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Basic Bookkeeping Training

For the Work From Home Small Business Owner

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This section (the whole website actually) is strictly for the non-accountants.

It was designed for business people with no financial background. That's right, no accounting degree required ... just practical information to help you do your bookkeeping.

Welcome to Bookkeeping Essentials - The Training!

As a self-employed business owner, working from home can be an isolating experience at times. I sometimes go for days without talking verbally to another human (lots of internet conversation though.) ... just me and my animals conversing with each other and with nature! I talk a lot to myself some days.

Even though I have accounting training, where do I turn now for resources and guidance because I no longer have co-workers down the hall? It was one of the challenges I faced when my commute to work went from 60 minutes to 60 seconds. ;-)

It's why I started this website ... a resource of practical information and basic accounting training for home based businesses.

Just click on any underlined title of your choice and you'll be taken right to the article.

The best place to begin is by understanding the basic accounting concepts and conceptual framework around which Canadian GAAP (Generally Accepted Accounting Principles) was developed ... the foundation for all bookkeeping and accounting training.

Canadian GAAP is changing. Accounting Standards for Private Enterprise (ASPE) came into effect January 1, 2011. You will find information about some of the changes that may affect how you keep your books.

For my U.S. visitors, you will find a link to U.S. GAAP resources. For small business purposes, Canadian GAAP is very similar to U.S. GAAP. Most the of differences between the two standards arise when dealing with the more advanced reporting required of publicly traded companies.

Learn how to read your financial statements and evaluate the information to uncover your business's financial health, problems, and potential outlook.

Also includes a chat on whether you need GAAP/ASPE financial statements... or can you use other comprehensive basis of accounting (OCBOA) such as income tax basis.

Sample financial reports because sometimes a picture is better than words ... for those who learn by seeing. These bookkeeping forms are a reference point for producing your own financial statements.

This page is meant to be used as you work your way through the articles mentioned on this page.

Learn why it matters that you understand your income statement.

Learn how profit and loss is different than cash flow. Discover how you use this financial statement to improve your bottom line. The mystery unfolds! ...

You'll also find four sidebar chats:

• How to record the bookkeeping entry when you extend a customer credit ... and the bookkeeping entry when a customer makes a payment on account
• Yearend journal entries for periodic inventory
• How to determine if a transaction should be expensed or capitalized
• Is it depreciation or amortization?

Here are links to individual items on the income statement:

Revenue   COGS and COGS formula   Gross Profit   Operating Expense
   Operating Income   Other Income and Expense   Net Income

Learn why it matters that you understand your balance sheet. Then discover what it reveals about your business finances. The mystery is about to unfold!

You'll find accounting training chats on:

• International Financial Reporting Standards and Accounting Standards for Private Enterprise that came into effect in 2011
• Bank reconciliations ... what is a bank reconciliation and the purpose for performing one.
• Prompt invoicing of accounts receivable and monthly statements sent out.
• How to book your loan payment
• A "cheat" table summarizing debits and credits ... for those who mix them up.

Here are links to individual items on the balance sheet:

Assets   Accounts Receivable   Inventory Count   Inventory
   Capital Assets   Liabilities   Equity

Every business owner should learn how to perform a monthly financial review as a way to stay in touch with your numbers and reduce the potential for fraud.

This article provides some basic accounting training ... and teaches you how to supervise your bookkeeper's work ... from a management perspective.

When you have completed the article, you should know how to determine if your financial statements are accurate.

Developing this management skill will bring you a level of assurance that you are basing your business decisions on sound data.

Periodic and perpetual inventory are explained ... and a bad habit to avoid with your accounts payable.

Visitors with an Insider's Pass should click here to view the entire article

I have spent some time scouring the internet looking for sites that are designed for business people without an accounting background … non-accountants.

Three sites that provide excellent basic accounting training for small business owners that do not have a financial background are:

• reallifeaccounting.com
• accountingcoach.com
• dwmbeancounter.com

Are you looking to further your bookkeeping knowledge through online bookkeeping courses? ... Or perhaps you are looking to become a certified professional bookkeeper?

