Accounting Unplugged

This Post is a listing of which General Ledger Accounts are used by which Financial Statement.

Trial Balance: All Accounts

Trial Balance: Income Statement Accounts Only

The Income Statement uses the Accounts for Accounting Types:

• Income
• Costs (of goods sold)
• Expenses
• Other Income and Expenses

Trial Balance: Balance Sheet Accounts Only

The Balance Sheet uses Accounts for Accounting Types:

• Assets
• Liabilities
• Owners (Stockholders) Equity

These example accounts do not have beginning balances and no equity contributions.  If there had been equity contributions the equity accounts would also be included in this section of the trial balance.

Statement of Cash Flows: This Statement documents both the change in Cash Position and the change in Financial Position.  The Statement of Cash Flows is essentially a Yearly Balance Sheet with an emphasis on Cash.

Notice that debits and credits are presented in the way that they contribute to cash.  This report might take some adjusting to as the +/- of all debit and credit accounts except Cash are reversed.

© 2008 – 2010 Erin Lawlor

Next up: >> Financials – Trial Balance

<< General Ledger

**disclaimer:  All information posted on this blog is from my own experience and training.  The guidelines I present are general and in my experience, standard practice.  I do not write with authority from any Accounting Standards Boards.

When it comes to accounting for startups, The Cash Flow Statement is extremly important (Statement of Cash Flows), it provides an overview of the way Funds move through an Entity, how they impact Overall Value and eventually reconcile with Cash Balances and determine Net Cash Flow in any given year.

The Cash Flow Statement is essentially the same as a yearly Balance Sheet – it’s just organized a little bit differently and is more summarized. The Balance Sheet accumulates its amounts from the beginning, the Cash Flow Statement only accumulates its balances over one business year. Since the Balance Sheet Accounts carry their balances from year to year, the Cash Flow Statement presents its amounts as either Increases or Decreases to groups of Accounts throughout the year, and this is how investment in the stock works. The American stock market is growing rapidly and is bringing more investors and traders from around the world especially in Saudi, UAE, Kuwait, Qatar and Oman. aForexTrust explains how to buy US stocks and trade on them.

Balance Sheet:

The Balance Sheet uses the three categories: Assets, Liabilities and Equity.  Notice that Cash is listed first and Net Income is listed last.

• Assets
  • Current Assets (including Cash)
  • Fixed Assets (Net of Accumulated Depreciation)
• Liabilities
  • Current Liabilities
  • Long Term Liabilities
• Equity
  • Owners’ Capital (Contributions, Stock and Paid in Capital)
  • Retained Earnings
  • Net Income

Cash Flow Statement:

You’ve heard the term “Bottom Line”  well, that term refers to the end result – the numbers at the bottom of the page.  Since the end result of the Cash Flow Statement is Net Cash, it is at the bottom of the report and everything else on the report funnels down to the bottom to come to the final Net Cash number.

The Cash Flow Statement uses the three categories: Operating, Investing and Financing.  Notice that Net Income is listed first and Cash is listed last.  Opposite from the Balance Sheet.

• Operating Activities
  • Net Income
  • + Depreciation Expense (+ Increase and -Decrease in Accumulated Depreciation)
  • + Increases in Current Liabilities
  • + Decreases in Current Assets
  • – Increases in Current Assets
  • – Decreases in Current Liabilities
• Investing Activities
  • + Decreases in Long Term/Fixed Assets (Independent of Accumulated Depreciation)
  • – Increases in Long Term/Fixed Assets (Independent of Accumulated Depreciation)
• Financing Activities
  • + Increases in Long Term Liabilities/Debt
  • – Decreases in Long Term Liabilities/Debt
  • + Increases in Owners’ Capital
  • – Decreases in Owners’ Capital
  • – Increases in Dividends
• Cash (Beginning Cash Balance – Net Increase/Decrease = Ending Cash Balance)

The net contribution to cash is summarized for each section and then combined to equal Net Cash Flow. Net Cash Flow is then combined with the Beginning Cash Balance to reconcile to the Ending Cash Balance for the year. Net Cash Flow is the difference between the Beginning and Ending Cash Balances.

