Administrative Assistant / Secretary: The Basics of Bookkeeping and Accounting

Financial Record Keeping
Bookkeeping and accounting are fields requiring special training. Smaller companies may assign these duties to the administrative assistant, especially with today’s new computerized accounting programs. Larger companies typically have an in-house accounting department or contract for the services of an accountant to prepare tax statements and other important records. Even so, it’s useful to familiarize yourself with the simple mechanics of bookkeeping and accounting no matter what size company you work for. The more informed you are, the more valuable you are to the company.

Assets
Property owned by a business organization and used in its operation is known as assets. The proprietor or owner of the business may be one person, two persons (in a partnership), half a dozen persons, or numerous persons operating a corporation. The interest of the owner or proprietor in the assets of the business is called proprietorship, net worth, or capital. If the business is free of claims against these assets, except for those of the proprietor, then assets equals proprietorship. For example, if John King purchased a stationery store for $10,000, his financial condition would be expressed in this way: assets $10,000 equal proprietorship $10,000.

Liabilities
A business owner may obtain additional property by borrowing money to purchase the property needed or by purchasing the property with a promise to pay for that property at some future date. Those from whom business owners borrow are known as creditors. The creditor has a claim on the property until the proprietor pays in accordance with an agreement. This claim is known as the liabilities of the business.
For example, Mary Brown borrows $5,000 from a bank to enlarge the building used for her dry cleaning establishment. The bank thus becomes her creditor. This $5,000 increase in Brown’s assets is accompanied by the bank’s corresponding claim on her assets until the borrowed $5,000 is repaid. To fill the newly enlarged building, Brown purchases additional equipment and merchandise from the American Dry Cleaning Equipment Company amounting to $5,000; the American Dry Cleaning Company thus becomes another creditor. If Brown fails to pay this $5,000, the company can enforce its claim by legal action; this potential claim of the company on Brown’s assets is another liability.
Assets of a business are, therefore, subject to two kinds of claims: (1) those arising from the rights of creditors, and (2) those arising from the rights of the proprietor. The sum of these rights is equal to the value of the assets. Thus, assets equal liabilities plus proprietorship.

Effect of Business Transactions
The proprietor must know the effect of all business transactions on his or her assets, liabilities, and proprietorship in order to make decisions regarding future operations. Accounts furnish the proprietor with a record for this purpose, which is why it’s critical that accounts be concrete, precise, and accurate.
For example, if the proprietor is considering hiring additional sales associates, he or she should know the results of the existing sales force to be able to estimate the probable results of hiring additional personnel. If the proprietor is considering purchasing additional merchandise, equipment, or space, attention should be given to the results from existing facilities.
The efficient proprietor is always seeking information concerning the effect of past operations in order to plan future operations. Such plans are known as budgets. Therefore, the primary purpose of accounting records is to give the proprietor information concerning the nature of his or her liabilities and proprietorship, as well as to furnish a concrete record of the effect of the business operation on them.
The purposes of accounting are to (1) record, (2) analyze and classify, and (3) summarize the activities of the business and their effects on each enterprise. Accounting simply reduces to writing the activities of a business.

Accounting Statements
Accounting statements (1) list a description of and amounts of property, together with ownership rights; and (2) report the effects of the operations on the owner’s equity.
The first statement is known as the balance sheet (shown below). The balance sheet shows the assets, together with the rights of the creditors and the rights of the proprietor. The second statement is known as the income statement or profit and loss statement (shown below). It shows income and costs of operation, with the resulting increase or decrease in proprietorship. The balance sheet shows the financial condition of the business at a given time; the income statement covers the periods between any two balance sheets.
These summaries are interesting to persons other than the proprietor. When the owner of the business wishes to borrow money from a bank, the bank officers, in order to judge the owner’s ability to repay the loan, ask for information concerning the assets and liabilities and the profits earned in previous periods. Creditors request the same information before selling merchandise on account. The Internal Revenue Service (IRS) also requires a similar statement to be assured that the income tax for the coming year is being estimated properly.

A sample balance sheet.



Profit and loss statement.


