So, you want to learn

Bookkeeping!
by Bean Counter's Dave Marshall

Lesson 5
The General Ledger and Journals

Introduction

Lesson
1

Lesson
2

Lesson
3

Lesson
4

Bean Counter

Lesson
5

Lesson
6

Lesson
7

General Ledger
In Lesson 4 we used T-Accounts to record the transactions for ABC, the lawn mowing guys. What you didn't
know at the time is that we were actually recording transactions in General Ledger Accounts. A General Ledger
is just a formal set of T-Accounts. Each account that we want to track and keep up with has a separate page or
pages maintained in a record book called the General Ledger. The book is organized into major sections just like
the Accounting Equation that we studied in previous lessons. Do you have any idea what these sections might
be ? Come on this question is not that hard. The general ledger's major sections are Assets, Liabilities, Owner's
Equity, Revenues, Expenses, and Draws.
For each item (account) in our General Ledger, we record the increases and decreases for a period (usually a
month) and calculate its ending balance. The ending balance of the account is easily determined by adding the
increases and subtracting the decreases from the account's beginning period balance.
Ending Account Balance = Beginning Balance + Increases - Decreases
If you noticed in my above equation I used the terms increases and decreases. If you also recall in our
discussion about debits and credits in Lesson 3, I tried to stress the fact that when applied to bookkeeping
these terms need to be associated with the types of accounts.
We also should know by now that the type of accounts have a normal balance that is either a debit or credit
balance. So actually the above equation is stated in two ways. The equation is stated one way for debit balance
accounts, and another way for credit balance accounts.
Using our bookkeeping terms debits and credits, we come up with the following equations:
Debit Balance Accounts Equation
Ending Account Balance for Normal Debit Balance Accounts = Beginning Balance + Debits(Increases) Credits(Decreases)
Credit Balance Accounts Equation
Ending Account Balance for Normal Credit Balance Accounts = Beginning Balance + Credits(Increases) Debits(Decreases)
Simply stated a General Ledger is just a book containing the summarized financial transactions and balances
of the accounts for all of a business's assets, liabilities, equity, revenue, and expense accounts.
One other record that goes hand in hand with the general ledger and that we've touched on before and used in
the prior lesson is The Chart Of Accounts. Remember The Chart Of Accounts is simply a listing of all the
accounts in the general ledger that contains the account's name, a brief description of the account, and usually
an account number assigned to aid in recording and tracking transactions.
It's chief purpose is to serve as an aid (reference) for looking up accounts and their associated account
numbers.
For this lesson, we expanded our chart of accounts by adding account numbers and grouped the numbers into
ranges that represent the major type of accounts.
Chart Of Accounts For ABC Mowing

So, you want to learn

Bookkeeping!
by Bean Counter's Dave Marshall

Lesson 6
Financial Statements

Introduction

Lesson 1

Lesson 2

Lesson 3

Lesson 4

Bean Counter

Lesson 5

Lesson 6

Lesson 7

The objective of this lesson is not so much a how to do it; but, to inform, introduce, and make you aware of
the basic financial statements.
Let's start this lesson by reviewing a few definitions.
Financial Statements are summary accounting reports prepared periodically to inform the owner, creditors,
and other interested parties as to the financial condition and operating results of the business. The four basic
financial statements or reports are:
Balance Sheet-The financial statement which shows the amount and nature of business assets, liabilities, and
owner's equity as of a specific point in time. It is also known as a Statement Of Financial Position or a
Statement Of Financial Condition.
Income Statement-The financial statement that summarizes revenues and expenses for a specific period of
time, usually a month or a year. This statement is also called a Profit and Loss Statement or an Operating
Statement.
Capital Statement-The financial report that summarizes all the changes in owner's equity that occurred
during a specific period.
Statement of Changes in Financial Position-The financial statement that reports the sources and uses of
cash or working capital for a specific period of time, normally a year.