The Cash Flow Statement is an important indicator of available cash for operations but also of how an entity is generating cash, if it is able to sustain itself and its growth through its operations or if it generated cash through increased debt and equity and/or decreased capital assets, learn more from this blog post explaining some of the Types of Personal Debts and how to solve it.

If you need help in keeping track of your business finances, you can visit morethanaccountants.co.uk/who-we-help/small-business-accountants/.

Statement of Cash Flows (Including Depreciation Entries from Balance Sheet Post)

© 2008 – 2010 Erin Lawlor

Next up: >> Cost of Goods Sold and Inventory

<< Financial Statements – Balance Sheet

**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.

The Revenue Principle of GAAP requires Revenue to be recorded in the period it is Earned regardless of when it is billed or when cash is received.

In some cases, it is simple to determine the timing for Revenues Earned, once ownership of a product is transferred or a service is complete, revenue is considered to have been earned.  But if revenue recognition were delayed until the end of a long term contract, the Matching Principle of tying revenues and their direct costs to each other would be violated.  The solution to this problem is the Percentage of Completion method of Revenue Recognition.

Contract Revenues are tied to Costs, but Billings on Contracts are not always tied to Costs. Sometimes elements of a contract are billed in advance or sometimes they are delayed by mutual agreement (or disagreement). This mismatch between actual billed revenue and earned revenue will require an adjusting entry but since the Percentage of Completion method adjusts billed revenue to reflect earned revenue, billings are posted to revenues and adjusted later to reflect the correct earned revenue amount. (Debit Accounts Receivable, Credit Sales).

Long Term Contracts will have estimates for both sides of a contract, Costs and Revenues.  Calculating Percentage of Completion requires both total actual and total estimated numbers to calculate a percentage so it uses the side where both the actual and estimated numbers can be known, Costs.

• Percent Complete = Actual Costs to Date / Total Estimated Costs

The Percent Complete is then applied to the Total Estimated Revenue to determine Earned Revenue to Date.

• Earned Revenue to Date = Percent Complete * Total Estimated Revenue

Finally, the Earned Revenue to Date is compared to the Billings on Contract to Date.  The difference is either added to or subtracted from the Revenue.

• Total Billings on Contract – Earned Revenue to Date = Over/Under Billed Revenue

**The Over/Under Billed Revenue accounts are Balance Sheet Accounts and they are often called either Billings in Excess of Costs (liability account that reflects over-billings) or Costs in Excess of Billings (asset account that reflects under-billings).

Work In Progress Statement:

A Work in Progress Statement is used to compile the information necessary for the percentage of completion calculations but also to provide crucial information about the total value and progress of work on hand inventory.

So, for Contract A

• Percentage Complete = 30,000 / 40,000 = .75
• Earned Revenue = 50,000 * .75 = 37,500
• Over/Under Billings = 37,500 – 35,000 = 2,500 (Under-Billed)

Entries to record Over/Under Billings:

What if there were prior balances in the Costs and Billings in Excess Accounts?

The amounts from Work in Progress Statement are either Total Estimates or Total Amounts to Date. This means that the over/under amounts are also total to date amounts. Over/Under adjustment entries are made to adjust total numbers to their “To Date” amounts. If there were previous entries, there would also be previous balances in the Costs/Billings in excess accounts. New entries should bring their balances to the new “To Date” amounts.

Assume that the Costs in Excess of Billings account had a previous balance of 1,000 and the Billings in Excess of Costs account had a previous balance of 500. The net prior amount is Costs in Excess of 500 meaning that earned revenue has already been adjusted for that 500 and only requires an additional adjustment of 1,250 – 500 = 750.  Instead of the entries listed above, the entries to adjust Earned Revenue in this case would be.

Notice that I completely removed the previous balances from both the Costs and Billings in Excess Accounts instead of just making net entries to bring them up to the current balance. This creates a good audit trail for future account analysis.

© 2008 – 2010 Erin Lawlor

Next: >> Accounting Journals and Ledgers

<< Cost of Goods Sold and Inventory

**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.

The Balance Sheet is the financial statement that summarizes the value of an entity’s resources and the claims on those resources at any given time. Balance Sheet accounts start accumulating their balances from the beginning of the entity and continue until the end. This contrasts with the Income Statement whose accounts are reset to zero at the end of each fiscal (business) year.

