Accounting Flashcards by Steve Hemgesberg

How much you make determines the price of insurance premium, workman’s comp, and liability insurance

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Cash

Difficult to keep track of
Cash misused

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Business Credit Cards

Great to track purchases
monthly statement provided

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Business Checking
Accounts

Provides a record of all payments
Provides a record of all deposits

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Do not mix personal and business accounts. Doing so
will create a possible “flag” for being audited.

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There are two basis for accounting
Cash Basis

Revunes are recorded when cash is received

Expenses are recorded when paid

This Basis is used by small businesses

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Accrual Basis

Revenues are recorded when earned

Expenses are recorded when incurred

The basis is used by large and medium size businesses

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Accounts Payable

ͻ Write off to a long term asset
ͻ The write off of the fixed assets (except land) during the
accounting period (1 year)
ͻ Non-cash expense (no check issued in payment of the exp

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Accounts receivable

Current asset
Not as liquid
Amounts owed to the business by customers for
services

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Cash

Current asset
Most liquid
Currency, coins, bank accounts, money market
accounts, commercial paper, certificates of deposit
(less than 90 days)

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Current Assets

Assets that can be turned into cash within 1 year

Example: Cash, accounts receivable, inventory, prepaid insurance, supplies

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Current Liabilities

Payments of debt within 1 year

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Depreciation

Write off to a long term asset

The write off of the fixed assets (except land) during
the accounting period (1 year)

Non-cash expense (no check issued in payment of the expense

Based on fixed depreciation guidelines set by the IRS,
including “salvage” value

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2 methods of depreciation (business expense)
Straight line and accelerated balance

Straight line- paying for 5 years with a 10,000 of depreciations

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Accelerated Balance depreciation

5 year payment with first year 20,000 next 15,000 then smaller expenses the rest of the years

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Expenses

Cost of doing business during the current accounting
period (1 year)

The expense could have been paid during the
accounting period (Example: payroll)

The expenses could have incurred on credit (Example:
accounts payable for supplies

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Fixed assets

Long term asset
Land, building, equipment, computers, fixed of
physical assets used by the business to generate
profits

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Net worth

assests-liabiliteies

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Long Term Liabilities

Payments of debt that exceed 1 year

Example: notes payable, mortgage

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mortgage not payable

Long term liablity

If to be paid after 1 year= long term liability

amount owed for land or building

secured by real property

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Revenues

Amount earned by the business during the current
accounting period (1 year)

The amount earned could be cash revenue or revenue
on credit

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Records

The Government requires that records be kept
ͻ Internal Revenue Service
ͻ Michigan Department of Treasury

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Records

ͻ A business owner should keep their records a
MINIMUM of seven (7) years

Personal records should be kept a minimum of three
(3) years

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Required Records
sales receipts

Invoices
ͻ Credit Memos
ͻ Contracts
ͻ Credit Card
Statements

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Required Records Check Register and Credit Cards

All payments should be made by credit cards 1st and checks 2nd

Required Records Bank Statements

Statements of all accounts

Required Records Payroll

W-2 (Employee Withholdings) ͻ 1099 (SubContractors) ͻ W-4 (Employee Exemptions such as kids) ͻ I-9 (Authorization to work)

Required Records Out of Pocket Expenses

These are cash receipts ͻ Information describing Purpose, date, and the job for which it was purchased should be attached

Required Records Employee Business Expenses

Usually applies to meals and entertainment ͻ Make notes on the receipts ͻ Only 50% of the total bill is an expense

Calendar Basis

Most business follow a calendar basis ͻ This reflects activity from January 1st to December 31st (most businesses)

Fiscal Basis

Another alternative is a fiscal basis ͻ This reflects activity that does not follow the calendar example lawn care (each has certain tax benefits)

1 Flow chart Source documents

Receipts ͻ Invoices ͻ Purchase Orders ͻ Sales

2 Journals with Detailed Information

“Log Books” of financial transactions Sales ͻ Purchase ͻ Cash Receipts ͻ Cash Disbursements ͻGeneral

3. General Ledger

This is your chart for all accounts” Salaries Insurance Materials, etc. “T-Accounts”

4. Financial Statements

Income Statement ͻ Balance Sheet ͻ Statement of Cash Flow ͻ Statement of Owner’s Equity Study chart in accounting, page 10

