CHAPTER Section 14.1 Recordkeeping Section 14.2 Accounting Systems Recordkeeping & Accounting

SECTION OBJECTIVES Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Understand financial records Differentiate between receipts, purchase orders, and sales invoices Know the basic principles of double-entry accounting Discuss the advantages and disadvantages of computerized accounting systems Describe the issues associated with the use of accountants and bookkeepers Recordkeeping 2

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Financial Records A savings account is a bank account in which you deposit money. The bank pays interest on the amount in your account. A checking account is a bank account against which you can write checks. You can also remove money from your account by using a debit card. A bank reconciliation is the process of verifying that your checkbook balance is in agreement with the ending balance in your checking account statement from the bank. 3

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Business Documents A receipt is the detailed written proof of a purchase. When you make a sale, always give the customer a receipt and always keep a copy for yourself. A purchase order (often referred to as a PO) is a detailed written record of a business’s request for supplies or inventory. A sales invoice is an itemized list of goods delivered or services rendered and the amount due. 4

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Accounting Principles Any payment or any income received is a transaction. A source document is the original record (source) of a transaction. All accounting systems make use of what is called double-entry accounting, which basically means that every business transaction affects at least two accounts. A chart of accounts shows all the accounts used in the business. 5

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Five Steps in Simple Double- Entry Accounting Systems 1. Prepare a chart of accounts. 2. Record all business transactions in an accounting database or journal, using source documents. 3. Total each account in the database or journal at the end of the accounting period. 4. Prepare an income statement and statement of cash flow. 5. Prepare a balance sheet using the ending balances in each asset, liability, and owner’s equity accounts. 6

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Computerized Accounting Some accounting software programs are meant to be used by entrepreneurs who have no knowledge of accounting. Common accounting software packages for small businesses include QuickBooks and Peachtree. They are available in a wide range of prices. The advantage of computerized accounting systems is that they prepare financial statements automatically, saving time and preventing mathematical errors. As with any software program, computerized accounting systems take time to learn how to use. 7

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Using Accountants and Bookkeepers Many entrepreneurs don’t keep their own records because of the time involved. Some entrepreneurs pay a part-time accountant or bookkeeper to maintain their books. Accounting controls are checks and balances established so that accounting personnel follow procedures that will avoid potential problems. An auditor is an accountant who examines a company’s financial records and verifies that they have been kept properly. This type of audit is often called an internal audit. 8

SECTION OBJECTIVES Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Describe how to use a single-column accounting worksheet Create financial statements based on a single-column accounting worksheet Accounting Systems 9

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Using an Accounting Worksheet Often, beginning entrepreneurs will use a single- column accounting worksheet when starting their business. After each transaction is posted in an accounting period, an entrepreneur can immediately determine the effect the transaction has on the financial statements. An accounting worksheet is primarily a cash-only accounting system. 10 Sample Accounting Worksheet

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Creating Financial Statements 11 Sample Balance SheetSample Income Statement After the transactions for a period are correctly entered into the accounting worksheet, you can prepare the balance sheet, income statement, and statement of cash flows.

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Creating Financial Statements In relation to the statement of cash flows, there are three basic types of business activities: Operating Activities. Day-to-day activities are called operating activities. Most cash changes fall into this category. Investing Activities. When a business buys assets that will last more than one year, they are called investing activities. Financing Activities. These activities consists primarily of debt and equity financing. 12 Sample Statement of Cash Flows

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Using a Computerized Spreadsheet Linking Numbers from One Part of the Worksheet to Another. One of the main advantages of a computer spreadsheet is that you can link numbers from one part of the spreadsheet directly to another part of the spreadsheet. Adding Columns of Numbers. You can also have the spreadsheet software total columns of numbers for you. Adding Comments to Cells. You can add comments to specific cells. 13