How do you keep records?How do you keep records?

Do you engage in any personal accounting Do you engage in any personal accounting for yourself? Probably, all of you do at for yourself? Probably, all of you do at some level if you have a checking account, some level if you have a checking account, although I have friends who tear checks out, although I have friends who tear checks out, stuff them in their pocket, write them, and stuff them in their pocket, write them, and never ponder recording that check never ponder recording that check information anywhere. Do you do that?information anywhere. Do you do that?

Personal recordsPersonal records

Assuming that you keep track of you cash Assuming that you keep track of you cash in you checking account, what do record in you checking account, what do record when you write a check? You would have when you write a check? You would have to deduct the amount of the check to keep a to deduct the amount of the check to keep a balance. Do you record the name of the balance. Do you record the name of the person you wrote the check to. WHY? person you wrote the check to. WHY? Have you ever really looked back to see Have you ever really looked back to see who a check was written to? Maybe.who a check was written to? Maybe.

Personal recordsPersonal records

You know, some people are hard core – You know, some people are hard core – they record the payee, the amount, calculate they record the payee, the amount, calculate a balance, AND THEN, on the next line, a balance, AND THEN, on the next line, write down what the check was for.write down what the check was for.

For exampleFor example

BalanceBalance $400.00$400.00

SchnucksSchnucks $50.00$50.00 $350.00$350.00» For beer and pretzels for Sam’s partyFor beer and pretzels for Sam’s party

No accounting rulesNo accounting rules

Unless you are experiencing cash flow Unless you are experiencing cash flow problems, and you are trying to figure out problems, and you are trying to figure out ways to budget your cash better, individuals ways to budget your cash better, individuals typically have no real need for this type of typically have no real need for this type of detail in their records.detail in their records.

Bottom line is – you keep your records any Bottom line is – you keep your records any way that pleases you.way that pleases you.

Business RecordsBusiness RecordsSubject to accounting rulesSubject to accounting rules

When you keep records for a business, When you keep records for a business, which is constantly making business which is constantly making business decisions, we must keep detailed records to decisions, we must keep detailed records to make available the mass amount of make available the mass amount of information necessary in a complex record information necessary in a complex record environment.environment.

We take an approach similar to the hard We take an approach similar to the hard core check book people.core check book people.

Double entry accountingDouble entry accounting

As individuals (checking accounts), we primarily As individuals (checking accounts), we primarily keep tract of one thing – do we have enough keep tract of one thing – do we have enough money in the bank to write this check? (Basically, money in the bank to write this check? (Basically, “single entry” accounting – keeping track of cash.“single entry” accounting – keeping track of cash.

In a formal accounting system, we use an In a formal accounting system, we use an approach referred to as “double entry” which approach referred to as “double entry” which means basically, “everytime we record a means basically, “everytime we record a transaction – two items will change” (at least two)transaction – two items will change” (at least two)

Perspective to address accounting Perspective to address accounting transactionstransactions

Everyone assume that this is your business Everyone assume that this is your business as we discuss the transactions.as we discuss the transactions.

The business is a lawn care business – we The business is a lawn care business – we spray yards with fertilizer.spray yards with fertilizer.

The following entries are the same from the The following entries are the same from the last ppt presentation. The transactions are last ppt presentation. The transactions are analyzed in terms of what definition the analyzed in terms of what definition the item meets in the major account item meets in the major account classifications.classifications.

On January 1, 2002, the owner established a business On January 1, 2002, the owner established a business checking account by depositing $100,000 cash into the checking account by depositing $100,000 cash into the checking account.checking account.

On January 1, 2002, the owner borrowed $200,000 cash from On January 1, 2002, the owner borrowed $200,000 cash from the bank and deposited it into the business checking account.the bank and deposited it into the business checking account.

On January 1, 2002, the owner purchased land for $25,000 – On January 1, 2002, the owner purchased land for $25,000 – making a down payment of $5,000 and owing the balance due making a down payment of $5,000 and owing the balance due evidenced by signing a promissory note in the amount of evidenced by signing a promissory note in the amount of $20,000. $20,000.

• On January 31, 2002, the company wrote a check for $500 for On January 31, 2002, the company wrote a check for $500 for supplies used by the company.supplies used by the company.

On January 31, the company received $700 for the completion On January 31, the company received $700 for the completion of services rendered.of services rendered.

On January 31, 2002, the owner withdrew $100 cash from the On January 31, 2002, the owner withdrew $100 cash from the business checking account for personal use.business checking account for personal use.

Transaction #1Transaction #1the owner invests personal assetsthe owner invests personal assets

Cash obviously meets the definition of an Cash obviously meets the definition of an asset (probable future economic benefit) an asset (probable future economic benefit) an item of value, the company has more cash – item of value, the company has more cash – its ASSETS increaseits ASSETS increase

When the owner invests his/her own money When the owner invests his/her own money into the business, it would not effect the into the business, it would not effect the debts of the business, the owner would have debts of the business, the owner would have the claim for that asset, therefore CAPITAL the claim for that asset, therefore CAPITAL would increasewould increase

Transaction #2Transaction #2 the owner borrowed cash the owner borrowed cash

As in transaction 1, the company has more As in transaction 1, the company has more cash, therefore increase ASSETScash, therefore increase ASSETS

But this time, when the assets increase, it is But this time, when the assets increase, it is because of the creditor invested the asset because of the creditor invested the asset into the business (the definition of a into the business (the definition of a liability) which increases LIABILITIESliability) which increases LIABILITIES

Transaction #3Transaction #3purchased land on credit making a purchased land on credit making a

downpaymentdownpayment The company has more land – land meets The company has more land – land meets

definition of asset, ASSETS increasedefinition of asset, ASSETS increase The company has less cash – ASSETS decreaseThe company has less cash – ASSETS decrease The company has more debt – LIABILITIES The company has more debt – LIABILITIES

increaseincrease

By the way, three items changed as a result of this By the way, three items changed as a result of this transaction and the entry is referred to as a transaction and the entry is referred to as a compound entry.compound entry.