The Balance Sheet

A Balance Sheet is simply a picture of a business at a specific point in time, usually the
end of the month or year. By analyzing and reviewing this financial statement the
current financial "health" of a business can be determined. The balance sheet is derived
from our accounting equation and is a formal representation of our equation
Assets = Liabilities + Owner's Equity.
If you recall, in an earlier lesson we learned that this equation is also called the Balance
Sheet Equation.
The categories and format of the Balance Sheet are based on what are called Generally Accepted Accounting
Principles (GAAP). These principles are the rules established so that every business prepares their financial
statements the same way.
Assets
Formal Definition:The properties used in the operation or investment activities of a business.
Informal Definition:All the good stuff a business has (anything with value). The goodies.
Additional Explanation: The good stuff includes tangible and intangible stuff. Tangible stuff you can physical
see and touch such as vehicles, equipment and buildings. Intangible stuff is like pieces of paper (sales
invoices) representing loans to your customers where they promise to pay you later for your services or
product. Examples of assets that many individuals have are cars, houses, boats, furniture, TV's, and
appliances. Some examples of business type assets are cash, accounts receivable, notes receivable, inventory,
land, and equipment.
Assets are listed based on how quickly they can be converted into cash which is called liquidity. In other

So, you want to learn

Bookkeeping!
by Bean Counter's Dave Marshall

Lesson 7
Review Of Major Concepts
Introduction

Lesson 1

Lesson 2

Lesson 3

Lesson 4

Lesson 5

Lesson 6

Lesson 7

Bean Counter

Remember me ? Yeah, it's me Dave. It's not often that I get my picture in a publication twice
but when you're the publisher you have a lot of leeway. I started out with you so I guess it's
only fitting and proper that I also end with you.

Of course businesses have many more than the ten simple transactions that I used in my example of ABC
Mowing. Probably 80% of a bookkeeper's time is spent recording and summarizing a business's financial
transactions. I intentionally limited the transactions used in my prior lessons in order to focus on the broad
concepts. My purpose (which I hope I accomplished) was to prepare you with a strong foundation that you can
continue to build on.

What We Covered
Let's Review the path that got us here.
The Introduction discussed the types of business organizations, types of business
activities, users of financial information, bookkeeping systems, accounting rules, and
the cash and accrual basis of accounting.
Highlights:
Bookkeeping is the process of recording and classifying business financial transactions (activities). In simple
language-maintaining the records of the financial activities of a business or an individual. Bookkeeping's
objective is simply to record and summarize financial transactions into a usable form that provides financial
information about a business or an individual.
Types Of Business Organization
One of the first decisions that a person(s) needs to make is how the company should be structured. The four
basic legal forms of ownership for small businesses are a Sole Proprietorship, Partnership, Corporation, and
Limited Liability Company. There are advantages and disadvantages as well as income tax ramifications
associated with each type of organization. We aren't going to delve in to this area but a brief description of the

different types of organization and what they are is needed.

Sole Proprietorship
Most small business start out as sole proprietorships. These firms are owned by one person who is normally
active in running and managing the business.
Partnership
A partnership is two or more people who share the ownership of a single business. In order to avoid
misunderstandings about how profits/losses are shared , who's responsible for what, and other management,
ownership, and operating decisions the partners normally have a formal legal partnership agreement.
Corporation
A corporation is an organization that is made up of many owners who normally are not active in the decision
making and operations of the business. These owners are called shareholders. Their ownership interest is
represented by certificates of ownership (stock) issued by the corporation.
Limited Liability Company (LLC)
The LLC is a relatively new type of business structure that combines the benefits of a partnership and
corporation.
Types Of Bookkeeping Systems
Single Entry
With the single-entry system, you record a daily and a monthly summary of business income, and a monthly
summary of business expenses. Single-entry is not a complete accounting system, but it shows income and
expenses in sufficient detail for tax purposes. This system focuses on the business' profit and loss statement
and not on its balance sheet. The single entry system is an "informal" record keeping system. While the single
entry system may be acceptable for tax purposes, it does not provide a business with all the financial
information needed to adequately report the financial affairs of a business.
Double Entry System
The double-entry system has built-in checks and balances and is more accurate than single-entry system. The
double-entry system is self-balancing. Since all business transactions consist of an exchange of one thing for
another, double-entry bookkeeping is used to show this two-fold effect. This system is a complete
accounting system and focuses on the income statement and balance sheet.
Cash Basis/Accrual Basis of Accounting
Another decision faced by a new business is what accounting/bookkeeping method they are going to use to
track their revenue and expenses. If inventories are a major part of the business, the decision is made for the
business owner by the Internal Revenue Service (IRS) and the business is required to use the accrual method
of accounting.
The Cash Basis recognizes revenues (earnings) in the period the cash is received and expenses in the period
when the cash payments are made. The Accrual Basis records income in the period earned and all expenses
in the period incurred.

