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Bookkeeping Essentials

2nd Australian Edition

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2nd Australian Edition

Bookkeeping Essentials

by Veechi Curtis

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Bookkeeping Essentials For Dummies®

2nd Australian Edition published byWiley Publishing Australia Pty Ltd 42 McDougall Street Milton, Qld 4064 www.dummies.com

Copyright © 2015 Wiley Publishing Australia Pty Ltd

The moral rights of the author have been asserted.

National Library of Australia Cataloguing-in-Publication data:

Author: Curtis, Veechi, author.

Title: Bookkeeping Essentials For Dummies / Veechi Curtis

Edition: 2nd Australian Edition

ISBN: 9780730310655 (pbk.)

9780730310662 (ebook)

Series: For Dummies

Notes: Includes index.

Subjects: Bookkeeping — Australia

Dewey Number: 657.2

All rights reserved. No part of this book, including interior design, cover design and icons, may be reproduced or transmitted in any form, by any means (electronic, photocopying, recording or otherwise) without the prior written permission of the Publisher. Requests to the Publisher for permission should be addressed to the Legal Services section of John Wiley & Sons Australia, Ltd, Level 2, 155 Cremorne Street, Richmond, Vic 3151, or email [email protected].

Cover image: © iStock.com/kutaytanir

Typeset by diacriTech, Chennai, India

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Limit of Liability/Disclaimer of Warranty: THE PUBLISHER AND THE AUTHOR MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUT LIMITATION, WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES OR PROMOTIONAL MATERIALS. THE ADVICE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR EVERY SITUATION. THIS WORK IS SOLD WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OR OTHER PROFESSIONAL SERVICES. IF PROFESSIONAL ASSISTANCE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL PERSON SHOULD BE SOUGHT. NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM. THE FACT THAT AN ORGANISATION OR WEBSITE IS REFERRED TO IN THIS WORK AS A CITATION AND/OR A POTENTIAL SOURCE OF FURTHER INFORMATION DOES NOT MEAN THAT THE AUTHOR OR THE PUBLISHER ENDORSES THE INFORMATION THE ORGANISATION OR WEBSITE MAY PROVIDE OR RECOMMENDATIONS IT MAY MAKE. FURTHER, READERS SHOULD BE AWARE THAT INTERNET WEBSITES LISTED IN THIS WORK MAY HAVE CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN IT IS READ.

Trademarks: Wiley, the Wiley logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Making Everything Easier, dummies.com and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries, and may not be used without written permission. The Institute of Certified Bookkeepers is a registered trademark of The Institute of Certified Bookkeepers Global Ltd. All other trademarks are the property of their respective owners. Wiley Publishing Australia Pty Ltd is not associated with any product or vendor mentioned in this book.

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Contents at a GlanceForeword ��������������������������������������������������������������xiii

Introduction ������������������������������������������������������������ 1Chapter 1: Getting Started ........................................................................5Chapter 2: Choosing Software and Working in the Cloud ...................15Chapter 3: Building Your Accounts ........................................................27Chapter 4: Creating Order from Chaos ..................................................41Chapter 5: Recording Expenses and Supplier Payments ....................55Chapter 6: Recording Receipts and Sales ..............................................71Chapter 7: Understanding GST ...............................................................81Chapter 8: Paying Employees .................................................................95Chapter 9: Reconciling Accounts .........................................................113Chapter 10: Understanding Financial Reports ...................................127Chapter 11: Starting a New Financial Year ..........................................141Chapter 12: Ten (Or More) Tips for Contract Bookkeepers .............151

Index ������������������������������������������������������������������ 163

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Table of Contents

Foreword �������������������������������������������������� xiii

Introduction ������������������������������������������������1About This Book .....................................................................1Foolish Assumptions ..............................................................2Icons Used in This Book ........................................................2Where to Go from Here ..........................................................3

Chapter 1: Getting Started � � � � � � � � � � � � � � � � � � � � � � � � 5Deciding What Software to Use ............................................6Designing a System to Fit You ...............................................6

Getting organised .........................................................6Keeping track of expenses and supplier bills ..........7Recording money in .....................................................8

Getting Technical ....................................................................8Understanding GST ......................................................8Working with payroll ....................................................9Reconcile often, reconcile well .................................10

Developing an Attitude ........................................................10Convince yourself this stuff matters .......................10Quit counting sheep ...................................................11Do your job well .........................................................12

