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Wednesday, 13 August 2014

Easy Basic Accounting Concepts - 10 Lessons

Easy Basic Accounting Concepts:

'via Blog this'

Having to run a small business again is not easy especially if you do the accounts yourself, for now. Here are some good articles that I am saving just in case.

This site is AWESOME!

Basic Accounting Concepts

Lesson 1 in the Basic Accounting series:

Understanding basic accounting concepts is a must for every small business owner.
Even if you have an accountant that takes care of that “accounting stuff”, you need to know accounting basics such as debits and credits and some accounting terminology.

Foundation of Basic Accounting Concepts:

Accounting is setting up a system of recording and summarizing financial transactions in such a way that they can later be analyzed or used to communicate with others.
The basic accounting equation is the foundation of all basic accounting concepts.
The financial position of all companies both large and small is measured by the following equation:
For sole proprietorships:
Assets = Liabilities + Owner’s Equity
For corporations:
Assets = Liabilities + Stockholders’ Equity
Assets are what a company owns
Liabilities are what a company owes
Owner’s (Stockholders’) Equity is the difference between assets and liabilities.
An example of this accounting equation for a small business owner:
You buy a computer (an asset) for $5,000 dollars. If you borrowed $3,000 (a liability) and paid the balance with your savings, here is what the accounting equation would look like: $5,000 computer (asset) = $3,000 loan (liability) + $2,000 (owner’s equity) in the computer.

Recording Basic Accounting Transactions:

There are two basic ways to record your financial transactions: single entry bookkeeping and double entry bookkeeping. See what the difference is between the two on this page: Double Entry Bookkeeping vs. Single Entry Bookkeeping
Most businesses use the double entry accounting system. In this system every business transaction is recorded in at least two business accounts.
Write a big T on a piece of paper. Above the left arm of that T writeDebit and above the right arm write Credit.
We are going to use this T account as a visual aid to see how debits and credits work with your accounts.
Now imagine you were paid $100 for your one-of-a-kind thingamajig. To record this business transaction in a double entry system, you would debit your Cash account by recording it under the left arm of that big T you drew and credit your Sales (Revenue) account by writing it under the right arm of that T--under the Credit heading. 
debits and credits
Accounting Basics Tips:
Debit just means left
Credit just means right
Debits and Credits must always equal!
To determine how you would record the transaction you have to determine what kind of account is being affected and if it was increased or decreased.
In the above example Cash is an asset account and we increased our cash with the sale, so looking at the chart below, you see that to increase our asset account we would need to record it on the Debitside (left side).
We also increased our Sales Revenue, but since it is an income account we would need to record it on the Credit side (right side).
See how even though we increased both accounts--the debits and credits equal? That is the basis accounting concept of debits and credits.
Debits and Credits vs. Account Types:
Debits go on the left and Credits on the right!
Note: Need more help remembering which account to debit and which account to credit?
See this page on basic accounting concepts for recording accounting journal entries  for some sure-fire tips on debits and credits.
Couple of pointers:
Although it is called a double entry system, a transaction may involve more than two accounts.
For example to record a loan payment you would debit two accounts Notes Payable and Interest Expense. Then credit the total loan payment because we decreased our asset account Cash.
although I used the T account to illustrate how debits and credits work, most accountants use the format shown on this page:Accounting Journal Examples.
Notice you first show the account and amount to be debited. Then indent the next line and show the account and amount to be credited.

Double Entry Bookkeeping

Lesson 2 in the Basic Accounting series:

With a double entry bookkeeping system every one of your small business transactions will be recorded into at least two of the accounts in your accounting system.
Is double entry accounting right for your small business or will another accounting system work better?