In this chat, you'll find information I found on:

• Bookkeeping courses for non-accountants
• Practice bookkeeping tests ... to help you prepare for certification
• US and Canadian bookkeeper certification programs

Not every source I found was online ... some mail the information to your home. Some of the information is free ... some is priced affordably ... and others will require an investment in yourself.

Criteria to Hire An Accountant

While this is not specifically related to online accounting training, it may help in hiring an accountant if you don't want to get trained in accounting.

How to Start a Business Guide.com has some criteria on how to find a professional accountant that is practical. It's useful to learn what is important when selecting an accountant.


The next three chats are overviews on topics that will eventually be expanded upon.

Cash flow is a barometer of your business’ health. As long as you have cash flowing in and out of your business, you can keep the doors open for business, even if you are not profitable.

Here's some quick accounting training ... a fast manual method (you could do it on a napkin if that's all you have available) of calculating your cash flow:

• Get your cash on hand from your latest bank statement.
• Add (+) your expected cash receipts (how much money you think will be coming in the door) for the next _______ ( you fill in the blank for the time period - a week, a month, a quarter, a year) ...
• Subtract (-) your cash disbursements (money you estimate will be paid out to cover fixed and variable expenses) for the next _______ ( you fill in the blank for the time period - a week, a month, a quarter, a year) ...
• Add (+) in any saving account balances your business has ...
• Subtract (-) your GST/HST funds collected and held in trust for the Receiver General ...
• Subtract (-) your payroll source deductions due to the Receiver General ...
• Subtract (-) your provision for income taxes so you have funds due at tax time (remember there are no source deductions paid on your net profits while you're earning them) ...
• Equals (=) projected cash at the end of the period.

If the amount is positive, you will have cash on hand.

If it is negative, I hope you have overdraft protection on your account because you are going to be short of cash.

Cash flow expert Michael Nolan recommends an 8 week cash flow forecast in his April 10, 2009 New Hampshire Business Review article titled, "How to get control of your cash flow".

Mr. Nolan suggests paying attention to detail and striving for accuracy. Why? "The better we forecast the better we will understand the sources and uses of the funds in this organization."

You can find more accounting training on cash flow here.

Go beyond the basics of learning to read and understand your financial statements. Learn what ratio analysis can tell you about your business and how to act on what is uncovered.

Ratios on their own don't have a lot of meaning. They become a very useful tool when the calculations are compared over a number of years as trends start to become evident.

Generally there are four types of ratios that we will be looking at:

1. Liquidity Ratios - resources available so you can pay your bills
2. Operating Ratios - how efficient you are at managing your capital
3. Profitability Ratios - your ability to control expenses and earn a return on your investment in the company
4. Leverage / Solvency Ratios - percentage of debt in your company indicating suppliers' protection or whether you can take on more debt or the chance that you may go bankrupt

So fill up your teacup and let's get started on this quick accounting training session.

Liquidity Ratios

For now, let's start your accounting training with a look at your working capital and your current ratio.

These two calculations are measuring your business's liquidity. They calculate whether your business can meet their debt obligations when they become due. The more cash you have, the more likely you will be able to make it through the tough times or the next recession.

In easy to understand language, these calculations determine whether you will be able to meet your payroll, pay your suppliers, and pay down your loans on the agreed upon payment schedule.

As a small business owner, you can improve/manage your working capital by increasing your current assets and/or decreasing your current liabilities.

Operating Ratios

Now let's continue this accounting training by turning our attention to your accounts receivable (AR). Two useful ratios you might want to calculate are:

To calculate this ratio you need two pieces of information.

Credit Sales are the sales reported on your income statement that were paid by extending credit. If you don't have the split, you can use your total sales but the calculation will not be as accurate.

To calculate your average receivables, take your AR balance at the end of last month + your AR balance at the end of the same month last year. Now divide by 2 and you have your average AR for the year.

A higher ratio infers that you are successfully collecting from your customers ... and that you have tight credit policies ... or your business deals mainly on a cash basis.

A lower ratio indicates problems and infers your customers are not paying you on a timely basis or overstocked inventory. You may experience cash flow crunches due to late or non payments. Also, the longer an account is outstanding, the more risk to you that it will not be collectible.

While there is no actual standard for this ratio due to the unique circumstances of each business ... you can sometimes find a standard for your industry to compare against.

