Bookkeeper’s blog by Karla Pacheco

Closing the bookkeeping cycle is like resetting the scoreboard for a new game. It prepares your accounts for the next accounting period. The closing process involves: 1. Closing temporary accounts    - Revenue accounts are closed to Income Summary    - Expense accounts are closed to Income Summary    - Income Summary is then closed to Retained Earnings 2. Preparing a post-closing trial balance    - This ensures all temporary accounts have zero balances    - Only permanent accounts (assets, liabilities, and owner's equity) should have balances 3. Creating closing entries in the journal    - These entries transfer balances from temporary to permanent accounts Why is closing important? - It starts each new period with a clean slate for revenues and expenses - It updates the Retained Earnings account, reflecting the year's profit or loss - It helps in segregating financial data by accounting period Remember, while temporary account...

Financial statements are the end product of the bookkeeping cycle. They provide a snapshot of your business's financial health. The three main financial statements are: 1. Balance Sheet Shows what your business owns (assets) and owes (liabilities) Includes owner's equity Provides a snapshot at a specific point in time 2. Income Statement Also known as Profit and Loss Statement Shows revenues, expenses, and profit/loss over a period Indicates how profitable your business is 3. Cash Flow Statement Tracks the inflow and outflow of cash Divided into operating, investing, and financing activities Helps assess liquidity and cash management These statements are interconnected and should be considered together for a comprehensive financial view. Key users of financial statements include: - Business owners for decision making - Investors for assessing potential investments - Lenders for evaluating creditworthiness - Tax authorities for ensuring compliance Remember, accurate bookkeeping ...

Adjusting entries are a crucial step in the bookkeeping cycle. They ensure that your financial statements accurately reflect your business's financial position at the end of an accounting period. Common types of adjusting entries include: Prepaid expenses: Expenses paid in advance but not yet used Unearned revenue: Money received for goods or services not yet provided Accrued expenses: Expenses incurred but not yet paid Accrued revenue: Revenue earned but not yet received Depreciation: Allocating the cost of assets over their useful life Why are adjusting entries important? - They align your books with the accrual basis of accounting - They ensure expenses and revenues are recorded in the correct period - They provide a more accurate picture of your financial health When making adjusting entries, always document your reasoning. This helps in future reference and audits. Remember, the goal is to match revenues and expenses to the period in which they occurred, not necessarily wh...

The trial balance is a crucial checkpoint in the bookkeeping cycle. It's a list of all accounts in your general ledger, along with their balances. Here's why the trial balance is important: It checks the mathematical accuracy of your books It ensures that the fundamental accounting equation (Assets = Liabilities + Equity) holds true It serves as a basis for preparing financial statements To prepare a trial balance: List all accounts from your general ledger Enter the balance of each account in either the debit or credit column Total both columns - they should be equal If the columns don't balance, don't panic! Common reasons for discrepancies include: - Math errors - Posting errors - Omission of entries Remember, a balanced trial balance doesn't guarantee error-free books. It only ensures that your debits equal your credits. Edited by: Karla Pacheco

Once you have your source documents, it's time to record transactions. This happens in two main books: the journal and the general ledger. The journal is the book of first entry. Here's what you need to know: Transactions are recorded chronologically Each entry includes date, accounts affected, amounts, and a brief description It uses the double-entry system: every debit has a corresponding credit From the journal, transactions are posted to the general ledger. The ledger: Organizes transactions by account Allows you to see the balance of each account at a glance Forms the basis for creating financial statements Many businesses now use accounting software that combines the journal and ledger functions. However, understanding the manual process helps in grasping the logic behind the software. Pro tip: Regularly review your journal and ledger to catch and correct errors early! Edited by: Karla Pacheco 

At the heart of bookkeeping are transactions - any event that affects your company's finances. These could be sales, purchases, payments, or receipts. Every transaction needs a source document as proof. Common source documents include: Receipts: For cash transactions Invoices: For sales or purchases on credit Credit card slips: For card payments Purchase orders: For ordering goods or services Payroll records: For employee compensation These documents are crucial for several reasons: They provide a paper trail for auditing They help in accurately recording transactions They serve as legal proof in case of disputes Proper organization of source documents is key. Consider using a digital system to store and categorize them. This not only saves space but also makes retrieval easier. Remember, the accuracy of your books depends on the reliability of your source documents. Always insist on proper documentation for every transaction! Edited by: Karla Pacheco