The Accounting Types reported on the Balance Sheet are:

Assets – Assets are items of value that are owned by the business and their value is expected to last beyond the current fiscal (business) year.

Liabilities are essentially debts, they are agreements to delay payments and so, are sources of funds because they provide a way to acquire or pay for goods and services without a direct transfer of cash at the time of the exchange. You can discover this info here.

Equity (Owners Equity) is a source of funds through direct owner investment (stock or owners capital accounts or owner “re-investment” (retained earnings) when some or all of the income from the previous year is retained by the business rather than distributing it to the owners.

The Balance sheet Equity Section refers to Total Equity which is Owners Equity + Net Income. The Net Income portion is easily calculated because since the total debits and total credits of all financial accounts must be equal, and the Balance Sheet and Income Statement split the Accounts between them the benefit of using a paystub generator. The difference between the Balance Sheet Accounts will equal the difference between the Income Statement Accounts – which is Net Income. They understand the importance of foreign investment in the Canadian economy. Their tax plan can help investors make informed decisions about investing outside Canada…and eliminate double taxation.

Since Owners Equity is only part of Total Equity, Net Income can also be calculated using a rewrite of the Accounting Equation:

• From: Assets = Liabilities + Equity
• To: Assets – Liabilities = Total Equity (Owners Equity + Net Income)

Move Owners Equity to the other side of the equation as well and the equation becomes:

• Assets – Liabilities – Owners Equity = Net Income  – or –
• Net Income = Assets – Liabilities – Owners Equity

Balance Sheet Draft:

The Balance Sheet does not contain any of the same accounts as the Income Statement, but it does summarize the Income Statement on one line called “Net Income” that is inserted (without an account #) at the end of the Equity Section of each Balance Sheet. The Net Income entry completes the Accounting Equation for the Balance Sheet: Assets = Liabilities + (Total) Equity (Owners Equity + Net Income)

So, the listing of balance sheet accounts from the Income Statement post gives us a start in creating a Balance Sheet prior to year end closing entries.

The Balance Sheet has a section for each of the elements of the Accounting Equation, Assets, Liabilities and Equity. It also divides Assets and Liabilities into Current and Long Term (or Fixed Asset) sections. The “Current” sections contain accounts for Assets and Liabilities that are expected to convert to cash within one year. To find more tools that can help you, you can visit this review about the best equity release calculator.

Current Liabilities are the claims on Current Assets the information from these Sections provide the information for two important financial ratios that help to determine if the business is able to fulfill its short term obligations.

• Current Ratio = Current Assets/Current Liabilities
  • A Current Ratio of at least 1:1 (or >= 1) indicate that there is at least one dollar of current assets for each dollar of debt.
• Quick Ratio = Current Assets – Inventory/Current Liabilities
  • A Quick Ratio of at least 1:1 indicates that there is at least one dollar of cash or cash equivalent (including accounts receivable) for each dollar of debt.

Balance Sheet Format:

To convert the account listing above to a Balance Sheet format, I’ll add some section headings and a line for the Net Income from the previous Income Statement post.

Assets = Liabilities + Equity. The the first thing I check when I read a Balance Sheet is whether it is “in balance”/the accounting equation is true. Once I know it balances, I can focus on the substance of the report.

Notice that the Net Income entry doesn’t have an account number beside it. Net Income does not have an account, it is the difference between the Balance Sheet Accounts. It is also the difference between the Income Statement Accounts.

Book Values:

Each item on the Balance Sheet is stated at its original value or cost. Since the accounts accumulate their balances from “the beginning of time”, each balance sheet item also stays there at its original value until it is sold, written off or satisfied (debts paid off or equity repurchased).

Items that are listed on the Balance Sheet do lose their value over time so instead of reducing their original account values, contra accounts are used to write down, depreciate or amortize them. Contra Accounts are the same Accounting Type as their counterparts but if their counterpart is a debit account, the contra account is a credit account. The Net Value of the Original Account and the Contra Account together reflects the decrease in book value without losing the historical value. Contra Accounts like Accumulated Depreciation prevent items from “falling off” the Balance Sheet while they are still owned by the entity because when the item’s value eventually depreciates to zero, it is still part of the original account balance.

