RECORD-KEEPING AND ACCOUNTING Entrepreneurship 4/26/2017 Chapter 11 RECORD-KEEPING AND ACCOUNTING 11.1 Set Up a Record-Keeping System 11.2 Understand Basic Accounting 11.3 Track Your Inventory Chapter 11

Lesson 11.1 SET UP A RECORD-KEEPING SYSTEM Chapter 11 Lesson 11.1 SET UP A RECORD-KEEPING SYSTEM GOALS Keep journals, ledgers, and other types of important business records. Learn about electronic record-keeping.

Then it starts over again Then the cycle begins again for the new period of time. Usually a month, but could be for a quarter (three months) or a year.

Step 1 Collect and Verify Source Documents Source documents are the evidence that a transaction or event happened in the business Types: Invoice Check Stub Receipt Memorandum Source documents are the evidence that a transaction or event happened in the business. The types of sources documents are Invoices, Check stubs, Receipts, Memonrandom

Analyze each transaction Step 2 Analyze each transaction 1. Determine accounts effected 2. Determine account type 3. Determine increase or decrease 4. Determine debit(s) and credit(s) The four steps involved in analyzing the transaction are : Determine accounts effected (cash, supplies, accounts payable, etc) Determine account type (asset, liability, or owner’s equity) **good spot to ask what they have written down for the definition of these on their index card. For each account ask is it increasing or decreasing Based on the type and whether it is increased or decreased: determine which accounts are increased or decreased

Part of step 2 Debits and credits Here's a Tip-- Debit means left Credit means right Generally these types of accounts are increased with a debit: Dividends (Draws) Expenses Assets Losses Generally these types of accounts are increased with a credit: Gains Income Revenues Liabilities Stockholders' (Owner's) Equity

Step 3 Journalize each transaction businesses record all activity that happens in their business each day in a journal. 1.Date 2.Account Debited 3.Amount Debited 4.Account Credited (indent slightly) 5.Amount credited The journal is like a diary of the business’ activities. Just like you would record everything that happens to you in your diary for the day, businesses record all activity that happens in their business each day in a journal.

Sample of Journal

Step 4 Post to the ledger Record for each individual account. Each account has it’s own ledger. That is just an individual record for that account. So all the transactions that effect the Cash account would be posted (recorded) into the Cash account. Each account has it’s own ledger. That is just an individual record for that account. So all the transactions that effect the Cash account would be posted (recorded) into the Cash account.

Sample of Ledger

Step 5 Prepare a Trial Balance This is to ensure that the accounting equation is still in balance. It is a listing of all the accounts and their balances. You add the debit balances, then the credit balances, and then check to make sure that they are equal. It is completed in the first columns of the worksheet, but must balance before the rest of the worksheet is completed. Next you prepare a trial balance. This is to ensure that the accounting equation is still in balance. It is a listing of all the accounts and their balances. You add the debit balances, then the credit balances, and then check to make sure that they are equal. It is completed in the first columns of the worksheet, but must balance before the rest of the worksheet is completed.

Sample trial Balance

Step 6 Prepare a Worksheet The worksheet is where you gather all the information needed to prepare the financial statements. Some accounts need to be adjusted to bring their balances current before the financial statements are completed. The worksheet is where you gather all the information needed to prepare the financial statements like the one we looked at when we started this unit. Some accounts need to be adjusted to bring their balances current before the financial statements are completed.

Sample worksheet

Step 7 Prepare the financial statements The Income Statement - shows how much money the business has made (or lost) during a period of time. 2. The Statement of Owner’s Equity - a report for the owner of the business to show how the business operations have effected his/her investment during a time period. 3. The Balance Sheet makes sure that the debits equal the credits at a point in time. Once the worksheet is complete you are ready to prepare the financial statements. These include the Income statement, a Statement of Owner’s Equity, and a Balance Sheet. The Income Statement show how much money the business has made (or lost) during a period of time. The Statement of Owner’s Equity is a report for the owner of the business to show how the business operations have effected his/her investment during a time period. The Balance Sheet makes sure that the debits equal the credits at a point in time. Checks to make sure the accounting equation is still in balance.

Step 8 Journalize and Post the closing entries During the accounting period the revenue, expense, and drawing accounts are used to itemize those transactions to assist management in making decisions on how the business is running. At the end of the accounting period these accounts which are classified as temporary accounts are closed and their balances are transferred (moved) into the owner’s capital account (where the equity is tracked).

Step 9 Prepare a Post-Closing Trial Balance This is just to make sure that all the debits equal all the credits are still equal and that the accounting equation is in balance before the next time period begins. The last step is to prepare a Post-Closing Trial Balance. This is just to make sure that all the debits equal all the credits are still equal and that the accounting equation is in balance before the next time period begins.

TYPES OF RECORDS Journals Ledgers Bank statements Payroll records Chapter 11 TYPES OF RECORDS Journals Ledgers Bank statements Payroll records Tax records

TYPES OF RECORDS Journals Ledgers Bank statements Payroll records Chapter 11 TYPES OF RECORDS Journals Ledgers Bank statements Payroll records Tax records

Chapter 11 JOURNALS Are accounting record of the transactions you make. Journals separate business transactions by account Sales journal Used to record only sales of merchandise on account. Get now pay later. Cash payments journal Used to record any Cash or check payments that a business makes. Cash receipts journal Used to record all cash receipts transactions. Purchases journal Used to record purchases of merchandise on account. General journal This is used to record any kind of transactions. Some busineeses use only GL.

