Records & Business Planning II
Records & Business Planning II ABM 112
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Generating Reports Study Guide When reviewing reports a good place to start is in the very beginning granted most people want to start with the Profit and Loss to see if they are in the red or better yet the black However this Study Guide begins with the Chart of Accounts Based on the information from the worksheet Joe s Chart of Accounts looks like this ReportsHListHAccount Listing Renard am planning Class 7 Quickme Wemier Accountant Edition 2005 e Edlt llew Llsts Acmurltarlt Qampany CMS39DNEFS VEHdgrs Emvluyees gammy REFINE Mndaw elp lay a 3n Blll neg Amt Rmrld Fm Suvvavl a m L L glsmnnnm 5mm Record and Planning Class Ccmvany ISWE Account L39st39ng Auteur 0 Type 0 Balance Toul o Descrlplmn o m Llne 0 32s nn E new WWW l Annulment Nsvnaln n ltUnasslgn2ngt These are the accounts necessary for Joe to enter his first month of activity This list was printed at the end of the month Note that only the Asset Liability and Equity accounts show a balance this is correct These three types of accounts carry a running total and each possesses a register which can be accessed and transactions can be entered directly The description column is blank entering a description is optional and Joe chose not to do that The tax line for each account shows unassigned for all accounts The tax line is entered either at the time you set u the account or later when edited The tax line ties the account if applicable to the specific tax line it is associated with This is necessary if a person wants to use Turbo Tax or if they want to produce a report that lists accounts by the tax line The report can be done either in summarized form or detailed The next report is the Transaction List by Date This report is important to have in case you have to reenter transactions for any reason It is also helpful to refer back to The Transaction List by Date looks like this ReportsHAccountant amp TaxesHTransaction List by Date Morgan Community College 1 ABM 112 Unit 5 at J 25 2 quot 3 nd Swvart Backup Feedback are All W PM Record and Planning Class 9quot7 95 Transaction List by Date Q All Transaclinns nne v Hum v Mame v emu v Q v Sphl v Deml v Creml v 1213mm Unanmq ali nun nn 1212m73 I Unemng Bali 10an 312W I Unemng Bali n 1231Qm73 I Unzmngaali 4n Hanna 4 mum mun Nana m inn nn mus2mm 2 cm Eustnmer 5m mu n warm um Taxacn a mu mm an innz mime 5m 1 l m an l Balancesnem Mmsnn nmmnm mu mu 3 tzr utticesunnllss mu PMquot A LDS mmn 3 cash Eustnmer sales 5 nun n Check Ens2k iii232nm 1W4 Lana mm ReMExnsnss 3m nn 0 3 MAEEWM Chec mauan WEE um we Checking mums 7 an l Emma NEV EB W Check nilz hznnA inns calmly Demand R checking lenses a P En an 53 5 Chick MITZulu inns Yen2n Checking Fuzl 25 an cm rmzmnna um Hardwaresmrs mm swims ssnn mmm mu men am cnmg 75mm sun nn 3 rmzwzmu cm Eusmmzr mam 5m Anna nn mm mayan Fun sTransier Savings Checking tin can m cm mum Hardware 5mg M v swims sun In Tow H lil The first column identifies the type of account this can be helpful to know how an entry was made was it a credit card charge a sales receipt or perhaps done as a general journal The cleared column indicates that the first four transactions have been reconciled the next column indicates whether the transaction was split or not and the last two columns reflect whether the transaction was a debit or a credit The last two columns show how the associated asset liability or equity account was affected In the case of the first three transactions the accounts Chec ing Savings and Equipment were debited or increased by the opening balances When e oan balance was entered it was increased by a credit The checks show up as credim because checking was decreased by the purchases and the credit card account was increased by the supplies charged The three sales receipm appear in the debit column because checking w increased by the entries The transfer is a credit because savings was decreased Refer to ABM ll 1 Unit 4 httpwww mnroancc it certl ARM ll lTl4 default html if you need a review of debits and credim The Transaction Detail Report lists each account and the transactions associated with that account For example the Checking account will list all checks and deposits for that account The same transactions will also appear in the assigned income expense asset liability or equity account So the transfer from Savings to Checking appears in the C ec account but also in the Savings account This report is helpful to verify that you have designated the correct account to each transaction It is also a useful report for your accountant or tax preparer to verify your entries A portion of the report appears below ReportsaAccountant amp TaxesaTransaction Detail by Account Morgan Community College 2 ABM l 12 Unit 5 imetxtig it 515tt m m E 711mm E w w 7 M u n mm rumba 1 mm mnnnal mm 1 mmm mm mama mmm um gamma llama More than likely the Pro t and Loss is the most looked at report