The following are some of the Rules used to "play" the Accounting "Game":

Accrual Concept
Revenue Realization Concept
Matching Concept
Accounting Period Concept
Money Measurement Concept
Business Entity Concept

Cost Concept
Conservatism Concept
Consistency Concept
Comparable
Materiality Concept
Cost-Benefit Convention

Going Concern Concept

Industry Practices Convention

Lesson 1 The Bookkeeping Language introduced you to some of the terminology and
definitions used in the accounting and bookkeeping language.
Highlights:
Major Type of Accounts:
Assets
Formal Definition:The properties used in the operation or investment activities of a business.
Informal Definition:All the good stuff a business has (anything with value). The goodies.
Additional Explanation: The good stuff includes tangible and intangible stuff. Tangible stuff you can physical
see and touch such as vehicles, equipment and buildings. Intangible stuff is like pieces of paper (sales
invoices) representing loans to your customers where they promise to pay you later for your services or
product. Examples of assets that many individuals have are cars, houses, boats, furniture, TV's, and
appliances. Some examples of business type assets are cash, accounts receivable, notes receivable, inventory,
land, and equipment.
Liabilities
Formal Definition:Claims by creditors to the property (assets) of a business until they are paid.
Informal Definition:Other's claims to the business's good stuff. Amounts the business owes to others.
Additional Explanation: Usually one of a business's biggest liabilities (hopefully they are not past due) is to
suppliers where a business has bought goods and services and charged them. This is similar to us going out
and buying a TV and charging it on our credit card. Our credit card bill is a liability. Another good personal
example is a home mortgage. Very few people actually own their own home. The bank has a claim against the
home which is called a mortgage. This mortgage is another example of a personal liability. Some examples of
business liabilities are accounts payable, notes payable, and mortgages payable.
Owner's Equity also called Owner's Capital
Comment:Both terms may be used interchangeably. In my tutorial lessons, I may refer to both terms or just
use one or the other.
Formal Definition:The owner's rights to the property (assets) of the business; also called proprietorship and
net worth.
Informal Definition:What the business owes the owner. The good stuff left for the owner assuming all liabilities

(amounts owed) have been paid.

Additional Explanation:Owner's Equity (Capital) represents the owner's claim to the good stuff (assets). Most
people are familiar with the term equity because it is so often used with lenders wanting to loan individuals
money based on their home equity. Home equity can be thought of as the amount of money an owner would
receive if he/she sold their house and paid off any mortgage (loan) on the property.
Revenue (Income), Expenses, Investment, and Draws
Revenues, expenses, investment, and draws are sub categories of owner's equity (capital).
Think of owner's equity as a mom named Capital with four children to keep up with (I know
she's only got one clinging to her leg but she left Expense, Investment, and Draws at home).
The kids are named Revenue, Expense, Investment, and Draws and each kid has one job that
they are responsible for in order to earn their allowance. Kid Revenue is responsible for
keeping track of increases in owner's equity (Ma Capital) and Kid Expense is responsible for
keeping track of decreases in owner's equity (Ma Capital) resulting from business
operations. Kid Draws has the job of keeping up with decreases in owner's equity (Ma Capital)
resulting from owner withdrawals for living expenses and other personal expenses. Kid
Investment has the job of keeping up with increases in owner's equity (Ma Capital) resulting
from additional amounts invested in the business.
Revenue also called Income
Formal Definition:The gross increase in owner's equity (capital) resulting from the operations and other
activities of the business.
Informal Definition:Amounts a business earns by selling services and products. Amounts billed to customers
for services and/or products.
Additional Explanation:Individuals can best relate by thinking of revenue as their earnings/wages they receive
from their job. Most business revenue results from selling their products and/or services.
Expense also called Cost
Formal Definition:Decrease in owner's equity (capital) resulting from the cost of goods, fixed assets, and
services and supplies consumed in the operations of a business.
Informal Definition:The costs of doing business. The stuff we used and had to pay for or charge to run our
business.
Additional Explanation:Some examples of personal expenses that most individuals are familiar with are
utilities, phone, clothing, food, gasoline, and repairs. Some examples of business expenses are office supplies,
salaries & wages, advertising, building rental, and utilities.
Owner's Investments
Formal Definition: Increase in owner's equity (capital) resulting from additional investments of cash and/or
other property made by the owner.
Informal definition: Additional amounts, either cash or other property, that the owner puts in his business.
Additional Explanation:Although these amounts can be kept up with as a separate item, they are usually
recorded directly in the Owner's Capital Account. In other words, immediately put into Ma Equity's purse.

