Accounting Tips Guides

Book Keeping and Accounting is something foreign to many, maybe because they never cared to learn it thinking it is just a dull game of recording transactions using unnecessarily complicated terms and methods. Far from it, book keeping and accounting is a logical way of recording transactions in a professional manner so that the information could be used in the ascertainment of many other vital business criteria such as the profits or losses made, who owes you and how much; how much you owe others, or are you carrying enough cash in the business for meeting immediate commitments etc., just to name a few.

Accounting is something that is useful in your personal as well as professional lives, and it would be worth your while to shed your prejudices and listen! Accounting is nothing complex as you have mistakenly imagined. It is based on one of the most fundamental concepts that if one receives something, then obviously another has to give; and therefore every transaction has a two-fold aspect called debit and credit in accounting terms. Maybe this reminds you of one of Newton’s Laws that action and reaction are always equal and opposite.

Fundamentally, the study of accounting is built on (i) The Accounting Equation, and (ii) Double Entry Book Keeping.

(i) The Typical Accounting Equation:
Assets = Liabilities + Equity

(ii) Double Entry aspect of Book Keeping:
The perfect balancing of the accounting equation is guaranteed by this system.

I think it pertinent now to define Accounting as a system of summarizing financial transactions and recoding in such a manner as to facilitate using such records for later analysis, preparation of further financial statements, interpretation of accounts and communication as required.

Now let’s go a little further with the Accounting Equation enunciated above, and move on to its practical implications:

Assets are your possessions (including what others owe you) while liabilities are what you owe others. The difference between the two is called Equity, which includes capital introduced by you (if it is a sole proprietorship) or by shareholders (in the case of a limited liability company) plus or minus any retained profits or accumulated losses respectively. May I also just state in passing that capital introduced is not refundable to anybody and as such it is not a liability. Hence it is called Equity.

Say, you buy a Motor Vehicle for $40,000 for which you pay $25,000 out of your retained profits (or personal savings) and for the balance you take a loan of $ 15,000 from an outsider.

Substituting these values in the Accounting Equation, we have:

Assets (Possessions) = Liabilities (what you owe others) + Equity (Capital/Personal Savings)
$ 40,000 = $15,000 + $25,000

You see one debit of $40,000 is equal to two credits added together ($15,000 + $25,000) = totaling to $40,000.

There could be more complex transactions requiring distribution to more ledger accounts as well as transactions involving only two ledger accounts. Every equation comprises of the double entry with one or a series of debits on one side of the equation equaling one or a series of credits on the other side.

In the two examples given below you will see how the two concepts of Accounting Equation and Double Entry are synchronized:

(i) Settlement of a liability by paying cash $50.
The liability represented by a creditor receives while your cash account gives.
Creditor (debited with) $50 = cash account (credited with) $50

(ii) Receipt of a debt from a debtor who owed you $75.
Your cash account receives while the debt represented by a debtor gives
Cash (debited with) $75 = Debtor (credited with) $75

Earlier we sited one of Newton’s laws to illustrate the concept of double entry in book keeping. At this point we would like to take you back to your algebra lessons way back in grade 8 or so where you were told that if you add something on one side of an equation, that you have to do the same to the other side of the equation too? It’s fair enough, is’t it? That is exactly what we ask you to do in book keeping too making the double entry equal and balancing.

Double entry book keeping is nothing so complex or weird as to defy fair and reasonable common sense. You can easily grasp the concept of double entry by training yourself to think logically as to who or what gives, and who or what receives in each transaction; and by framing the entries accordingly, while ensuring that the two sides of the equation are in agreement (balancing) and are consistent with common sense.

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Medical practices are opting to use medical billing services more and more because of the convenience of having someone else doing the paperwork. They are able to focus more on other aspect of their practice.

Medical billing is a very tedious and frustrating part of any medical practice. Coding alone can take a very long time, and filling out the paperwork can be just as long. It can be maddening if the insurance company rejects your claims and you have to start all over again. Add to that the existing claims that need to be filed and the person doing the work may find themselves in need of medication. It is a responsibility that most office personnel decline.

Many small practices feel that they cannot afford the cost of medical billing services, however when you consider the time it takes to fill out the forms by staff members, the time it takes for the insurance company to accept or reject the claim and then send the check, you are talking about several months with no income into the medical practice. For some, it is a financial burden that can cause great hardship. Using this type of service is very cost effective for any medical practice.

