Accounting for Business Owners Flashcards
Negatives of Cash
1.
2.
3.
4.
- Difficult to keep track of
- Receipts get lost
- Cash misused
- Does not comply with federal and state reporting guidelines
Which accounting basis has no accounts receivable?
Cash
Accrual Basis
Revenues are recorded when cash is earned
Which basis has no accounts receivable?
Cash
What do Business Checking Accounts do
1.
2.
- Provides a record of all payments
- Provides a record of all deposits
which basis is used by medium and large businesses?
accrual
The purpose of accounting
1.
2.
3.
4.
5.
6.
- Increase your business skills
- Reduce overhead
- Reduce areas of non-profitability
- Comply with state and federal laws
- Account for all cash flow
- Provide information for insurance companies
What provides the main sources of record keeping?
A combination of business credit cards and a business checking account will provide the main sources of record keeping.
On a cash basis, expenses are recorded when?
When paid
Which basis conforms to GAAP
accrual
What dictates the recording process of cash basis?
Cash
which basis uses accounts payable
accrual
On an accrual basis, expenses are recorded when?
When incurred
Which basis are tax returns prepared on
Cash Basis
Do not mix X and Y. Doing so will create a possible “flag” for being audited.
Personal and business
Business Credit Cards
1.
2.
3.
- Great way to track purchases
- Easy to return purchases for credit
- Monthly statements provided
Which basis is formal accounting basis?
accrual
There are two basis for accounting 1 2
Cash basis Accrual Basis
Which basis has no recorded of expenses on credit?
Cash
Which basis is used by small businesses?
Cash
which basis is taught in all accounting classes
accrual
Cash basis
Revenues are recorded when cash is received
Which basis has user accounts recievable
accrual
Accounts payable: current X
liability
Accounts payable: Amounts owed to X
amounts owed to suppliers by business
Accounts payable: Equity:
Amount of assets remaining after all liabilities are paid off. The true ownership value
Accounts Receivable Current X
asset
Are accounts receivable: liquid or not as liquid
not as liquid
Are accounts receivable: amounts owed to X
Business by customers for services
Cash: current X
asset
Cash is it liquid?
Most liquid
examples of cash
Currency,
coins,
bank accounts,
money market accounts,
commercial paper,
certificates of deposit (less than 90 days)
What are current assets?
Assets that can be turned into cash within 1 year
Current assets examples?
cash, accounts receivable, inventory, prepaid insurance, supplies
What are current liabilities?
Payments of debt within 1 year
What is Depreciation:
Write off to a long term asset or The write off of the fixed assets (except land) during the accounting period (1 year)
What type of expense is depreciation?
non cash expense
2 methods of depreciation?
Straight line and declining balance
Expenses:
Cost of doing business during the current accounting period
Expenses: When could the expenses been paid?
During the accounting period
Expenses: Where could the expenses have been incurred?
on credit (Example: accounts payable for supplies)
Fixed assets:
long term asset
examples of fixed assets
Land, building, equipment, computers, fixed of physical assets used by the business to generate profits.
Long Term Liabilities:
payment of debt that exceeds 1 year
long term liability examples
notes payable, mortgage
what kind of liability is Mortgage note Payable
long term liability
Mortgage note Payable:
amount owed for land or building
Net worth:
Assets minus all liability
Revenues:
Amount earned by the business during the current accounting period (1 year)
What form can Revenue be earned as
cash revenue or revenue on credit
Basic Law of Business:
Always have:
Attorney Accountant
Accounting:
The Government requires that X
all records be kept
Which government agencies require that records be kept
Internal Revenue Service Michigan Department of Treasury
A business owner should keep their records a MINIMUM of X
seven (7) years
Personal records should be kept a minimum of X
three (3) years
Six types of required records:
- Sales receipts
- Check register and Credit Cards
- Bank statements
- Payroll Records
- Out of Pocket Expenses
- Employee Business Expense
Sale Receipts examples:
Invoices
Credit Memos
Contracts
Credit Card Statements
All payments should be made by X first and Y second
All payments should be made by credit cards 1st and checks 2nd
What are bank statements?
Statements of all accounts
Payroll record examples:
W-2 1099 W-4 I-9
When is 1099 due?
January 31 1099
What are out of pocket expenses?
Cash reciepts
How should you record out of pocket expenses?
Information describing Purpose, date, and the job for which it was purchased should be attached
Employee Business Expenses: usually applies to X
meals and entertainment
Employee Business Expenses: only X% of the total bill is an expense
only 50% of bill is an expense
Most business follow what fiscal basis?
Calendar
Tax Statement Flow Chart:
1
2
3
4
Source Docs
5 journals with detailed information
General ledger
financial statement
Examples of source documents
1 Receipts
2 Invoices
3 Purchase Orders
4 Sales
5 Journals with Detailed Information
1 Sales
2 Purchase
3 Cash Receipts
4 Cash Disbursements
5 General
What does a general ledger do?