Chapter 11 LEDGERS Businesses use general ledgers to which they post the items that they record in their journals. Ledgers separate transactions by account. Ex. Expenses (rent, utilities) Subsidiary ledgers Is a ledger that is summarized in a single general ledger account. Aging tables Is a record-keeping tool for tracking accounts receivable accounts. Ex. p273

Chapter 11 BANK STATEMENTS A check register is a book in which you record the dates, amounts, and names of people or businesses to whom you have written checks.

Chapter 11 PAYROLL RECORDS A payroll is a list of people who receive salary or wage payments from a business. A payroll register includes the following information: Employee’s name Number of hours worked Regular and overtime earnings Federal, state, and local taxes deducted Social security and Medicare contributions deducted Other deductions

TAX RECORDS Income tax Payroll deductions Sales tax Chapter 11 TAX RECORDS Income tax Business that earn profit must pay income tax. These taxes are paid quarterly ( every 3 months) Payroll deductions Sales tax

COMPUTERIZED RECORD-KEEPING Chapter 11 COMPUTERIZED RECORD-KEEPING Advantages of computerized record-keeping Store and analyze data Link records - sale, Income statement and Inventory Reduce errors - Correct errors Disadvantages of computerized record-keeping Staff resistance Unauthorized access Computer problems

Lesson 11.2 UNDERSTAND BASIC ACCOUNTING Chapter 11 Lesson 11.2 UNDERSTAND BASIC ACCOUNTING GOALS Demonstrate understanding of balance sheets, income statements, and cash flow statements. Determine whether you need a professional to help you with your record-keeping and accounting.

TYPES OF FINANCIAL STATEMENTS Chapter 11 TYPES OF FINANCIAL STATEMENTS The balance sheet The income statement The cash flow statement

Balance Sheet What is a Balance Sheet? A statement that shows (1) How much money a company has (2) How much money a company owes (3) How much the company is worth (value of company) Follows the accounting equation Assets = Liabilities + Owner’s Equity

Sample Balance Sheet

Label the Balance Sheet

Label the Balance Sheet 1. Company Name Balance Sheet Date

Label the Balance Sheet 1. Company Name Balance Sheet Date 2. Total Assets – how much you have

Label the Balance Sheet 1. Company Name Balance Sheet Date 3. Total Liabilities – how much you owe 2. Total Assets – how much you have

Label the Balance Sheet 1. Company Name Balance Sheet Date 3. Total Liabilities – how much you owe 4. Owner’s Equity– how much you are worth 2. Total Assets – how much you have

C heck Point…. You make $400 (after taxes) and you owe $275 in bills. What is your worth? $400 (asset) - $275 (liability)= $125 (worth)

Income Statement What is an Income Statement? A statement that shows a company’s profit. How much was sold or made? ( revenue) How much was spent? (expense) How much is left over? (net income/profit) Revenue – Expenses = Net Income/Loss

Sample Income Statement

Sample Income Statement 1. Company Name Income Statement Date 2. Total Revenue - how much was sold 3. Total Expenses - how much was spent 4. Net Income/Loss- how much profit

Label the Income Statement 1. Company Name Income Statement Date

Sample Income Statement 1. Company Name Income Statement Date 2. Total Revenue - how much was sold

Sample Income Statement 1. Company Name Income Statement Date 2. Total Revenue - how much was sold 3. Total Expenses - how much was spent

C heck Point…. You have $5000 in sales Your company had $1200 in expenses Did you have a Net Income or Loss? What was the amount? Revenue $5000 – Expenses $1200 = Net Income $3800

THE CASH FLOW STATEMENT Chapter 11 THE CASH FLOW STATEMENT Net cash flow is the an accounting report that describes the cash flow in and out of business. Difference between cash receipts and disbursements. Cash receipts – Disbursements = Net cash flow Positive or negative cash flow Positive- Cash receipts total is larger than disbursements. Negative Disbursements are larger than cash receipts. Economic effects on cash flow – ex sept 11, 2011

Cash flow statement vs income statement Chapter 11 Cash flow statement vs income statement Income deals with Expenses and Revenues while cash flow statement deals with money coming in and out.

USE PROFESSIONALS Accounting assistants Certified public accountant Chapter 11 USE PROFESSIONALS Accounting assistants Records business transactions. Certified public accountant Accounts that have passed

Lesson 11.3 TRACK YOUR INVENTORY Chapter 11 Lesson 11.3 TRACK YOUR INVENTORY GOALS Track your inventory using a perpetual inventory method and a periodic inventory method. Determine how much inventory to keep in stock.

TRACK YOUR INVENTORY Perpetual inventory method Chapter 11 TRACK YOUR INVENTORY Perpetual inventory method Take a physical inventory Periodic inventory method

MANAGE YOUR INVENTORY Costs of carrying inventory Chapter 11 MANAGE YOUR INVENTORY Costs of carrying inventory Obsolescence Deterioration Interest fees Insurance Storage Costs of being out of stock Turnover rates

Review…. What accounts would you find listed on the balance sheet? Assets Liabilities Owner’s Equity

Review…. What is the term used for how much you owe? Liability

Review…. How do you calculate how much you are worth? Assets – Liabilities = Owner’s Equity (worth)

Review…. What financial statement shows how much profit you made and how is this calculated? Income Statement Revenue - Expenses