ABM Services
Accounting and Small Business
Introduction
Every enterprise needs a system of records that
provides an accounting of the business and financial transactions that occur.
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The
company must maintain adequate records to support compensation of employees,
collection of debts and payment of bills.
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The
company needs to track income and expenses in order to know whether or not it
is profitable.
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The
company also needs to provide an accurate reporting of business activity and
conditions for investors, lenders, and governmental authorities.
This presentation will describe the basics that a
system of records should have to support your business. Whether or not you choose to hire an
accountant or bookkeeper, your system has to provide you with adequate
information to support good business decisions. I chose to do this layout based on the need to produce two basic
financial statements, the balance sheet and the income statement.
Financial Statements
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XYZ Company Balance Sheet December 31, 1996 Assets Current Assets Cash $ 2065 Accounts receivable 2720 Inventory 760 Prepaid expenses 2300
Total current assets
$7845 Plant Assets Land $10000 Equipment 1800 Less accumulated deprec. 50 1750
Total plant assets
11750 Total assets 19595 Liabilities Current Liabilities Accounts payable 900 Wages payable 250 Customer deposits 240 Total liabilities 1390
Owner's Equity Tom Jones capital 18205 Total liabilities & owner's
equity 19595 Figure 1 - Balance Sheet |
When
we talk about business activity and conditions, we are looking at two specific
elements which, when taken together, give a reasonably good picture of an
enterprise. Specifically, when we talk
about the financial condition of a business, we are looking at the value of a
business at a given point in time. In
short, "What was the business worth, as of the end of last
month?" When we talk about
business activity, we are describing the profitability of the business over a
period in time. The short version of
this question, "How much profit (or loss) did we have in the last quarter?" As stated earlier, there are two basic financial
statements that answer these questions.
Balance Sheet
The balance sheet measures the condition of the
business, as of a certain date. It gets
its name from the balance in the basic accounting equation -- Assets
equal Equity. The equity of a
business is really in two parts, lenders' equity (liabilities) and owners'
equity (capital), thus the more common statement is Assets equal liabilities plus
owner's equity. The balance
sheet is normally laid out listing assets first, followed by liabilities and
owner's equity. A typical balance sheet
might look as shown in Figure 1.
Income Statement
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XYZ Company Income Statement For Year Ended
December 31, 1996 Revenue from sales: Sales $115000 Less: Sales returns $1400 Discounts 500
1900
Net Sales $113100
Cost of merchandise sold: Inventory, 1/1/ 96 $24030 Purchases $28045 Less discounts 355 Net purchases $27690 Add transportation in
845 Cost of Mdse purchased 28535 Mdse available for sale $52565 Less, Inventory 12/31/96 760 Cost of merchandise sold 51805 Gross
profit $61295
Operating Expenses Payroll expenses $15100 Advertising 1450 Insurance expense 975 Accounting & legal 1750 Supplies 305 Depreciation 50 Rent 3600 Utilities 1275 Taxes 1359
Total operating expense 25864 Income
from operations $35431
Other Expense Interest expense 1231 Net
Income
$34200 Figure 2 - Income Statement |
The second basic report is the income statement (sometimes
referred to as the profit & loss statement). The income statement covers a period of time, such as a month,
quarter or year. Income statements
reflect the business activity that happened during the period. The business activity includes generation of
revenue through sales of goods or services and incurring costs and expenses
relevant to the business activity. The
layout of the income statement normally shows revenue first, followed by cost
of goods and operating expenses.
In a basic merchandising system, the cost of goods
is determined by adding the cost of goods purchased in the period to the
beginning inventory, and then subtracting the ending inventory. The computation is a bit more involved for a
manufacturing concern, in that labor and overhead associated with the
manufacturing process would also be considered in cost of goods. A service business, such as an accountant or
lawyer may not have any cost of goods.
Expenses are costs necessary to the operation of the
enterprise, but which are not directly attributable to the product
itself. They include, but are not
limited to advertising, vehicle expenses, commissions, taxes, licenses,
salaries & wages, insurance, interest, rent, utilities, repairs &
maintenance, supplies, travel, office expenses, professional services,
etc. A typical income statement might
look as shown in Figure 2.
Income Taxes
The income statement and the balance sheet provide a
relatively complete picture of the overall condition and profitability of a business. The year-end income statement provides most,
if not all, of the information necessary to complete the Profit and Loss from
Business (Schedule C) portion of the Federal income tax for a sole proprietor,
and the income statement and balance sheet combined will provide most of the
information needed for tax returns for partnerships (Form 1065) and
S-corporations (Form 1120-S).
Records and Documentation
The remainder of this tutorial will focus on the
type of records and documentation that a firm needs to keep in order to prepare
these reports properly.