Getting Skilled Up .................................................................12Keeping your qualifications up to date ...................13Joining an association ................................................13Signing up to a course ...............................................13

Chapter 2: Choosing Software and Working in the Cloud � � � � � � � � � � � � � � � � � � � � � � � � � 15

Heading for the Clouds ........................................................15Why the cloud is such a big deal .............................16Why cloud accounting doesn’t always

fit the bill..................................................................18Accessing your accounts when the internet goes

down .........................................................................18Rounding up the Main Players ............................................19

Muscling up with MYOB ............................................20

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viii Bookkeeping Essentials For Dummies, 2nd Australian Edition

Playing it straight with Reckon and QuickBooks ...21Having fun with Xero .................................................22

Matching Software to the Job in Hand ..............................23Starting up a new business .......................................23Getting ready to grow ................................................24Manufacturing, wholesaling and retailing ...............24Catering for bigger business or non-profits ............25

Chapter 3: Building Your Accounts � � � � � � � � � � � � � � � 27Classifying Accounts ............................................................28Building Your Profit & Loss Accounts ...............................28

Analysing income streams ........................................29Separating cost of sales accounts ............................29Cataloguing expenses ................................................30Dealing with personal expenses ...............................32

Seeing Where the Money’s Made ........................................33Itemising Balance Sheet Accounts .....................................34

Adding up the assets .................................................35Listing liabilities ..........................................................37Accounting for equity ................................................38

Your Final Chart of Accounts ..............................................39

Chapter 4: Creating Order from Chaos � � � � � � � � � � � � 41Getting Paperwork in Order ................................................41

Locating bank and credit card statements .............42Organising supplier bills ............................................43Dealing with receipts .................................................43Scanning receipts and supplier invoices ................44Keeping records of customer invoices ....................45

Nitpicking over Petty Cash ..................................................45Storing cash under lock and key ..............................45Robbing Peter to pay Paul ........................................48Coding receipts automatically ..................................50Keeping tabs of cash on the run ..............................50

Deciding What to Keep and for How Long ........................51Protecting Your Accounting Data .......................................52

Backing up data from the cloud ...............................52Devising a backup strategy .......................................53

Chapter 5: Recording Expenses and Supplier Payments � � � � � � � � � � � � � � � � � � � � � � � � � � � 55

Bookkeeping for a Micro Business .....................................56Automating data entry with bank feeds ..................57Entering transactions one by one ............................58

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Table of Contents ix

Bookkeeping for a Small Business ......................................61Deciding whether to record supplier bills ..............61Dealing with EFTPOS and credit card

transactions .............................................................63Bookkeeping for a Larger Business ....................................63

Managing supplier orders and invoices ..................64Making supplier payments ........................................64Recording EFTPOS and credit card

transactions .............................................................66Allocating Everything Correctly .........................................66

Chapter 6: Recording Receipts and Sales � � � � � � � � � 71Tracking Sales and Payments .............................................71

Recording customer sales .........................................72Entering customer payments ....................................73

Working on a Cash Basis .....................................................75Bookkeeping for Other Receipts .........................................77

Recording miscellaneous receipts ...........................77Selecting accounts correctly .....................................78

Bringing Home the Bacon ....................................................79

Chapter 7: Understanding GST � � � � � � � � � � � � � � � � � � � 81Looking at How GST Works .................................................82

Picking a reporting method ......................................83Deciding how often to report ...................................83

Calculating GST .....................................................................84Figuring What’s Taxed and What’s Not ..............................84

Move it, groove it, tax it ............................................85Transactions with no GST .........................................85

Understanding Tax Codes ....................................................87Creating a list of tax codes ........................................87Linking accounts to tax codes ..................................89

Staying Out of Trouble .........................................................90Avoiding traps for the unwary .................................90Keeping personal matters separate .........................91

Completing Your Business Activity Statement .................92Playing in form ............................................................92Meeting your deadlines .............................................93

Chapter 8: Paying Employees � � � � � � � � � � � � � � � � � � � � 95Hiring a New Employee ........................................................95

Getting the paperwork in order ...............................96Covering against mishaps .........................................97Subscribing to super ..................................................97

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x Bookkeeping Essentials For Dummies, 2nd Australian Edition

Doling Out the Cash on Pay Day ........................................99Paying folks their dues ..............................................99Taxing pay (no mercy shown) ................................101Dealing with deductions ..........................................102Calculating superannuation ....................................102Issuing pay slips .......................................................104