Single Entry vs Double Entry Bookkeeping:

There are two basic ways to record your financial transactions: 
singl entry bookkeeping
Single entry bookkeepingcan used by small businesses where a balance sheet is not required for financial control or tax purposes.
Double entry bookkeepingis required for all businesses that must produce both a profit and loss account and a balance sheet.
To decide if a single entry or double entry system would be best for your business...consider the type of business you own.
A small sole proprietorship or home-based business may not require a double entry system for recording business transactions.
However, if you have quite a few accounts receivable (money owed to your business by your customers) or accounts payable (money owed by your business), you may want to consider utilizing a double entry system.
Most small business owners do not usually start right out with a double entry system.
It is easier for them to use a single entry method which is kind of like your check register. You just add the money coming in and subtract the money going out and keep a running balance.
There are pros and cons of using a single entry bookkeeping system.
The main selling point is the simplicity of single entry bookkeeping.
You just have two lists--one for income and one for expenses.
The main disadvantage of single entry bookkeeping is its limited ability to track your assets (what your business owns) and liabilities (what your business owes.) It is also easier to make errors with. With double entry bookkeeping everything must balance.
I have built my free accounting spreadsheets using the single entry bookkeeping system mainly because the double entry system would be too complicated for me to build and give away and secondly because I had built these spreadsheets in the first place for several small business owners that did not have any prior accounting skills.

Double Entry Bookkeeping Advantages:

Most medium and large businesses use a double entry system which tracks their income and expense AND their assets and liabilities.
Double entry accounting is require for all businesses that are required to produce a statement of its assets and liabilities (a balance sheet).
In a double entry system, at least two entries are recorded with each business financial transaction...a debit and credit. Each transaction must balance each other. See more details about basic accounting concepts such as debit and credits .
Take for example the purchase of the computer for your small business. In a single entry system, you would simply subtract the purchase price from your running total.
In a double entry system you would debit your asset account (Office Equipment or whatever you named it) and credit either cash or accounts payable...depending on how you paid for it. See why a double entry system is best for tracking assets and liabilities?
Note: If you use small business accounting software you probably will not see that two or more accounts are being affected. All that fun double entry accounting stuff is done behind the scenes for you.
For example if you record a check you wrote for that computer we were talking about above, your accounting software will automatically reduce your Cash account and only ask you for the other accounts affected such as Office Equipment.
See this page for some tips on picking out an affordable user-friendlydouble entry bookkeeping system.

How to Record Accounting Journal Entries

Lesson 3 in the Basic Accounting series:

Learning how to record journal entries is the foundation of any accounting course.
If you are a student, small business owner, or just wanting to brush up on your accounting skills, understanding the basic accounting concepts of debits and credits and double entry accounting will be the first step you want to take in building your accounting skills.
Let’s go step-by-step through the accounting cycle of double entry  journal entries.

Step 1 - Recording Accounting Journal Entries with Debits and Credits:

  • In a double entry accounting system(used by most businesses) every business transaction is recorded in at least two accounts. (Learn more about double entry accounting in ourbookkeeping section)
  • One account from your small business chart of accounts will be debited which simply means the amount will be recorded on the left side and one account will be credited…amount recorded on right side.
  • Debits and credits must balance equal.
  • See more about debits and credits in our basic accounting concepts section.

Step 2 - Journalizing

Note: Today most accounting is done on computers and the journalizing (recording accounting journal entries) is done in the background; however, it is still important to know the basics of double entry accounting.
  • In manual accounting each financial transaction is first recorded in a book called a journal.
  • In that accounting journal entry the title of the account to be debited is listed first, followed by the amount to be debited. The title of the account to be credited is listed below and to the right of the debit, followed by the amount to be credited.
  • To determine which account is debited and which is credited you have to first determine what kind of account is being affected and if it was increased or decreased.

Step 3 - Recording Accounting Journal Entries using the Accounting Equation:

  • To determine which account is debited and which is credited memorize this basic accounting equation (the foundation of all basic accounting concepts):
Assets = Liabilities + Owner’s Equity
  • Assets are on the left side or debit side and asset accounts such as Cash have their normal balances on the left side.
  • Liabilities and Owner’s equity are on the right side or creditside and their accounts in the general accounting ledger have their normal balance on the right side.’s where it gets a little complicated...but keeping the above equation in mind makes it a lot easier to understand:)

Step 4 - Recording Accounting Journal Entries: Increase or Decrease?