Owner's Drawing
Formal Definition: Decrease in owner's equity (capital) resulting from withdrawals made by the owner.
Informal definition: Amounts the owner withdraws from his business for living and personal expenses.
Additional Explanation:The owner of a sole proprietorship does not normally receive a "formal" pay check from
the business, but just like most of the rest of us needs money to pay for his house, car, utilities, and groceries.
An owner's draw is used in order for the owner to receive money or other "goodies" from his business to take
care of his personal bills.

Lesson 2 Property and Property Rights explained Property & Property Rights, the
Accounting Equation, double entry bookkeeping, and how business transactions affect the equation.
Highlights:

ACCOUNTING EQUATION.
Abbreviated version

PROPERTY=PROPERTY RIGHTS
or the expanded version

ASSETS=LIABILITIES + OWNER'S EQUITY

and lastly the fully expanded version ( Lesson 3 )

ASSETS = LIABILITIES + BEGINNING OWNER'S EQUITY +

ADDITIONAL OWNER INVESTMENTS + REVENUE - EXPENSES DRAWS
Remember Mom Equity and Her Kids and due to "Mom" Equity's other special responsibilities
OWNER'S EQUITY expanded becomes
Current Owner's Equity (Capital) = Beginning Owner's Equity (Capital) + Owner's
Investments + Revenues - Expenses - Draws

Owner Investments Increase Owner's Equity

Revenues Increase Owner's Equity
Expenses Decrease Owner's Equity
Owner's Draws Decrease Owner's Equity

Lesson 3 Debits and Credits introduced and explained Debits and Credits and how they affect the
Accounting Equation and are used to record business transactions.
Highlights:
For Every Debit There Is A Credit
Debit- an entry (amount) entered on the left side (column) of a journal or general ledger account that

increases an asset, draw or an expense or an entry that decreases a liability, owner's equity (capital) or
revenue.
Credit - an entry (amount) entered on the right side (column) of a journal or general ledger account that
increases a liability, owner's equity (capital) or revenue, or an entry that decreases an asset, draw, or an
expense.
Debit and Credit Equation
Assets + Draws + Expenses = Liabilities + Owner's Equity + Revenue
Normal Debit Balance Accounts = Normal Credit Balance Accounts

All You Need To Know About Debits and Credits

Summarized In One Sentence:
Enter an amount in the Normal Balance Side of an Account to Increase the Balance of
an Account and in the Opposite Side of an Account to Decrease the Balance of an
Account.
How To Use and Apply The Debit and Credit Rules:
(1) Determine the type of account(s) the transactions affect-asset, liability, revenue, or expense account.
(2) Determine if the transaction increases or decreases the account's balance.
(3) Apply the debit and credit rules based on the type of account and whether the balance of the account will
increase or decrease.
Good News
In the Introduction, I recommended that small as well as larger businesses use accounting and bookkeeping
software. While the software for most transactions "automatically" handles the process of debiting and
crediting the proper accounts, in some instances, you do have to record your own debits and credits such as
when making adjusting entries. I also stated that you need a properly trained bookkeeper or accountant that
is also familiar with the software product in order to properly use the software. Even recording the so called
"automatic" transactions needs an educated person with some bookkeeping knowledge and skills to
properly use the software.

