Section 14.1 Recordkeeping

Section 14.2 Accounting Systems

OBJECTIVES

Understand financial records Differentiate between receipts, purchase orders, and sales

invoices Know the basic principles of double-entry accounting Discuss the advantages and disadvantages of

computerized accounting systems Describe the issues associated with the use of

accountants and bookkeepers

2Section 14.1: Recordkeeping

Financial Records

A savings account is a bank account in which you deposit money. The bank pays interest on the amount in your account.

A checking account is a bank account against which you can write checks. You can also remove money from your account by using a debit card.

A bank reconciliation is the process of verifying that your checkbook balance is in agreement with the ending balance in your checking account statement from the bank.

3Section 14.1: Recordkeeping

Business Documents

A receipt is the detailed written proof of a purchase. When you make a sale, always give the customer a receipt and always keep a copy for yourself.

A purchase order (often referred to as a PO) is a detailed written record of a business’s request for supplies or inventory.

A sales invoice is an itemized list of goods delivered or services rendered and the amount due.

4Section 14.1: Recordkeeping

Accounting Principles

Any payment or any income received is a transaction.

A source document is the original record (source) of a transaction.

All accounting systems make use of what is called double-entry accounting, which basically means that every business transaction affects at least two accounts.

A chart of accounts shows all the accounts used in the business.

5Section 14.1: Recordkeeping

Five Steps in Simple Double-Entry

Accounting Systems1. Prepare a chart of accounts.2. Record all business transactions in an accounting

database or journal, using source documents.3. Total each account in the database or journal at

the end of the accounting period.4. Prepare an income statement and statement of

cash flow.5. Prepare a balance sheet using the ending

balances in each asset, liability, and owner’s equity accounts.

6Section 14.1: Recordkeeping

Computerized Accounting

Some accounting software programs are meant to be used by entrepreneurs who have no knowledge of accounting.

Common accounting software packages for small businesses include QuickBooks and Peachtree. They are available in a wide range of prices.

The advantage of computerized accounting systems is that they prepare financial statements automatically, saving time and preventing mathematical errors.

As with any software program, computerized accounting systems take time to learn how to use.

7Section 14.1: Recordkeeping

Using Accountantsand Bookkeepers

Many entrepreneurs don’t keep their own records because of the time involved.

Some entrepreneurs pay a part-time accountant or bookkeeper to maintain their books.

Accounting controls are checks and balances established so that accounting personnel follow procedures that will avoid potential problems.

An auditor is an accountant who examines a company’s financial records and verifies that they have been kept properly.

This type of audit is often called an internal audit.

8Section 14.1: Recordkeeping

OBJECTIVES

Describe how to use a single-column accounting worksheet

Create financial statements based on a single-column accounting worksheet

9Section 14.2: Accounting Systems

Using anAccounting Worksheet Often, beginning entrepreneurs will use a single-

column accounting worksheet when starting their business.

After each transaction is posted in an accounting period, an entrepreneur can immediately determine the effect the transaction has on the financial statements.

An accounting worksheetis primarily a cash-onlyaccounting system.

10Section 14.2: Accounting Systems

Sample Accounting Worksheet

Creating Financial Statements

11Section 14.2: Accounting Systems

Sample Balance Sheet Sample Income Statement

After the transactions for a period are correctly entered into the accounting worksheet, you can prepare the balance sheet, income statement, and statement of cash flows.

Creating Financial Statements

In relation to the statement of cash flows, there are three

basic types of business activities:Operating Activities. Day-to-day activities are

called operating activities. Most cash changes fall into this category.

Investing Activities. When a businessbuys assets that will last more than oneyear, they are called investing activities.

Financing Activities. These activitiesconsists primarily of debt and equityfinancing.

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Sample Statement of Cash Flows

Section 14.2: Accounting Systems

Using a Computerized Spreadsheet

Linking Numbers from One Part of the Worksheet to Another. One of the main advantages of a computer spreadsheet is that you can link numbers from one part of the spreadsheet directly to another part of the spreadsheet.

Adding Columns of Numbers. You can also have the spreadsheet software total columns of numbers for you.

Adding Comments to Cells. You can add comments to specific cells.

13Section 14.2: Accounting Systems