Introduction to Bookkeeping

    Accurate bookkeeping is a necessity when operating a mobile DJ service for many reasons.  Complete and precise bookkeeping will identify your financial position effectively and will allow you to make intelligent business decisions and transactions.   It will highlight weak areas in your business that should be improved and areas that are over-budgeted, etc.  The time put into accurate record keeping of business transactions will prove to save you less headaches when tax season rolls around and should be taken very seriously.
    There are two methods of accounting:

• Cash basis – where revenue (income) is considered earned only when a cash transaction is used to earn revenue or incur expenses (this is the method used for Mobile DJ services with the exception of corporate services)
• Accrual basis – where revenue is considered earned when services have been provided and expenses considered when actually incurred.  This still holds true even if a payment has not been made.

    Source documents are proof that a transaction occurred and state the amount involved in the transaction.  Sales/purchase invoices, cheques and bills are all examples of source documents.  Information can then be extracted from the source document and transposed to the general journal.  This procedure is called “journalizing” and will be covered later in this article.  First the theory of debit and credit will be examined in order to achieve a clear understanding of a few basic principles.
 
The Theory of Debit and Credit

    To verify that we’re “speaking the same language”, it is essential to clarify a bit of Accounting terminology at this point.
Assets are defined as items of value owned by a business.  A few examples of assets are cash, equipment, supplies, etc.  Liabilities are debts or amounts owed to others.  A bank loan or mortgage is an example of a liability.   Owner’s equity is defined as the net worth of a business.  In order to calculate owner’s equity; simply subtract the total liabilities from the total assets.  This formulates what is known as:  “The Fundamental Accounting Equation”:

Therefore, using this equation if two totals are known, the third can be calculated.  For example, if the assets totaled $100, 000 and the owner’s equity was $50, 000, the liabilities could be calculated using the equation and found to be $50, 000.
If an asset account is increased, then it is referred to as being "debited."  Consequently, if a liability is increased, then it is referred to as being "credited.”  In the same way, if the owner’s equity is increased it is also “credited.”  Said another way, when an asset is decreased, it is “credited” and when a liability is decreased it is “debited.”  Owner’s equity is “debited” when decreased as well.  The following charts will summarize the concept of debit and credit:
 

Chart of Accounts
 A chart of accounts is a list of all asset, liability and owner’s equity accounts and their assigned account numbers.  All asset accounts are numbered in the one hundreds range (100-199), all liabilities are assigned values in the two hundreds range (200-299) and owner’s equity accounts are assigned account numbers in the three hundreds range.  All revenue accounts are listed in the four hundreds range and expenses are listed in the five hundreds range. Here is an example of a chart of accounts:

Journalizing
    A journal, or book of original entry, is a day-to-day record showing the debit and credit entries of each transaction.  A brief explanation is also included for each transaction.
    Once the transaction information is extracted from the source documents (amount, date, account number, etc.), it can be entered into the journal.  Each entry is called a “journal entry.”  Each page is numbered (J1, J2, etc) so that it can be cross-referenced easily.
    When journalizing. it is extremely important to follow several Generally Accepted Accounting Principles. (GAAP's)  GAAP's are beyond the intention for this article and will not be discussed in detail, however a handful will be discussed briefly in order to maintain proper form consistency.  A GAAP that is essential to note is the "Cost Principle" which states that: "Assets are to be recorded at their purchase price."  This GAAP generally speaks for itself, but is important to follow when bookkeeping.  The second GAAP is the "Business Entity Principle" that states that: Personal assets, liabilities and financial transactions are to be excluded from statements referring to a business.  This is extremely important in bookkeeping in order to keep accurate records and establish a financial position properly.
    It is also imperative to match debit and credit entries when journalizing.  For instance, consider a payment of $1,000 was made on a bank loan using cash.  $1,000 would be debited from the account "bank loan." (Note that "bank loan" is a liability)  Now, we must match this debit entry with a corresponding equal credit value. (This can consist of several credited accounts or vice versa)  Therefore, $1,000 would be credited from the "cash" account.  The key factor here is that just $1,000 debited from the account "bank loan" is not sufficient.  It must be matched with a credited account that is equal to the same value. (Or several accounts that total the equivalent value) Don't forget that as previously stated, a brief description of the transaction is required on the last line of each transaction.  It is also accepted that the debit entry goes before the credit entry, and the credit entry is indented.  Here is an example of a short Journal page:
 