People always want to know the bottom line ReportsaCompany amp FinancialHPro t andLoss Standard MuttRenal Emu n 2 Lung m gm v i melmllum il m lunar2n 1 cams Yuralarw mm Record and Planning class 0911M Pro I ampLoss mm am January 2904 Jana Vnmme me p mm mu m 1mm man an E 3 Halv Swarm 7 mm mmquot 7 mar bull lmeresi Expense an an Lizenses a pawn 37 an Ealanueshael mmnn 0mm 5mm 37am mack g Pm mn an a m 4 MM Rem Expense 3nn an chuma39vt Naugalm Sunnis 735 an awnm u nu 75m m mm m an a lncorre 1032300 Note rst of all that this report is on the accrual basis that means it includes income that has been earned but perhaps not received and expenses incurred but perhaps not paid for Some programs allow you to toggle back and forth between Cash and Accrual including QuickBooks and others including Peachtree require you to decide up front if you want Cash or Accrual Morgan Community College 3 ABM 112 Unit 5 reports If you have the ability to toggle back and forth it is critical when you print reports for your accountant or tax preparer that you know which to print If you le taxes on a cash basis do not print Accrual reports You can specify your report to show a single period of time or you can have it compare one period to another Joe has only entered one month of activity otherwise he could print a Year to Date Comparison report The report separates income from expenses remember only income and expense accounts appear on the Pro t and Loss subtotals each section and then gives you a Net Income Prepare yourself that Net Income can be either a positive or negative amount depending on the transactions entered for that period The Net Income is then transferred automatically to the Equity section of the Balance Sheet If you are using Classes a Pro t and Loss report can be selected that shows how each class has preformed to that point The Balance Sheet is a snapshot in time it re ects the accumulated balance for any given moment Remember the Balance Sheet includes Assets Liabilities and Equity accounts and it MUST balance Assets Liabilities Equity The beginning and ending Balance Sheets are below to re ect the two different time periods ReportsaCompany amp FinancialHBalance Sheet Standard nunmm mm kmunuNlEdllhmiM39i mm mm m mm m Fllmwlw Cl Balance sum Morgan Community College 4 ABM 112 Unit 5 n E m v W mm13 L Notice which account balances changed from the beginning Balance Sheet to the ending Balance Sheet Checking Savings Visa and the Mortgage Loan balances all changed due to the activity entered for the month Also note the 10328 Net Income that came across from the Pro t and Loss report The Statement of Cash Flows shows how your cash position changed over a period of time in the example below it compares January 1 with January 31 The report shows the amount of cash earned from pro t where additional cash was received and where the cash was spent ReportsaCompany amp FinancialHStatement of Cash Flows Morgan Community College 5 ABM 112 Unit 5 h AlmuLx mm x mm m Pllnmnv Cllu mm v Smlemental Cash mes The Statement of Cash Flows report above starts with Net Income from the Pro t and Loss 10328 plus the 500 provided by the Visa card purchase of supplies The next step in this example shows the 500 payment to the Mortgage Loan The result is the net cash increase for the period which added to the cash at beginning of period gives Joe his cash at end of period This assists Joe in knowing his actual cash ow for the month There are a host of other reports available Joe is able to generate a Sales Report though it provides very little information His sales were entered as Sales Receipts from a Cash Customer so his report appears like this ReportSHSaleSHSales by Customer Detail Morgan Community College 6 ABM 112 Unit 5 mm m Fllnnlnv cum Sales by summer man Had he entered the sales to speci c customers the report would have provided information speci c to each customer Had the sales been entered as invoices the reports would have looked like this Rum puma cum WW Sales by Cusmmersummary He could also generate an Aging Report had he invoiced the customers ReportSHCustomers amp ReceivablesaAR Aging Summary Morgan Community College 7 ABM 112 Unit 5 The Aging Report provides a listing of customers With an outstanding balance the balance also appears on the Balance Sheet m h mmE 1 mm um M The 12000 from the Aging Report appears in the Accounts Receivable section of this Balance Sheet Note the Current Assets have increased by the 12000 but the Net Income in the Equi section remained the same That is because the Sales Receipts were deleted and replaced by the Invoices or Receivables Morgan Community College 8 ABM 112 Unit 5 Setting up Customers information is useful for billing purposes as well as creating a contact list ReportsaListsaCustomer Contact List nmummmnm numm Dummkrmmmmmllm39u u39i at mm gm m a Fllnmni cum Cusmmer Contact Llsl smmw 111 ms In the original example Joe enteredhis expenses by way of checks he could have also entered the bills as he