Double Entry Book Keeping

Every business financial transaction requires two entries for recording purposes ͻ T-Accounts provide for this recording

Double Entry Book Keeping

A debit is recorded on the left side of an account (negative) A credit is recorded on the right side of an account (positive)

Journals

ͻ These are called the books of original entry ͻ As much information as possible is recorded with each transaction ͻ At the end of the month all journal entries are added and then recorded in the general ledger

Five Basic Journals Sales journal

ͻ Recording of sales on credit

PURCHASES JOURNAL

ͻ Recording of purchases on credit

CASH RECEIPT JOURNAL

Recording of all Incoming CASH business transactions ͻ Example: Owner’s investment of Cash, Collection of Receivables, Collection of Cash Sales

CASH DISBURSEMENTS JOURNAL

ͻ Recording of all outgoing cash business transactions (payments made) ͻ Examples: Payments to suppliers, Payroll-used to calculate state and federal reports, Payment to Lenders

GENERAL JOURNAL

Recording of adjusting and closing entries ͻ Example: Records Non-Cash Expenses ͻ Depreciation is shown here, along with equipment lost or damaged, inventory of no value, stolen equipment and bad debts.

Ledgers ͻ General Ledger

These are called the Books of “final” entry ͻ These are a summary of information from the journals

Ledgers

THE GENERAL LEDGER BALANCES MUST BALANCE IN ORDER FOR THE ACCOUNTING EQUATION TO BE IN BALANCE ͻ ALL OF THE ACCOUNTS MAKE UP THE GENERAL LEDGER

Financial Statements INCOME STATEMENT

Shows net profit or loss Shows revenues and expenses for the business for the current accounting period

Financial Statements STATEMENT OF OWNERS’EQUITY

ͻ Shows value as of statement date ͻ Capital paid in, draws, and investments

Financial Statements BALANCE SHEET

Shows assets, liabilities, and equity ͻ The financial condition of the company

STATEMENT OF CASH FLOW

Shows where the cash went-basically for bank statements

what is a good current Ratio

2;1

Quick Assets Ratio

You can not use inventory as a quick assets ratio. (if you see -inventory on a question it will be a quick asset ratio) A Quick Ratio of 1.0 to 1 (or better) usually indicates a Good Short-Term Paying ability ͻ A Quick Ratio indicates the ability to pay current debts ͻ Loan officers consider Quick Ratios a good indicator to approve a loan request

True Investment Yield (Real Rate of Return)

Nominal investment -Rate of inflation

A _____________ provides a good, detailed, overview of how current income compares with income received last week?

Sales Journal

Sales Records are needed...

For some insurance reports

*4. Builders need ______ to pay small expenses that arise day to day.

Petty Cash

*Rent, phone, utilities, and office supplies are considered_______ expenses.

Overhead

*______must be presented when apply for performance bonds and for loan applications

Financial Statements

*______ is the simplest bookkeeping method used.

Double entry

*A ______ is entered on the left side of a T-Account.

Debit

*A____ is entered on the right side of a T-Account

Credit

*Comparisons of net worth to liabilities used by bankers considering load applications are called________.

Ratios

A General Ledger

Summarizes all business operations b. Is separate form subsidiary ledgers c. IS out of balance if there is a posting error

*_____are funds withheld form payments as an incentive for timely job completion.

Retainage

*The most popular and widely used test for cash position is the_____.

Current ratio

*______summarizes the existing condition of a business.

Balance Sheet

The satisfactory minimum current ratio which compares current assets to current liabilities is:

2:1

*A ratio used to determine the ability to pay current debts without including inventory.

Quick Assets

*Working capital is_________.

Available Current Assets

Current Assets minus current liabilities=

Working capital

*Current assets divided by current liabilities=

Current ratio

*Net Income divided by net sales=

Profit Margin

Michigan Corporate Income Tax (Cit) is based on business income of a Corporation with gross receipts of “more” than

$350,000.00

For 2019 the Social Security Tax is based on the first

$132,000 of employee payroll

The IRS Form 1099 is used to indicate any payment made to a subcontractor (not employee) for the previous year

The employees FICA Tax rate is a combination of the social security tax rate of ________, and the Medicare tax rate of _______.

6.2%, 1.45%