If your answer comes in under 30 days, then you know your customers are paying their accounts on time.

The faster you collect your receivables, the better. When customers pay you, you will be able to pay your suppliers on time or buy new product. When receivables are paid quickly and on time, there is less risk to you and your business.

If it is taking longer than 30 days for your customers to pay you, you need to take action. Your business could get in serious trouble if your accounts receivables are not actively managed. Consider implementing these collections procedures so your AR does not get away from you.

Nina Kaufman's home-study program How to Train Your Clients to Pay You can teach you how to decrase your receivables and increase your cash flow.

You might also want to calculate the bad debt to sales ratio. Simply divide your bad debt expense by your credit sales. This ratio measures your expected uncollectible AR. If it is increasing, it indicates a future write-off is possible.

Profitability Ratios

Moving on in this brief accounting training session, let's turn our focus to profitability.

When learning about the various components of the income statement, we chatted about the gross profit margin. Sometimes this number makes more sense if it is expressed as a percentage.

We said that ...

(In general, the higher this number is, the more efficient your business is.)

This ratio explains how much money you have left over to cover marketing and administrative expenses ... you know important stuff like wages, debt obligations, government taxes.

You may also want to calculate profit margin.

(In general, the higher this number the better.)

This ratio calculates your safety margin if things start to "go south". It explains to readers of your financial statement how well you converted your sales into profits.

Remember earlier I said that you want to look at trends when doing ratio analysis.

In AIPB's accounting training publication Mastering Financial Statement Analysis, they suggest if your profit margin is falling consistently over numerous periods, look to see if your business also has falling sales, increased cost of goods expenses (relates to gross profit margin) or expenses (relates to profit margin) that have not been passed onto customers or maybe even theft.

When you perform your monthly financial review, keep your eye out for unrecorded sales or overstated expenses. AIPB's publication suggests investigating changes between years that are greater than 10%.

Don't focus solely on your gross profit margin though. Two other ratios are also important, return on equity and return on assets, which we'll discuss another day.

Joshua Kennon wrote an article titled A Deeper Look at Gross Profit and Gross Profit Margin.

In this article, Joshua explains that if you can turn over your assets more frequently, you can "can generate more absolute profit relative to the capital invested in the enterprise than one with slower turnover but higher profit margins".

Joshua uses Walmart and Microsoft as examples. After examining the different business models each company uses, Joshua stresses that the key is decide which business model you are going to use and stick with it ... "as long as it works".

Ahhh, I forgot to tell you the business models Joshua looked at ... they were the low gross profit margin business model and the high gross profit margin business model.

That's it for this section on accounting training ... for now.

Leverage / Solvency Ratios

Let's wrap up this accounting training by turning our attention to your debt ratio and your debt service ratio.

Total liabilities in the debt ratio formula is often referred to as "total debt". This ratio explains how leveraged your business is.

Creditors like this ratio to be low ... the lower the better for them ... aim for .5 or less.

Owners sometimes like this ratio to be high ... especially if they like risk. If the business fails, the owner walks away with only a small to moderate loss. You can see how this would make creditors nervous ... and they may begin requesting repayment of debt.

Bankers and long term creditors especially like to look at your debt service ratio because it assures them your business can service its long term debt from its operating profits. For them, your earning power is an important factor in whether they will loan your business money. Any weakness here may mean it is tough to impossible to get a bank loan or other source of financing.

This ratio is also referred to as interest coverage or times interest earned.

The higher this ratio the better. If it falls below 1.5, lenders may stop lending your business money. Why? This ratio shows that your low coverage means you will likely face difficulties if you borrow more funds. Two or higher is good but your banker is most likely to compare your ratio with your industry average.

If you are looking for short term financing, your banker will be more interested in your working capital.

I found a really great Financial Difficulties checklist over at Keith Anderson CA's website cabusinessadvisor.ca. It lists 39 early warning signs and nine late warning signs. It is worth looking at to see how your business compares.

I'll wrap this up with this reminder ... just remember, ratios are most useful when looked at over a number of periods ... so you can identify trends ... and be proactive if necessary.