When a medical practice bills insurance companies on their own, they have to manually code and send each claim to the insurance company where they are combined with millions of other claims. They sit in piles on the desks of overworked employees waiting to be processed. It can take several weeks to several months for a claim to be processed manually.

If the claim is rejected it is sent back to the practice where the whole process starts all over again.

There are many advantages to using a medical billing company. Before a claim can be processed, it has to be coded. Coding the claim is done quickly and efficiently by specially trained professionals. Because all claims submitted electronically, more than ninety percent of all claims are accepted. Each claim is followed from the time it is submitted to the time it is paid. The repayment time for claims is reduced to a couple of days instead of several months.

Medical billing companies are available to every type of medical service. No matter the size of the practice, this type of service can benefit everyone.

Perhaps the greatest benefit is that the physician is able to reduce office expenses while being able to spend more time with patients. They know that their financial status is taken care of and that the insurance rebates will be forthcoming. This is very important to all practices, however those who have small medical practices find it extremely cost effective because they depend on the rebate to meet the financial obligations.

Physicians who have debated whether or not to use a billing service have found that by using it has given them the freedom to enjoy other things instead of sitting at a desk filling out paperwork. They have seen an increase in their funds and are better able to meet their financial obligations faster and easily.

Peter Geisheker is CEO of The Geisheker Group marketing firms. One of the types of
clients that Peter helps are medical billing services

Tax authorities are often relaxed about the need for small business to prepare and produce formal accounting records. Often the requirement is simply that each business retains sufficient financial records to support the accounts submitted.

Such advice from tax authorities places a burden upon small business in that the vast majority are honest hard working people who are meticulous about keeping accounting records of sales made during the financial year. Unfortunately many small businesses are not so meticulous about keeping financial records of business expenses in their accounts.

A typical taxi driver may for instance keep a diary and record the daily receipts from his fares. If those recorded receipts are accurate then the total sales turnover for the year will show the correct total. The same may not be true of expenses and the accounts thereby overstated.

The total business expenses of the taxi driver would mainly include the fuel receipts plus the other running costs of the business. Typically a receipt for fuel will be obtained and kept in a file or shoe box. Some may get mislaid and lost and be missing from the final accounts preparation.

Other receipts for miscellaneous items may not even be retained as forgotten, lost or not thought of at the time of purchase. Examples may be purchase of the diary in which sales records are kept, business cards, other stationery, and cash payments for a whole variety of miscellaneous items.

The same practise is also often applicable to not just taxi drivers but many small businesses.
A small business owner may visit a supermarket for groceries and also buy an item of stationery for business use the cost of which is lost when the grocery receipt is discarded. If close attention is paid then the stationery item could have been obtained on a separate receipt and the cost of the journey to purchase it also included in the business expenses.

The stationery item is just one example which could be multiplied hundreds of times with hundreds of different items during the financial year. While each item missed and unrecorded may not be significant the total could well be sufficient to significantly reduce the year end tax burden by lowering the net taxable accounting profit.

Having retained a separate receipt for everything it is useful if the receipts are filed and the bookkeeping system employed updated at least once a month and preferably each week. By updating the accounting records on a regular basis more expenses will be recorded as the memory will remember recent expenses more clearly and accurately.

Another useful method to ensure all business expenses are maximised is to keep a daily diary of all expenses incurred. Use the entries in the diary when updating the bookkeeping records to ensure nothing has been missed in the accounts.

The essential message is to be meticulous about keeping receipts for everything, no matter how small, and recording both income and expenditure on a regular basis so that items are not lost or forgotten and included in the bookkeeping records. By also keeping a diary of financial records even if a receipt has been mislaid the amount should still be included in the accounts. It could be disallowed later if the tax records are enquired into but that is a matter of negotiation with the tax authority from a standpoint where the financial records are correct.

In addition all small business should take some time to review all potential expenditure which can be claimed under the tax rules. Many valid expense items can be missed having been dismissed as ordinary expenses which may be business related and therefore claimable in the financial accounts.

Terry Cartwright is a qualified accountant in the UK designs Accounting Software on excel spreadsheets providing complete Small Business Accounting Software solutions for with single and double entry Bookkeeping solutions for limited companies and self employed business

Company owners are often confused by the tangled web of business and financial regulations. To simplify the complicated financial part of the business, many of them choose to protect themselves by contracting for outsourced accounting services. On the other hand, some companies are still trying to handle their own bookkeeping or hiring non professionals to tackle the job in an attempt to save time or money. However, not using a professional is one that can cost a business owners more time and money than they realized they were gambling.

