13 Small Business Accounting: Projecting and  Evaluating Performance McGraw-Hill/Irwin  Copyright © 2009 by The McGraw-Hil...
<ul><li>Why Accounting Matters </li></ul><ul><li>Proves what your business did financially </li></ul><ul><li>Shows how muc...
<ul><li>All of the following are types of accounting except: </li></ul><ul><li>a) Financial accounting </li></ul><ul><li>b...
<ul><li>Three types of accounting : </li></ul><ul><ul><li>Managerial accounting : used by managers for planning and contro...
<ul><li>Basic Accounting Concepts </li></ul><ul><li>Business entity concept : a business has an existence separate from th...
Basic Accounting Concepts Cont. <ul><li>Assets : things you own </li></ul><ul><li>Liabilities:  things you owe </li></ul><...
<ul><li>What is a cost? What is an expense? </li></ul><ul><ul><li>Costs : real changes in what you own </li></ul></ul><ul>...
<ul><li>Information usefulness : must be accurate and relevant </li></ul><ul><ul><li>Only  two reasons  to do accounting: ...
<ul><li>Computerized accounting : most commonly used (QuickBooks, Peachtree) </li></ul><ul><ul><li>Systems should easily a...
<ul><li>Which Accounting Software is Best for You? </li></ul><ul><li>Two main types of accounting software: </li></ul><ul>...
<ul><li>Setting Up an Accounting System </li></ul><ul><li>Accounting functions : </li></ul><ul><ul><li>Accounts payable </...
Accounting System <ul><li>Logical system of recording transactions of your business </li></ul><ul><li>Think about this: if...
<ul><li>Financial Reports </li></ul><ul><li>Five common financial statements : </li></ul><ul><ul><li>Income statement </li...
<ul><li>Income statement : primary source of information about a business’ profitability </li></ul><ul><ul><li>Revenues – ...
<ul><li>Balance sheet : “Statement of Financial Position” </li></ul><ul><ul><li>Snapshot  of financial holdings and liabil...
<ul><li>Balance sheet : cont. </li></ul><ul><ul><li>Limitations : </li></ul></ul><ul><ul><ul><li>All values listed are  hi...
<ul><li>Cash flow statement : sources and uses of cash by the business </li></ul><ul><ul><li>Cash flows from  operating ac...
<ul><li>Building a Financial Budget </li></ul><ul><li>Business budgeting is one of the most powerful financial tools avail...
<ul><li>Financing activities : actions taken by management to finance the operations of the business </li></ul><ul><ul><li...
<ul><li>Financial accounting  can be a highly valuable aid in decision making </li></ul><ul><li>Reporting to outsiders </l...
<ul><li>Managerial accounting  techniques will make you a better small business manager </li></ul><ul><li>More  accurate  ...
<ul><li>Cost-Volume-Profit analysis:  technique which looks at the fixed and variable costs of a business to arrive at a n...
<ul><li>The point at which total costs equal total sales is called the … </li></ul><ul><li>a) Breakeven Point </li></ul><u...
<ul><li>Business Plan and the Budget </li></ul><ul><li>Business plan : specifies the amounts and types of inputs required ...
<ul><li>Planning / budgeting : process through which strategy is mapped into a series of tactical and operational actions ...
<ul><li>Sales budget : projected future level of sales in units multiplied by the sales price per unit </li></ul>Chapter 1...
<ul><li>Purchases budget : number of units that are expected to be acquired during the budget period </li></ul>Chapter 13 ...
<ul><li>Cost of Goods Sold Budget :  predicted cost of product actually sold during accounting period </li></ul><ul><li>La...
<ul><li>Budgeted income statement : budgets that have been completed to this point are combined into pro forma financial s...
<ul><li>Completing a comprehensive budget : </li></ul><ul><ul><li>Final processes  to be accomplished to produce a complet...
<ul><li>Controlling :  </li></ul><ul><ul><li>Managerial accounting provides information that allows managers to determine ...
