Business Start Up Basics III

Business Start Up Basics III Intro to Accounting Presented by: Suzie Dills SBDC Business Consultant

Agenda Key Objectives of the Course Brief History & Definition of Accounting General Ledger Double Entry Accounting Balance Sheet Overview Income/Profit-Loss Statement Overview Cash vs. Accrual Accounting Cash Flow Statement Chart of Accounts Excel Spreadsheets Accounting Software Benefits Practice Basics for your Business

Objectives Define and describe accounting Explain the importance of accounting principals Provide detailed explanations about different types of financial statements or scorecards

Brief History of Bookkeeping Thousands of years ago, wealth & taxes were recorded. Based on principals set in text over 500 years ago. Double entry system ( debits & credits) first used by merchants in Venice, Italy around 1494 and is still used today! The five groups of accounts still used today: Assets, Liabilities, Income, Expense & Capital

Definition of Accounting Accounting is the art of recording, classifying & summarizing financial events. Accounting can be defined as providing information about business organizations to interested parties. All businesses need a system of planning & maintaining information about their financial affairs!

Why is Accounting Important? Accounting is the language of business, interpretation & communication of a company s operations & finances. Financial information allows entrepreneurs to make informed business decisions. We all work with & use accounting principals (ex. deciding how to spend paycheck). Whoever makes the decisions for the business needs to understand the basics and what each financial report means!

General Ledger A business uses a general ledger to organize all of it s accounting transactions. A moment to moment record of everything that happens. Today, most small businesses use a software package to keep track of their general ledger.

Double Entry vs. Single Entry Double Entry - Making a transaction to one side and then make a second entry to the other side of the general ledger, financial statement or scorecard. Helps to keep it balanced. Single Entry Associated with an automated accounting system. After entering the first entry, the computer program makes the other side. You still need to know what is going on behind the scenes.

Double Entry Balance Sheet Income Statement Debit Cash Credit Accounts Payable Credit Sales/Revenue Debit - Expenses

Craig's Design and Landscaping Services Trial Balance As of April 8, 2014 Debit Credit Checking 1,201.00 Savings 800.00 Accounts Receivable (A/R) 5,281.52 Inventory Asset 596.25 Undeposited Funds 2,062.52 Truck:Original Cost 13,495.00 Accounts Payable (A/P) 1,602.67 Mastercard 157.72 Arizona Dept. of Revenue Payable 0.00 Board of Equalization Payable 370.94 Loan Payable 4,000.00 Notes Payable 25,000.00 Opening Balance Equity 9,337.50 Retained Earnings 206.25 Design income 2,250.00 Discounts given 89.50 Landscaping Services 1,197.50 Landscaping Services:Job Materials:Fountains and Garden Lighting 1,971.50 Landscaping Services:Job Materials:Plants and Soil 2,220.72 Landscaping Services:Job Materials:Sprinklers and Drip Systems 138.00 Landscaping Services:Labor:Installation 250.00 Landscaping Services:Labor:Maintenance and Repair 50.00 Pest Control Services 40.00 Sales of Product Income 912.75 Services 503.55 Cost of Goods Sold 405.00 Advertising 74.86 Automobile 113.96 Automobile:Fuel 349.41 Equipment Rental 112.00 Insurance 241.23 Job Expenses 155.07 Job Expenses:Job Materials:Decks and Patios 234.04 Job Expenses:Job Materials:Plants and Soil 353.12 Job Expenses:Job Materials:Sprinklers and Drip Systems 215.66 Legal & Professional Fees 75.00 Legal & Professional Fees:Accounting 390.00 Legal & Professional Fees:Bookkeeper 55.00 Legal & Professional Fees:Lawyer 100.00 Maintenance and Repair 185.00 Maintenance and Repair:Equipment Repairs 755.00 Meals and Entertainment 28.49 Office Expenses 18.08 Rent or Lease 900.00 Utilities:Gas and Electric 200.53 Utilities:Telephone 130.86 Miscellaneous 2,916.00 TOTAL $40,871.60 $40,871.60

Financial Reports Balance Sheet Income/Profit & Loss Statement Cash Flow Statement Keeping accurate books will help you: Price products correctly Know if you are making or losing money Know your cash flow short & long term Work with bankers, investors & tax agencies

Balance Sheet Equation: Assets = Liabilities + Equity/Retained Earnings Assets Items of value owned/controlled by a business; examples are cash, inventories, buildings, equipment. (have) Liabilities Amounts owed to people or organizations outside the business; examples are amounts owed to vendors for purchases (accounts payable), taxes, wages, loans. (give) Equity Amount the business owes to the owner which includes original capital invested minus owner withdrawals. (keep) This report shows how your business looks now.