There are several reasons why choosing professionals to handle online bookkeeping services is one of the most cost-effective investments that a company can make.

Navigating the Regulatory Maze
The legal landscape changes quickly and businesses struggle to keep abreast of the latest developments. In our increasingly litigious society, ignorance of the law is no protection from significant financial liability.

This is one of the many reasons companies chose to employ outsourced accounting services. Unless a business is primarily involved in financial services, it is difficult to keep track of the changes. By hiring an experienced professional, not only does a company get its books in order, but it also gets financials done in compliance with the law.

Recent Changes Turn the Financial World Upside Down
The past few years have seen some of the most sweeping business reforms since the Great Depression. High-profile financial disasters like Enron and Worldcom have fueled public outcry for legal protection that has put a burden on all companies, public and private. It is harder for companies to use the casual internal bookkeeping services that have served them in the past. They need dedicated, full-time specialists that are familiar with today’s proper accounting practices, not the practices of ten years ago.

Using online bookkeeping services that use highly specialized accountants relieves the company of much of the burden of following frequent regulatory changes. These firms do nothing but financial work, so they can focus on using the correct practices and that protects their client companies.

You’re in Control When Using Online Bookkeeping Services
Although hiring an outside firm to do financial work can provide protection against liability, it doesn’t absolve the company of responsibility. For that reason, some companies are hesitant about using outsourced accounting services. They fear losing one of two things: control or security. If you choose the right service provider, neither of these will be a problem.

Online bookkeeping services give you full, real-time access to all of your financial data. Nothing is done without your permission or behind your back. You get regular financial reports that allow you to keep an eye on the company’s financial health. The service is there merely to process the data; all financial decisions are still yours.

That unlimited access doesn’t mean there is no security. In fact, your data is probably more secure if handled by online bookkeeping services. Professional companies have dedicated systems have hacker defenses, virus protection, and backup capabilities that small or even mid-sized companies can’t match.

Few companies need or can afford to hire a full-time, dedicated accounting staff and yet all companies need those capabilities. Outsourced bookkeeping services give you the benefit of expert financial services at far less cost.

Author is a freelance copywriter. For more information on Online Bookkeeping
Services, visit http://www.osibusinessservices.com

The basic advantages of a computerized accounting system are efficiency and speed. In a manual system receipts and disbursements are initially recorded in registers. This can involve writing a check and then writing a description in a register or this can be done on a one-write system. Either way the transactions in the registers must be manually posted to the general ledger and then compiled into financial statements. This manual transfer of information is time consuming and subject to error (such as transpositions).

In a computerized system all the multiple steps of a manual system are collapsed into one entry. For example when you create a check there is an automatic and simultaneous posting to a register and to the general ledger accounts. Financial statements can be created at any time and as often as needed.

You would think that with these advantages computerized accounting would be both cheaper and more error free than manual accounting. But it turns out that this is not always true. First of all while software costs have come down there is a fairly big learning curve involved in using the software properly. Much of the problem lies in ill conceived software design.

The problem of poor design stems from an over ambitious attempt on the part of developers to allow users with no bookkeeping training to make entries without reference to the debit and credit structure. The software hides this structure on the assumption that the user does not understand it. All manner of problems ensue from this design flaw. Often even CPAs and experienced bookkeepers cannot figure out what is going on with these software packages. This necessitates expensive training and consultation with experts in the software.

It would be far better if the software mirrored and exposed the debit and credit structure so anyone with basic bookkeeping knowledge could understand how to use the software. I am convinced anybody can learn the debit and credit system within a few hours (see my book). But the software developers believe that business owners are too stupid or intimidated to learn the system and that it has to be hidden. This causes all kinds of expensive problems.

The software developers also try to set up default charts of accounts and financial statement formats that create all manner of problems that could be avoided simply by insisting that the user learn enough about accounting and their own business. Again these “simplifying” designs increase the reliance on expensive experts.

