First, the disclaimer: I am not an accountant. I am a bookkeeper, have been so for 12 years, and do believe I’m good at it. Not the best. I don’t claim to know it all, but I’ve seen worse. My belief is that every bookkeeper should actually work for a CPA firm before he/she can say he/she’s a bookkeeper. Yes, I did bookkeeping before I went to work for my current firm. Did I have a clue what I was doing? Barely. Class is not a replacement for real life experience (but isn’t that true for every field?). So, if you have already decided to hire a bookkeeper for your work, 1) find someone who loves what they do, and 2) ask if they’ve actually worked for a CPA firm before. If you do both of these, you’ll find a decent bookkeeper.
Okay, kicking that soap box away, let’s start talking about the bookkeeping end of the artist’s business. To start, a few terms for general definition. This way, when I use a term, you’ll have a basic idea. I might add more terms here as I write the blogs which expand upon these terms, so if you run across something you don’t understand, try this blog first. If I then don’t answer the question, add a comment.
What you need to know to start:
Assets: items that can be converted to cash, some maybe be more “liquid” (easier to sell) than others. Example, cash is cash (very liquid), a stock (semi-liquid as it takes a couple days to be sold and get the cash), a building (not so liquid as it could take months to get sold).
Liabilities: debts and money owed to people or businesses.
Equity: your investment and capital as owner.
Income: money received in exchange for your art product.
Expenses: money paid out to support your art and the making of product.
Chart of Accounts: the accounts used in a bookkeeping system to classify business transactions.
Debit: in a double entry bookkeeping system, this is the left hand column where numbers are put to either increase or decrease the balance of an account. Assets, for example, are debit accounts so a debit to their column increases the balance while a credit decreases it.
Credit:in a double entry bookkeeping system, this is the right hand column where numbers are put to either increase or decrease the balance of an account. Liabilites, for example, are credit accounts so a credit to their column increases the balance while a debit decreases it.
Double Entry: a system of bookkeeping that splits between transactions between two or more accounts. For example, you purchase a notepad for use in your business for $5.00. An entry to record this on your books would consist of a credit to Cash for $5.00 and a debit to Office Expense for $5.00. In a double entry the total of the debit and credit columns will always balance. Very few people use a single entry bookkeeping system any more and double entry is far more accurate because it forces the bookkeeping to balance, it’s the one we’ll be using.
Formulas to keep in mind:
Assets = Liabilties + Equity (These are items on your “balance sheet” – a financial statement showing the health of your business.)
Income – Expenses = net income or net loss (These are items on your “income statement” or your “profit and loss.” These terms are interchangable and are part of your financial statement. Your net income/loss flows through to the equity section of your balance sheet.) Net income means you’re making money. Net loss means you’re losing money. At the end of the year, your income and expense accounts are zeroed out with the net between the two closing out to a retained earnings account (which is under equity). All other accounts keep their year end balance into the new year.
Next, we’ll be expanding upon these terms and discuss actually recording transactions. Put your hands in the air and enjoy the ride!