  • To record a business transaction in an accounting journal entry, we need to look closely at the transaction and see which accounts it involves and if it increased or decreased those accounts.
  • If it involved an asset account such as Cash, you would picture that basic accounting equation above and know that its normal balance is on the left side (debit side), so if we received (increase) cash we would record the amount on the left side.
  • However, if it decreased our asset account such as paying our small business bills, we would record it on second line and on the right side to show a decrease in that account.
  • If the business transaction increased our liabilities or owner’s equity we would record it on the right side ( credit side) because those balance sheet accounts have a normal credit (right) balance. (Remember that equation?)
  • If the transaction decreased our liabilities or owner’s equity we would record it on the left side ( debit side).
  • To sum it up—remembering the basic accounting equation: increase a balance sheet account by recording the amount on the same side as its on in the equation; decrease it by recording amount on the opposite side.
  • For income statement accounts such as revenue (income) and expenses, you just need to remember revenue accounts have a normal right credit balance. (Easy for me to remember—Revenue increases owner’s equity and has the same normal “credit” balance)
  • So following the rules above—when you increase your revenue account, you would record the amount on its normal credit (right) side and to decrease it you would record the amount on the debit (left )side.
  • Expenses have a normal debit (left) balance. To increase your expense account, you would record the amount on its normal debit (left) side and to decrease it you would record the amount on its opposite (credit) side. Tip: Expenses are almost always debited!

Step 5 - Practice Recording Accounting Journal Entries:

The best way to learn something is to do let’s study some accounting journal entry examples:
Accounting Journal Entries Examples
Jane and Bob open their brand new store selling thingamajigs. They invest $15,000 into their new business; rent a building, and start selling their merchandise.
Examples of their accounting journal entries for the first month:
DateAccount Names & ExplanationDebitCredit
Jane and Bob deposit $15,000 in their new business bank account.
Debit: increase in asset (cash)
Credit: increase in owner’s equity
3/5Rent Expense
Paid first month's rent of $1700.
Debit: increase in expenses (rent)
Credit: decrease in asset (cash)
3/10Thingamajig Material - Inventory
Accounts Payable
To make their thingamajigs Jane purchased $4000 in thingamajig materials on credit.
Debit: increase in assets (inventory)
Credit: increase in liabilities (AP)
Account Receivable
Sales of $2200. Cash sales of $1200 and sold $1000 on customer credit. (Compound entry: Some transactions will affect more than one account)
Debit: increase in assets (cash)
Debit: increase in assets (AR)
Credit: increase in Revenue
3/15Thingamajig Material Expense
Thingamajig Material - Inventory
$600 in Thingamajig material was used to make more Thingamajigs.
Debit: increase in expenses (Thingamajig Material)
Credit: decrease in asset (inventory)
3/28Accounts Payable
Paid $1800 on credit account.
Debit: decrease in liabilities (AP)
Credit: decrease in assets (cash)
Accounts Receivable
Collected $500 in cash from credit customers.
Debit: increase in assets (cash)
Credit: decrease in asset (AR)
Notice how each transaction is balanced. Everything entered on the left hand (debit) side equals the (credit side) right hand side. That’s what double entry bookkeeping is all about—transactions must balance. It’s kind of like what you learned in basic algebra classes–if you can remember back that far – what you did to one side of the equation you had to do to the other side.
Couple more tips:
  • The above accounting journal entries did not include account numbers. Usually in real life, you would use the account numbers from your chart of accounts to identify each account.
  • You do not use dollar signs in recording the amounts. If the journal is prepared in the United States the amounts are understood to be in the US Dollar.

How to Post to Your Accounting Ledger

Lesson 4 in the Basic Accounting series:

general ledger is a collection of your chart of accounts. It is where all of your accounting journal entries end up.
Most all accounting these days is done on computers and the accounting software does the posting to the general ledger in the background.

For example, say you record a check that you wrote to pay your rent in your accounting software.
In the background your accounting software will automatically debit your rent expense account and credit your cash account...posting them to your accounting ledger.
However, it is important as small business owners or even someone just studying accounting to know how and why the accounting software did what it did :)
So I am going to give you a brief overview of how to post accounting journal entries to your general ledger.
First of all, if you haven’t read it, please read this page on accounting journal entries It will tell you how to decide if an account should be debited or credited.
I am going to use those accounting journal entries examples to show you how to post them to an accounting ledger. So you might want to print that page out first and then come back to this page...or I have the above link to the accounting journal entries opening in another window if you just want to have both pages up at once.