Depreciation is determined by type of fixed asset. Depreciation methods, classes of assets and examples are listed in IRS Publication 946. Sometimes entities use different depreciation methods for book/tax purposes. If you have questions like “what is business tax?” We recommend asking a tax professional for guidance in making decisions that have tax implications. You have to keep in mind that before the date of annual tax amnesty filing taxes are important you can save time and money.

The purpose of this entry is to demonstrate basic depreciation entries rather than depreciation calculations. I will use straight-line depreciation and assume that the assets were put into service on January 1st. Publication 946 (pg 31) indicates that office equipment is depreciated over 5 years and office furniture is depreciated over 7 years. For the depreciation entry I will add a contra asset account and a depreciation expense account.

Balance Sheet After Closing Entries:

At the end of each year when the Income Statement accounts are reset to zero, the difference between their debit and credit balances (Net Income/(Loss)) is posted to a Balance Sheet Equity account called Retained Earnings (for corporations or Owners’ Capital for other types of organizations). An example of this entry can be found at the end of the Income Statement post.

After the depreciation entry above, expenses were increased and net income was decreased by $496. After the depreciation entry is appended to the closing entries to the Income Statement, our Balance Sheet looks like this. Note the change from Net Income with no account number to Retained Earnings with the account number 3500. The entry to account 3500 is is part of the year end income statement accounts closing entry.

© 2008- 2010 Erin Lawlor

Next up: >> Financial Statements – Statement of Cash Flows

<< Financial Statements – Income Statement

**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards. If you’d like to learn more about these financial statements, I’d suggest attending to financial seminars.

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The Matching Principle requires that revenues and their related costs be matched up and posted into the same accounting period. When Inventory is purchased and before it is sold, there are no revenues to match it to so it cannot be considered a cost until it is sold. If need help from a professional is better to be on the matter and on top of your money and savings, american hartford gold is a family-owned company that helps individuals and families diversify and protect their wealth with precious metals.

For your savings we also recommend using the The Children’s ISA for your kids future. The inventory examples assume that the entity has ownership of products purchased and that they are purchased and manufactured for sale as finished goods how to plan for business finance. There are cases where the entity purchasing materials for and accounting for a project are not the owners of the product even as it is in the process of construction or manufacturing. In these cases, purchases are debited directly to Income Statement Cost accounts. The key concept is ownership.

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The first system I’ll demonstrate is the Periodic System. The Periodic System may work well for companies where changes in sales can be tied closely to changes in inventory purchases. Under this system, as inventory is purchased, it is debited to the Income Statement Account “Purchases” and the Balance Sheet Account “Inventory” is adjusted at the end of the year when the available inventory is counted and valued. At this time, the balances of the Inventory and Purchase Accounts are transferred to Cost of Goods Sold Account and the value of the Ending Inventory is transferred back from Cost of Goods Sold to Ending Inventory.

Entry for purchases throughout the year.

*In the entry above, the credit entry could be cash, I chose Accounts Payable because it will be the most common account used in this situation.

At the end of the year, inventory is counted and valued and adjusting entries are made to the Balance Sheet and Income Statement Accounts.

This entry assumes prior entries and the following account balances at the end of the year: Beginning Inventory of $5,000, Purchases of $60,000 and Ending Inventory of $6,000.

Entry to transfer balances to Cost of Goods Sold and adjust the Inventory Account to equal the ending balance valuation.

When working with accounts like Inventory under the Periodic Inventory system, I prefer to remove the entire account balance and make the adjusting entry equal to the new ending balance. This strategy makes future cpa audits of the account more clear.

Freight-In is considered a direct cost of inventory because all costs that are directly related to the acquisition and preparation for sale of inventory are considered part of its direct cost. Freight-In is not included in the adjusting entries, it is maintained in a separate account. Freight-In is an Income Statement Cost Account.

Companies using the Periodic Inventory System provide more detail for Cost of Goods Sold on the Income Statement and expand the entry to include the Cost of Goods Sold calculation/statement.

The format for the Cost of Goods Sold Statement is:

• + Beginning Inventory
• + Net Purchases (Inventory Purchases – Returns)
• + Freight “In” Charges
• – Ending Inventory
• ————————–
• Cost of Goods Sold

Perpetual Inventory System – Assumes Entity Owns Inventory until Sale:

The next system is understanding paystubs. Using this system, inventory purchases are debited to a Balance Sheet Inventory account rather than an Income Statement Purchase account and they are transferred to the Cost of Goods Sold account at the time of sale.