<ul><li>Decision Making </li></ul><ul><li>To make good decisions, you need : </li></ul><ul><ul><li>Good information </li><...
<ul><li>Managerial accounting  is both a source of information and a methodology to reduce the complexity of the informati...
Tracie’s cheat sheet for accounting – format of BALANCE SHEET <ul><li>I. Assets  (things you own) Ex. cash, receivables, e...
Tracie’s cheat sheet cont. FORMAT OF BALANCE SHEET <ul><li>II.  Liabilities  (things you owe) </li></ul><ul><ul><li>A.  Cu...
Tracie’s cheat sheet – format of INCOME STATEMENT <ul><li>I.  Income  – either billings or collection of income </li></ul>...
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  • Answer: c
  • There are some basic concepts every business owner needs to understand. First: You and the company are not the same thing. All company money is not your money. It is important to have a life away from the company. The company can go on without you. The going concern means the company is expected to go on in the future. It is not expected to close at the end of the week. Thus we need to plan for the future. And the most basic accounting equation: Assets minus liabilities equals the owner’s equity.
  • When we ask what a can of soda costs it is typically 55 cents. But in reality there are other costs associated including gas to get to the store to buy the soda and the time you spent. For our purposes here, costs are the total change in what you own that takes place during an exchange. An expense is what you put in the books or records to indicate you have used goods or services. It may be a fee to an accountant for doing the taxes. It may be use of parts to in manufacturing. Managerial accounting records the uses of good and services for planning and purchasing.
  • Any information used in accounting must be accurate meaning correct and up-to-date. It must also be relevant- pertain to the situation at hand.
  • For those of us who do not enjoy accounting there is simple software which can help. You may want to check with your accountant and see which software is compatible with his or her system.
  • Which Accounting Software is Best for You? Two main types of accounting software: industry specific and generic Consider the following for choosing a package: The size of your business The industry you&apos;re in The components you need Available support Financial resources Professional recommendations Ease of use
  • Accounting software can be very useful for a variety of reasons. It can help you track sales, predict trends, plan purchasing, and notify you when it is time to reorder. It can help track employee times, time-off, and calculate employee taxes and payroll.
  • Many reports can be generated using software but in this case less may be more. Focus on five key reports- each of which are discussed in turn.
  • The difficulty with an income statement is in deciding when to recognize a revenue. With a cash sale, you recognize it immediately. But if credit is extended for a sale in December 2006 and payment is made on the account in January 2007, then when was the revenue earned?
  • A balance sheet is like taking a financial picture. Your balance sheet tomorrow will be different from the one produced last week. Current assets and liabilities are short term- generally under 12 months. Long-term is considered over one year in the United States.
  • A cash flow statement is very useful in small business because cash is a major issue. Operating activities are the daily activities required for running the company. These include sales, shipping, payroll, etc… Cash flows from investing may be minimal for a new company as there is not excess money to invest. Financing activities are covered on the next slide.
  • Building a Financial Budget Business budgeting is one of the most powerful financial tools available Most effective financial budget includes both a short-range month-to-month plan for at least a calendar year and a quarter-to-quarter long-range plan you use for financial statement reporting It is important to budget both the income statement and balance sheet You will have to make reasonable assumptions about your business in establishing your budget You will need to prepare the income statement budgets first, then balance sheet, then cash flow
  • There may be many outsiders requiring reports especially if other people’s money was used. Granting agencies, banks, investors, and partners all want to see how their money is being spent.
  • Answer: a
  • The business plan sets goals and methods for achieving them. The budget outlines the amount of money need to perform these action and reach these goals. The master budget is comprised of the smaller budgets in several areas.
  • The budget is a very useful tool to keep owners on track, however, few use it on a consistent basis. Budgeting for expenses such as marketing can help keep you on track to your goal, but when a business is very new, it may be difficult to estimate what it will take to achieve the desired results in the beginning.