Posting to an Accounting Ledger:

As you can see, Jane and Bob have recorded their business transactions for the first month of business. Now it is time to take those accounting journal entries and transfer the debits and credits from the journal entries to the appropriate accounts in the general accounting journal.
This is called posting.
Here is an example of posting some of Jane and Bob’s journal entries that involved cash to the Cash account in their accounting ledger.


March-1Balance forward from Feb-280
The title contains the name of the account and its reference number from your chart of accounts.
  • First column is the date. Fill in the date of the transaction.
  • Second column is the item. (It is not necessary to write out a description unless you just want to.)
  • The third and fourth column is the debit and credit columns.
  • The fifth column is the balance column. Some keep a running total, but most draw a line underneath the entries, net all the entries together, and put the balance on the correct side (See explanation at the botom of this page) of the account.
Summary of example above:
  • First line is the balance carries forward from the month before.
  • Second line is Jane and Bob's contribution of $15,000 on March 1st to capitalize their business. (Increased cash – debit)
  • On the 5th Jane wrote a check for $1700 for the lease on their store.(Decreased cash – credit)
  • On the 15th they had cash sales of $1200. (Increased cash – debit)
  • On the 28th Bob paid $1800 to their suppliers for material purchases made earlier in the month on credit. (Decreased cash – credit)
  • On the 30th they received $500 from their credit customers customers(Increased cash – debit)
I just used this as an example. In real life you would take each line from the accounting journal entries and transfer the amounts to the corresponding Ledger accounts.
*Notice where I put the balance. It is in the debit column. Each type of account will have a normal balance in either the debit or credit column depending on the category of the account:
  • Asset accounts have a debit balance.
  • Liabilities have a credit balance.
  • Owner’s Equity have a credit balance.
  • Incomes have a credit balance.
  • Expenses have a debit balance.

Understanding Financial Statements

Lesson 5 in the Basic Accounting series:

Understanding financial statements is one of the keys to your small business success.
Sadly, many entrepreneurs fail not because they lack knowledge of their products and determination...
but, because they failed to realize the importance of preparing and analyzing their financial statements.

Analyzing and Understanding Financial Statements:

Financial statements are the main way to report financial information to people within your organization...
such as management and employees and to people outside your organizations such as banks, investors, suppliers and others.
For example, a small excavating company significantly increased sales for three straight years then failed. The reason why? They overspent on equipment and overextended themselves by offering loose credit terms and discounts.
You can avoid these cash flow traps by simply taking the time to analyze your financial statements.
The main three financial statements for small businesses are the Profit and Loss Statement (income statement), the balance sheet, and the statement of cash flows.
The order in which the statements are normally prepared and the nature of the data presented in each statement are as follows:
All three financial statements should be identified by the name of your small business, the title of the statement, and the date or period of time.
The data presented in the profit and loss statement and the statement of cash flows is for a certain period of time. The data presented in the balance sheet is for a specific date.
Note: If you have a very small business, a profit and loss statement and a balance sheet is usually all that is required or needed.
Your retained earnings data, which shows your profits or losses from the first day of your business to the present are shown on your balance sheet in small businesses. In larger businesses this data is detailed in a separate report called a Statement of Owner’s Equity.
A statement of owner’s equity a summary of the changes in the owner’s equity that occurred during a specific period of time, such as a month or year. It is also called a Retained Earnings Statement.
Understanding financial statements is not rocket science. Most small business owners have basic financial information on their financial statements. So learn basic accounting principles and gain a basic understanding of how to prepare and read financial statements.
This information will help you with your day to day financial decisions in your business and help you in your quest for financial success.
See this page for explanations and examples of financial statements for "Nonprofit" organizations:Understanding Financial Statements for your Church or Nonprofit

Financial Ratio Analysis

Lesson 6 in the Basic Accounting series:

Financial ratios and performing a financial analysis using your financial statements can be a valuable tool in constructing a successful small business.