Lesson 4 Recording Business Transactions explained and used examples to illustrate how
business transactions are properly analyzed, recorded, and summarized.
Highlights:
Typical Types Of Business Transactions
and Accounts Used To Record Them

In a typical business transaction we get something and we give up something.

Sale-Sell goods and/or services
o Cash Sale-customer pays at the time of sale
The business gets cash or a check from their customer and gives up a product or service to
their customer.
Accounts Used:

Debit: Cash
Credit: Sales
o On Account Sale-business allows the customer time to pay
The business gets a promise to pay from their customer and gives up a product or service to
their customer.
Accounts Used:
Debit: Accounts Receivable
Credit: Sales
Purchase goods and/or services
o Cash Purchase-business pays the supplier at the time of purchase
The business gets a product or service from their supplier and gives up cash or a check to
their supplier.
Accounts Used:
Debit: Expense or Inventory Account
Credit: Cash
o On Account Purchase-supplier allows the business time to pay
The business gets a product or service from a supplier and gives up a promise to pay to their
supplier.
Accounts Used:
Debit: Expense or Inventory Account
Credit: Accounts Payable
Pay Supplier Charge Purchases -pay suppliers for products and/or services that we promised to
pay for later (charge).
The business gets the amount of their promise to pay the supplier reduced and gives up cash or a
check.
Accounts Used:
Debit: Accounts Payable
Credit: Cash

Receive Customer Charge Payments -receive payments from a customer that promised to pay us
later (charge sale).
The business gets cash or a check from their customer and gives up (reduces the amount of) their
customer's promise to pay.
Accounts Used:
Debit: Cash
Credit: Accounts Receivable
Borrow Money (Loans) The business gets cash or equipment and gives up a promise to pay.
Accounts Used:
Debit: Cash or Equipment
Credit: Note Payable
Repay a Loan
The business gets the amount of their promise to pay reduced and gives up cash or a check.
Accounts Used:
Debit: Note Payable
Credit: Cash
Draw
The business gets the owner's claim to the business assets reduced and gives up cash or a check.
Accounts Used:
Debit: Owner's Draw
Credit: Cash

Payroll (not covered in this tutorial)

The business gets services from their employees and gives up a check. Accounts Used:
Debit: Salary & Wages Expense
Credit: Cash

Lesson 5 The General Ledger and Journals explained what General Ledger and Journals
are, how they're used, and what bookkeeping purposes they serve.
Highlights:
A General Ledger is just a book containing the summarized financial transactions and balances of the
accounts for all of a business's assets, liabilities, equity, revenue, and expense accounts.
Journals are preliminary records where business transactions are first entered into the accounting system.
The journal is commonly referred to as the book of original entry. Specialized Journals-are journals used to
initially record special types of transactions such as sales, cash disbursements, and cash receipts in their own
journal.

Lesson 6 Financial Statements explained what financial statements are, how they're created,
and how they're used.
Highlights:
Financial Statements are summary accounting reports prepared periodically to inform the owner, creditors,
and other interested parties as to the financial condition and operating results of the business. The four basic
financial statements are:
Balance Sheet-The financial statement which shows the amount and nature of business assets, liabilities, and
owner's equity as of a specific point in time. It is also known as a Statement Of Financial Position or a
Statement Of Financial Condition.
Income Statement-The financial statement that summarizes revenues and expenses for a specific period of
time, usually a month or a year. This statement is also called a Profit and Loss Statement or an Operating
Statement.
Capital Statement-The financial report that summarizes all the changes in owner's equity that occurred
during a specific period.
Statement of Changes in Financial Position-The financial statement that reports the sources and uses of
cash or working capital for a specific period of time, normally a year.
Believe It Or Not
I know you probably got tired of ABC Mowing; but, using only our 10 sample transactions, we've covered the
Basics Of Bookkeeping. Of course, in the real world, a business will have many more transactions that need to
be analyzed and recorded; but, you apply the same methods and concepts that we learned and used in this
Tutorial.

