Intro to 5 Step Bookkeeping

The Bookkeeping Process with a Spreadsheet Template or other user friendly, database driven bookkeeping software is a simple 5 Step Process.

  1. Review Prior Work

  2. Record Transactions "Accurately"

  3. Categorize Transactions

  4. Review the Income Statement Net Income Statement

  5. Review the Balance Sheet Comparative Net Worth Statement

The Process is Simple. Just ignore their Vocabulary...

Table of Contents

The following Sections are found below:

  1. Welcome

  2. Bookkeeping with a capital "B" is a very specific 5 Step Process

  3. The 5 Step Bookkeeping Process Expands Out with Generic Vocabulary

  4. The Income Statement vs The Balance Sheet

  5. The 5 Step Bookkeeping Process Expands Out More with Industry Vocabulary and Alternative Suggestions

  6. The Confusing Vocabulary is Called Out and Put on Display

With just a few minutes of reading. you are a lot WISER!

1) Welcome

If you are reading this we are going to assume one of two things. 1) You have no clue what Bookkeeping is broadly speaking or in proper context OR 2) You do to a greater or lesser degree, but you are curious to see how that compares to another perspective.

We have really great books on our website which dive in. This is meant as a lead in.

It's easier to learn the PROCESS OF BOOKING than the vocabulary.

This is especially true in the digital age because all of the dogma can be omitted. Regarding the vocabulary, once you see what it should have been, accepting what they turned it into is easier to do.

The Bookkeeping Process is best learned with software. With software it's a Simple 5 Step Process that does not require the Bookkeeper to know that debits and credits exist, and that is a very good thing.

Since the 1980s and the advent of spreadsheets, this could have been learned in this far easier, procedural way by all in 6th grade.

We are 35 to 40 years behind in proper bookkeeping and technology related curriculum but this is a ketchup!

2) Bookkeeping with a Capital "B" is a very specific 5 Step Process

The word Bookkeeping has many connotations. To talk about it in general with others without specifying scope will lead to vague and incomplete conversations.

Broadly speaking, it refers to the numerical tracking of business events in a Small or Large Business or in your own personal life.

It's typically related to financial events, but those might be related to inventory, quality or one of a hundred other things. Spell out what you are talking about even with Pros or you may experience miscommunication.

Among those that speak Accounting-ese on a higher level, the term Bookkeeping refers to a very specific numerical tracking process referred to here forward as "The 5 Step Bookkeeping Process".

1) This process does not include check writing.

2) This process does not include tracking outstanding checks.

3) This process does not include direct thoughts about cash flow management, budgeting, payroll or break even.

Bookkeeping in proper Context is a very specific 5 Step Process that is designed to provide accurate summary insight into your business and it feeds your Tax Accounting needs for purposes of Self Reporting Income Tax.

The 5 Step Bookkeeping Process is defined as follows:

  1. Review Prior Work

  2. Record Transactions "Accurately"

  3. Categorize Transactions

  4. Review the Income Statement (Net Income Statement)

  5. Review the Balance Sheet (Comparative Net Worth Statement)

3) The 5 Step Process Expands Out with Generic Vocabulary

Here is the 5 Step Process with descriptions of each step with generic vocabulary:

1) Review Prior Work
The first time through, there is no Prior Work to review, obviously, so you do the setup process first. Each time after that, there is prior work which should be quickly reviewed to identify where you left off and to ensure nothing has fallen out of Balance in your file since the last time you went through the Reconciliation Process.

2) Record Transactions Accurately
Copy transactions from bank console or bank statements into your bookkeeping software. You can do this one transaction at a time or you can download them with lessor or greater automation (lessor is better). Then, to ensure accuracy, compare your paper or pdf bank statement header data to aggregated values in your software to ensure you entered everything correctly without omissions or errors.

3) Categorize Transactions
Categorize the transactions by selecting a category from a list provided for you. This list is provided for you by the person who helped you setup your bookkeeping system. 90% of the list options are very basic common sense options. The other 10% can be learned in a matter of minutes.

4) Review the Income Statement
Click a button to review an Income Statement, better thought of as a "Net Income Statement".

It is a very straightforward one page report with two separate sections on it. The software will use addition and subtraction to find a numerical result for each section.

Section 1 (income) - Section 2 (expenses) = Net Income (aka Profit). The larger the number the more financially successful you were for a given time frame.

