|
BOOKKEEPING
Financial records document the operations of a business. Financial records are an extremely important tool for managing the inflows and outflows of a business activity. There are certain required records that must be maintained to satisfy the Internal Revenue Service for income tax reporting. However, the need for good record keeping goes beyond the IRS. Information which is specific to your business should be documented in an organized manner to enable you to efficiently and effectively manage your business. If adequate records are kept, peaks and dips in sales are easily determined; cash needs for payroll or outstanding bills are easily counted; and inventory can be controlled by maintaining records.
The simplicity or complexity of the record keeping system is dependent on your personal preference and the needs of the business. For example, an accounting system can be as simple as a 3-ring notebook with notebook paper or be as complex as an entire computerized system. The Small Business Development Center is equipped with a Lotus Learning Center, a free service which makes IBM computers and Lotus software available to small business owners. Here you can learn how to use computer hardware and various software with a self-paced demonstration package and training manual. Also, the IRS provides a free publication entitled, The Small Business Tax Kit, which illustrates the required record keeping for tax purposes. There are several inexpensive computer accounting packages available which are relatively easy to customize and use.
No two sets of financial records are the same. However, the basic format includes a Cash Payments Journal (checkbook register), a Cash Receipts Journal ( receipts book), a Sales Journal, an Accounts Receivable Journal, an Accounts Payable Journal, and a General Journal. The standard financial statements include a Balance Sheet, an Income Statement, a Statement of Owner's Equity, and a Statement of Cash Flows.
The accounting vocabulary can be overwhelming at times, and you may find the services of an accountant to be helpful. But here are the basics:
A "journal" is nothing more than diary or a logbook. The purpose of the diary is to keep tract of similar type transaction items in a separate diary. For example, in the Sales Journal, you keep track of all your sales in the same diary which is separate from your check register called the "Cash Disbursements" Journal.
LEDGER BOOKKEEPING
TYPE OF JOURNAL -- HOW IT IS USED
CASH DISBURSEMENTS -- CHECKBOOK REGISTER
JOURNALRECORD MONEY SPENT
CASH RECEIPTS -- JOURNAL RECEIPT BOOK
RECORD MONEY RECEIVED
SALES JOURNAL -- RECORD INVOICES WHEN SALE IS FINAL
NOT DEPENDENT ON CASH RECEIVED
ACCOUNTS RECEIVABLE -- DETAILED LISTING OF CUSTOMERS TO
JOURNALWHOM YOU SOLD MERCHANDISE ON
CREDIT
ACCOUNTS PAYABLE -- DETAILED LISTING OF VENDORS FROM
JOURNALWHOM YOU BOUGHT MERCHANDISE ON
CREDIT
ENE -JOURNAL MASTER FILE, RECORDS ALL INDIVIDUAL
ENTRIES AND TRANSACTIONS FROM EACH
JOURNAL
Balance Sheet
The balance sheet shows the financial position of a company at a particular point in time. It is like taking a snapshot of the company's records on the last day of the year. Assets are basically things you own. They are items of value expected to produce future economic benefit. Liabilities are amounts you owe. They represent claims of outside creditors on your assets. Owner's Equity is the value of assets that you actually own - the net value of assets after paying off liabilities. The basic equation in double entry bookkeeping is the amount of the assets equals the sum of liabilities and owner's equity. The left column (assets) must equal the right column (liabilities & owner's equity).
BALANCE SHEET
AS OF 12/31/XX
ASSETS LIABILITIES
CASH ACCOUNTS PAYABLE
INVENTORY LOAN PAYABLE
EQUIPMENT
BUILDINGS OWNERS EQUITY
LAND
TOTAL LIABILITIES AND OWNERS
TOTAL ASSETS EQUITY
Income Statement
The income statement measures the profitability of a business for a period of time. This period can be a month or a year. It is similar to taking a video movie of the company over the year. Revenues represent inflows of assets from performing some activity, such as selling a product or performing a service. Revenue does not necessarily mean cash received. Expenses represent costs incurred to produce revenues. Net Income represents the excess of revenues over expenses for a given period. The net income figure is added to the owner's equity balance listed on the balance sheet.
INCOME STATEMENT
FOR YEAR ENDING 12/31/XX
REVENUES EXPENSES
SALES OPERATING EXPENSES
INTEREST INCOME ADMINISTRATIVE EXPENSES
SELLING EXPENSES
TOTAL INCOME TOTAL EXPENSES
I I NET INCOME
Statement of Owner's Equity
The statement of owner's equity shows the changes in the owner's equity account over a period of time. It is similar to the income statement in that it is like taking a video movie of the company over a year. Net income increases owner's equity. Cash withdrawals by the owner decrease the balance. The ending balance of owner's equity is listed on the balance sheet.
Statement of Cash Flows
The statement of cash flows shows the movement of actual cash during the year. It is used to illustrate the inflows and outflows of cash in the company. This statement is very important to lending institutions. This statement will show if the company has the cash available and can reliably pay back borrowed money.
STATEMENT OF OWNER'S EQUITY
FOR YEAR ENDING 12/31/XX
STATEMENT OF CASH FLOWS
FOR YEAR ENDING 12/31/XX
BEGINNING BALANCE
NET INCOME
WITHDRAWALS
ENDING BALANCE
CASH AT BEGINNING OF YEAR OPERATING CASH FLOW INVESTING CASH FLOW FINANCING CASH FLOW
NET CASH FLOWS
|