Summary of the journals T-accounts of everything make up the general ledger
Financial Statements examples
Income Statement
Balance Sheet
Statement of Cash Flow
Statement of Owner’s Equity
Every business financial transaction requires X entries for recording purposes
two
X recorded on left side of T account Y recorded on right
Debit on left, credit on right
Journals are called X
Books of original entry
- SALES JOURNAL:
Recording of sales on credit
- PURCHASES JOURNAL:
Recording of purchases on credit
- CASH RECEIPT JOURNAL:
Recording of all Incoming CASH business transactions
- CASH DISBURSEMENTS JOURNAL
Recording of all outgoing cash business transactions (payments made)
What is a cash receipt journal used to prepare?
Sales Tax Requirements
- GENERAL JOURNAL
Recording of adjusting and closing entries Non cash expenses
In which journal is depreciation shown in
General Journal
In which journal is equipment lost or damaged, inventory of no value, stolen equipment and bad debts shown in
General Journal
All transactions from the journals are recorded where?
general ledger
THE GENERAL LEDGER BALANCES MUST X IN ORDER FOR THE ACCOUNTING EQUATION TO BE IN X
Balance
What provides information for preparing the financial statements
journals and general ledger
Once the recording process is complete, accountants prepare X
Financial Statements
There are four formal X
Financial Statements
What are the four formal Financial statements?
1.
2.
3.
4.
- INCOME STATEMENT
- STATEMENT OF OWNERS’EQUITY
- BALANCE SHEET
- STATEMENT OF CASH FLOW
- INCOME STATEMENT:
Shows net profit or loss Shows revenues and expenses for the business for the current accounting period
- STATEMENT OF OWNERS’ EQUITY
Shows value as of statement date
Capital paid in, draws, and investments
- BALANCE SHEET
Shows assets, liabilities, and equity The financial condition of the company and the financial strength of the operation
- STATEMENT OF CASH FLOW
Shows where the cash went-basically for bank statements
How often are income statements prepared?
Monthly
What do financial statements indicate?
problem areas
income statements show how well you control
How well you control costs and expenses
What does a balance sheet indicate and when?
Indicates the financial condition of the company on the LAST DAY of the accounting period (year)
Financial Ratios are calculated for
comparison purposes and are used to make business decisions
Working Capital Ratio: and how to calculate it
A measure of liquidity to pay current bills Current Assets - Current Liabilities = working capital
Current Ratio: and how to calculate it
Current Assets (From Balance Sheet) / Current Liabilities (From Balance Sheet)
What is a good current ratio
2 to 1
Quick Assets Ratio:
A Quick Ratio indicates the ability to pay current debts
Whats a good quick ratio
1.0 to 1 (or better) usually indicates a Good Short-Term Paying ability
Quick asset ratios do not X
include inventory. Any time it says not including inventory, it means quick asset ratio.
How do you calculate a quick asset ratio:
Cash + Acct. Rec. + Short Term Invest / Current Liabilities
Fixed Assets -Net Worth Ratio:
A formula showing the relationship between a company’s fixed (tied up) assets and the company’s total assets after liabilities
Fixed Assets -Net Worth Ratio reflects the companies level of X
solvency, as fixed assets are not easily exchangeable for cash
Fixed Assets -Net Worth Ratio formula:
Fixed assets / net worth (total assets - liabilities)
In a fixed assets to net worth ratio anything over X puts the company in a vulnerable position
0.75
Gross Profit - Sales Ratio:
A formula showing the relationship between profits after direct sales expenses and total sales.
Fixed Assets -Net Worth Ratio reflects the companies X
This ratio reflects the company’s money available to pay operating expenses and profit.
Gross Profit - Sales Ratio formula
Net Sales (Sales - Direct Sales Expenses) / sales
Gross Margin Ratio (Profit Margin) formula
gross profit (net sales - cost of goods sold) / net sales
Why should a company monitor its gross margin ratio:
A company should be continuously monitoring its gross margin ratio to be certain it will result in a gross profit that will be sufficient to cover it selling and administrative expense
True Investment Yield (Real Rate of Return):
A formula calculating the true value of an investment after inflation.
True Investment Yield (Real Rate of Return) formula:
rate of return - 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
- Check Registers…
Balance the bank accounts
- 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
A General Ledger
a. Summarizes all business operations
b. Is separate form subsidiary ledgers
c. IS out of balance if there is a posting error
- A Financial Statement_____________.
Summarizes the General Ledger
Comparisons of net worth to liabilities used by bankers considering load applications are called________.
Ratios
- _____are funds withheld form payments as an incentive for timely job completion.
Retainage
It is important to watch____, since it can alert the business to the acumulation of hard to collect accounts
Trends
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
Net Income to Net Ratio gives the contractor a good idea of
Operation efficiency
Current Assets minus current liabilities=
Working capital
Current assets divided by current liabilities
Current ratio
Assets minus Inventory divided by current liabilities
Quick Assets Ratio
Net Income divided by net sales
Profit Margin
Loan officers consider X a good indicator
to approve a loan request
Quick Ratios