Under the perpetual system, products that are purchased as finished goods are accounted for in one inventory account but products that will be manufactured use three inventory accounts, raw materials, work in progress and finished goods.

For the purposes of this entry, I will use one Cost of Goods Accounts (5000), three Inventory Accounts (in the 1300 range) and one Revenue Account (4000 – Sales). The Account Numbers are not important to the concept, they are used here to provide easy identification. The important concept is the difference between Cost of Goods which is an Income Statement Item and Inventory which is a Balance Sheet Item.

In the case of retail, where products are purchased as finished goods and then resold, products are owned by the seller until sold. An example of the initial cost entry is:

There are two entries to make when Products (Inventory) are sold:

Record the Sale:

And then transfer the Cost of the products that were sold from Inventory to Cost of Goods:

In the case of Value Added or Manufacturing, all costs related to purchasing materials and preparing them for sale are included in their value. When a company purchases Raw Materials well in advance a Raw Materials Inventory Account is used. In cases where the company is manufacturing or constructing a product for sale but only purchases inventory as it is required, the Raw Materials Inventory Account is skipped and the Purchases are debited directly into the Work in Progress Inventory Account.

Purchase of Raw Materials In Advance:

To Record the purchase of Raw Materials that will be put to immediate use:

Or, to transfer the cost of the Raw Materials that are in the process of Manufacturing to Work in Progress.

To Record Direct Labor:

To Transfer the Cost of the Value Added or Manufactured Goods that are completed to Finished Goods:

* Credit entries are “Source of Funds/Value” entries and for these examples they are either cash – Operating (bank) Account, a delay in cash – Accounts Payable OR they are Transfers of Values. For cash or cash delays, I selected the accounts that would be the most commonly used for each. Payroll is usually posted when it is paid and Purchases are often made on account.

Sales/Revenue Entries

There are two entries to make when Products (Inventory) are sold:

Record the Sale:

And then transfer the Cost of the products that were sold from Inventory to Cost of Goods:

Cost of Goods Sold, Services – No Inventory:

In the case of Services, there is no product for ownership transfer so, an example of the the initial cost entry is simple:

The entry for the sale of services is as simple as the entry for its cost:

Cost of Goods Sold: No Inventory Accounting, Assumes Entity does not Own Inventory:

The Cost entries are simply made directly to the Income Statement Cost Accounts.

The Revenue entries for this Cost of Goods Sold case will be the same as the Revenue Entry above for Services. However, if the manufacturing or construction of the product extends over several accounting periods, there are additional entries that may have to be made to adjust a portion of the Revenue Entry into a either an “Under-Billings” Asset account or an “Over-Billings” Liability account in order to satisfy the Revenue Principle. I will address those adjustments in the next post.

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© 2008 – 2010 Erin Lawlor

Next Up:>> >>Work in Progress Statement and Percent Complete Revenue Adjustments

<< Financial Statements – Statement of Cash Flows

**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.

One of the Principles of GAAP is the Matching Principle.  Matching requires that when you post sales into the system for an accounting period (month), you must also post the costs of the products or services you sold during that period in the same accounting period (month). The Matching Principle essential to Financial Statements, particularly the Income Statement, because it makes them meaningful.

The Income Statement, also called the P&L or Profit and Loss Statement, is a “Current Year” statement, it does not cross years. The Income Statement provides cumulative “To Date” financial data for the current business (Fiscal) year. So, the March Income Statement shows the totals for January, February and March together in one column and the totals for the previous December would not be part of the totals for that column. If you want to give that income column a boost, start by reading about cyrpto investment with the help of the Latest News – Funfair website.

Unlike the Trial Balance, the Income Statement and Balance Sheet each only show a portion of the General Ledger Accounts. The GL Accounts are split between the Income Statement and the Balance Sheet by their Accounting Types. The Income Statement Accounting Types are Revenue, Cost of Goods Sold and Expenses. The Accounts that are not on the Income Statement are on the Balance Sheet.

As its name suggests, the purpose of the Income Statement is to report Income. Income = Revenue – Expenses. It is almost that simple, but there is more to the Income Statement than a simple calculation, click here to learn more calculation options.

