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Bookkeeping System Building Blocks
Every bookkeeping system has a few consistent elements. Here is a list of what your business requires to ensure that it’s bookkeeping by the book:
Chart of Accounts: Lists all accounts in the books and is the road map of a business’s financial transactions
Journals: Place in the books where transactions are first entered
General Ledger: The book that summarizes all a business’s account transactions
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Key Steps of Bookkeeping
As a bookkeeper, you complete your work by completing the tasks of the accounting cycle. Here’s a look at the cycle, and the related bookkeeping steps:
Transactions: The purchases or sales of items start the process of bookkeeping.
Journal entries: Enter transactions into the books through journals.
Posting: Post journal entries to the General Ledger.
Trial balance: Test accounts in the General Ledger to see if they’re in balance.
Worksheet: Enter on a worksheet any account adjustments needed after the trial balance.
Adjusting journal entries: Post adjustments from the worksheet to affected accounts in the General Ledger.
Financial statements: Prepare the balance sheet and income statement using the corrected account balances.
Closing: Close the books for the revenue, expense and drawings accounts, and start the entire cycle again with zero balances in these accounts.
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Flow of Credits and Debits in Double-Entry Bookkeeping
In double-entry bookkeeping, you enter all transactions in the books twice: once as a debit and once as a credit. This chart shows you how debits and credits affect your various business bookkeeping accounts.
| Account Type | Debits | Credits |
|---|---|---|
| Assets | Increase | Decrease |
| Liabilities | Decrease | Increase |
| Equity | Decrease | Increase |
| Drawings | Increase | Decrease |
| Revenue | Decrease | Increase |
| Expenses | Increase | Decrease |
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Current Ratio: A Valuable Formula for Bookkeepers
Bookkeepers use the current ratio to compare the current assets of a business to its current liabilities. This ratio provides a quick glimpse of your business’s ability to pay its bills. The formula for calculating the current ratio is
Current assets ÷ Current liabilities = Current ratio
The following is an example of a current ratio calculation:
$5,200 ÷ $2,200 = 2.36 (current ratio)
Lenders usually look for current ratios of 1.2 to 2, so any bank would consider a current ratio of 2.36 a good sign. A current ratio under 1 is considered a danger sign because that indicates that the business doesn’t have enough current assets to pay its current bills.
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Bookkeeping Tips for Controlling Your Business Cash
Bookkeeping is all about keeping tabs on where your business’s cash is. Here are a few handy tips that will ensure that your bookkeeping doesn’t require too much red ink so your small business can thrive.
Separate cash handlers. Be sure that the person who accepts cash isn’t also recording the transaction.
Separate authorization responsibilities. Be sure that the person who authorizes a payment isn’t also signing the cheque or dispersing the cash.
Separate the duties of your bookkeeping function to ensure a good system of checks and balances. Don’t put too much trust in one person — unless it’s yourself.
Separate operational responsibility (actual day-to-day transactions) from record-keeping responsibility (entering transactions in the books).
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Source:http://www.dummies.com/how-to/content/bookkeeping-for-canadians-for-dummies-cheat-sheet.html
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