Financial Ratio - Comparative Analysis 

Comparing your current financial statements to previous years, previous months, and/or previous quarters can tell you how your business is doing financially.
financial ratio analysis

  • Are sales better or worse?
  • Are costs more or less (compare each expense)
  • Is your cash flow improving?
These are just a few of the things you will want to study in your financial analysis.
Pull out those previous financial statements, clear your calendar, get comfortable and plan on spending a few hours analyzing and comparing those previous financial statements with your current ones.
Those of you with a new business can take your pro forma statements (Pro forma financial statements are forecasts of the financial position of a business at some defined point in the future) and perform your financial analysis by asking yourself the following questions:
  • Do you have less sales than you predicted…if so why?
  • Where any expenses greater than you predicted?
  • Is there a way to lower them?

Financial Ratio - Industry Comparisons

An industry comparison analysis compares your small business’s performance to other small businesses in your industry.
These are not as easy to do simply because finding the data you need to perform these financial analyses are sometimes a little difficult to find.
However, if you ever need a loan or investors, you can bet they are going to perform some of the following ratio analysis with your financial statements.
So it may be worth a little effort and/or money to get your industry average ratios. I live close to a college and usually I can get a copy of industry averages free from the library there
You might be able to find the same information at your local library. The books you want to look at are the Standard and Poor Industry Averages and the Valuline Surveys.
You can also get a basic financial ratio report in your industry free online from this site:, but you have to pay for a more current detailed report.
Here are a few of the most common financial ratio analyses using your Profit and Loss Statement:
  • Gross Profit Ratio – This is the most common ratio calculated on your Profit and Loss statement. You simply divide your gross profit by your net sales. Then compare your ratio to similar small businesses in your industry. Click here for a freeGross Profit Margin Ratio calculator
  • Net Profit Ratio – This formula is simply Net (pre-tax) Profit divided by Net Sales. “Net Income” is income with all expenses subtracted out including taxes, interest expenses, and depreciation. “Net Sales” is sales revenue minus any returns and allowances. This is a good ratio to perform a comparative analysis with. Look at your data historically to see how the net profit margin is trending.
Most financial ratios are calculated using your Balance Sheet.
Here are a few of the most common financial ratio analyses: using your Balance Sheet:
  • Current Ratio - This is the most common ratio calculated on your Balance Sheet. Bankers and investors use this ratio to determine if you are likely to be able to pay your bills. It is calculated by dividing Current Assets by Current Liabilities. An acceptable current ratio is at least 1:1, but a ratio of 2:1 would be much better. Click here for a free Current Ratio calculator.
  • Quick Ratio – Calculated by dividing the sum of Cash and Account Receivables by Current Liabilities. This ratio is often referred to as the “Acid Test” because it concentrates mainly on your more liquid assets. An acceptable quick ratio is 1:1. Click here for a free Quick Ratio calculator.
  • Debt/Assets RatioTotal liabilities divided by total assets. The resulting ratio tells your banker, investors, and/or creditors what portion of your assets are paid for with borrowed money, so the lower the better with this one:) Click here for a free Debt-to-Assets Ratio calculator.
  • Return on Assets – This is calculated by dividing Net (pre-tax) Profit by Total Assets. Bankers and investors use this one to determine how efficiently you are using your assets.Click here for a free Return on Assets Financial Ratio calculator.

These are just some of the ratios you can use to do a simple financial statement analysis. There are more complex ratios you can use (do a search on financial ratios), but if you have a very small business such as myself you really don’t need the more complex analyses just yet.
So use these and compare how you are doing now to how you were doing and how you compare to others in your industry.

Remember the sky is the limit when it comes to building your business!

How to Figure Your Break-Even Point

Lesson 7 in the Basic Accounting series:

Your small business’s break-even point is the point where your total revenue received equals your total costs associated with the sale of your product or service...
or a even simpler accounting definition is the point where your business does not make a profit or suffer a loss.

