Lessons 30 – 35 covered payroll and the documentation requirements.
Lessons 36 – 40 explained sales and the receivables function.
Lessons 41 – 43 laid out the issues related to purchases and tracking bills.
Lessons 44 – 48 discusses cash and how cash is addressed by the bookkeeper.
Lessons 49 – 53 addresses assets and the tools of depreciation and amortization for allocating capital costs to the income statement.
Lesson 54 illustrates loan accounting.
Lesson 55 is about suspense accounts.
Lesson 56 – 59 covered the various forms of taxes.
Lesson 60 – 63 deals with transportation accounting.
Lesson 64 got into the details about charitable giving.
Lesson 65 – 67 expands the bookkeeper’s understanding of non standard entries (recurring, complex and adjusting).
Lesson 68 – 69 teaches how the books are closed each accounting period.
At this point the student is well prepared to conduct daily tasks as a bookkeeper. The only barrier remaining relates with how to enter more advanced economic transactions. Remember, your job is to record economic activity so that management can understand how money is being spent and if the business is making any profit.
Now the lessons from this point forward will expand into more precise methods and account structures to get better results from all information. This is known as advanced skill sets. Understanding these skills allows the bookkeeper to transition from the field of bookkeeping to the field of accounting. The difference between these two levels of accounting, is as follows:
* Bookkeepers enter simple standard transactions to the books of record. In addition they are responsible to keep management apprised of cash status, collect receivables, prepare depreciation/amortization schedules, track and verify accounts payable, separate principal and interest components of long-term debt and maintain ledgers for equity accounts. At the end of each accounting period reconcile and verify account balances. Finally the bookkeeper prepares and presents financial reports to management.
* Accountants generally are more knowledgable about why information is organized in certain ways. Most often this knowledge is gained from formal education or through industry practices. In addition they are held to a higher standard of care in preparing financial reports and are expected to interpret the information presented.
The next section of bookkeeping (advanced skill sets) introduces the bookkeeper to the different organizational methods and explains why certain kinds of transactions are handled differently than standard entry practices. In addition some tax knowledge is infused throughout as the tax code impacts much of how accounting is performed. Finally, this section illustrates several relationships and their impact with decision-making.
As a bookkeeper transitioning to accounting, these skills are essential in delivering high quality data to management. With good clarity management can make good decisions that impact the profitability of the business and the long-term security of employment for staff.
There are several different methods of accounting in business. Many are industry specific but one of three particular methods is used the majority of the time. They include departmental accounting, job costing and cost accounting.
Departmental accounting is also known as class accounting. It is designed to break a company’s financial information into respective functions. For a grocery store there are several departments such as meat, dairy, bakery, dry goods and health care products. In manufacturing it may be broken out into product lines or by plants. The goal is to recognize the revenue generated and its associated direct costs of sales.
Job costing is similar except it is designed to account for particular projects and therefore has different names including project accounting, contract costing or fund accounting (used with non-profit organizations). This method of accounting is very common in the construction and service industries.
Similar to class accounting, the focus is on revenues and the associated direct costs.
The third most common method of accounting is cost accounting. Also called managerial accounting, it is designed to organize information around manufacturing processes. Its goal is to maximize unit profitability over a substantial number of units produced. This form of accounting is even used in the food service industry.
Although these may appear overwhelming to the inexperienced bookkeeper, once they are explained and illustrated, you will find them easy to implement and interpret.
In addition to gaining an understanding of the more common organizational methods, the advanced skills section will introduce some sophisticated issues. This will include payroll complexities involving bonuses, owner compensation and owner benefits. These lessons will get into the actual journal entry details and why it is done a certain way. Other complicated transactions that will be explained include:
1) Accounting for Personal Benefits
2) How to Properly Record Life Insurance Premiums
3) What is a working trial balance and how are journal entries posted to a working trial balance?
4) Discounts Accounting
5) Liens and Levies
6) Accounting for Highly Complex Asset Purchases
7) Understanding the Various Forms of Basis
8) Management Reports
9) What are internal controls?
In addition to all this, the field of knowledge for taxation is explored.
There are two governing bodies related to financial accounting. The first is the American Institute of Certified Public Accountants (AICPA). This group promulgates Generally Accepted Accounting Principles (GAAP). The second governing body is the Internal Revenue Service (IRS). Their rules are dictated by Congress and economic goals. Most economic transactions are recorded in a similar manner. However, there are some notable differences between the two governing bodies (financial and tax accounting) creating two distinct groups of differences. These are known as timing differences and basis adjustments as explained here:
A) Timing Differences – The Internal Revenue Code advocates for earlier deduction of capital expenses (via accelerated depreciation and amortization) reducing the overall tax obligation for the taxpayer. However, GAAP (longer depreciation cycles) will ultimately match the tax deduction over the standard period of time. During this unequal period a timing difference between the two deductions exist. This form of timing difference exists for revenue recognition, cost allocation and recognition of certain capital gains.
B) Basis Adjustments – The Code specifically excludes certain expenses as non deductible for tax purposes. This includes one-half of most meals and entertainment costs, charitable giving, life insurance premiums for key individuals, certain benefits for owners and more. In effect, the IRS treats these items as either basis adjustments or outright dividends depending on the situation.
The accountant’s job is to keep track of these book to tax differences. Several lessons in the advanced skills section cover these items and how to properly track the values. In addition, the lessons go further and explain how to reconcile the values to the books of record.
Finally the advanced skills section will tie a lot this information together. It is essential for an accountant to understand the why’s of entering data. Making the connection to certain actions and their corresponding impact on the financial statements is critical in helping management understand the effect of their decisions. Learning about cash flows and how to calculate cash flow is extremely beneficial to any business organization. Furthermore, proper understanding of many business issues allows the bookkeeper to record economic activity painting a more accurate financial picture. This includes:
* Contractual Defaults
* Penalties and Interest
* Capital Accounts
… and many more.
This understanding allows the bookkeeper to prepare the three other financial statements:
1) Statement of Retained Earnings
2) Cash Flows Statement
3) Notes to Financial Statements
All three of these financial statements are covered in the advanced skills section of this website. Those lessons include general introduction, concepts and reasoning behind their necessity. Furthermore, the methods and tools used to calculate their values are explained. I also cover proper presentation formats and how to answer basic questions from management as they interpret the information.
Summary – Advanced Skill Sets in Accounting
Lessons 1 through 69 introduced the reader to the fundamentals of bookkeeping. Essentially, you are full-scale bookkeeper heading towards becoming an accountant. What was taught in those lessons is no different from what is taught in the first three years of accounting in almost every college with an accounting program. Actually, you have learned more because it includes procedural processes that are not taught in school.
The next area transitions the bookkeeper into an accountant. Much of what is taught in this next section is not taught in college but is learned through experience. The difference between this series and the college graduate is a piece of paper recognizing completion of a formal process. In your case, you have a superior basis to do the actual work as you now understand the actual processes used.
You are now more prepared than 99% of all other bookkeepers performing bookkeeping services. Complete the next section and you’ll surpass the skill sets of any accountant in the market. Good luck and send me a note with your comments to dave (use the ‘AT’ symbol) businessecon.org. Act on Knowledge.