Taking Leave ........................................................................104Calculating leave on a percentage basis ...............105Calculating hours per pay period ..........................106Keeping good records ..............................................107

Reporting for Payroll ..........................................................107Summarising wages and PAYG ................................108Paying superannuation ............................................109Watching out for payroll tax ...................................109Other payroll deadlines ...........................................110

Your Payroll Checklist ........................................................111

Chapter 9: Reconciling Accounts� � � � � � � � � � � � � � � � 113Getting Started ....................................................................114

Deciding what bank accounts to reconcile ...........114Calculating your true bank balance .......................114Recording your opening bank balance ..................116

Doing Your First Reconciliation ........................................117Reconciling accounts when you’re not using

bank feeds ..............................................................118Reconciling accounts when you have bank

feeds .......................................................................120Troubleshooting opening balances ........................121

Keeping Proof ......................................................................122Balancing Tricks ..................................................................123Reconciling Other Kinds of Accounts ..............................124

Chapter 10: Understanding Financial Reports � � � � � 127Cash versus Accrual — What’s the Difference? .............128Telling the Story with Profit & Loss .................................129

Examining income ....................................................129Weighing up gross profit .........................................131Watching expenses ...................................................131

Painting a Picture with the Balance Sheet ......................132Sketching assets, black as ink ................................134Drawing liabilities, red as blood .............................134Sculpting equity, cast in gold ..................................135

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Table of Contents xi

Understanding the Relationship between Profit and Cash ..................................................................................136

Why there’s profit but no cash ...............................136Why there’s cash but no profit ...............................137

Scrutinising Results ............................................................138

Chapter 11: Starting a New Financial Year � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 141

Finalising the Old Year .......................................................142Out with the old year . . . in with the new .............142Generating end-of-year reports ..............................144Protecting against accidents ...................................145

Communicating with Your Accountant ............................146Checking the Accountant’s Figures Make Sense ............147Starting a New Year ............................................................148

Understanding what happens when you start a new year..............................................................149

Archiving data ...........................................................149

Chapter 12: Ten (Or More) Tips for Contract Bookkeepers � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 151

Register as a BAS Agent .....................................................151Get Skilled Up ......................................................................152Cover Yourself with Insurance ..........................................153Join a Professional Association ........................................154Act Honestly and Independently ......................................154Avoid Conflicts of Interest .................................................155Behave Professionally ........................................................156Take Reasonable Care ........................................................157Write an Engagement Letter ..............................................159Know Your Limits................................................................160Protect Client Data .............................................................160

Index ������������������������������������������������������163

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Foreword

W hile reviewing this edition of Bookkeeping Essentials For Dummies, I have once again been impressed with how

well Veechi has captured today’s bookkeeping. While some say bookkeeping doesn’t change, what is very obvious (and what Veechi takes care to explain within these pages) is that the next generation of software development, led by cloud technology, is bringing significant change to a bookkeeper’s approach and techniques.

Bookkeeping Essentials For Dummies is a must-read, whether you’re considering doing the books for your own business or whether you’re considering bookkeeping as a career. The combination of step-by-step explanations, background information, tips and warnings will help you gain a rapid and accurate understanding of all requirements. Veechi not only explains the basics of bookkeeping, introducing essential bookkeeping concepts in an accessible and logical way, but she also offers an introduction to more advanced bookkeeping topics, including financial reporting, in case you’re interested in further developing your bookkeeping skills.

I first met Veechi Curtis more than ten years ago at an MYOB accounting software conference. I was the technical presenter and Veechi was there in her capacity as a bestselling author of numerous accounting software and small business titles. Since then — many years, many conferences and many chats later — it has become obvious to me that Veechi has a passion for sharing her knowledge about bookkeeping and small business in a creative and committed way that always sheds new light on the topics.

I helped found the Institute of Certified Bookkeepers (ICB) in Australia in 2006. ICB is the largest bookkeeping institute in the world and aims to promote and maintain the standards of bookkeeping as a profession. All kinds of people, with different backgrounds, experiences and qualifications, are involved in ‘keeping the books’. Although some people seek out bookkeeping as a profession, others end up working as bookkeepers almost by accident — which is fine, but without training, they often lack the skills to do the best job possible.

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xiv Bookkeeping Essentials For Dummies, 2nd Australian Edition

My vision for ICB is to help bookkeepers find information and resources, and access insurance and quality support. Given ICB’s aim to provide bookkeepers with information of the highest quality, I’m very proud to write this foreword for Veechi’s book.