received them indicated when they were due and then created a check to pay them ReportSHVendors amp PayablesaAP Aging Summary Morgan Community College 9 ABM 112 Unit 5 The Payables Report lists the Vendors the amount due and the period they are due If Joe enters the Vendor s information he could print and send checks andor print a contact list When J oe s Bank Statement arrived he was quick to reconcile my 1R1 Eii We l EUL mm m Pllnmnw cum Recanmllaunn Summary cumngpmmmmum WM The summary is easily matched to Joe s Bank Statement The beginning balance matches the statement beginning balance the 10 checks and payments equaling 167200 and the 4 deposits and credits equaling 1250000 all match the information on his statement as well as the ending balance Congratulations Morgan Community College 10 ABM 112 Unit 5 The Reconciliation Detail Report lists each of the checks and deposits for greater detail These reports can be printed at the time of the reconciliation or by going to ReportsaBankingHPrevious Reconciliation Is it necessary to print these reports It could be useful if down the road Joe goes to reconcile and his beginning balance is off prior reconciliation reports might help in locating the discrepancy There are a host of other reports available for your perusal At this point turn your attention to the modify feature of the reports Any report that has the Modify button in the upper le hand comer allows manipulation Morgan Community College 11 ABM 112 Unit 5 Mod fv Report Pra l a Lass y mere Revarl Dee Renee neces Cusmm Pram mmznmE 1d cummm new gees Aw ga C Cagh ennne eeney mm by Tma any r 7 v Add subm umns 1 D prendds Ben Emp avee Pawn quotEm ceded peyee pen culumnsmaybe added etc Be suretu Explure ths feature Murgan Cummumty Cullege TYPE e he v dueeadn H deederFddcer u FDmsSNumhers The deee rangE yddspeafy n me Pram end rd e ds m semng deeennnes new and repdmewmweees nmne end expenses surety Defau t Ascendmg arder N sun n i E z ang umn 3 O D seendmg nrder D Veegaoece D V mum D 39n aflnmme D mafmense addmunal ABM 112 UmtS Slmlarly the Filter huneh alluws ehem selectvery speci c mfurmanun BEmave Se edsd my Aeeam nher Chaase me WDESDfacmunts ar e sven tacmuntimm me emwh h hs39 xnmeece whemey ar nacvah want svhtdem m EDDlEr h me repawehnee Sheet amums an v m Hm wquot hum ehth pmgram These examples are hem Qmekseeks but eaeh pmgam alluws many quhe same ephehs seewhatyuu eah du Qmekseek39s Repuns szxgatur age prumdes easy access m the vznuus spurts Murgan Cummumty Cullege 13 ABM 112 Umt s If you do modify or lter a report to your specific liking and wish to use it again memorize it Eb i 31 e 639 20 Reg Am we we Suwnrtaadmp Feeaeee Tu 31293 E Culumns vlsun y ween Record and Planning Cass Pro t amp Loss Accrual Basis January 2004 o JanM o H er Yncnme I Memorize Report Sales gt mum 4 Tom Income 2m n um Ex ense D saw Memm zeaaepormw Due 75 m7 lnlerelexpenae m an hcenses a Parmlls an an an Navigalar mnee SupnheS 37 an dong Paris in an em Rem Expense 3m m1 Accaumam Nawgalur euppnee 735 an n M ummes e ToulExDense Mel Income 10 23 an Granted there is nothing unique about the above report but if you do modify one and do not want to have to modify it again the next time you want the same information save it To generate it then go to Reports gtMemorized Reports gtMemorized Report List gtand select the desired report This is just the tip of the iceberg eXplore the opportunities Morgan Community College 14 ABM 112 Unit 5 Study Guide for Advanced Accounting Entries V111 Lease Another method of obtaining a piece of equipment instead of purchasing is leasing With a lease one obtains the use of an asset for a xed period of time in exchange for a rental payment A true lease is a lease contract that speci es a set payment over a set period of time Any subsequent purchase of the equipment must be made at market value at the end of this time period Lease Example A producer leases a sprinkler for his farm for 7 years The rst year payment is 3500 or 10 of the purchase price Over the next six years the payments are 6527 a year At the end of the lease period he has the option to buy the sprinkler at fair market value Explanation The lease payments are expensed each year that they are paid thus decreasing the checking account and increasing a producer s expenses If the producer decides to buy this sprinkler at the end of the lease period the amount that is agreed on would be entered as an asset that is depreciated Study Guide for Advanced Accounting Entries VI Livestock Proper entry for livestock transactions requires taking into consideration whether the livestock is purchased or raised Purchased livestock pertains to market livestock that is bought for resale purposes or breeding stock purchased with the intent of production over a period of years Cost is associated with purchased livestock but it depends on whether the cost is eXpensed over a period of years or eXpensed when the animals are sold Consider the following examples Livestock