Recordkeeping

Recordkeeping

1. Accounting Principles

   • Keeping good records is a crucial part
   • Without good records, business owners can't be confident that documents are accurate.
   • The IRS also insists that you keep accurate records for tax purposes
   • The accountant will need certain information to prepare monthly and annual financial statements, as well as for filing your takes properly
   • The information that's recorded comes from source documents.
   • A source document is the original record (source) of a transaction.
   • Source documents include receipts, cancelled checks invoices, bank deposit slips, and other records
   • At a minimum, an entrepreneur must carefully track • All cash flors (receipt) • All cash outflow (payment)

2. Chart of Accounts

   • The first step in double entry accounting is to create a chart of accounts.
   • Shows all the accounts used in the business.
   • It includes all assets, liabilities, owner's equity, income, and expense accounts.
   • Assets = Liabilities + Owner's Equity
   • The most important thing to remember about recording transactions is that just as with a balance sheet, any change on the left side of the equation must equal a change on the right side.

3. Double-Column Approach

   • Manual accounting systems use the double columns of debits and credits.
   • Each account has a left hand and a right-hand column.
   • The left-hand column is the debit side, and the right-hand column is the credit side.
   • Here's the key to understanding this approach: • Increases in assets are recorded on the debit side. • Increases in liabilities and owner's equity are recorded on the credit side. • Decreases in assets are recorded on the credit side. • Decreases in liabilities and owner's equity are recorded on the debuit side.

4. Duality

   • No matter which approach you, you are employing a key accounting concept called duality.
   • At the end of each reporting period, the account balances are totaled and transferred to the financial statements.
   • In the double column method, duality means that for any transaction posted to the general journal and any special joumals, all debits must equal all credits.
   • At the end of each day, the general journal entries are posted to each respective account in what is called a general ledger.

5. Basic Process

   • No matter which approach you use the end result produces the same set of financial statements.
   • Although the number and types of accounts may increase and the approach may vary, the process used in a simple double-entry accounting system has five steps:
   • 1. Prepare a chart of accounts. 2. Record all business transactions in an accounting database or jou mal, using. 3. Total each count in the database or journal at the end of the counting. 4. Prepare an income statement and statement of cash flow. 5. Prepare a balance sheet using the resting balances in chasse, liability, and owners equity accounts.

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