Other Balance Sheets Terms Accounts Receivable Money that your customers owe to you. Other Current Assets Things you own that you ll use or convert to cash within 12 months. Fixed Assets Things your company owns that decrease in value over time (depreciate). Other Assets Things you won t convert to cash in the next twelve months or depreciate.

Other Balance Sheets Terms Cont. Accounts Payable Money you owe in the next twelve months to vendors. Other Current Liabilities Money you owe in the next twelve months such as sales tax. Long Term Liabilities Money you owe after the next Twelve months such as mortgage payments.

Excel Balance Sheet Balance Sheet For Year Ending December 31, 2010 (all numbers in $000) ASSETS LIABILITIES Current Assets Current Liabilities Cash $51 Accounts payable $237 Accounts receivable 340 Short-term notes 23 (less doubtful accounts) (129) Current portion of long-term notes 14 Inventory 175 Interest payable 5 Temporary investment 12 Taxes payable 10 Prepaid expenses 2 Accrued payroll 13 Total Current Assets $451 Total Current Liabilities $302 Fixed Assets Long-term Liabilities Long-term investments $40 Mortgage $840 Land 650 Other long-term liabilities 425 Buildings 841 Total Long-term Liabilities $1,265 (less accumulated depreciation) (132) Plant & equipment 560 (less accumulated depreciation) (331) Shareholders' Equity Furniture & fixtures 57 Capital stock $300 (less accumulated depreciation) (41) Retained earnings 228 Total Net Fixed Assets $1,644 Total Shareholders' Equity $528 TOTAL ASSETS $2,095 TOTAL LIABILITIES & EQUITY $2,095

Balance Sheet

Income/Profit & Loss Statement Equation: Income Expenses = Net Income/Profit Income COGS = Gross Margin. Gross Margin Operating Expenses = Net Profit Income earnings or revenue of the business; examples are sales, services, events & programs. Expenses outflows of the business; examples are costs of goods sold(cogs), payroll, insurance & administrative. This report shows how your business looks over time.

Income/Profit & Loss Terms Cost of Goods Sold (COGS) Cost of products and materials that you held in inventory then sold and other expenses related to sales such as commissions. Gross Margin/Profit Sales minus COGS, percentage of sales. It is important to business for it is money left over to pay for expenses of being in business. Business Expenses or Fixed Expenses Costs of being in business such as : salaries, insurance, rent, advertising, utilities and interest payment. They do not vary with the sales level. Depreciation The reduction of cost of your equipment over time. A non cash expense.

Excel Income/Profit & Loss Statement <Company Name> Revenue Sales Sales Returns Sales Discounts <Other Revenue> <Other Revenue> <Other Revenue> Net Sales Cost of Goods Sold Gross Profit Operating Expenses Salaries & Wages Depreciation Expenses Office Expenses Rent Expense Travel Expenses Maintenance Expenses Advertising Expenses <Other Expense> <Other Expense> <Other Expense> Total Operating Expenses Income From Operations Interest Income (Expense) Income Before Income Taxes Income Tax Expense Net Income Income Statement For the Year Ending <Date> January February March April May June July August September October November December YTD $ 50,000 $ 52,500 $ 55,125 $ 57,881 $ 60,775 $ 63,814 $ 67,005 $ 70,355 $ 73,873 $ 77,566 $ 81,445 $ 85,517 $ 795,856 - - - - - - - - - - - - - 5,000 5,250 5,513 5,788 6,078 6,381 6,700 7,036 7,387 7,757 8,144 8,552 79,586 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - $ 55,000 $ 57,750 $ 60,638 $ 63,669 $ 66,853 $ 70,195 $ 73,705 $ 77,391 $ 81,260 $ 85,323 $ 89,589 $ 94,069 $ 875,442 $ 20,000 $ 21,000 $ 22,050 $ 23,153 $ 24,310 $ 25,526 $ 26,802 $ 28,142 $ 29,549 $ 31,027 $ 32,578 $ 34,207 318,343 $ 35,000 $ 36,750 $ 38,588 $ 40,517 $ 42,543 $ 44,670 $ 46,903 $ 49,249 $ 51,711 $ 54,296 $ 57,011 $ 59,862 $ 557,099 $ 7,500 $ 7,875 $ 8,269 $ 8,682 $ 9,116 $ 9,572 $ 10,051 $ 10,553 $ 11,081 $ 11,635 $ 12,217 $ 12,828 $ 119,378 500 525 551 579 608 638 670 704 739 776 814 855 7,959 475 499 524 550 577 606 637 668 702 737 774 812 7,561 1,500 1,575 1,654 1,736 1,823 1,914 2,010 2,111 2,216 2,327 2,443 2,566 23,876 250 263 276 289 304 319 335 352 369 388 407 428 3,979 100 105 110 116 122 128 134 141 148 155 163 171 1,592 200 210 221 232 243 255 268 281 295 310 326 342 3,183 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - $ 10,525 $ 11,051 $ 11,604 $ 12,184 $ 12,793 $ 13,433 $ 14,105 $ 14,810 $ 15,550 $ 16,328 $ 17,144 $ 18,001 $ 167,528 $ 24,475 $ 25,699 $ 26,984 $ 28,333 $ 29,750 $ 31,237 $ 32,799 $ 34,439 $ 36,161 $ 37,969 $ 39,867 $ 41,861 $ 389,572 (100) (105) (110) (116) (122) (128) (134) (141) (148) (155) (163) (171) (1,592) $ 24,375 $ 25,594 $ 26,873 $ 28,217 $ 29,628 $ 31,109 $ 32,665 $ 34,298 $ 36,013 $ 37,814 $ 39,704 $ 41,690 $ 387,980 750 788 827 868 912 957 1,005 1,055 1,108 1,164 1,222 1,283 11,938 $ 23,625 $ 24,806 $ 26,047 $ 27,349 $ 28,716 $ 30,152 $ 31,660 $ 33,243 $ 34,905 $ 36,650 $ 38,483 $ 40,407 $ 376,042

