Many errors result from incorrect item set up or lack of understanding of basic accounting.
Here are some examples:
1. Adding items to the item list: the item list is used to populated forms such as invoices, sales receipts, sales orders, purchase orders, and bills. The items direct the transactions to the chart of accounts. If the item is tagged to the incorrect account on the chart of accounts, the financial statements will be incorrect. It is important to know when an item is to be coded as income, expense, or an inventory item as it is used on a form.
2. Treating all payments as expense - payments for credit cards or loans should not be treated as expenses. These are liability payments. The expenses are the actual charges on the credit card statements and the interest component on the loan payment. These are the charges that should be reflected on the income statement, not the payment to reduce the loan or credit card balance. Those payments impact the balance sheet.
Basic accounting requires an understanding of the accounts on the chart of account list:
Assets - items owned by the company: cash, accounts receivable, fixed assets, inventory, and intangible assets such as trademarks and patents.
Liabilities - items owed by the company: accounts payable, payroll taxes, sales taxes, customer deposits, mortgages loans, vehicle loans, and credit cards.
Capital - net equity of the company (assets - liabilities): capital consists of cash and property put into the company by the owner; distributions taken by the owners, and retained earnings (sum of profits and losses over the life of the business).
Viewing transactions as a journal entry will help reduce errors on a financial statement. Here are some examples:
Sales: Debit to Accounts Receivable or Cash
Credit to Income
Expense: Debit to Expense (utilities, office supplies, etc)
Credit Cash or Accounts Payable
Owner Draw/Distribution: Debit Owner Distributions (capital account)
Credit Cash
These are some basic concepts to keep in mind about processing financial data for one's financial statements. Liberty Financial can help organizations ensure they have credible financial statements, which are vitally important to their success.
Contact LFC today for assistance.