Darn It, back under that light again ! I didn't take this course to be tortured. You didn't think you
were going to escape the last lesson without being tested did you ? See how you do with a few
Quizzes.
Basic Bookkeeping and Accounting Concepts - I
Basic Bookkeeping and Accounting Concepts - II
Basic Bookkeeping and Accounting Concepts - III
Debit/Credit Transaction Skills Test - Final

Additional Introductory Accounting and Bookkeeping Games and Quizzes

If you recall, in Lesson 6 I said that you never know what lies in store for you in the final
lesson. Instead of being under the light, why not see what you know and have a little fun
too !

Bookkeeping and Accounting Games

o Fling The Teacher Game
The object of my Fling The Teacher Bookkeeping and Accounting Games is to build a trebuchet
by correctly answering 15 questions. If you can get it completely built, you can get rid of me (at
least for a little while) by using the catapult to fling me away. A trebuchet, for those like me that
didn't know, is a catapult or type of medieval artillery used during sieges.
o Basketball
The object of my Basketball Bookkeeping and Accounting Games is to test your 3-point shooting
skills in addition to testing your basic bookkeeping and accounting knowledge.
o Walk The Plank
The object of my Walk The Plank Bookkeeping and Accounting Games is to feed me to the
sharks by making me walk the plank. You accomplish this by answering bookkeeping and
accounting questions correctly.
o Teacher Invaders
This game is similar to one of my favorite games Space Invaders. The object of my Teacher
Invaders Game is to score points by answering questions correctly and shooting the advancing
teachers. You get time to shoot at the beginning of the game and additional time by answering
bookkeeping and accounting questions correctly.
Quick Quizzes
Instead of clicking on the answer with your mouse, you just move your mouse over the answer you
think is correct and you're immediately told whether your answer is right or wrong. When deemed
necessary, you're also told why your answer was wrong.

Congratulations

My congratulations to all you Yogi Bears (Smarter Than The Average Bear) For those of you too
young to remember, Yogi Bear is a cartoon character created by William Hanna and Joseph
Barbara who always claimed to be smarter than the average bear. Hopefully, if I did my job,
when it comes to bookkeeping, you can now claim to be smarter than the average bear. No I
didn't say you're ready for the CPA exam yet !

Your Next Step

More Free Bookkeeping Courses !
My free So, you want to learn Bookkeeping! introductory bookkeeping course
introduced you to basic bookkeeping and my style of presenting information. In
addition to my Introductory Bookkeeping Tutorial, I've "cooked up" some additional
courses (So, you want to learn Bookkeeping! Series Of Bookkeeping Tutorials) for
those of you wanting or needing some additional bookkeeping and accounting
education. If you've acquired a taste and have an appetite for more of my kind of
cooking you need to check out these additional accounting tutorials.
So, you want to learn Bookkeeping! - Series
Bean Counter's
Bean Counter's
So, you want to learn Bookkeeping!
So, you want to learn Bookkeeping!
Chart Of Accounts
Merchandise Inventory
Bean Counter's
Bean Counter's
So, you want to learn Bookkeeping!
So, you want to learn Bookkeeping!
Special Journals
Cash
Bean Counter's
So, you want to learn Bookkeeping!
Payroll
If you benefited from my tutorial, consider purchasing an E-book or CD version of my
tutorials. Your support makes it possible for me to continue to develop and add additional
new tutorials to my Bean Counter Series.
Purchase E-book or CD Versions

Your Humble Tutor

Dave Marshall
Bean Counter
Cartoons in this tutorial provided by Ron Leishman. If you enjoyed them, get some of your own Toon-A-Day.
http://www.toonaday.com
<--BACK
Introduction

Lesson 1

Lesson 2

Lesson 3

Lesson 4

Lesson 5

Lesson 6

Lesson 7

Bean Counter