Profit/Loss Statement

QuickBooks Income/Profit & Loss Statement

What is the Difference Between Cash & Accrual Accounting? Cash Basis: Revenues are reported on the income statement when received from customers Expenses are reported on the income statement when cash is paid Accrual Basis: Revenues are reported on the income statement when earned which often occurs before cash is received Expenses are reported on the income statement when they occur which is often in a period different from when they are paid Accrual basis of accounting provides a better picture of a company s financial position.

Cash Flow Statement Beginning Cash Balance Plus Cash Inflows Minus Cash Outflows Equals Ending Cash Balance

Craig's Design and Landscaping Services Statement of Cash Flows January 1 - May 4, 2014 OPERATING ACTIVITIES Net Income 1,551.21 Adjustments to reconcile Net Income to Net Cash provided by operations: Accounts Receivable (A/R) -4,879.77 Inventory Asset -596.25 Accounts Payable (A/P) 1,302.67 Mastercard 157.72 Arizona Dept. of Revenue Payable 0.00 Board of Equalization Payable 360.44 Loan Payable 4,000.00 Net cash provided by operating activities $1,896.02 INVESTING ACTIVITIES Truck:Original Cost -13,495.00 Net cash provided by investing activities $ -13,495.00 FINANCING ACTIVITIES Notes Payable 25,000.00 Opening Balance Equity -14,337.50 Net cash provided by financing activities $10,662.50 Net cash increase for period $ -936.48 Cash at beginning of period 5,000.00 Cash at end of period $4,063.52

Chart of Accounts The Starting Point End result of bookkeeping & accounting is a set of financial statements but the starting point is the chart of accounts. List of all accounts you use to track money in your business. Tool for tracking your company s finances at a relatively high level. Helps you produce financial statements and prepare your business tax returns.

Chart of Accounts Index of Accounts in the General Ledger 1000 Assets 2000 Liabilities 3000 Equity 4000 Revenue 5000 Costs of Goods Sold (COGS) 6000 Expenses Accounts can be broken down in more detail using subaccounts.

Sample Chart of Accounts Balance Sheet

Sample Chart of Accounts Income/Profit & Loss Statement

Excel Spreadsheet Example Formulas Included 14-Jan 14-Feb 14-Mar 14-Apr 14-May 14-Jun 14-Jul 14-Aug 14-Sep 14-Oct 14-Nov 14-Dec Total Revenue 4000 Youth Workshops 0 4100 Training 0 Total Revenue 0 0 0 0 0 0 0 0 0 0 0 0 0 Expenses 5000 Mileage 0 5100 Printing 0 5200 Marketing 0 5300 Supplies 0 5400 Misc 0 Total Expenses 0 0 0 0 0 0 0 0 0 0 0 0 0 Net Income 0 0 0 0 0 0 0 0 0 0 0 0 0 In Kind

Benefits to Using Accounting Software Customized Reports Budget Comparisons Historic Reports Invoicing Check Writing Bank Reconciliation

