Recordkeeping & Accounting 14 Recordkeeping & Accounting Section 14.1 Recordkeeping Section 14.2 Accounting Systems

Section 14.1: Recordkeeping 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 Section 14.1: Recordkeeping

Financial Records Keeping good financial records is essential to a business's success. The more you know about recordkeeping, the more you increase your odds of being a successful entrepreneur. 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. Section 14.1: Recordkeeping

Business Documents When you start a business, you need to establish recordkeeping procedures. These procedures will typically involve receipts, purchase orders, and invoices. 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. Section 14.1: Recordkeeping

Accounting Principles Accounting is the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results. 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. Section 14.1: Recordkeeping

Five Steps in Simple Double-Entry Accounting Systems Prepare a chart of accounts. Record all business transactions in an accounting database or journal, using source documents. Total each account in the database or journal at the end of the accounting period. Prepare an income statement and statement of cash flow. Prepare a balance sheet using the ending balances in each asset, liability, and owner’s equity accounts. Section 14.1: Recordkeeping

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. Section 14.1: Recordkeeping

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. Section 14.1: Recordkeeping

Section 14.2: Accounting Systems Describe how to use a single-column accounting worksheet Create financial statements based on a single-column accounting worksheet Section 14.2: Accounting Systems

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. Sample Accounting Worksheet Section 14.2: Accounting Systems

Creating Financial Statements 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. Sample Balance Sheet Sample Income Statement Section 14.2: Accounting Systems

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. Sample Statement of Cash Flows Section 14.2: Accounting Systems

Using a Computerized Spreadsheet If you use an electronic spreadsheet, you can easily keep track of transactions and prepare financial statements. 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. Section 14.2: Accounting Systems