• Financial ratio and analysis worksheets
• Break even, contribution margin and cost-volume-profit worksheets
• Depreciation and amortization worksheets
• Financial statement worksheets
• General business forms

This package saves you the time of creating these worksheets yourself and makes getting your accounting training easier on you. It will reduce the likelihood of a calculation logic error (but not necessarily clerical errors). Click here to view more details.

This product has a 90-day money-back guarantee, no questions asked. I received this product when I joined the AccountingCoach Pro. This exclusive members area contains good accounting training study products. (I used the quizzes and exams to study for my Certified Professional Bookkeeper exam.) I am also a fan of his website. It is because of this that I decided to become a compensated affiliate.

Business coach Susan Martin from Business Sanity.com explains a quick method of calculating your profitability manually in "Computing Business Profitability".

I like it because it teaches you how the numbers from your financial statements work (it's painless and relevant accounting training) ... instead of just relying on your computer to spit the numbers out for you. Think of it as a way to proof your financial reports.

For those of you keeping manual books or who don't have regular financial statements, it's a great way to determine if you are making money ... instead of waiting for your accountant to give you the big surprise at year-end.

Here is Susan's method ... I've modified it slightly so that you have more of a template that you can setup and use all the time ... plus I snuck in one more calculation so you also have your owner's equity.

On a clean sheet of paper ... or create your own bookkeeping worksheet template in an Excel spreadsheet ... with your accounting ledger at hand (you do need fairly up-to-date record keeping to use this method):

• Make six columns across the top and call them Account, Jan 1, Today, Change, Plus, Minus.


• Under the Account column, write down:
  • chequing
  • savings
  • accounts receivable
  • inventory (at cost)
  • goods in process (at cost)
  • capital assets
  
  These are your assets (what your business owns) so mark the next line with Total Assets.


• Continue under the Account column, skip two lines ... then write down:
  • accounts payable (include tax payable accounts like GST)
  • credit card
  • loans
  
  These are your liabilities (what your business owes) ... so mark the next line with Total Debt.


• Under the Account column again, skip two lines and write Owner's Equity.


• Under the Jan 1 column, write down the opening balance on Jaunary 1 for each of the accounts you listed above. Your opening balance should be the same as your December 31 closing balance.


• Under the Today column, write down today's balance for each of the accounts you listed above.


• Subtract column three from column two ... show the change as a positive or negative number in the Change column.

Your (rough) income statement:

• For your asset accounts (cash, accounts receivable, inventory and goods in process, capital assets) do this:
• If the account balance is larger now than at the beginning of the year, put the calculated change in the Plus column.
• If the account balance is smaller now than at the beginning of the year, put the calculated change in the Minus column.


• For your liability accounts (accounts payable, credit card or loans) do this:
  • If the account balance is smaller now than at the beginning of the year, put the calculated change in the Plus column.
  • If the account balance is larger now than at the beginning of the year, put the calculated change in the Minus column.
  
  
• Total the Plus and Minus columns.



• Subtract the Minus Column from the Plus Column ...
• A positive balance means you are profitable .. Whoo hoo!
• A negative balance means you are losing money. :0(

Accounting training made easy! Now for the extra calculation I snuck in ...

Your (rough) balance sheet:

• Under the Today column, add up your assets and write the number down on the line I had you mark as Total Assets.


• Under the Today column, add up your liabilities and write the number down on the line I had you mark as Total Debt.


• Under the Today column, if you subtract your Total Assets from your Total Liabilities, you have your Owner's Equity (how much you have invested in the business ... not to be confused with the value of your business).

I'm not sure if you figured it out ... but the Plus column is Debits and the Minus column is Credits. You can find a "cheat table" on Debits and Credits on a sidebar in my article on the balance sheet.

Now this mini accounting training lesson wasn't too bad, was it?

Susan Martin offers financial management coaching services (relevant accounting training) for small business. You can contact her through her website. I have not used her services, but I like her blog and management articles.

P.S. The more you practice doing this mini accounting training lesson, the more likely it will be that you will begin to intuitively understand the numbers that drive your business.

P.P.S. If you liked this sidebar, you might also like this quick method of estimating your cash flow.

There are so many business skills to learn about when running your own business. You may not need formal accounting training but developing financial skills will help you beat the odds of still being in business five years from now.

To your ongoing business success!

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