  • In the direct labor budget, you must assume labor can easily be varied. Reality will tell you a 35 hour employee works 35 hours. However, overtime can be requested if necessary. Additionally, employees can be moved to other tasks if not necessarily needed in their normal position. Employee flexibility is key for a small business. Also, by budgeting labor, the owner can determine whether employees are working up to their potential.
  • As noted before, the master budget is made up of a series of smaller budgets. The master budget is a key component in the planning process.
  • Controlling is a very necessary step in a small business. Accounting information and reports can be used to determine where variances are occurring. This information leads into a investigation of why the variances occur, and how to fix the situation. The more carefully and frequently information is evaluated, the better control over the company.
  • Good information is timely, accurate, and complete. However, a semi-truck load of information is not helpful. Thus, reasonable ways of condensing information to a useable format or report are helpful. Additionally, when deciding between several options, accounting information can give you a factual basis on which to make your comparisons.
  • Chap013bus230

    1. 1. 13 Small Business Accounting: Projecting and Evaluating Performance McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
    2. 2. <ul><li>Why Accounting Matters </li></ul><ul><li>Proves what your business did financially </li></ul><ul><li>Shows how much your business is worth </li></ul><ul><li>Banks, creditors, development agencies, and investors require it </li></ul><ul><li>Provides easy-to-understand plans for business operations </li></ul><ul><li>You can’t know how your business is doing without it </li></ul>Chapter 13 13-
    3. 3. <ul><li>All of the following are types of accounting except: </li></ul><ul><li>a) Financial accounting </li></ul><ul><li>b) Tax accounting </li></ul><ul><li>c) Managerial accounting </li></ul>Chapter 13 Question 13-
    4. 4. <ul><li>Three types of accounting : </li></ul><ul><ul><li>Managerial accounting : used by managers for planning and control </li></ul></ul><ul><ul><li>Tax accounting : used for calculating and reporting taxes </li></ul></ul><ul><ul><li>Financial accounting : used by banks and outside investors </li></ul></ul>Chapter 13 13-
    5. 5. <ul><li>Basic Accounting Concepts </li></ul><ul><li>Business entity concept : a business has an existence separate from that of its owners </li></ul><ul><li>Going concern : business is expected to continue in existence for the foreseeable future </li></ul><ul><li>Accounting equation : assets = liabilities + owner’s equity </li></ul>Chapter 13 13-
    6. 6. Basic Accounting Concepts Cont. <ul><li>Assets : things you own </li></ul><ul><li>Liabilities: things you owe </li></ul><ul><li>Equity : running total of profits/losses of bus, less withdrawals, plus contributions </li></ul><ul><li>Income - revenues from sales </li></ul><ul><li>Expenses- items paid out to operate </li></ul>
    7. 7. <ul><li>What is a cost? What is an expense? </li></ul><ul><ul><li>Costs : real changes in what you own </li></ul></ul><ul><ul><li>Expenses : entries made in your accounting system to record your use of goods and services </li></ul></ul><ul><ul><li>Managerial accounting is focused on predicting the future, so it uses expenses only for budgeting and planning purpose </li></ul></ul>Chapter 13 13-
    8. 8. <ul><li>Information usefulness : must be accurate and relevant </li></ul><ul><ul><li>Only two reasons to do accounting: </li></ul></ul><ul><ul><ul><li>To produce information that is useful to you for managing your business </li></ul></ul></ul><ul><ul><ul><li>To meet legal or contractual requirements </li></ul></ul></ul>Chapter 13 13-