purchase example a A producer purchases 100 head of feeders for his feedlot costing 425 head Explanation Market livestock that will be sold within a given year and shortly thereafter are eXpensed when the animals are sold The current assets of this producer increase by the purchase cost of the feeders They will remain as an asset until they are sold His liability went up because his loan balance increases Study Guide for Advanced Accounting Entries Livestock sale example b A producer sells 50 head of fat cattle weighing 1100 lb for 066 LB He purchased them at a cost of 425 head He applies 35000 to the principal on his Explanation Each feeder sold for 726 The total amount for 50 head is 36300 that is income The operating amount decreases by 35000 with the interest of 1300 being an expense Market livestock is expensed when sold Therefore the cost of the 50 head of 21250 50 x 425 is subtract from the asset account since the animals are no longer on hand and this amount increases the expense account The income statement shows the income from the sale and the expense of what the livestock cost when purchased Breeding stock purchase example c At the livestock sale a producer purchases 10 head of bred cows for 750head Explanation Breeding stock is intended to be kept so that production occurs over a period of time The cost of these animals will be depreciated In this example the producer switches assets from a savings account to an asset called breeding stock What kind of goals are there One way to categorize goals is by their subject matter Just as a chart of accounts is useful for categorizing similar accounts together we can use the broad categories of business family and personal goals to gather similar goals These categories may overlap and some goals may be equally at home in two categories but you should pick one category for the goal Your family and personal goals may be dif cult to distinguish but it should be pretty easy to separate business goals from family and personal One of the primary goals of the ABM program is to help business owners divide business from the rest of their lives It is essential to separate your goals into at least business and personal categories If you decide to modify your business pursuits or get out of the business altogether you still have family and personal goals We can assume that most of them would not change and would still be reachable if the business changed Business Goals the goals of the business These goals are usually the most measurable and the outcomes are most easily compared to other businesses The language of business goals is simpler Examples To increase net business income by xxx in the next business year To spend no more than xxx on inputs To market my product in the top third of the market To enter my transactions as written instead of waiting for the bank statement Family goalsthese goals have to do with your family While the emphasis of this class is obviously on managing the business it is important to know your goals for the family Examples Develop and stick to a family budget Write a savings plan for the kids college needs Plan for and take a 10day vacation Write or update our estate plan Remodel the kitchen Personal Goalsthese are the goals that have to do with the self Goals in this category are frequently called quotpersonal improvementquot goals but shouldn t be considered merely a laundry list of all the things you want to improve about yourself They can and should include your quotdreamsquot of quotsome dayquot If you quothave always wanted toquot do something chances are it is a dream ready to be expressed as a goal Examples Be able to nd something ef ciently on the Internet Spend one evening a week with my spouse and family Become more organized by handling papers only once Finish building the ship in the bottle Sort your goals by how far into the future they go Another good way to categorize goals is to arrange them by the time limit for reaching them Many people suggest categories of short intermediate and longterm goals Short term would generally be anywhere from one week to one year away Intermediate would be from one year to ve and long term goals would be greater than ve These divisions are arbitrary and a person s de nitions of short intermediate and long term will vary with others and perhaps with a person s own previous de nitions In any case they are used as a useful guide a framework for thinking about goals We suggest you write your long term goals rst then your intermediate and short term goals can be steps toward the long term goal There ofcourse will be selfcontained intermediate and short term goals but there should be some pieces ofyour long term goals listed in your intermediate and short term goals You should have some goals for each ofthe nine boxes below I Business goals I Family Goals I Personal I I Long term I I I I I Intermediate I I I I Short term I I I I Putting it all together Setting goals is a process with individual