Finally, software developers do not make money by selling excellent and reliable software that works for years. Rather developers make money by selling new and improved upgrades. But guess what? An accounting package that was any good to begin with should not require frequent upgrades, or for that matter upgrades at all Basic bookkeeping and financial statement compilation procedures have not changed for centuries. Yet any popular software package user will be inundated with new versions of the package which will require yet more expensive consultations. Most of these upgrades are simply unnecessary bells and whistles or fixes for bugs that should have never been in earlier versions.

So what should a small business do? By all means buy a software package but do not expect that your costs will end with the purchase of the package. Undoubtedly you will need to pay a consultant to set the program up and give you basic training. Overall cost savings from conversion from a manual system will not be as great as they should be.

Michael Sack Elmaleh is a Certified Public Accountant and Certified Valuation Analyst. His book, “Financial Accounting: A Mercifully Brief Introduction”, has received wide critical acclaim. He has nearly 30 years of accounting and 10 years of teaching experience.His web site is understand-accounting.net

Basic bookkeeping consists of recording the prime business transactions of sales, purchases and cash. The accounting documents supporting and evidencing these transactions being called prime documents which are entered into the business books by a bookkeeper.

Sales Invoices

A sales invoice is a prime document. In more advanced accounting systems technical terms such as sales day books, sales ledgers, debtors and credit control are important but at the basic level bookkeeping of sales is the act of recording those sales in the business books.

A sales day book is basically a log of sales invoices issued by the business and this level of recording financial transactions is all that may be required for a small business. A simple list of the sales invoices which would be described as part of a single entry bookkeeping system.

A basic bookkeeping system for sales invoices would be a single entry bookkeeping system with minimal analysis of the total sales value. An accountant or bookkeeper may make these entries although in smaller organisations the records are often kept by the business owner.

Larger organisations may well maintain sales day books but would certainly also enter the sales invoices into an accounting system and would usually use accounting software to do so. Within the financial accounting package the sales would not only appear as a list making up the total sales turnover but would also be entered in a sales ledger.

Each sales invoice being allocated to the various clients to whom the sales had been made. The sales ledger at this stage of the bookkeeping represents the value of goods or services sold to each customer.

Purchase Invoices

A purchase invoice is a prime document and a purchase day book is a list of purchase invoices received from suppliers. The purchase invoice day book would not normally require further financial analysis of the type of expenditure. To that extent a simple purchase day book would be a good starting point for a simple set of accounts but require a little more sophistication requiring analysis by expense type for both financial control and taxation purposes.

A basic bookkeeping system for purchase invoices would be a single entry bookkeeping system that also had columns to analyse the expenditure into the expense categories required by the particular tax rules under which the accounts were being prepared.

Medium and larger organisations require to track and control purchase invoices to control costs and payments. In a mirror of the sales ledger system purchase invoices would also be entered by supplier into a purchase ledger. The easy way is to allocate each supplier a code number so that the accounting software can collect the amounts owed to each supplier the individual supplier accounts being the purchase ledger.

Cash and Bank Transactions

Quite apart from the single entry of sales and purchases is the recording by a business in its books of cash and bank receipts and payments. The third area of prime documents is the cash receipt or bank slip, given or received. Such documents may take many forms from the till roll of a retail business to the deposit slip at a bank but all are evidence of money changing hands.

In a small business cash and bank records may be maintained separately to the records of other prime accounting records. In a simple format the cash or bank records would be similar to the bank statement but showing the names of customers and suppliers or if multiple customers for example then the source of the money being received or paid.

Larger organisations and particularly using accounting software also code each receipt and payment to the same customer and supplier codes used to produce the sales ledger and the purchase ledger. In addition to recording the cash and bank transactions in the cash and bank accounts the amounts received and paid are also recorded in the sales ledger and purchase ledger.

By recording the cash and bank transactions in the ledgers the customer and supplier records making up the accounting ledgers then show the balances on each account and the recording of the financial transactions in this way is effectively the other side of the double entry bookkeeping system.

A small business not requiring sophisticated accounting records for financial control purposes and using a single entry as opposed to a double entry bookkeeping system could simply record receipts against the list of sales invoices and the payments against the list of purchase invoices.

Basic bookkeeping using single entry of prime accounting documents would be suitable for small business, requires very little accounting knowledge and when carried out by the business owner rather than a bookkeeper or accountant can save money,

Terry Cartwright is a qualified accountant in the UK designs Accounting Software on excel spreadsheets providing complete Small Business Accounting Software solutions for with single and double entry Bookkeeping solutions for limited companies and self employed business