A large business has hundreds and even thousands of assets to list; these are classified as current assets, fixed assets, and deferred charges to expenses.
Current assets appear in the form of cash or items that may reasonably be expected to be converted into cash in the near future by the regular operation of the business. This includes stocks, bonds, mutual funds, and other negotiable financial instruments. When listed on the balance sheet, these assets are arranged in the order in which they will be converted. Columns are also provided to show the quantity, description, price, and extensions. When all these sheets are extended and totaled, their sum is entered on the balance sheet as merchandise inventory.
Fixed assets are those of a permanent (or fixed) nature that will not be converted into cash as long as they serve the needs of the business. They are not intended for resale but are expected to wear out in the course of the business. They include store equipment, office equipment, delivery equipment, building, and land.
Deferred charges to expenses are assets purchased for use in the business that will be consumed in the near future—for example, store supplies, office supplies, and prepaid insurance.
The classification commonly used for liabilities is similar to that for assets: current liabilities, fixed liabilities, and deferred credits to income.
Current liabilities are those that will be due within a short time. For example, if John King purchases equipment on account with the agreement that he will pay for it within thirty days, this transaction results in a current liability. A liability is considered to be a current one if it comes due within one year after the balance sheet date. Under this heading are notes payable, accounts payable, and accrued liabilities.
Notes payable are promises given by the proprietor to someone to whom he or she owes money. The proprietor may give these to a creditor from whom he or she has purchased equipment or merchandise, or to a bank when borrowing money. Accounts payable are the financial obligations of a business, usually arising from a purchase on account, when the buyer has given his or her promise to pay at some future time for the goods received. Accrued liabilities are amounts owed to the government on taxes, to employees on wages, or to creditors on interest. If one of these is unusually high, it may be set up singly under some designation such as “taxes payable,” “wages payable,” and so forth.
Fixed liabilities are those that will not be due for a comparatively long time after they are contracted. They usually arise in the purchase of fixed assets and include liabilities that will not be liquidated within one year from the date of the balance sheet—for example, mortgages payable or bonds payable.
A mortgage payable represents a debt owed by a business for which the creditor possesses a mortgage on a particular asset. Bonds payable are long-term obligations of corporations commonly evidenced by bonds without referencing a particular asset.
Deferred credits to income are the unearned portion of a payment when a business is paid in advance for a service. For example, an insurance company receives in one fiscal period a payment for insurance that extends over a future fiscal period. The unearned portion of the premium is a deferred credit to income and would usually be listed as unearned premium income.

The Balance Sheet
Usually the purpose of any business is to increase its proprietorship—that is, to make money. The amount of profit or loss incurred during a given period is the most important single fact.
A balance sheet shows the proprietor the amount of his or her proprietorship to help determine whether the proprietorship is increasing or decreasing; it does not, however, show the cause of the increase or decrease.

The Income Statement
At various intervals, the proprietor has to plan to increase profit and eliminate future losses. For this, a report is needed to show the amount of sales, the cost of procuring and selling the goods that are sold, and the difference between the two, which is the profit or loss. The income statement gives such information, as well as the gross profit on sales, operating expenses, and depreciation. The period it covers is known as the fiscal period.

Income Statement Terms
There are a variety of important terms included on an income statement that need some explanation.
- Sales—The gross return from operations. Different businesses use different terms for their sales, depending on whether the business sells commodities or services. For example, sales in a mercantile business are the total amount of money customers have paid or agreed to pay for merchandise sold to them. Airlines have passenger revenue or freight revenue, whereas professional men and women have fees. Investment trusts have interest income and dividend income.
- Cost of goods sold—The purchase price paid by a business for the goods it has sold, as distinguished from the sales price. Cost of goods sold is made up of (1) the price charged by the seller as shown on the invoice of sale, and (2) the shipping and handling charged for the delivery of the goods.
- Gross profit on sales—Derived by subtracting the cost of merchandise sold from the total sales, representing the profit that would be made if no expenses were incurred in conducting the business. Because expenses are always incurred, they must be considered in determining profit. The expenses of operating the business must be deducted to obtain the net profit.
- Operating expenses—Includes all commodities and services expended in the operation of a business: services of personnel, paper, electricity, fuel, postage, and so forth.
- Depreciation—The cost arising from the decrease in value of the fixed assets. Not only are supplies and services used to operate a business, but fixed assets, such as office equipment and store equipment, are gradually worn out through use.
The income statement shows the result of the operations of a specific business during a particular period of time. It lists the income from sales and subtracts from this the expenses of the business in making such sales. The last figure is the net profit from operations.

The Account
Each time a business performs a transaction, a change is made in one or more elements of the equation “assets equal liabilities plus proprietorship.” Regardless of the number of transactions, the results of all changes must be ascertained in order to prepare an accurate balance sheet and an accurate income statement at the end of the fiscal period. To accomplish this, each transaction must be recorded as it occurs. The account is the method used to record these individual transactions, and it is from this word that the subject of accounting receives its name.

The Account Record
The account is the record of each item entered on the balance sheet and on the income statement—that is, the increases and decreases that occur. In its simplest form, the account provides (1) the name of the customer, (2) transactions decreasing the amount of proprietorship, and (3) transactions increasing the amount of the same item.

Trial Balance
If the bookkeeper has correctly recorded each transaction, the total of all the debits in all the accounts will equal the total of the credits in all the accounts. A test is made at intervals, usually at the end of the month, to check whether the debits do equal the credits; this test, known as a trial balance, summarizes the ledger information. If the sum of the debits does not equal the sum of the credits, an error has been made, and then the bookkeeper has the job of reconciling.