steps The most important step writing goals is the rst But if you don39t follow through with the rest of the steps it will be dif th to reach your goals Like the business plan itself setting goals is a circular process The length ofthe cycle may be different for each goal but for sure you should work with your goals at least once a year Revising Evaluating Plinlilizing Steps in the goal setting process Harms a shun explanauun arms steps wasquotme mam suds memn mu my m mm W mmxm ms mm mm majme sum paylefmddrume gnu demwmknkeeys mm rams mm mummy W n m 3911 mm 3914 wmkslme ymded ma swath mm msadwn 3 m mm ms mm mm sud them 3911 my mwnmx thymedmbe magma thods WMKWDMQ mu m 5 oilYsormmhlm1rd mmedmbe new nnmlm mbyselzc rgwhnh mm m m mme m RaviMitch MW mm mam e an m skyls mtmkeeydu Sudmfnmufw l mymlrmrd mum 5 abunth yul a sum mm gust m m mtmm nyml h39ym used wwumhu m Icoxd w my yul were mum m Minimum mum unnnymnwx MW 3914 gm Sudsmxmsumw wuss m stay k 13 mm ch sud mabe Mame 1mleer mm used as we 1 d mssed we dm m me 1m Wed a drum mm was eye mugth mum Mm aft mrd Emumm 5 3914 skywhuewe Judge at mm wlrwtlruwe 1 mm 3911 gm Foxsum suds nwx beAYESm mm mom mm ARKQM ofcumykcnn Answer 4 mam Mom Df39l39 g a W W yenbum than ya do w mm u add manuamm of museum Phase 01quot mm mm M h m m lm w 5m M m m k 6 Wm We W m Wm my n quotgymnqu h m mm mm mm W m mm 9 mm m m 5 em mm m mxmmnmm m M or W mmm WHWWWWWM I mhuldmg a pmml m hand but I any Lhmk ufany guals m wme mstSkP h mY an F m gin ch mm mm Vpunrmrd mg m Ircw n m u Parting shots Here are some other people s thoughts on goals and the discipline it takes to really work through this process When you stop having dreams and ideals you might as well stop altogetheriMarion Anderson If my mind can conceive it and my heart can believe it I know I can achieve itiDr Martin Luther King Jr Make no little plans They have no magic to stir men s bloodiDaniel Burham Hudson architect Some people regard discipline as a chore For me it is a kind of order that sets me free to y ilulie Andrews Problems worthy of attack prove their worth by hitting back iPiet Hein The best way to make your dreams come true is to wake up 7H M Power Striving for success without hard work is like trying to harvest where you haven t planted iDavid Bly The more I want to get something done the less I call it workiRichard Bach We must accept nite disappointment but we must never lose in nite hope iDr Martin Luther King Jr Discipline is the re ning re by which talents become ability iRoy L Smith Be SMART about setting goals Make them Speci c Measurable Achievable Relevant Timeframed Wellwritten goals can be reached in STEPS Make them Simple Time framed Ef cient Prioritized Start now II Depreciation Expense When a business buys an asset it in effect buys a fund of usefulness Day by day as the asset is used in the operations of the business a portion of this usefulness is consumed or expired In accounting this expiration of an asset s usefulness is called depreciation All fixed assets except land lose their usefulness Decreases in the usefulness of assets that are used in generating revenue are recorded as expenses Depreciation is an expense and is deducted each year until the cost of the asset is expensed The account debited is a depreciation expense account The account credited is an accumulated depreciation account Accumulated depreciation accounts are called contra accounts because they are deducted from the related asset accounts on the balance sheet The use of a contra account allows the original cost to remain unchanged in the fixed asset account Depreciation is called a noncash expense since no actual dollars exchange hands There are several methods of calculating depreciation with the most common being straight line Depreciation Expense example a An accountant figured the depreciation for a business as follows equipment depreciation of 2500 and improvement depreciation of 1500 Explanation Depreciation is an expense that affects the income statement by lowering the net income This expense increases by 4000 the total of the depreciation for the equipment and the improvements It can be entered into more than one depreciation account depending on your preference The dollar amounts in the accumulated depreciation account decrease each year as the life of the asset is used up Depending on the setup there could be a separate depreciation account for each depreciable asset such as equipment and improvements Study Guide for Advanced Accounting Entries IV Payroll In accounting the term payroll refers to the amount paid to employees for the services they provide during a period The total earnings of an employee for a payroll period including bonuses and overtime pay are called gross pay From this amount is subtracted one or more deductions to arrive at the net pay Net pay is the amount the employer must pay the employee Common deductions for an employee include federal taxes state or local income taxes and FICA tax Employers are required