Determining your Break-Even Point:

How to Figure Your Break-Even Point
As small business owners determining our break-even point can be a very handy tool...
in determining how much to charge for our product or service...
or where we might be able to even cut some costs.
But before we start figuring at what point we can break even, let’s go back over some accounting terminology:
  • Variable CostsThese are expenses that are associated with producing your product. They are directly proportioned to the production of your product. For example, if you owned a bakery, your variable cost would be your flour, sugar, etc.
  • Fixed Costs: These are expenses that would be the same even if you did not sell any of your product such as rent, insurance, etc.
  • Unit Selling Price: The price you will be selling a single product or service for.
  • Contribution Margin: The amount generated after the variable expenses have been covered that will contribute toward the fixed expenses
Keeping those accounting definitions in mind, let’s discuss how to conduct a break-even analysis of your small business by using the break-even point formula:
Breakeven Point = Fixed Costs/Unit Selling Price – Variable Costs
Using this formula, you can determine how much of your product you will need to sell to break even. Once you have reached that point you have recouped all your cost that you have generated producing your product both fixed and variable.

Figuring your Contribution Margin:

Another important term used in a break-even analysis, is contribution margin (see definition above).
The formulas for figuring the unit contribution margin is:
Unit Contribution Margin = Unit Selling Price – Unit Variable Cost
Using the formulas above, let’s figure the breakeven point for a fictional bakery that sells cakes. The amounts and assumptions used in this example are also fictional.
We have figured that are variable cost for each cake we sell is $10. If we sell our cakes for $25 the contribution margin per cake would be:
Contribution Margin per cake = $25 minus $10
Contribution Margin per cake = $15
So the contribution margin per cake tells us that after the variable expenses are covered...$15 per cake will go towards paying the fixed expenses. Assuming we have $300 of fixed expenses per week, the point we break even in cakes per week would be:
Breakeven point in cakes per week = Fixed expenses per week divided by Contribution Margin per cake
Breakeven point in cakes per week = $300/$15 per cake
Breakeven point in cakes per week = 20 cakes per week
From this we can see we would need to sell at least 20 cakes a week to break even. To double check this we would use the following schedule:
Projected Net Income for a Week
Sales (20 cakes sold at $25 per cake) = $500 Minus variable expenses (20 cakes at $10 per cake) = $200 Minus fixed expenses =$300 Equals $0 Net Income
There are several good on-line break-even calculators to help you with your break-even analysis:

Learn Cost Accounting Basics the Easy Way

Lesson 8 in the Basic Accounting series:

Cost accounting basics is all about learning how to use different accounting methods to determine the cost of producing your product and then how to use that information to make a profit.
That is why cost accounting is often referred to as cost management accounting.

cost accountin
As a small business owner your number one goal is to make a profit.
You do this by keeping a close eye on the expense of producing your product and adjusting your selling price to keep an acceptable level of profitability.
Basic cost accounting is a very important part of maintaining a healthy profitable small business.

Cost Accounting Basics:

To better understand cost accounting basics, I will use a very simple cost accounting example using the fictional bakery I used in figuring abreak-even-point.
Our costs include:
  • $900 per month for our rent
  • $300 per month for utilities
  • $1600 per month for a person to help us
  • $10 per cake for sugar, flour, etc. to make our cakes
We estimate we can make and sell 90 cakes a week or 360 in a month.
We are using a basic cost accounting method that uses both fixed and variable costs to determine our unit cost.
Quick accounting definitions refresher:
  • Variable Costs: These are expenses that are associated with producing your product. They are directly proportioned to the production of your product. For example, if you owned a bakery, your variable cost would be your flour, sugar, etc.
  • Fixed Costs: These are expenses that would be the same even if you did not sell any of your product such as rent, insurance, etc.
Our unit cost is:
  • Building rent = $900 per month / 360 cakes = $2.50 per cake
  • Utilities = $300 per month / 360 cakes = $.83 per cake
  • Our helper =$1600 per month / 360 cakes = $4.44 per cake
  • Ingredients = $10 per cake
So the actual cost to produce a single cake is $17.77.