5) Review the Balance Sheet
Click a button to review a "Balance Sheet", better thought of as a "Comparative Net Worth Statement".

It's a moderately straight forward one page report with two separate sections on it too. Each section contains a list of items with values associated similar but different to the Income Statement. The software will use addition and subtraction to find a numerical result for each section, similar to the Income Statement.

Section 1 - Section 2 = an important number. If that number equals zero, it means the two section values were equal, which is the goal, and Balance Sheet is said to be "in Balance". If they are not equal, the "trial balance" will be a non-zero value and there are errors that need to be found and corrected.

This is the entire FIVE STEP PROCESS expressed in very generic terms. With a computer, you have to do ZERO math. Without a computer you would have had to do basic addition and subtraction.

You could have done this in 6th grade if not earlier and it could have been taught to you with a high degree of proficiency in under 4 hours without ever hearing words like debits, credits or any of the confusing report names. 6th graders really can and should be able to handle this., and they need it now too.

This is what "procedural learning" looks like. This feels better for most for sure.

Do you see similarities between the Income Statement and Balance Sheet that might make the structure of both reports easier to remember?

4) The Income Statement vs The Balance Sheet

The "Income Statement" and the "Balance Sheet" both have two relevant sections on them and the goal is a singular value. But there's a lot more similarities than just this...

In both cases, a Start Date and End Date is required to complete the statements

In both cases, a total is obtained for each section.

In both cases, one section is subtracted from another to get an important value.

In the case of the Income Statement, the larger the important value the better.

In the case of the Balance Sheet, zero is the desired result for the important value. A non zero result means there is an error.

WOW. This is easy to remember now.

5) The 5 Step Bookkeeping Process Expands Out More with Industry Vocabulary and Alternative Suggestions

Now we'll expand out more with vocabulary. This is the same as above, but with industry vocabulary used, along with alternative thought suggestions.

Some will get this right away, others will not, but they can return to generic thinking here and above very easily and still do just fine with their own bookkeeping and that of others until the vocabulary becomes more familiar.

You do NOT need to memorize this. Bookmark this page in your browser and refer back to it when needed. The Vocabulary will come with time. Allow your eyes to flow through this.

1) Review Prior Work

With a Spreadsheet, the data and reporting is dynamic at all times. This differs from many database driven software solutions where snapshots of reports are taken at a given time once you say everything is in order. In those systems, if you find errors, you often times have to unlock data if they will allow it and then you have to make changes and then you have to confirm everything is reconciled again and then you have to take more snapshots.

The good news here is if you find errors, you just modify them. It's simple. However, without data locks, errant slips of the hand can lead to errors in prior data. This may sound like bad news, but it's not. This is like painting trim without the Blue Tape. Once you learn how to work with this it's 3 times faster, your straight lines are far closer to perfect, and you can find a rhythm in your work that is lacking with all non spreadsheet solutions.

2) Record Transactions Accurately

Copy transactions from bank statements or bank consoles into your bookkeeping software. Use a process called "Statement Reconciliation" to crosscheck your work. This process entails comparing your paper or pdf bank statement information to the data you typed or copied in to your software to verify you entered everything correctly without omissions or errors. There are actually two different ways to do "statement reconciliation". One is an item by item visual check. Another is a faster, aggregated method. Our software uses the second, faster method, which will be new to many folks as most were taught the slower item by item method which is actually a part of "cash flow management" and not bookkeeping.

3) Categorize Transactions

Categorize your transactions using a list of categories created from a "Chart of Accounts" which is just a "List of Accounts" or an "Account List". Why do they call the category list a Chart of Accounts instead of just an Account List or a Category List? Some of it has to due with Olde English. Think this way: Your "Category List" for categorizing transactions is the same as your "Account List" which is the same as the "Chart of Accounts".

4) Review the Income Statement

Click a button to review an Income Statement, better thought of as a "Net Income Statement". It is a very straightforward one page report with two separate sections on it. The top section is referred to as the "Income" section. The bottom section is referred to as the "Expense" section. Income represents money flowing into a company via sales typically. In your personal life income for most is their "take home pay". Expenses represent money flowing out of the company for cost of rent, utilities, office expenses, payroll expenses, cost of goods sold, meals and entertainment, etc. The numbers in the Income Section are added together to get "total income". The numbers in the expenses section are added together to get "total expenses". Total Income - Total Expenses = Net Income , also referred to as Profit. With this vocabulary it's easier to see why this should have been called the "Net Income Statement" not the "Income Statement" as income is only one of the two relevant sections.