The format for the Income Statement is:

The Income Statement uses intermediate steps to reach Net Income. The first of these steps is Gross Margin.  Gross Margin = Revenue – Cost of Goods Sold and represents the amount of revenue that is left after costs to cover operating expenses. Gross Margin is meaningful because it shows the direct relationship between the costs of products or services and their sales.

The Gross Margin % can be compared to industry standards to make sure your pricing and costs are competitive. It is calculated as:

• Gross Margin = Revenue – Cost of Goods Sold
• Gross Margin % = Gross Margin ($) / Revenue

The next intermediate step towards Net Income is Operating Income. Operating Income = Gross Margin – Expenses and is the amount of profit (income) from normal (usual) operations.

The final step in calculating Net Income is to add the amounts for the Accounts categorized as “Other Revenue” and to subtract the amounts for the Accounts categorized as “Other Expenses”. Other Revenues include any “money in” (gain) that is not received from the sale of the usual business products or services, this might be a gain on the sale of an asset like a vehicle. You should have a peek at this web-site if you’re looking for a reputable credit union. Other Expenses include any “money out” (loss or expense) that is not part of the usual expenses or cost of goods sold. Other Expenses might include some interest charges or a loss on the sale of an asset and the use of loans as Some credit companies offer guaranteed loans without a credit check. Genuine lending companies always look at your past credit history before giving approval for a loan, this is why people need to find credit card consolidation services whenever they have a hard time paying off their debt, just so that their credit does no get damaged.

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This Income Statement is produced from the transactions that have been posted in previous posts.  The presence of sales but no costs on this Income Statement indicate that either my entries for the period are incomplete or I’ve violated the matching principle because if I have sales, I must have some associated costs, when looking to learn more about finance experts

Net Income is the amount of revenue that was not spent on operations, it represents the amount of the increase in overall value.  Remember not to confuse the terms Revenue or Income with Cash. The Net Income amount here is $45,600 and if you check the Trial Balance from the previous post, the Checking Account Balance is $44,350.

Let’s look at the Income Statement again in terms of debits and credits.

Remember from the Trial Balance report which shows all accounts and their balances that the total debit amounts were equal to the total credit amounts.  The Income Statement splits the accounts with the Balance Sheet and so the total debits and total credits on each of these statements will not be equal, but the debits and credits of their combined accounts are equal.  So, let’s take a look at the Accounts that are not listed on the Income Statement.

The difference between the balances of the Income Statement Accounts, $45,600, is equal to the difference between the Balance Sheet Account balances.  This listing of the Balance Sheet Accounts shows where the Net Income went.  $47,300 increase in assets – money still due $1,700 = $45,600 = Net Income of $45,600 which is added to the total Net Worth.

The Income Statement Accounts accumulate their balances throughout the fiscal year and at the end of the year, the accounts are reset to zero (closed out) and the difference between their total debits and total credits (Net Income) is transferred to the Balance Sheet. The Balance Sheet account used in the transaction is an Equity account and is either Retained Earnings or Owners Capital depending on the structure of the business.

Closing Entries:
The entry to close out the year for the Income Statement Accounts in our examples is:

**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.

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The difference between high-growth and average-growth firms lies in their marketing and a good ASO Services management. High-growth firms invest more in marketing – both time and dollars – and as a result they are able to achieve extraordinary growth rates. Specifically, they focus on differentiation as their top marketing priority, leverage M&A, build visibility around their subject-matter experts, and strike the right balance between traditional and digital channels.  In short, the marketing decisions you make can dramatically affect the growth and profitability of your firm. Fortunately I learned about customer focus before even starting.

Wouldn’t you like to know what high-growth accounting firms do differently? Are there marketing techniques that are proven to work better than others? And can a business like yours emulate the best performing CPA firms? (Yes, it can.)

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Accounting marketing is evolving from a geographically limited, relationship-driven discipline to a multifaceted, expertise-based strategy that leverages technology and scientific techniques to target specific audiences across a wide area. This new approach can have a major impact on a firm’s reputation, visibility, new client acquisition, services offerings, pricing, client retention and recruiting. The easiest way to start marketing for your business is by hiring this seo agency.