    9. 9. <ul><li>Computerized accounting : most commonly used (QuickBooks, Peachtree) </li></ul><ul><ul><li>Systems should easily accomplish: </li></ul></ul><ul><ul><ul><li>Easy-to-understand user interface </li></ul></ul></ul><ul><ul><ul><li>Context-sensitive help function </li></ul></ul></ul><ul><ul><ul><li>Income statements </li></ul></ul></ul><ul><ul><ul><li>Classified balance sheet </li></ul></ul></ul><ul><ul><ul><li>Development of a cash budget </li></ul></ul></ul><ul><ul><ul><li>Produce financial statements </li></ul></ul></ul>Chapter 13 13-
    10. 10. <ul><li>Which Accounting Software is Best for You? </li></ul><ul><li>Two main types of accounting software: </li></ul><ul><ul><li>industry specific and generic </li></ul></ul><ul><li>Consider the following for choosing a package: </li></ul><ul><ul><li>The size of your business </li></ul></ul><ul><ul><li>The industry you're in </li></ul></ul><ul><ul><li>The components you need </li></ul></ul><ul><ul><li>Available support </li></ul></ul><ul><ul><li>Financial resources </li></ul></ul><ul><ul><li>Professional recommendations </li></ul></ul><ul><ul><li>Ease of use </li></ul></ul>Chapter 13 Example <ul><ul><li>http://www.entrepreneur.com/money/moneymanagement/financialmanagementcolumnistpamnewman/article166216.html </li></ul></ul>13-
    11. 11. <ul><li>Setting Up an Accounting System </li></ul><ul><li>Accounting functions : </li></ul><ul><ul><li>Accounts payable </li></ul></ul><ul><li>Payroll </li></ul><ul><ul><li>Fixed asset </li></ul></ul><ul><ul><li>Inventory </li></ul></ul><ul><ul><li>Credit card sales </li></ul></ul>Chapter 13 <ul><ul><li>Accounts receivable </li></ul></ul><ul><ul><li>Insurance register </li></ul></ul><ul><ul><li>Investments </li></ul></ul><ul><ul><li>Leasehold records </li></ul></ul>13-
    12. 12. Accounting System <ul><li>Logical system of recording transactions of your business </li></ul><ul><li>Think about this: if you record invoices, deposits, bills, and expenses paid, haven’t you recorded most of what is happening with your business. </li></ul>
    13. 13. <ul><li>Financial Reports </li></ul><ul><li>Five common financial statements : </li></ul><ul><ul><li>Income statement </li></ul></ul><ul><ul><li>Statement of retained earnings </li></ul></ul><ul><ul><li>Statement of owner’s equity </li></ul></ul><ul><ul><li>Balance sheet </li></ul></ul><ul><ul><li>Cash flow statement </li></ul></ul><ul><ul><ul><li>Important thing is that the information flows all the way from the income statement to the balance sheet </li></ul></ul></ul>Chapter 13 13-
    14. 14. <ul><li>Income statement : primary source of information about a business’ profitability </li></ul><ul><ul><li>Revenues – Expenses = Net income </li></ul></ul><ul><ul><li>Difficulties in understanding the income statement </li></ul></ul><ul><ul><ul><li>Disagreements about what exactly should be reported as revenue </li></ul></ul></ul><ul><ul><ul><li>Disputes over when to recognize revenues </li></ul></ul></ul><ul><ul><li>Most small business do not have problems with these; sales are cash, or the same as cash </li></ul></ul>Chapter 13 13-
    15. 15. <ul><li>Balance sheet : “Statement of Financial Position” </li></ul><ul><ul><li>Snapshot of financial holdings and liabilities at the close of business on a specified date </li></ul></ul><ul><ul><li>Minimum detail is to report assets and liabilities in two categories: Current and Long-term </li></ul></ul><ul><ul><li>Used to determine the liquidity, financial flexibility, and financial strength of the business </li></ul></ul>Chapter 13 13-
    16. 16. <ul><li>Balance sheet : cont. </li></ul><ul><ul><li>Limitations : </li></ul></ul><ul><ul><ul><li>All values listed are historical values </li></ul></ul></ul><ul><ul><ul><ul><li>Value recorded in the accounting records can be widely different from the asset’s current value </li></ul></ul></ul></ul><ul><ul><ul><li>Balance sheet might not completely reflect the business </li></ul></ul></ul><ul><ul><ul><li>Certain assets and liabilities are omitted from the balance sheet </li></ul></ul></ul>Chapter 13 13-
