Bookkeeper Launch: Foundations

Question 1

Accounting Equation

Answer 1

Assets = Liabilities + Equity

Example:
Car Purchase = Loan + Down Payment
$10,000 = $8,000 + $2,000
(debits must equal credits)

Question 2

Explain the two components of Equity

Answer 2

Income & Expenses are what feed into the Equity accounts

Question 3

The Account

Answer 3

It is a simple way to record and give details of the increases and decreases of the balances of assets, liabilities, equity, income, and expenses

Question 4

T Account

Answer 4

1) Account Title
2) Debits on the Left
3) Credits on the Right

Question 5

Debit

Answer 5

Money in

Question 6

Credit

Answer 6

Money out

Question 7

Dr and Cr: Assets & Expenses

Answer 7

Asset and Expense accounts normally have a debit balance

Debit to increase
Credit to decrease

Question 8

Dr and Cr: Liability, Equity, Revenue

Answer 8

These accounts normally have a credit balance

Debit to decrease
Credit to increase

Question 9

General Ledger

Answer 9

A recording of all the individual transactions happening inside of the business

Question 10

Chart of Accounts

Answer 10

Listing of all accounts used by the business to record & classify financial transactions

Question 11

Trial Balance

Answer 11

Two column summary of all the dr and cr in the COA

Question 12

In what order do the accounts appear on the Chart of Accounts?

Answer 12

Assets, Liabilities, Equity, Revenue, Expenses

Question 13

Tell me about GAAP

Answer 13

Stands for Generally Accepted Accounting Principles

It’s a rulebook to which bookkeeping is based all must adhere

It is governed by FASB

GAAP is a way to make the financial statements of one entity comparable to another

Question 14

Accounting Principle #1: Economic Entity Assumption

Answer 14

The business and it’s financial transactions are separate and distinct from the owner’s personal financial transactions

Question 15

Accounting Principle #2: Monetary Unit Assumption

Answer 15

Financial transactions are measured in U.S. dollars - not monopoly money or Schrute Bucks!

Question 16

Accounting Principle #3: Time Period Assumption

Answer 16

The financial transactions and statements cover a specific span of time (week(s), month(s), year(s)

Question 17

Accounting Principle #4: Cost Principle

Answer 17

Financial transactions are shown, forever, as the original and historical cost

Question 18

Accounting Principle #5: Full Disclosure Principle

Answer 18

All Pertinent information must be disclosed on the financial statements

Question 19

Accounting Principle #6: Going Concern Principle

Answer 19

The business is going to last into the foreseeable future

Question 20

Accounting Principle #7: Matching Principle

Answer 20

Forces us to use what is called the accrual basis of accounting

Expenses are matched with revenue (ex: cost of a product is shown when sold –sales commission is reflected in the period the sale is recorded)

Question 21

Accounting Principle #8: Revenue Recognition Principle

Answer 21

Revenue/sales/income is shown in the financial statements when a service is performed or a good is sold

Question 22

Accounting Principle #9: Materiality Principle

Answer 22

Is it “insignificant”?

Question 23

Accounting Principle #10: Conservatism Principle

Answer 23

When faced with a choice on financial statements, choose the option that reflects:
-Decrease in net income and/or
-Decrease in assets/equity and/or
-Increase in liabilities

Question 24

What are the 3 questions entrepreneurs should ask that the financial statements answer?

Answer 24

1. What is the EQUITY capital) in the business?
2. What is my profit?
3. Where the heck did cash come from and where did it go?

Question 25

Balance Sheet

Answer 25

-Shows equity (capital) in the business

-Is the accounting equation in financial statement form

-Balances in the accounts are as of a specific date (e.g. December 31)

-Shows assets (and their total), then liabilities, then equity (both with their sum total)

-Might hear this referred to as “ Statement of Financial Position” or “Statement of Financial Condition”

The Income statement “feeds” into the balance sheet, which causes it to…BALANCE

Question 26

Income Statement

Answer 26

-Answers the second question.

-It is a summary of the revenue, costs, expense and net income (loss) of a business over a specified period of time

-Revenue - Costs - Expenses = NET INCOME

-NET INCOME is then transferred to the balance sheet in the equity section

-This is a temporary statement and it gets closed out (think of your year-to-date pay stub)

Question 27

Statement of Cash Flows

Answer 27

-Answers the third question

-Divides cash flows into 3 main categories: operating activities (day-to-day operations), investing activities (buying equipment), Financing activities (taking out a loan to buy equipment)

Question 28

Bookkeeping Cycle

Answer 28

Financial Transactions
Journal
Ledger
Trial Balance
Financial Statements
Closing Entries

Question 29

Journal

Answer 29

-The place where the financial transactions are first recorded (“book of original entry”)

-The journal runs in chronological -order

Two Types:
General journal (all businesses)
Special journals (lots of repetitive entries)

Question 30

Examples of special journals include:

Answer 30

-Cash receipts journal
-Cash disbursements journal
-Purchases journal
-Sales journal

Question 31

Advantages of special journals include:

Answer 31

-Reduces clutter and the need to have to place details in multiple places

-Less posting from the journal to the ledger

-Allows a bookkeeper to focus on one specific journal at a time or exclusively

Question 32

Most common subsidiary ledgers

Answer 32

-Accounts receivable
-Accounts payable

These remove the need to post individual transactions to the general ledger, keeping things clean and easier to locate

Also helps with internal controls

Allows us to track activity by customer or vendor