Craig's Design and Landscaping Services Profit and Loss January 1 - May 4, 2014 l Jan 1 - May 4, 2014 Income Design income 2,250.00 Discounts given -89.50 Jan 1 - May 4, 2013 (PY) Landscaping Services 1,287.50 Job Materials Fountains and Gard en Lighting 2,246.50 Plants and Soil 2,220.72 Sprinklers and Drip Systems 138.00 Total Job Materials 4,605.22 0.00 Labor Installation 250.00 Maintenance and Re pair 50.00 Total Labor 300.00 0.00 Total Landscaping Servi ces 6,192.72 0.00 Pest Control Services 40.00 Sales of Product Incom e 912.75 Services 503.55 Total Income $9,809.52 $0.00 Cost of Goods Sold Cost of Goods Sold 405.00 Total Cost of Goods Sold $405.00 $0.00 Gross Profit $9,404.52 $0.00

Budget vs. Actuals Report Budget vs. Actuals Cash Basis Sample Reports 123 Main Street Hometown, MA 9999 101 Beacon: 2013 Budget 3/1/2013 to 3/31/2013 Total Annual (1/1/2013 to 3/31/2013) Account Actual Budget $ Over Budget % of Budget Actual Budget $ Over Budget % of Budget Income Application Fee Income $30.00 $42.00 ($12.00) 71.43% $90.00 $500.00 ($410.00) 18.00% Late Fee Income $15.00 $29.00 ($14.00) 51.72% $45.00 $350.00 ($305.00) 12.86% Laundry Income $47.00 $50.00 ($3.00) 94.00% $141.00 $600.00 ($459.00) 23.50% Parking Income $100.00 $100.00 $0.00 100.00% $300.00 $1,200.00 ($900.00) 25.00% Rent Income $1,250.00 $1,250.00 $0.00 100.00% $3,750.00 $15,000.00 ($11,250.00) 25.00% Total Income $1,442.00 $1,471.00 ($29.00) 98.03% $4,326.00 $17,650.00 ($13,324.00) 24.51% Expenses Management Fees $95.00 $95.00 $0.00 100.00% $285.00 $1,140.00 ($855.00) 25.00% Other Interest Expense $100.00 $92.00 $8.00 108.70% $300.00 $1,100.00 ($800.00) 27.27% Postage and Delivery $3.00 $4.00 ($1.00) 75.00% $9.00 $45.00 ($36.00) 20.00% Repairs Repairs - Other $75.00 $29.00 $46.00 258.62% $225.00 $350.00 ($125.00) 64.29% Total for Repairs $75.00 $29.00 $46.00 258.62% $225.00 $350.00 ($125.00) 64.29% Total Expenses $273.00 $220.00 $53.00 124.09% $819.00 $2,635.00 ($1,816.00) 31.08% Net Operating Income $1,169.00 $1,251.00 ($82.00) 93.45% $3,507.00 $15,015.00 ($11,508.00) 23.36% Net Income $1,169.00 $1,251.00 ($82.00) 93.45% $3,507.00 $15,015.00 ($11,508.00) 23.36% Generated 11/27/2012 12:22 PM Page 1 of 1

Practice Balance Sheet Your Balance Sheet Example Company Balance Sheet December 31, 20XX Assets Liabilities Account # Account Title Account # Account Title Retained Earnings/Equity Account # Account Title

Practice Income/Profit & Loss Statement Company Name Income Statement For the Year Ending <date> Account # Revenue Revenue Title Account # Operating Expenses Expense Title

[Your Company Name] Projections For the Year Ended [Mmmm Dd, 200X] Jan. Feb. Mar. Apr. May Jun Jul Aug Sep Oct Revenue: Gross Sales (Note 1) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Less: Sales Returns and Allowances $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Net Sales $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Cost of Goods Sold: Beginning Inventory $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Add: Purchases (Note 2) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Less: Ending Inventory $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Cost of Goods Sold $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Gross Profit (Loss) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Expenses:( Note 3) Advertising $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Amortization (Note 4) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Bad Debts $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Bank Charges $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Charitable Contributions $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Commissions $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Contract Labor (Note 5) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Credit Card Fees $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Delivery Expenses $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Depreciation (Note 6) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Dues and Subscriptions $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Insurance $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Interest (Include in loan payments) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Maintenance $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Miscellaneous $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Office Expenses $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Operating Supplies $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Payroll Taxes $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Permits and Licenses $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Postage $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Professional Fees (Note 7) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Property Taxes $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Rent $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Repairs $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Telephone $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Travel $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Utilities $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Vehicle Expenses $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Wages (Note 8) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Total Expenses $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Net Operating Income $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Loans: Mortgage Payments $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Term Note Payments $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Line of Credit Payments $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Total Loan Payments $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Other Income: Gain (Loss) on Sale of Assets $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Interest Income $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Total Other Income $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Net Disposable Income (Loss) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Thank You