    17. 17. <ul><li>Cash flow statement : sources and uses of cash by the business </li></ul><ul><ul><li>Cash flows from operating activities </li></ul></ul><ul><ul><li>Cash flows from investing activities </li></ul></ul><ul><ul><li>Cash flows from financing activities </li></ul></ul><ul><ul><ul><li>Net effect of foreign exchange rates </li></ul></ul></ul><ul><ul><ul><li>Net change in cash balance during the period </li></ul></ul></ul><ul><ul><ul><li>Non-cash investing and financing activities </li></ul></ul></ul>Chapter 13 13-
    18. 18. <ul><li>Building a Financial Budget </li></ul><ul><li>Business budgeting is one of the most powerful financial tools available </li></ul><ul><li>Most effective financial budget includes both a short-range month-to-month plan for at least a calendar year and a quarter-to-quarter long-range plan you use for financial statement reporting </li></ul><ul><li>It is important to budget both the income statement and balance sheet </li></ul>Chapter 13 Example http://www.entrepreneur.com/money/moneymanagement/financialanalysis/article21942.html 13-
    19. 19. <ul><li>Financing activities : actions taken by management to finance the operations of the business </li></ul><ul><ul><li>Net effect of foreign exchange rates : rates often vary rapidly </li></ul></ul><ul><ul><li>Net change in cash balance : reconciles the net increase and decrease with the beginning balance </li></ul></ul><ul><ul><li>Non-cash investing and financing : exchange of value other than cash takes place </li></ul></ul>Chapter 13 13-
    20. 20. <ul><li>Financial accounting can be a highly valuable aid in decision making </li></ul><ul><li>Reporting to outsiders </li></ul><ul><li>Record keeping </li></ul><ul><li>Taxation </li></ul><ul><li>Control of receivables </li></ul><ul><li>Analysis of business operations </li></ul>Chapter 13 13-
    21. 21. <ul><li>Managerial accounting techniques will make you a better small business manager </li></ul><ul><li>More accurate at forecasting profits, planning operations, and conserving scarce resources </li></ul><ul><li>Managerial functions : </li></ul><ul><ul><li>Planning, organizing, staffing, directing, and controlling </li></ul></ul>Chapter 13 13-
    22. 22. <ul><li>Cost-Volume-Profit analysis: technique which looks at the fixed and variable costs of a business to arrive at a number of unit sales (volume) to maximize profits </li></ul><ul><li>Variable Costs: costs that change with each unit produced </li></ul><ul><ul><li>Raw materials </li></ul></ul><ul><li>Fixed Costs : costs that remain constant regardless of quantity of output </li></ul><ul><ul><li>rent </li></ul></ul>Chapter 13 13-
    23. 23. <ul><li>The point at which total costs equal total sales is called the … </li></ul><ul><li>a) Breakeven Point </li></ul><ul><li>b) Equalization Point </li></ul><ul><li>c) Neutral Point </li></ul><ul><li>d) Variable Point </li></ul>Chapter 13 Question 13-
    24. 24. <ul><li>Business Plan and the Budget </li></ul><ul><li>Business plan : specifies the amounts and types of inputs required to achieve a set of desired outcomes </li></ul><ul><li>Based on assumptions : </li></ul><ul><ul><li>How risks can be controlled </li></ul></ul><ul><ul><li>What opportunities can be taken </li></ul></ul><ul><li>Budgets have the advantage of being comprised of a series of small schedules </li></ul>Chapter 13 13-
    25. 25. <ul><li>Planning / budgeting : process through which strategy is mapped into a series of tactical and operational actions </li></ul><ul><ul><li>Budget becomes a standard against which performance can be measured </li></ul></ul><ul><ul><li>Basis for controlling activities and the use of resources </li></ul></ul><ul><ul><li>Few small business owners consistently budget </li></ul></ul>Chapter 13 13-
    26. 26. <ul><li>Sales budget : projected future level of sales in units multiplied by the sales price per unit </li></ul>Chapter 13 13-