Marketing is often confused with sales (which some people refer to as business development). Sales is the process of understanding a specific prospect’s needs, offering a specific set of services to address them and convincing the prospect to purchase the services. Marketing, on the other hand, is the process of generating awareness for a firm’s services and encouraging qualified prospects to reach out and request more information.

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This is where the Double Entry System starts to Pay Off.  The time element introduced in this post completes the basics of how to organize and operate this system.  From this point forward, you will start to experience nothing but increasing rates of return on your investment of time in learning it.  The next few posts will introduce Financial Statements and how to put them to work for you and will complete the basics.

The General Ledger is more than just another important element in the Accounting System, it is where the goods are.  The General Ledger is the combination of the Chart of Accounts, Financial Transactions, Account Balances and Accounting Periods.  In practice, once the Chart of Accounts has been established, the term “Chart of Accounts” is considered more in terms of a report than as an object.  From this point forward, Accounts from the Chart of Accounts will be called General Ledger Accounts.

The General Ledger adds the essential organizational element of Time (Accounting Periods) to the Accounting System, so in addition to the original three organizational methods of the Chart of Accounts, the General Ledger is organized in four ways.

• 1. Accounting Type
• 2. Order of Liquidity
• 3. Account Number
• 4. Accounting Periods

Accounting Periods are generally date/time intervals of Months, Quarters and Years.  The term Accounting Period can mean any of those in different situations.  For purposes of this discussion, Accounting Periods will refer to Months within a given year.

If the General Ledger is going to organize around accounting periods, then we need to add dates to the data we gather with transactions.  There can be a variety of dates that are relevant to a transaction, the transaction date, the invoice date, the due date, the expiration date etc. but for purposes of this post, the date we’ll focus on is the transaction date. Find and easy late payment of commercial debts calculator online to manage your finances better.

The transaction grid introduced in the previous posts needs to be expanded to 5 columns to accommodate the new data requirements of date and account number.

The Transaction Date is only required to be entered on the first line of a transaction (in a manual ledger) because it is assumed to be (and must be) the same for each entry in a transaction.  In addition to the requirement that total Debits = total Credits for each Transaction, Total Debits must also equal Total Credits for each Accounting Period. This requirement fulfills the original intent of double entry, a balanced view of uses and sources of funds (debits = credits) by Transaction, by Accounting Period and by default, Overall.

Both entries in the transaction post to their Accounts in Accounting Period 9/08.

This is a Comparison Trial Balance Report from the General Ledger and this is where you can take a step back from the details of transactions and see the larger picture.

**This example starts with June because of space limitations here.

The only accounts listed are the two from the transaction example but they demonstrate the ability to compare accounts against themselves and against other accounts from period to period.  Notice that the totals on the bottom line are all zeros, this shows that the books are in balance because total debits (positive amounts on this report) combined with total credits (negative amounts on this report) = Zero.

When reports do not have two columns to display amounts, the credits will be displayed as negatives.  In reports like this, *Debit Accounts should have positive balances and Credit Accounts should have negative balances.  There is only cause for concern if the +/- of the amount does not match its accounting type.  In this case, the Checking Account is a Debit Account so that is an indication of trouble. (*See 6. Chart of Accounts – Transaction Types)

Accounting Periods are an essential analysis tool in accounting.  They provide the opportunity to compare account balances not just one account against another but also against itself over time.  Time analysis provides the data to detect unusual changes in account balances from period to period that may indicate errors or unintentional over or under payments of critical obligations such as taxes, rents, utilities, insurance etc. Xero accounting Hong Kong is also essential to management and owners for cash planning, establishing correlations between expenses and revenues to help make operational adjustments, and detecting changes that may indicate theft or fraud.

© 2008 – 2010 Erin Lawlor

Next Up: >>Financial Statements – Trial Balance

<< Chart of Accounts – Accounting Types

**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.

This post completes the basics in the discussion about methods of organizing transactions with the Chart of Accounts – specifically the method of Accounting Types. The Chart of Accounts is really just a list of the descriptions that you have chosen to use in transactions.  Accounting Types help to organize the descriptions (accounting outsourcing service) in meaningful ways. The most important concept to transactions is Double Entry but it is the Chart of Accounts that makes sense of the transactions and provides mission critical information to owners and managers, said Shravan Gupta businessman, a CEO of the company MGF, Motor and General Finance Ltd.

