost of goods sold expense

· recording cost of goods sold expense for shipping

· collecting cash from the credit card company

· paying the employee

· recording the company portion of the employee Social Security

· payment for inventory previously purchased

· paying the shipping fee for the current month

· paying advertising expenses for the month

· making a loan payment to the bank

· paying for office rent

· paying electricity and heat

· depreciation of the furniture and computer equipment

· and finally recording income tax owed for the month

In this lesson we will use our month 2 example to show the following:

· the impact of using cash to measure profits

· the impact of using accrual accounting, or double entry accounting, to measure profits and will compare the 

  two

· how accrual accounting can accommodate timing differences between when an expense and a cash

  payment occurs

· how accrual accounting can accommodate timing differences between when a revenue and a cash receipt

  occurs

In this lesson we will define debits and credits. We’ll explain

· their meaning depending on the context that they are used

· and we will show why people are confused with the definition because they’re used to the bank using debits

  and credits a certain way in their checking account

In this example we’re going to do the following:

· explain what is a general journal

· explain what is a chart of accounts

· record each transaction of our fictitious company Thai Teak Concepts for the first month. We have previously

  done this using the balance sheet equation and a spreadsheet. We will reference that for each transaction

   and then will show how you record the transaction using debits and credits

In this lesson we’re going to use a spreadsheet that you can download at the end of the lesson

· we will revisit the general journal

· we will show how each entry in the general journal is posted to the general ledger

· will prepare a trial balance for month one

· will prepare an income statement for month one

· prepare a closing entry for month one

· we will post the closing entry to the general ledger for month one

· we will prepare a post closing trial balance for month one

· will prepare the balance sheet for month one and finally we will prepare a statement of cash flows for month one

In this lesson we are going to add some accounts to the chart of accounts. And then we will record all of the transactions for the second month for Thai Teak Concepts using debits and credits. We had previously recorded these transactions using the balance sheet equation spreadsheet. So, we will relate the way you record transactions using a spreadsheet to the way you record transactions using debits and credits

There is a spreadsheet you can download after the lesson to review everything that we’ve done in the lesson:

· we will take every debit and credit in the general journal for month 2

· and post it to the general ledger

· we will then prepare a trial balance for month two

· prepare an income statement for month two from the trial balance

· prepare a closing entry for month two

· post the closing entry for month two to the general ledger

· and then prepare a post-closing trial balance

· and from the post-closing trial balance prepare a balance sheet for month two

· and lastly, we will prepare a statement of cash flows for month two

In this lesson we will introduce this highly rated accounting software and will take a quick tour of the software

In this lesson we’re going to take a brief look at the chart of accounts that comes standard with QuickBooks. We will look at a few of the asset, liability, equity, revenue and expense accounts

In this lesson we will do the following:

· customize the QuickBooks chart of accounts

· enter journal entries 1 to 14 in QuickBooks for month one

· prepare a QuickBooks trial balance and compare it to the one that we did in a previous lesson

· prepare a QuickBooks balance sheet and compare that to the balance sheet we prepared in a previous lesson

· do the same for a QuickBooks income statement

· do the same for the QuickBooks statement of cash flows

In this lesson we’re going to

· illustrate journal entries 15 to 32 for month two in QuickBooks

· prepare a trial balance for month 2 in QuickBooks

· prepare a balance sheet

· an income statement

· and a statement of cash flows