Good luck — and happy bookkeeping!

Matthew Addison Executive Director, Institute of

Certified Bookkeepers September 2014

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Introduction

B ookkeeping has changed enormously since I first started as a bookkeeper in my late teens, writing up accounts by

hand in leather-bound journals in my hometown of Edinburgh, Scotland. Accounting software has replaced handwritten books, emails have largely replaced the postal service, and the ability to add up in one’s head is now an anachronistic party trick. However, one thing has stayed the same. A bookkeeper remains a person upon whom most businesses depend.

Bookkeeping Essentials For Dummies aims to be a reference for any bookkeeper. Are you wondering about the difference between an asset and a liability, how GST works or how to calculate an employee’s take-home pay? Then I hope this book can be your go-to guide. I also talk about the major changes that have occurred in the bookkeeping industry in recent years, such as cloud accounting, browser-based software and bank feeds, and how these changes affect the way you do your day-to-day work.

About This BookIn this book, I talk about bookkeeping for all sizes of business. I cover essential topics such as how to record expenses or raise customer sales, how to balance a bank account, processing an employee’s pay, and applying GST correctly. I also explain the basics of employee payroll, and how to generate financial reports.

Because of the smaller size of this book, I don’t delve into some of the more complex bookkeeping topics, such as calculating depreciation, working with inventory or making general journals, topics which fall into a grey area between the responsibilities of a bookkeeper and those of an accountant. If you want to know more about these topics, you may want to get a hold of my ‘big’ bookkeeping book, Bookkeeping For Dummies, Second Australian & New Zealand Edition.

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2 Bookkeeping Essentials For Dummies, 2nd Australian Edition

Foolish AssumptionsBecause I’m so blindingly sensible, I don’t make any foolish assumptions about you, dear reader. I don’t assume that you have any bookkeeping experience or even that you’ve worked in a business before (although it’s possible, of course, that you’re a bookkeeper extraordinaire with 30 years’ experience under your belt). All I assume is that you are at least vaguely interested in bookkeeping and the results that the process yields.

Icons Used in This BookThroughout this book you find icons in the margins to help you navigate through the text. Here’s what these icons mean:

Want to be streets ahead of the competition? Then look for this handy icon.

You find this icon next to stuff relating to GST or taxation (ah, such fascinating topics).

This icon flags information to do with working online, in the ‘cloud’.

Tie a knot in your hankie, pin an egg-timer to your shirt but, whatever you do, don’t forget these little nuggets.

This icon points the way to doing your job better, faster and smarter.

A pitfall for the unwary. Read these warnings carefully (then you can’t say no-one told you . . .).

GST

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Introduction 3

Where to Go from HereBookkeeping Essentials For Dummies isn’t a gripping novel to be read from cover to cover. This book is designed (all 12 bite-sized chunks) so you can pick it up at any point and just start reading.

If you’re new to business and trying to set up a bookkeeping system from scratch, I recommend you read Chapters 1 to 3 before doing much else. If you’re trying to figure out how best to organise paperwork and record sales and expenses, then Chapters 4 to 6 are made for you. Chapters 7 to 9 provide a reference for more technical stuff, such as understanding GST, working with payroll and reconciling bank accounts. And finally, Chapters 10 and 11 deal with the topics of financial reports and starting a new financial year, while Chapter 12 provides some guidance about starting your own bookkeeping business.

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Five Tips for Collecting Money

✓ Draw up a credit policy. If you’re charged with chasing money from customers, you want to have a set of rules that outlines the deal for any customer who receives credit. This is called a credit policy and, if such a policy doesn’t yet exist, you may need to prompt the business owners to create this document.

✓ Do your homework. Just asking a customer to complete a credit application isn’t enough. Take the time once you receive the application to perform a thorough background check.

✓ Don’t waste a moment. When a customer’s account runs overdue, get on the phone straightaway. Start chasing as soon as an account is seven days overdue. The longer you leave a debt before chasing it, the more risk you run of not getting paid.

✓ Calculate the cost of debts. Not only does the business risk increased bad debts the longer they wait before chasing money, but slow-paying customers also tie up valuable capital.

✓ Keep a dossier. Keep track of every phone call made, every reminder sent and every promise received. Sometimes it takes months, numerous phone calls and many emails or letters before you succeed in getting someone to pay, and if you repeat this process with a lot of debtors, you soon lose track of who promised what.

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