Transaction #4Transaction #4paid for supplies used to operate paid for supplies used to operate

businessbusiness Less cash, ASSETS decreaseLess cash, ASSETS decrease Think about it, no other assets have changed, and Think about it, no other assets have changed, and

this would not affect the amount the company this would not affect the amount the company owes the bank, so we are only left with a decrease owes the bank, so we are only left with a decrease in CAPITAL to keep our accounting equation in CAPITAL to keep our accounting equation intact. I know it’s a drag, but if the value of my intact. I know it’s a drag, but if the value of my business goes down (other than a transaction business goes down (other than a transaction affecting liabilities) my claim against the assets affecting liabilities) my claim against the assets has to go down. By the way, this is classified has to go down. By the way, this is classified more specifically as an expense (price paid for more specifically as an expense (price paid for goods and services used to operate a business).goods and services used to operate a business).

Transaction #5Transaction #5receive money for services renderedreceive money for services rendered

More cash – ASSETS increaseMore cash – ASSETS increase This is what its all about, the company This is what its all about, the company

earns some revenue (price received for earns some revenue (price received for goods and services rendered to customers). goods and services rendered to customers). If the value of the business goes up (again, If the value of the business goes up (again, not from a liability transaction) my claim not from a liability transaction) my claim has to go up – increase CAPITAL.has to go up – increase CAPITAL.

Transaction #6Transaction #6withdraw funds for personal usewithdraw funds for personal use

Isn’t this what it’s all about – having a Isn’t this what it’s all about – having a business that earns a profit that pays for the business that earns a profit that pays for the things we do in lifethings we do in life

The amount of cash in the business does go The amount of cash in the business does go down, so ASSETS decreasedown, so ASSETS decrease

This is the owner exercising his claim to the This is the owner exercising his claim to the assets, and once he has done so, his claim assets, and once he has done so, his claim would necessarily decrease, therefore would necessarily decrease, therefore decrease CAPITALdecrease CAPITAL

DATEDATE ASSETS =ASSETS = LIABILITIES +LIABILITIES + CAPITALCAPITAL

1/11/1 +100,000+100,000 00 +100,000+100,000

1/11/1 +200,000+200,000 +200,000+200,000 0 0

totaltotal +300,000 +300,000 +200,000+200,000 +100,000+100,000

1/11/1 +25,000+25,000

- 5,000- 5,000

+20,000+20,000 00

totaltotal +320,000+320,000 +220,000+220,000 +100,000+100,000

1/311/31 -500-500 -500-500

totaltotal 319,500319,500 220,000220,000 99,50099,500

1/311/31 +700+700 +700+700

totaltotal 320,200320,200 220,000220,000 100,200100,200

1/311/31

totaltotal

-100-100

320,100320,100

00

220,000220,000

-100-100

100,100100,100

EvaluationEvaluation

First of all, we are “doing accounting”First of all, we are “doing accounting” Why?Why? We are recording economic information We are recording economic information

about a business entity – the definition of about a business entity – the definition of accountingaccounting

But what about the format?But what about the format?

Accounting Equation FormatAccounting Equation Format

This format focuses on the relationship between the major This format focuses on the relationship between the major account classifications, obviously.account classifications, obviously.

This format does disclose at a glance the total assets, This format does disclose at a glance the total assets, liabilities and capital of the company.liabilities and capital of the company.

This format’s lack of detail is probably insufficient, in This format’s lack of detail is probably insufficient, in most cases, for the information needs to make business most cases, for the information needs to make business decisions.decisions.

An example of the shortcoming of this format would be An example of the shortcoming of this format would be the question “How much cash does the business currently the question “How much cash does the business currently have?” This format does not provide this basic, necessary have?” This format does not provide this basic, necessary information.information.

Lets adjust the format to provide the more detailed Lets adjust the format to provide the more detailed information required in a business decision-making information required in a business decision-making setting.setting.

ACCOUNTING FORMATACCOUNTING FORMAT

Maintain the umbrella of the accounting equationMaintain the umbrella of the accounting equation Shift the format to focus on the individual Shift the format to focus on the individual

economic items of interest to the businesseconomic items of interest to the business Spend a little more time in setting up the format, Spend a little more time in setting up the format,

but will spend the exact same amount of time but will spend the exact same amount of time recording the transactions that will result in recording the transactions that will result in detailed information being presented.detailed information being presented.

Examine the format on the next slide and then Examine the format on the next slide and then enter the transactions using this format.enter the transactions using this format.

CashCash LandLand Note Note PayablePayable

CapitalCapital DrawingDrawing RevenueRevenue ExpenseExpense

ASSETS=ASSETS= LIABILITIESLIABILITIES + CAPITAL+ CAPITAL

ASSIGNMENTASSIGNMENT

PREPARE A FORM LIKE THE ONE ON PREPARE A FORM LIKE THE ONE ON THE PREVIOUS PAGE AND ENTER THE PREVIOUS PAGE AND ENTER THE TRANSACTIONS INTO THE FORMTHE TRANSACTIONS INTO THE FORM