General Accounting Principle

Accounting is based on a simple formula:  Assets = Liabilities + Equity

Here is how it works:  Let’s say you wanted to open a new business selling t-shirts. What is one of the first things you would need?  Equity or starting capitol.  You decide to write up a business plan and investment $10,000 into your new company.  You would then write a $10,000 check made payable to your business.  Here is how the accounting formula, using your new business, now looks:

Assets	Liabilities	Equity
Bank - $10,000	$0	$10,000

  Your asset and equity accounts changed.  Your liability account did not.

Now you have capitol, what is the next step?  Before you start selling t-shirts you need to buy some t-shirts to stock in inventory.  You decide to spend $1,000 on new t-shirts.  Now, let’s see how your business looks:

Assets	Liabilities	Equity
Bank - $9,000	$0	$10,000
Inventory - $1,000

In this scenario, only the asset account changed.  The bank account had $1,000 deducted from it and the inventory account had $1,000 worth of t-shirts added to it.  The liability and equity accounts stayed the same.

Now you have inventory, what is the next step.  Are you planning on selling t-shirts out of your car?  Of course not.  You decide that a store would work best for your type of product.  You look around and find the perfect building.  Unfortunately it costs $15,000.  Since you only have $9,000 in the bank, you decide to purchase a loan.  (In this example we’ll assume that you are financing the entire $15,000 with zero percent down.)

Here is how your business now looks:

Assets	Liabilities	Equity
Bank - $9,000	Bank Loan - $15,000	Starting Capitol - $10,000
Inventory - $1,000
Buildings - $15,000

Now let’s total everything up.  Your assets total $25,000, your liabilities total $15,000, and your equity totals $10,000.  Are you in balance?  Yes!  $25,000 = $15,000 + $10,000.

This was just a basic example of how the accounting formula works.  We will explore additional accounts (such as expense and income accounts) and how debits and credits work into the equation in a future post. 

How to Prevent Fraud and Theft

I belong to many bookkeepers groups and one topic I see time and time again is fraud and how it is affecting businesses.  When hiring an out-sourced bookkeeper, many business owners are worried about handing the company's financial responsibilities over to someone they don't know.  What they don't realize is that fraud and embezzlement can also occur with a full-time employee just as much as it could with an out-sourced bookkeeper.  In fact, most of the news articles I read about fraud, theft, and embezzlement are perpetrated by employees.  Here is an example... I recently  read an article about a woman who worked as a controller for an Acura dealership in Pennsylvania.  Here is the first paragraph of that article:

"Patricia Smith, the former controller of an auto dealership in Pennsylvania, is headed to jail after embezzling $10 million from her former boss in a stunning case of a trusted employee looting the business then squandering the cash on luxuries."- ABC News (link to article below) http://abcnews.go.com/Business/employee-scams-car-dealership-10m/story?id=16604125

As a bookkeeper and business owner I am not only shocked that someone could do that but that it went on for seven years before it was detected. 

The key to preventing fraud, theft, and embezzlement is to have proper checks and balances in place.  Here are steps you can take to protect yourself and your business:

1.  Have a separation of duties-  The person who receives cash should not be the same person who takes it to the bank, the person who cuts checks should not be the person who signs them, and so on.

2.  Audit your books at least once a year by an outside and experienced person.  You should also run monthly "Audit Trail" reports in QuickBooks.

3.  When a mistake is made on a check, have your bookkeeper "VOID" the check in QuickBooks (instead of deleting the check).  Make sure your bookkeeper keeps a copy of every check he or she voided.  Often check the check sequences in your accounting program to make sure that all checks are accounted for.  If a check number is missing contact your bookkeeper immediately.

5.  Make sure you receive and review the monthly bank reconciliation detail and summary reports.  These reports will show every cleared and uncleared transaction for that month.  Go over this report with your bookkeeper so he/she can explain why some transactions may not have cleared yet.

6.  Review the images of checks that cleared on your monthly bank statement (you are looking at who the checks were made out to).  If your mailed bank statement does not include images of cleared checks, you can go to your bank's website and print a statement with check copies.

7.  At least once a month, check the journal entries your bookkeeper made.  Look for any unusual entries.  Some of the usual entries are for prepaid insurance, accrued expenses, depreciation/amortization, payroll taxes, etc...