by the Federal Insurance Contributions Act FICA to withhold a portion of the earnings of each employee The amount of FICA tax withheld is the employees contribution to two federal programs The rst program call social security is for old age survivors and disability insurance OASDI The second program called Medicare is health insurance for senior citizens Tables from accountants or the Internal Revenue Service are available to determine the amount of tax that should be withheld Neither the employer nor the employee has any choice in deducting taxes from gross earnings However an employee may authorize deductions for retirement plan insurance premiums etc Employers are required to contribute to the Social Security and Medicare programs for each employee Some accounting so ware packages use the term employer s matching contribution for the name of this expense account Additional payroll liabilities for the employer may include Federal Unemployment Tax Act FUTA and State Unemployment Tax Act SUTA FUTA provides temporary payments to employees who become unemployed as a result of layoffs due to economic causes beyond their control SUTA also provides payments to unemployed workers Contact your accountant to see if you as an employer are subject to these taxes In general payroll includes transactions which effect accounts for payroll expenses and payroll liabilities Payroll expenses occur on your company s income statement or pro t and loss Payroll liabilities are found on the balance sheet under current liabilities Some common payroll expenses include gross pay matching contribution by the company of payroll taxes and company bene ts Examples of payroll liabilities are Federal withholdings State withholdings and Social Security and Medicare tax The amount of gross pay determines which expense and liability accounts are effected Your company s bene t policy also comes into play In general when a paycheck is written the following transactions take place 1 Gross wage is expensed 2 Company s match or share of withholdings is expensed 3 Checking is reduced by the amount of the net wage 4 The employee s withholdings and the company matching funds increase liabilities Payroll Example A producer paid his employee a weekly check of 42335 The employee s withholdings were federal 2600 state 1240 and FICA 3825 I Account NameNumber IAccounttype IIncrease I Decrease I Debit I Credit I IEmployee gross Wage I Expense I 50000 I 50000 I Study Guide for Advanced Accounting Entries Explanation Checking decreases for the amount of the net wage paid to the employee The total expense for the employee is 500 that includes the net wage the federal state and FICA that was withheld from his check The liability accounts increase by the amount of the withholdings and the matching FICA from the employer Calculation of accrued federal tax 2600 3825 3825 10250 The state withholding is 1240 Since the employer is responsible for paying the withholdings the liability accounts will decrease when a payment is paid Study Guide for Advanced Accounting Entries 11 Depreciation expense When a business buys an asset it in effect buys a fund of usefulness Day by day as the asset is used in the operations of the business a portion of this usefulness is consumed or expired In accounting this expiration of an asset s usefulness is called depreciation Depreciation is an expense and is deducted each year until the cost of the asset is expensed There are several methods of calculating depreciation with the most common being straight line Depreciation is called a noncash expense since no actual dollars exchange hands Depreciation Example An accountant gured a producer s depreciation for the year to be 13725 The machinery depreciation is 7500 while the depreciation on the real estate improvements is 6225 Explanation Depreciation is an expense that affects the income statement by lowering the net income This expense increases by a total of 13725 It can be entered into more than one depreciation account depending on your preference The dollar amounts in the accumulated depreciation accounts decrease each year There could be a separate depreciation account for each depreciable asset such as machinery real estate improvement and breeding stock Study Guide for Advanced Accounting Entries Introduction The chart of accounts that you have setup for your business is an integral part of any accounting package Through these accounts you track the ow of money in your business It tells you how much money you have how much money you owe where money is being spent and how much money is coming in Transactions will fall under the following types of accounts assets liabilities equity income or expense When coding your daily business transactions will increase or decrease these types of accounts A group of accounts used by a business in recording transactions is called a ledger The speci c accounts used by a business in recording its transactions vary from one concern to another In