Basic Accounting & Budgeting February 4, 2009 The Nature of Accounting Systems Accounting is the process of recording, classifying, summarizing, reporting and interpreting information about the economic activities of an organization. This information is communicated to stakeholders of the organization to help them in decision making. These Stakeholders include: Managers Investors Suppliers Government agencies Employees The financial information captured by the accounting system is usually communicated through reports called financial statements. Including: Income Statements Balance Sheets Cash Flow Statements
Income Statement The income statement captures revenue, expenses and net income over a period of time. Important elements of an income statement: Revenue is the monetary compensation given to the organization in exchange for good and services provided Expenses are the cost incurred by the organization in providing the goods and services to its customers Net Income (Losses) is the difference between income and expenses, depending on which is greater Example Income Statement Income Statement For the Period Ending December 31, 2008 As of As a % of Dec 31, 08 Total Revenue REVENUE: Ice Cream Sales $ 6,000 75.0 Baked Goods 2,000 25.0 NET REVENUE $ 8,000 100.0 COST OF GOODS SOLD Labor 2,500 31.3 Materials 1,300 16.3 TOTAL COST OF GOODS SOLD 3,800 47.5 GROSS PROFIT 4,200 52.5 EXPENSES: Selling, General, and Administrative Sales Salaries 250 3.1 Management Salaries 400 5.0 Utilities Expense 100 1.3 Employee benefits 175 2.2 TOTAL SG&A EXPENSES 925 11.6 OPERATING INCOME (LOSS) $ 3,275 40.9 Interest expense 200 2.5 PRE-TAX INCOME $ 3,075 38.4 Income Taxes (1,046) (13.1) NET INCOME (LOSS) $ 2,030 25.4
Balance Sheet The balance sheet shows assets, liabilities and owner s equity at a point in time. Important elements of a balance sheet: Assets are the resources owned by the organization. These resources can be classified as fixed or current, and as tangible or intangible. Liabilities are the obligations of the organization to other organizations. The obligations can be classified as long-term or current. Equity is the residual amount left after liabilities are subtracted from the assets of an organization. This amount represents the actual value of ownership the shareholders have in the organization after all of their obligations are met The accounting equation: The relationship of the three types of accounts listed above is represented by the accounting equation: Assets = Liabilities + Equity Example Balance Sheet Balance Sheet As of December 31, 2008 As at Dec 31, 08 ASSETS: Current Assets Cash 250 As a % of Total Assets $ 33.3 Accounts Receivable 75 10.0 Inventory 125 16.7 Prepaid Expenses 50 6.7 Total Current Assets 500 66.7 Fixed Assets Property & Equipment 400 53.3 Less: Accumulated Depreciation 150 20.0 Total Net Fixed Assets 250 33.3 TOTAL ASSETS $ 750 100.0 LIABILITIES: Current Liabilities Accounts Payables 150 20.0 Current Portion of Long-Term Debt 75 10.0 Total Current Liabilities 225 30.0 Long-Term Liabilities Long-term Debt 100 13.3 Total Long-Term Liabilities 100 13.3 TOTAL LIABILITIES 550 73.3 SHAREHOLDERS' EQUITY Total Shareholders' Equity 200 26.7 TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 750 100.0
Why an Accounting System is Important An effective accounting system captures large amounts of data and organizes it into understandable, useful information This information is used within the organization for a variety of purposes, such as: Development of Business Strategy Identification of Areas of Risk Budgeting Trend Analysis And also by those outside of the organization, for purposes such as: Prospective Investing Creditworthiness Tax Liability Determination Regulatory Compliance The Importance of a Budget A budget gives an organization a method of presenting its future expectations, and measuring actual results against those expectations In measuring differences between expectations and actual results, management can indentify Areas of the business that need improvement Areas of success Unrealistic expectations Developing Trends In Identifying these things, management can better focus its efforts, and gain a clearer understanding of the key factors to the organization s success
Creating a Budget Steps in Creating a Budget: Forecast revenue Forecast expenses Record actual results and compare to forecasts Identify variances and determine possible causes Adjust budget to reflect adjusted assumptions, goals and circumstances Example Budget Monthly Budget for 2009 January January February February March March 2009 2009 Budget Actual Budget Actual Budget Actual Budget Actual REVENUE: Ice Creame $ 600 $ 575 $ 630 $ 580 $ 650 $ - $ 8,000 $ - Baked Goods 60 70 65 60 70-800 - NET REVENUE 660 645 695 640 720-8,800 - COST OF GOODS SOLD Labor 200 175 200 165 200-2,500 - Materials 130 130 125 100 125-1,500 - TOTAL COST OF GOODS SOLD 330 305 325 265 325-4,000 - GROSS PROFIT 330 340 370 375 395-4,800 - EXPENSES: Selling, General, and Administrative Sales Salaries 25 30 25 25 25-300 - Management Salaries 35 35 35 35 35-450 - Utilities Expense 10 15 15 20 15-150 - Employee benefits 20 20 20 25 20-200 - TOTAL SG&A EXPENSES 90 100 95 105 95-1,100 - OPERATING INCOME (LOSS) 240 240 275 270 300-3,700 - Interest expense 20 20 20 25 20-200 - PRE-TAX INCOME 220 220 255 245 280-3,500 - Income Taxes (35) (30) (40) (45) (45) - (500) - NET INCOME (LOSS) $ 185 $ 190 $ 215 $ 200 $ 235 $ - $ 3,000 $ -