Organizing Costs:

Now to analyze these costs and determine how we can increase our profit...let’s organize our costs. We do this by putting them into three cost accounting basic categories:
  • Direct Material Cost: The actual cost of all the materials or ingredients we need to produce our product
  • Direct Labor Cost: The actual wages associated with producing our product
  • Burden Cost: Overhead
Now we will organize our bakery unit costs:
  • Direct Material cost = $10
  • Direct Labor cost = $4.44
  • Burden cost = $3.33
Analyzing these three categories, we decide we cannot for the time being change or improve the burden and labor cost, but we have shopped around and found a wholesale store where we can purchase bigger quantities and different brands of our ingredients and cut our direct material cost down to $7.50 per cake. This will affect our break-even-point and our profitability in a positive way.
We could also use this cost accounting basic method to see if hiring an additional baker would be a wise decision assuming demand was there.

Accounts Receivables Accounting

Lesson 9 in the Basic Accounting series

Accounts Receivables (AR) are sales made by your small business, but not paid for yet by customers. They are usually in the form of invoices generated by your small business and delivered to your customers for payment in an agreed upon time frame. 

Accounts Receivables Tips:

Account Receivable Accounting
Many businesses now only accept credit cards...
as the tracking and collecting of accounts receivables is difficult for many small businesses.
However, there are some types of businesses that must sell on credit to their clients or customers in order to keep their business going.
If you do sell on credit, here are some tips on tracking and collecting your AR:
Decide on your credit terms. Most businesses use one or more of these options:
  • Net 10 – amount due within 10 days of receiving invoice
  • Net 30 – amount due within 30 days of receiving invoice
  • Due upon receipt – amount due upon receiving invoice
Design your invoice. One of the best and easiest way I have found for creating and managing invoices is FreshBooks. It is super simple to use and you can access it anywhere from your tablet/smart phone.
Many small business accounting software systems have invoice templates. You can usually customize them to fit your business, including adding your own logo. 
In some small business accounting software systems such asQuickBooks, all you have to do is prepare the invoices and deposit your customer’s payments as your AR account is automatically tracked.

Properly Tracking your Accounts Receivables:

If you use a manual AR process, here are some of the steps you need to perform in order to properly track your it:
Prepare an invoice. You can do this by hand or through software programs such as FreshBooks. Then you can send your invoice electronically, mail it, or deliver it by hand. Make sure you always keep a hard copy of each invoice.
Set up a collection system. Action is the key. If you are not receiving the money due to you, do something about it. Have a prompting system to ensure all overdue accounts are followed up in a timely fashion. See this page on small business debt collection techniques.
Enter each sale in your Cash Receipts/Sales Journal. Make sure you enter the date, invoice number, and the amount of the invoice in your journal. Write the customer’s name and account number in the description column of your sales Journal.  Record each credit sale individually so you can properly account for each customer’s purchases.
Post individual sales to the appropriate customer accounts in your Customer Ledger. Use a separate page for each customer account.  You will record all the activity that relates to each particular customer on each of those pages.
The customer ledger should include the date, transaction amount, invoice number, PO number when applicable, sales journal page, any information you want on customer’s monthly statement. 

Post summary information (column totals each completed journal page) to the AR and Sales General Ledger accounts, plus any other accounts involved in the transactions such as sales tax and freight charges. The general ledger entry should include the date dollar amount and sales journal page. Accounts Receivables are shown in the balance sheet as an asset.
Some free AR Spreadsheets:

Accounts Payable Process

Lesson 10 in the Basic Accounting series

The accounts payable process for a small business is simply the process of accounting for and paying invoices that your business legitimately owes. 
The process involves logging in an invoice in some type of accounting software, spreadsheets, or paper; then removing it when you pay it.

Setting up Accounts Payable in your Chart of Accounts:

Accounts Payable is a current liability account in your chart of accounts.
Back on my “Learn Accounting Basic Terms” page,
you discovered that liabilities are debts owed by your business. 
You also learned that liability accounts appear on your balance sheet.
Current liabilities are debts due within a year of your balance statement’s date.
Accounts Payable accounts are used in accrual basis accounting because you are recording expenses when they are incurred which may be before or after they are paid.
It is possible to use an accounts payable process even if you are using a cash basis accounting. It is called the hybrid method. See more in this article regarding: Cash or Accrual Basis Accounting Methods
Some bills you may consider setting up in your Accounts Payable are:
  • Utilities
  • Telecommunications
  • Internet
  • Rent 
  • Insurance payments
  • Newspaper subscriptions
  • Advertising
  • Office supplies bought on credit
  • Copier lease payments
  • Repair bills
  • Subcontractor payments (if not paid immediately upon receipt)
  • Bookkeeper, accountant, or attorney monthly or quarterly payments
  • Anything purchased on credit or paid regularly