    27. 27. <ul><li>Purchases budget : number of units that are expected to be acquired during the budget period </li></ul>Chapter 13 13-
    28. 28. <ul><li>Cost of Goods Sold Budget : predicted cost of product actually sold during accounting period </li></ul><ul><li>Labor budget : amount and cost of labor needed to meet required production </li></ul><ul><ul><li>Assume that labor can easily be increased or decreased </li></ul></ul><ul><ul><li>Can easily be modeled as a fixed cost </li></ul></ul>Chapter 13 13-
    29. 29. <ul><li>Budgeted income statement : budgets that have been completed to this point are combined into pro forma financial statements </li></ul><ul><ul><li>Common to create the statement in only a fiscal year format </li></ul></ul>Chapter 13 13-
    30. 30. <ul><li>Completing a comprehensive budget : </li></ul><ul><ul><li>Final processes to be accomplished to produce a complete master budget </li></ul></ul><ul><ul><ul><li>Budgeted cash receipts </li></ul></ul></ul><ul><ul><ul><li>Budgeted cash payments </li></ul></ul></ul><ul><ul><ul><li>Cash budget </li></ul></ul></ul><ul><ul><ul><li>From these statements, prepare: </li></ul></ul></ul><ul><ul><ul><ul><li>Pro Forma projected balance sheet </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Pro Forma projected cash flow statement </li></ul></ul></ul></ul>Chapter 13 13-
    31. 31. <ul><li>Controlling : </li></ul><ul><ul><li>Managerial accounting provides information that allows managers to determine how well the business is doing in attaining its goals </li></ul></ul><ul><ul><li>Variances should be evaluated to determine the significance; they occur due to one of these events </li></ul></ul><ul><ul><ul><li>Prices are different from what was estimated </li></ul></ul></ul><ul><ul><ul><li>Quantities are different from what was estimated </li></ul></ul></ul>Chapter 13 13-
    32. 32. <ul><li>Decision Making </li></ul><ul><li>To make good decisions, you need : </li></ul><ul><ul><li>Good information </li></ul></ul><ul><ul><li>Efficient ways to condense information </li></ul></ul><ul><ul><li>Methods to help compare alternatives </li></ul></ul>Chapter 13 13-
    33. 33. <ul><li>Managerial accounting is both a source of information and a methodology to reduce the complexity of the information </li></ul><ul><li>Accounting is useful for: </li></ul><ul><ul><li>Managers of small businesses </li></ul></ul><ul><ul><li>Record keeping </li></ul></ul><ul><ul><li>Reporting to absentee owners </li></ul></ul><ul><ul><li>Substantiating assertions made to regulators and taxing agencies </li></ul></ul>Chapter 13 13-
    34. 34. Tracie’s cheat sheet for accounting – format of BALANCE SHEET <ul><li>I. Assets (things you own) Ex. cash, receivables, equipment </li></ul><ul><li>--A. Current assets – either cash or something easily converted to cash </li></ul><ul><ul><li>B. Fixed: Buildings, equipment, less accum depredication </li></ul></ul><ul><ul><li>C. Other Assets: deposits on power, utilities, etc. </li></ul></ul>
    35. 35. Tracie’s cheat sheet cont. FORMAT OF BALANCE SHEET <ul><li>II. Liabilities (things you owe) </li></ul><ul><ul><li>A. Current liabilities – things that will be paid short term, generally a year Ex. Payroll taxes, sales tax, accounts payable </li></ul></ul><ul><ul><li>B. Long term – notes payable </li></ul></ul><ul><ul><li>III. Equity – retained earnings, capital contributed, dividends taken </li></ul></ul>
    36. 36. Tracie’s cheat sheet – format of INCOME STATEMENT <ul><li>I. Income – either billings or collection of income </li></ul><ul><li>II. Expenses </li></ul><ul><li>A. Cost of goods sold – those directly related to the production of income, they fluctuate with income levels (variable costs) </li></ul><ul><ul><ul><li>B. Selling and Administrative – indirectly related to sales, fixed in nature, overhead items </li></ul></ul></ul>

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