Accounting

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QuickBooks

John C Welden says:

Bookkeeping is explained differently by different people. This is because when they start to explain they start in middle. To explain bookkeeping consistantly, you should start at the beginning.

In the beginning there were only two accounts.
ASSETS account. These are real accounts
OWNERSHIP equity. These are equity accounts

Assets accounts included:

Cash and cash type of accounts, on hand, in banks, etc. Current Assets

Funds due from others - Accounts Receivable Current Assets

Inventories Current Assets

Ownership in investments - Stocks and bonds, Notes, Etc... Investments

Fixed Assets- Land, Buildings, Equipment, Vehicles, Etc... Fixed Assets

Other Assets - Intangible, Goodwill, Development expenses, Etc.... Other Assets

What is the real value of the assets accounts?

Are all the Accounts Receivable going to be collected? If not then an assets valuation account is set up: Allowance for Doubtful Accounts.
Fixed assets do wear out, and the systematic write down of the fixed assets is call depreciation. An asset valuation account is set up: Accumulation of Depreciation.
Intangible assets are written down as Amortization of the Intangible Assets.

When ownership could not fund all the assets, the creditor equity accounts were set up. These are also called Liabilities.

Accounts Payable - Trade for merchandise
Payroll payable
Taxes payable
Loans payable
Mortgage payable.
Etc.

To answer to the question: "How much of the credit equities is due to be paid in the next fiscal year?", the credit equities were divided into current creditor equities due within one year. And non-current creditor equities due after one year.

Ownership Equity = Assets - Liabilities
When the creditor equities are deducted from the assets account the balance is ownership equity.

Temporary accounts were set up for the following to be closed at the end of the fiscal year.

When owners wanted to know how much was taken out by owners a Ownership withdrawal account was set up for ownership withdrawal, a.k.a. Stockholders dividends for a corporations set of book.

When owners wanted to know how much additional investment was made during a fiscal period then an account was set up for Additional investment.

To determine the change in ownership equity as the result of the operations, the following accounts were set up

Revenue Accounts for increase in ownership equity:
      i.e. Sales of Merchandise
             Service labor income
             Other charges to customers.

Expense Accounts.
      Cost of Sales type expenses:
             Cost of merchandise sold.
             Direct costs of the sales.

      Operational Expense Accounts.
             Breakdown of expenses that the management wants, or that is needed to file different type of reports.
              i.e. Income Tax Returns.
                     Payroll tax Returns
                     Items need for forms 1099

When an operation has assets that they do not own but must account for to a third party and eventually either return the assets or pay the third party for them, the possible liability should be recorded on the books, by setting up an account such as

             Consigned Inventory                                Debit for the amount of consigned inventory
             Accounts Payable-Consigned Inventory    Credit for the amount due on consigned inventory

These two accounts always should offset each other.
If there is more than one supplier that has furnished consigned inventory, then a consigned inventory, and Account payable for consigned inventory should be set up for each of the supplier products.

After the General Ledger was set up the volume of entries led some accountants to required that a sub-ledger be set up for the individual accounts.

          Accounts Receivable Ledger
          Accounts Payable Ledger
          Equipment Ledger

These sub ledgers should allways be in balance with the general ledger account.

In the beginning entries were made direct to the general ledger accounts.
If there was a mistake or if an entry was not made, it was not possible to always find the error.

Therefore, a journal system was set up to be the "Books of original entries"   And the ledger were to be the "Books of secondary entries."

The rule that always should be followed is "No original entry in the ledger accounts." The entries into the ledger account are from the journals.

If an mistake is made, we can be sure that the mistake can be found.
Today, a businesses financial travels are recorded in the order of occurance in a "Journal". The events are to be summarized by the class of the events into a legder account. The ledger accounts are maintained in a "Ledger"

Originally there was only one "Journal" called a "General Journal", but in time this Journal became hard to maintain, and specfic transactions were set out into specific journals. i.e. Receipts Journal, Check Journal, Sale Journal, Purchase Journal, Payroll Journal. which are to be summarized and the summary recorded in the General Journal.

As time moved forward, some bookkeepers believe that it was not necessary to record the specfic journals summary in to general journal, and posted the specific journal summary direct into the General Ledger.

When the specific journal summary are recorded into the general journal, it allows that a review of the individual classes of event can be reviewed to determine if any event is missed classified. i.e. office rent as office expense intead of office rent expense.

We must not forget that there are two set of books in the "books of Accounts".

The Journal system records the events as they happen, and are summarized into different classes of events.

The "Ledger or General Ledger" is the ledger accounts for each of the classes of events.

The classes of ledger accounts are set up are:

     Assets ----   What we have, i.e. Cash, Bank Accounts,Receivable, Inventory,
                         Equipment, Buildings, Land, and intanable (deferred expenses-
                         payment of expenses what benefit furure periods) and items
                         of Goodwill etc.

                         These accounts are set in order of when they will be reduce
                         Cash, -- I.e. Cash,Bank account, Accounts Receivable, Inventories
                          etc.

    Liabilities --    What we owe to people out side this operations. Accounts
                          Payable, Payroll, Payroll taxes, Notes payable, Mortgages
                          Payable, Etc.

    Capital --     Is the difference between what we have and what we owe.
                       And it is hoped that we have more assets than lliabilities.


What about the Income and Expenses classes?? During any period of time there are changes in the Capital or ownership.

In order to follow the changes the classes of income is set to following the increase in capital, and clases of expenses are set up to follow the decreases in capital.

i.e.   Increase in capital by --    Sales

         Decrease in capital by -- Purchases, Payroll, and other expenses.

These temp. accounts are closed in to the capital account at the end of the accounting period. Usually at the end of a year

Cash and cash type of accounts, on hand, in banks, etc.	Current Assets
Funds due from others - Accounts Receivable	Current Assets
Inventories	Current Assets
Ownership in investments - Stocks and bonds, Notes, Etc...	Investments
Fixed Assets- Land, Buildings, Equipment, Vehicles, Etc...	Fixed Assets
Other Assets - Intangible, Goodwill, Development expenses, Etc....	Other Assets