Mixed Accounts
If all transactions recorded in the accounts coincide with the accounting period as shown on the balance sheet and the income statement, the trial balance is a satisfactory check. But it is impossible to arrange transactions so that there will be no carry-overs between accounting periods. A means must therefore be provided to meet this condition; this is called a mixed account—an account with a balance that is partly a balance sheet amount and partly an income statement amount.
For example, the trial balance amount for the account called Office Supplies summarizes all office supplies purchased plus those on hand at the beginning of the period covered. To find out how many office supplies have been used during the accounting period, an inventory of office supplies is taken. The office supplies on hand are a balance sheet entry; the office supplies used are an income statement entry. Therefore, the account Office Supplies is a mixed account.
The adjustment of mixed accounts must determine the correct balance sheet amount and the correct income statement amount for any trial balance entry that is mixed. For example, a typewriter is recorded as an asset at the time of purchase and appears in the trial balance. The depreciation of the typewriter is not recorded each day and must, instead, be recorded by an adjustment at the end of the accounting period.
Other types of business operations continually affect accounts—for example, as insurance expires and wages and salaries accrue. It’s necessary to record all such mixed accounts. A purchase of office supplies is debited to the asset account Office Supplies, or it can be debited to the expense account Office Supplies Used. By means of an account for Office Supplies Used or Expired Insurance, the adjustment can be made. This is an asset adjustment. A liability adjustment is made similarly.

Adjusted Trial Balance
The trial balance summarizes only transactions during the accounting period. Insurance has expired, supplies have been used in operating the business, office and other salaries are incomplete, and equipment has depreciated. The adjustments must be combined with trial balance amounts by means of an adjusted trial balance.

Sample payroll form.



Payroll
A good bookkeeping system must provide accurate information concerning the payroll. Because of Social Security laws, income-tax–withholding laws, and other state and federal regulations, any and all of this information must be instantly available. Therefore, an individual payroll record book should be maintained. The following information is needed for accurate and complete payroll accounting:
- Name of employee, with address and personal data
- Social Security number
- Company number (if any)
- Department number (if any)
- Date employment began and ended (and reason for separation)
- Dates worked, rate of pay, hours per day worked, regular and overtime status
- Regular salaries paid if not on hourly basis
- Deductions (federal withholding tax, Social Security taxes, state and local taxes, medical insurance premiums, union dues, retirement plan contributions, etc.)
- Totals by month, quarter, and year

Travel and Entertainment and Auto-Expense Records
If your boss travels as part of the job, he or she may ask your help in maintaining a record of travel and entertainment expenses. If the boss uses his or her personal vehicle for business travel, you’ll need to maintain a vehicle expense record as well. The IRS requires detailed records with documentary evidence for each, especially for expenses over the “standard amounts” it specifies. Such records should be accurate.

Travel and Entertainment Expenses
Records for all travel and entertainment expenses should show:
- Expenditure amount
- Date of departure and date of return for every trip
- Number of days spent on business versus days spent on pleasure
- Business purpose of the expenditure
- Place of travel or place of entertainment (if clients were entertained)
- Relationship to the business of the person or persons being entertained by the taxpayer

Evidence for these expenses is required, such as credit card charge copies and receipts of all bills paid for lodging and meals while traveling. In addition, travel expense report forms are useful to keep track of out-of-pocket expenses, such as tolls, taxies, tips, and telephone calls. These forms are obtainable from any office supply store.

Automobile Expenses
Anyone who uses a personal automobile for business purposes (other than commuting) is entitled to deduct such expenses on his or her income tax return, according to IRS rules. If the personal vehicle is used entirely for business, all expenses can be deducted; if the vehicle has both business and personal use, its expenses may be deducted in part. A printed form, Record of Automobile Expenses, is obtainable in most office supply stores. So is a pocket-size booklet that can be handily kept in a briefcase or automobile glove compartment.

Sample travel expense record.



Sample expense report.



You can also use a Smart Phone to record automobile mileage and expenses. A sample of an automobile expense record that can be created using one of the Task Wizards available in Microsoft Excel is shown above.
If the boss does not want to keep detailed records of automobile expenses, an optional deduction method is allowed. Instead of deducting a vehicle’s actual fixed and operating expenses with a separate deduction for depreciation (for an individual), the boss could deduct a standard mileage rate for annual business miles traveled. State and local taxes (not including gasoline tax) and interest payments on loans to purchase business vehicles are deductible as well.
These laws change frequently, and it would be wise for you or your employer to secure up-to-date IRS booklets for rules on required record maintenance and reporting to make sure you’re keeping adequate records. But even with these booklets, your employer should also utilize the services of a competent accountant.

Cash Budgets
A cash budget is an estimate of expected cash receipts and expenditures. It is necessary for any business, especially a small business where every dime counts. Cash budgets should be prepared six months ahead or, if possible, twelve months ahead with revision as needed.

Sample automobile expense record in Microsoft Excel.



Cash flow statement.



When you help your boss develop a cash budget, it must be a realistic estimate. A cash budget is completely useless unless it is based on realistic, sober judgment springing entirely from experience.

The above cash flow statement that can be created using one of the many Task Wizards available in Microsoft Excel software.

Records for Lenders
If your employer is just starting a business, a lender is likely to request a specific list and total estimate of the business’s start-up costs. Table 39-1 shows a sample. You might help your employer gather the necessary information.
As with a start-up estimate, a lender is likely also to request an estimate of probable monthly expenses, which when multiplied by twelve will be an estimate of first-year expenses.
 

A Sample Estimate of Start-Up Costs for a Retail Shop
 

A Sample Estimate of Monthly Expenses for a Retail Shop