Setting Up the Accounts Payable Process:

As stated in the beginning of this article, the accounts payable process begins with entering an invoice (as soon as you receive it) into some kind of accounting software, spreadsheet, or manually in an accounts payable ledger.
Of course the easiest and best method for setting up accounts payable is with a computerized accounts payable system...
because most of the work is done in the background…
automatically by your accounting software.
However, many small business do not have a computerized accounting system and use either spreadsheets or paper ledgers (See more detail for using those accounts payable processes later in this article).
That is fine as long as you are not getting very many invoices per day. A general rule is if you are receiving more than two invoices a day or have several employees, it is a good idea to set up a computerized accounts payable system to accurately track and pay what your company owes.
Most computerized accounts payable system will:
  • Inform you when bills are due.
  • Collect all your vender information and then enable you to automatically pull up their information when entering and paying invoices.
  • Enable you to pay those invoices that are due and print out checks.
  • Posts your payment check automatically to the right expense account.
  • Warn you if you are try to enter a bill that has already been posted.
  • Track all payments to each vendor.

Setting Up Your Computerized Accounts Payable Process:

The exact instructions for using your particular accounting software to set up an accounts payable system may differ slightly...
but I will give you a general guideline on setting up your accounts payables:
Turn on the accounts payable module in your accounting software if applicable.
Most of the time, this is done in the set up process of your accounting software, but most can be turned on and/or set up at any time.
Gather up the bills you want to enter into your accounts payable.
Go to the Vendor section of your software. Vendors are the people and businesses from which you purchase goods and services. There should be a place to enter your vendor’s information such as name, remit to address, phone numbers, email, contact person, and your account number.
Now go to the “Enter a Bill” section. Using the drop down list, select the name of the vendor whom you are paying or type in.
Select the payment terms (most are Net 30). Enter the reference number (usually your invoice number). Most accounting software also let you have the option of entering a note in the memo section and that note appears in the Accounts Payable register.
Choose which expense account you want the bill posted to. For example, if it was office supplies you bought on credit, you would choose your Office Supplies expense account. Behind the scenes, your software will debit that expense account and credit your Accounts Payable account.
When it is time to pay bills, go to the “Pay a Bill” in the Vendors section. There you will have the option of choosing one or all bills that are due and print all the checks at once. Again as stated above, your accounting software will do the hard work behind the scenes and debit your Accounts Payable account and credit your Cash account.

Setting Up an Accounts Payable System in Spreadsheets:

The accounts payable process for spreadsheet users involves setting up your file to gather the following information:
  • Vender’s name
  • Date invoice was received
  • Amount owed
  • Account number
  • Expense account to be debited
Those of you that use the free accounting spreadsheets from this site will need to set up or download a accounts payable template to track and maintain their accounts payable as my accounting spreadsheets are a single entry bookkeeping system and therefore cannot track assets or liabilities. 
You can download a free accounts payable template from Accounts Payable Ledger

Or you can build your own with the instructions from this article: How to Create an Accounts Payable Spreadsheet

Setting up a Manual Accounts Payable Process:

Below is an example of a bookkeeping entry you would make to record a bill you received for office supplies bought on credit:

Office Supplies   $157
                                                       Accounts Payable $157

Here is an example of the bookkeeping entry you would post when you paid the bill:

Accounts Payable $157 
                                                     Cash  $157
After you have entered the bill, you need to file the hard copy. I keep a “Bills Due” folder on my desktop and then when I pay it, I move it to my “Paid Bills” folder. Some people take it a step farther and scan their bills in and keep them in similar files on their computer desktop. Whatever accounts payable process works best for you.


  1. Yeah dear, everything you have shared here is well explained and for that I am very thankful to you but to learn these entire things and concepts your basics should be cleared. I am lucky enough for that because I was student of Dr.Aloke Ghosh.


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