5) Review the Balance Sheet

Click a button to review an Income Statement, better thought of as a "Comparative Net Worth Statement". It is a very straightforward one page report with two separate sections on it. The Balance Sheet is a mathematical tool that is used to verify data integrity. This is not a common way to describe it but it is the accurate way to describe it. The ZAP Accounting Software Bookkeeping module is more transparent than most. The top section calculates Company Net Worth in an incremental fashion requiring a start date and an end date. The bottom half calculates Company Net Worth in an absolute fashion using Bank statements and other reports for a given date. When the top section equals the bottom section, the difference between this is zero and the statement is said to be "in balance". When they are unequal the difference between them will be a positive or negative value. If there is only one error leading to that discrepancy often times it will be the value of the discrepancy or half the value. One of the hardest parts of Bookkeeping in Database software is finding Balance Sheet errors. Our system allows for walking through data by day extremely easy and makes it almost like child's play.

This entire process is just a FIVE STEP PROCESS.

With a computer, you have to do ZERO math. Without one you would have had to do addition and subtraction. With a computer you don't rely on this vocabulary nearly as much to "do bookkeeping".

If the vocabulary makes you feel a little uncomfortable just forget it for now and go back to the generic 4 Step Description mentally.

5) The Confusing Vocabulary is Called Out...

Do you see how difficult the wording above seems to be if you are not familiar with it? And we left out the most confusing part related to the Balance Sheet section titles.

Everything seems like it should have been referred to as something else. None of the words represent the objects they are designed to represent. This is called DOGMA.

If you have had problems learning accounting before, it is for this reason and this reason only. The math involved is long addition and basic subtraction.

Someone introduced a lot of "dogma" into the accounting vocabulary . That dogma was clearly designed to keep the populous from being Accounting Literate as they were in prior times.

The "Income Statement" and the "Balance Sheet" both have two relevant sections on them. IN both cases one section is subtracted from another to get a key value. In the case of the Income Statement, the larger the better. In the case of the Balance Sheet, zero is the desired result.

Our goal is to get you creating and understanding those two reports as quickly as possible with little to no dogma. Life would have been much easier if they had just named these two reports "Accounting Report #1" and "Accounting Report #2". In your head maybe you should think that way. It might help.

VOCABULARY CONFUSION SUMMARY for the INCOME STATEMENT

=== The Report Name Confusion ===
Income Statement should have been referred to as "Net Income Statement". Profit/Loss Statement is very accurate, but the "/" breaks up the conscious flow. Calling it a "Profit Statement" would have been comparable or parallel to "Net Income Statement".

=== The Income Section on an Income Statement Confusion ===
The subtotal from the Income section on an "Income Statement" is only half of the relevant data on the statement. The other half is Expenses. The income section should have been consistently called Gross Income (gross in German is large) , or Revenues, or Gross Revenues.

=== The Expenses Section on an Income Statement Confusion ===
Unlike the income section, which may only have one or a few categories, the expenses section is typically broken down into a lot more expense categories that all sum together for a single expense value

=== The Resulting Value from Income - Expenses ===
"Net Income" or "Profit" if it is positive
"Net Loss" or just "Loss" if it is negative.

VOCABULARY CONFUSION SUMMARY for the BALANCE SHEET

=== The Report Name Confusion ===
Balance Sheet should have been called Balance Statement. Then, the two most relevant accounting reports would have been called:
Report #1 -Net Income Statement
Report #2 - Balance Statement

=== The Section Names ===
One section is called the "Equity" Section. The other is called the "Assets-Liabilities" section. But wait?! They calculate the same thing? YES . The do, and what they are calculating is "Company Net Worth" which translates into the word Equity when talking about it in a possessive sense.

We call these two sections the "incremental net worth calculation section" and the "absolute net worth calculation section". The could have also been called Equity Calculation #1 and Equity Calculation #2 and that alone would have removed pounds of confusion.

The Process of bookkeeping is far simpler than the vocabulary "they" assigned to it.

Do NOT try to memorize the vocabulary all at once.

Learn how to "do the process" with mindfulness and the vocabulary will eventually follow.