Posting to the Ledger

    The usage of a general journal proves to be quite useful in many ways and additionally prevents errors from occurring.  The next step is to post the debit and credit values into the ledger in order to keep a running total of each account balance.  A ledger does exactly this and all the individual accounts are often referred to as "T-Accounts."  Each account or "T Account" is usually a page and is assigned a number.  (Please refer to the Chart of Accounts example above)  It is recommended to post to the ledger following the completion of each journal entry, to minimize the chance of error.
    "P.R" is short for "Posting Reference" and consists of the corresponding journal page of the entry.  Additionally, you may notice in the example below that the column "DR/CR" exists.  This serves as a balance indication of either DR or CR. (debit or credit)  Therefore, if the cash T Account below has a credit of $100 and a debit value of $1,000, the ending balance for the T account is $900. (The difference is found to be a debit balance, because the debit value is greater than the credit value)  Here is an example of a general ledger using the same data from the previous example:
 
 

    Recall the Fundamental Accounting Equation. Liabilities and the owner's equity must equal the value of the total assets.  The trial balance exists to test this calculation to see if it holds "true."  Before advancing any further, the trial balance must be adjusted until it is correct or the following steps will be incorrect as well.  Transferring to the trial balance is as easy as recording all the accounts on the left side and their debit or credit balance in the appropriate column. (Debit values in the second column and credit values in the third)  Here is an example of a Trial Balance:
(NOTE: Please observe the title layout for a trial balance- WHO, WHAT and WHEN information on three separate lines.  Additionally, it is imperative that all final totals are double-underlined, and addition or subtraction calculations are indicated by a single underline)
 

Mapy's DJ Service Trial Balance January, 31, 1999
Account Title	Acc.No	Debit	Credit
Cash	100	500
Accounts Receivable- Steele, Jim	101	800
Music Library Supplies	102	100
L. Mapy, Capital	300		1000
Sales Revenue- January	400		800
Advertising Expense	500	400
		______________	______________
Totals

Preparing Income Statements

    If the debit and credit values match up, then you're on the right track.  At this point, we must take a look at two new GAAP's to grasp a full comprehension of income statements.  The first is the "Time Period Principle" that deals with the Accounting period of the income statement.  If an income statement deals with the month of January, then only the revenue and expenses in January should be present.  The last GAAP that will be discussed in this article is the "Matching Principle" that states that: "The revenue earned during an accounting period must be matched with the expenses involved in generating this revenue."  In a nutshell, this is basically saying that all expenses that are used to earn revenue should be included in the income statement.  If a business paid a phone bill of $100 in order to sell products and generate revenue, then it must be included on the income statement.
 
 

Mapy's DJ Services Income Statement For the Month Ended January, 31, 1999.
Revenue
Sales Revenue -January	800
Total Revenue		800
Expenses
Advertising Expense	400
Total Expenses		400
		______________
Net Income

(NOTE: Regularly many revenue and expense accounts exist and are each totalled resulting in a revenue and expense total.  The Net Income or Net Loss is found by subtracting the total expenses from the total revenue and is double-underlined)

Preparing Report-Form Balance Sheets

    The last topic that will be discussed in this article is the report-form balance sheet.  If there is a net loss involved, then it is added to the drawings account (money taken out of the business by the owner for personal purposes) and then the total is subtracted from the original capital value. (At the beginning of the Accounting period)  If there is a net income, then the drawings account is subtracted from this value and then the total is added to the original capital. (Net worth of business)  As well, please keep in mind that the liabilities plus the owner's equity must equal the value of total assets.  Here is an example of a report-form balance sheet:

(NOTE: Data listed below is not taken from the previous examples)
 

 

Mapy's DJ Services Report Form Balance Sheet January, 31, 1999.
Assets
Cash		5000
Accounts Receivable		1000
Music Library Supplies		3000
Equipment		8000
Total Assets
Liabilities
Bank Loan		5000
Mortgage		9000
Total Liabilites			14000
Owner's Equity
L. Mapy, Capital- Jan. 1		1500
Add: Net Income	3000
Less: Drawings	1500
Increase in Owner's Equity		1500
		________
L. Mapy, Capital- Jan. 31			3000
			________
Total Liabilities and Owner's Equity