Chapter 1 Basics of Record Keeping Accounting and Finance for Entrepreneurs EBD-301 All Rights ReservedDr. David P Echevarria1

 Timely and accurate financial records help to;  Monitor the progress of the business  Prepare financial statements  Identify sources of revenues and expenses  Provide data for preparing tax returns  Source documents to provide proof All Rights ReservedDr. David P Echevarria2 Motives

 Keep track of business transactions  Categorize  Record (storing)  Summarize  Requirements for data  Must be timely  Must be complete  Must be accurate All Rights ReservedDr. David P Echevarria3 Bookkeeping Basics

 Categorizing Economic Impact  Using dedicated ledger accounts  System of accounts aids in analysis of operations  Impose internal controls  Prevent theft  Deter fraud All Rights ReservedDr. David P Echevarria4 Accounting Basics

 Two Areas of Focus  Financial Accounting  Systematic recording of all business transactions  Assist in monitoring the cost structure of the business  Managerial Accounting  Using accounting data to analyze the business  Analysis helps to;  Make better business decisions  Assist in planning and forecasting All Rights ReservedDr. David P Echevarria5 Accounting Basics

 Endgame of F.A.  Collect data to prepare financial statements  Statement of Profit & Loss or Income Statement  Balance Sheet  Statement of cash Flows  Statement of Changes in Owner’s Equity All Rights ReservedDr. David P Echevarria6 FINANCIAL ACCOUNTING OBJECTIVES

 Endgame (con’t)  5 Primary Objectives  Reliability: data free from errors or biases  Understandability: how is the data organized and what is it telling us.  Comparability: ability to compare current to past performance and to similar businesses  Relevance: data collected should assist decision makers in making better decisions  Materiality: omissions or misstatements can lead to bad decisions All Rights ReservedDr. David P Echevarria7 FINANCIAL ACCOUNTING OBJECTIVES

 Two Basic Methods  Single-Entry  Double-Entry  Decision Criteria  Complexity of the business  IRS requirements  Accrual based accounting requires double-entry  If business has inventories, receivables, payables, and physical assets – requires double entry All Rights ReservedDr. David P Echevarria8 BOOKKEEPING METHODS

 Single-Entry as Informal System  Each transaction event generates a single entry in the “books”  Works well enough for a cash-based business  Problems  Insufficient information to analyze operations  Difficult to compare results across time  Not suitable for businesses that carry inventories, have receivables or payables. All Rights ReservedDr. David P Echevarria9 S INGLE -E NTRY B OOKKEEPING

 Checkbook Procedures  One entry for each check written or deposit made  Entries made in chronological order  Register records basic information  Date  Check number  Payee  Amount  Updated balance All Rights ReservedDr. David P Echevarria10 S INGLE -E NTRY B OOKKEEPING

Checkbook Register All Rights ReservedDr. David P Echevarria11

 Number or Code: Record the check number and any identifying transaction code. [Check #1356 was written to WXBG-AM for May’s radio ads – a tax deductible expense.]  Date: The date of the transaction.  Transaction Description: Record the payee’s name or the transaction identification and any additional explanations on the shaded-line.  Payment, Fee, Withdrawal: the dollar/cents amount on the check, or withdrawal (-).  Deposit, Credit: The amount deposited [or bank credit] (+)  $ Balance: the [checkbook] balance in the account after this transaction. All Rights ReservedDr. David P Echevarria12 Checkbook Register

 Register serves as a General Journal  Entries made as they occur  Suggest keeping two registers  Revenues  Expenses  Profit = Revenues – Expenses  Principal Problems  Cannot be easily used to prepare balance sheet  Profit calculation lacks detail  Requires multiple registers or journals to record specific types of transactions All Rights ReservedDr. David P Echevarria13 Checkbook Register

 D-E Most Prevalent Method for Recording Data  Each account has two columns  Debit  Credit  Each transaction recorded in two accounts  The first gets a credit entry  The second gets a debit entry  Verification of all entries when Debits = Credits All Rights ReservedDr. David P Echevarria14 D OUBLE -E NTRY B OOKKEEPING

 Advantages of Double-Entry Accounting System  Ease in preparing financial statements  Helps in the accuracy of the audit function All Rights ReservedDr. David P Echevarria15 Double-entry Bookkeeping

 G ENERAL J OURNAL  Book of original entry  Special Journals  Ledgers  Asset accounts: Cash, Receivables, Inventory  Liability Accounts: Payables, Loans  Owner’s Equity: Capital, Retained Earnings, Draw  Revenues  Expenses: Rent, wages, utilities, etc. All Rights ReservedDr. David P Echevarria16 Business Records

 Seven (7) Basic Steps 1.Analyze source documents 2.Classify effect of transaction 3.Record transactions 4.Summarize accounts (trial balance) 5.Make adjustments (amortize) 6.Close the books 7.Interpret the results All Rights ReservedDr. David P Echevarria17 Accounting Cycle

 IRS Requires Accrual Accounting if;  Business has inventories and/or physical assets  Receivables and/or payables  Cash basis – small home business – single-entry All Rights ReservedDr. David P Echevarria18 Cash vs. Accrual Accounting

 Keeping accurate records are a must for every business  Accurate records are a must when preparing tax ret  Accounting systems allow the owner manager to analyze business performance.  Double-entry more complex but more accurate than single- entry  Accounting is a systematic process of analysis, classification, recording, summarizing, adjusting, closing, and interpreting results. All Rights ReservedDr. David P Echevarria19 Chapter Summary