other words your chart of accounts is unique to your business and may not be the same as your neighbor s When recording your transactions the mechanics of double entry comes into play Every transaction affects two or more accounts with equal debits and credits Transactions are so recorded because equal debits and credits offer a means of proving the recording accuracy Running the trial balance in your accounting software shows equal debits and credits and is proof of your work Are debits and credits a little fuzzy to you Let s review Remember the basic balance sheet formula Assets equals liabilities plus equity Here is how debits and credits affect this equation Assets Liabilities uit Debit Credit Debit Credit Credit Increase Decrease Decr Incr Incr Debit Credit Debit Credit Incr Decr Decr Incr The terms to debit and to credit should not be confused with to increase and to decrease To debit means to enter the amount on the left side of an account to credit means to enter the amount on the right side of the account An account has a credit balance when its credits exceed its debits It is said to be in balance when its debits and credits are equal With theses T accounts it is possible to formulate the rules for recording transactions using a double entry accounting system Asset Increases Decreases Income Decreases Increases After entries are posted to the accounts the total of all debit balances should equal the total of credit balances Adding all the debit balances then adding all the credit balances and finally Study Guide for Advanced Accounting Entries comparing the two totals to see whether they are equal is called proving the ledger A formal way to prove debits and credits is to prepare a trial balance A trial balance is a list of all account names and their current balances All the debit balances are added All the credit balances are added The totals are compared and should be equal If the totals are not equal this is your clue that an error has been made In computerized accounting the double entry is done for you so there is little room for error Cash Vs Accrual Accounting Using the accounting period concept accountants determine in which period the revenues and expenses of the business should be reported To determine this period accountants can use the 1 cash basis of accounting or 2 the accrual basis for accounting Under the cash basis revenues income and expenses are reported when the cash is received or paid For example sales are recorded when you have collected the funds from your customer and the rent on your building would be expensed on your income statement when the bill is paid Under the accrual basis revenue income is reported on an income statement in the period in which they are earned For example sales are reported when the service takes place Cash may or may not have been received during this period Under the accrual basis expenses are reported when they incur whether or not cash is paid out For example a repair expense is reported as an expense when the bill was incurred not when it was paid The accounting concept that supports reporting revenues and the related expenses in the same period is called the matching concept Reports based on accrual provide an accurate picture of a business and should be use for the decision making process The following owcharts illustrate accrual vs cash methods for sales and purchases Exhibit A SalesAc crual Method Sales W accounting AR Accounts Receivable UDF Undeposited Funds P amp L Pro t and Loss Statement Bal Sht Balance Sheet Invoices service rendered Receive Payment Deposits Accounting Accounting Accounting Increase sales income P amp L Decrease AR asset Decrease UDF asset Increase AIR asset Bal Sht Increase UDF asset Increase Cash Asset Exhibit B SalesCash Method Cash receipt received payment Deposit Accounting gt Accounting Increase sales income P amp L Decrease UDF asset Increase UDF Bal Sht Increase cash asset Exhibit C PurchasesAccrual Method Purchases waccounting AP accounts payable P amp L Profit and Loss Statement Bal Sht Balance Sheet 2 Study Guide for Advanced Accounting Entries Enter Bill Pay Bill Accounting Accounting Increase in expense P amp L Decrease AP Increase AP liability Bal Slit Decrease cash asset Exhibit D PurchasesCash Method Pay Bill Accounting Increase Expense P amp L Decrease cash asset Bal Slit Many accounting packages have the ability to generate accrual and cash basis reports A challenge for you is to look at your business using both methods You may nd it very interesting The topics for this advanced accounting study guide are as follows 1 WSQVHgtWN Capital sale purchase or tradein Depreciation Expense Patronage Dividend Payroll OptionsHedging Livestock purchases and sales Commodity Credit Loans Leases Each of the following sections contains an introduction about the topic sample problems entry methods using increases and decreases and debits and credits and an explanation
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