8.  In QuickBooks, set a closing date and password.  This prevents users from making changes in previous periods by making them enter a password before the transaction is saved.


I hope these steps will help you.  Our goal at Kerr Bookkeeping is to help our client's acheive their goals.  Sometimes that goal is to obtain a piece of mind.  That is where this post come in.

For more information please visit our website www.kerrbookkeeping.com or send us an email at info@kerrbookkeeping.com.

Why Customer Service is Key

Most companies these days understand the value in customer service but there are some companies that either don't care or don't realize how important it is.  If you were looking at an org chart, you would usually find customer service reps at the very bottom.  Because of this, many companies don't spend the time or resources needed to find suitable employees for those positions. 

Customer service reps are considered "face" of most companies.  The reason for this is simple... If you call AT&T because of an issue with your bill or because you are having technical issues, you don't speak to a CEO, VP, or even manager.  You are transferred to a customer service rep.  If that rep provides poor customer service, whether they are inexperienced/uneducated about the product or are just plain rude, it leaves you with a bad taste in your mouth and a poor image of that company.  If the customer service was really bad we will sometimes file a complaint, write the company a bad review (on Yelp.com for example), or even go to the extreme of cancelling our service with that company or not purchasing from them again.  On the other hand, if you are transferred to a customer service rep who is courteous and knowledgeable it leaves you with a good feeling and a positive impression of that company.  If the service is exceptional we want to tell our friends about it and/or write a great review for that company.  To simply sum it up:  Poor customer service = bad reviews and potential loss of current and future customers; Where as great customer service = positive reviews and/or repeat and referred clientele.

The reason for this post comes from an article published yesterday by AOL (see link for article below).  The article was titled "The 11 Worst Companies to Work for in America".  Here are a few excerpts from the article: 

Game Stop- ranked #10:  "Employees appear to regularly complain that the company privileges sales above customer service. According to one review, "Priority is placed on sales instead of games and customers, pushing people to pre-order games can place them in a situation where they spend good money on a bad game with no possibility of a refund, business' models place customers at a disadvantage." It may also be the reason why the video game retailer made the Consumer Report's annual "naughty" list for bad customer service in 2011. Likely adding to poor customer service, reviews point to high turnover."

Sears Holdings (Sears/Kmart)- ranked #6:  "Customers will not be surprised to hear that Sears employees think the company's "ancient systems" are in desperate need of repair. In addition to aging infrastructure, retail workers at both companies are unhappy with compensation. Sears employees consistently pointed to low starting salary and even lower annual raises. Kmart employees complained they cannot get enough pay as they are limited to fewer than 32 hours a week with shifts only "four to six hours long." In 2011, Sears' American Customer Satisfaction Index score was a 76 out of 100. Among all department stores and discount retailers, only Walmart received a lower score."

Dish Network- ranked #1:  "Many reviewers objected to the company's long hours and no holidays. "You work all day all night. Your day starts from 6:45am till 6pm or 10pm You work every holiday that your day falls on." It is no surprise then that reviewers suggested employees were unhappy with management, citing "mandatory overtime" and "no flexibility" with schedule. Perhaps the dissatisfaction of employees is affecting customer satisfaction. MSN Money awarded Dish a spot in its 2012 Customer Service Hall of Shame, noting that Dish's customers did not like that the broadcaster had dropped channels and seemed to prioritize sales over quality service."

Excerpts all from AOL Jobs website.  Click the following link to read the full article: 
http://jobs.aol.com/articles/2012/08/14/the-11-worst-companies-to-work-for-in-america/

My advice is simple.  Listen to what your customers and employees have to say.  When employees and customers are happy they will promote your company via "word of mouth".  In this day and age of social media it's an excellent form of free marketing.

Is An Entry a Debit or a Credit?

If you have trouble remember which accounts to debit and which ones to credit, here is a very easy cheat sheet:

Asset Accounts: debit (increase) - credit (decrease)
Liability Accounts: credit (increase) - debit (decrease)
Equity Accounts: credit (increase) - debit (decrease)
Expense, Revenue, and Draw Accounts- debit (increase) - credit (decrease)