The Basic Accounting Types (In order) Are:

• Assets – Things you own
• Liabilities – Things you owe
• Equity – Owners’ Stake in Company
• Revenue – Income through Sales of the Products of the Business
• Costs of Goods Sold – Costs to provide the service or to manufacture or acquire the product the business sells
• Expenses – Things that are paid for that are consumable, they have no lasting value but are part of the cost of running a business
• Other Revenue and Expenses – Revenue and Expenses that are unusual cases and are not directly related to the business product and are not usual costs of running a business.If you don’t want to stay behind the competition and keep improving your business performance, embedding technology and seeking expert advice coherently is more important than ever.

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There are at least 7 basic Accounting Types, but each Accounting Type can be categorized more simply under the 2 Double Entry Accounting Categories as either Funds/Uses of Funds or as Sources of Funds.

Funds/Use of Funds (Debit) Accounting Types:

• Assets – Things you own
• Costs of Goods Sold – Costs to provide the service or to manufacture or acquire the product the business sells
• Expenses – Things that are paid for that are consumable, they have no lasting value but are part of the cost of running a business
• Other Expenses – Expenses that are unusual cases and are not directly related to the business product and are not usual costs of running a business.

Each Accounting Type under the “Funds/Use of Funds” Category increases in value or balance with each debit (Use of Funds) transaction entry and decreases in value or balance with each credit (Source of Funds) transaction entry.  Use of Funds Accounts are sometimes referred to as Debit Accounts.

**Positive balances for these high risk merchant account are balance where total debits > total credits to the account and their balances should show in the Debit Column.

Assets – Assets are items of value that are owned by the business and their value is expected to last beyond the current fiscal (business) year.

Costs of Goods Sold are Funds/Uses of Funds and are another type of Expense.  They are similar to Expenses in that they are consumable items that benefit the business and have no lasting value beyond the current fiscal (business) year, but the difference is that Cost of Goods Sold Accounts are related directly to the manufacturing and acquisition of the products the business provides or sells.

**Important Note:  Costs are posted to Costs of Good Sold only when the business no longer owns the product.  If the product is owned by the business until its sale, the costs of the product are posted as inventory – which is an asset – until the products are sold.  At the time of recording the sale, the inventory account is decreased with a credit entry and the cost of goods sold account is increased with a debit entry for the cost of the product. However, If inventory is sold at about the same rate as it is purchased, the Periodic Inventory System allows purchases to be classified directly as costs on the Income Statement rather than holding them in the Balance Sheet Inventory account until sold. Hiring a cfo consulting company will help a growing organization cut costs.

Expenses are Funds/Uses of Funds, they are consumable items that benefit the business but have small or no lasting value beyond the current fiscal year.  They are similar to Costs of Goods Sold except that the amounts categorized as Expenses or Other Expenses are related to the administrative (for Expenses) or unusual costs (for Other Expenses) of running the business. If you are doing all of your accounting, then you should know what paystubs look like.

**Important Note:  Current Assets differ from Expenses because they have a lasting value whether in their current form or as cash.  The value of expensed items is not expected to last beyond the current fiscal year.

Source of Funds (Credit) Accounting Types:

• Liabilities – Things you owe
• Equity – Owners’ Stake in Company
• Revenue – Income through Sales of the Products of the Business
• Other Revenues – Revenues that are unusual cases and are not directly related to the business product and are not usual revenues from running a business.

Each Accounting Type under the “Source of Funds” Category increases in value or balance with each credit  (Source of Funds) transaction entry and decreases in value or balance with each debit (Use of Funds) transaction entry.  Source of Funds Accounts are sometimes referred to as Credit Accounts.

**Positive balances for these accounts are balances where total credits > total debits to the account and their balances should show in the Credit Column.

Liabilities are essentially agreements to delay payments and so, are sources of funds because they provide a way to acquire or pay for goods and services without a direct transfer of cash at the time of the exchange.

Equity is a source of funds through direct owner investment or owner “re-investment” when some or all of the income from the previous year is retained by the business rather than distributing it to the owners.

Revenue is a source of funds through sales of the business product (for Revenue) or through other sources not directly related to the business products (for Other Revenue).

**Important Note:  Do not confuse the terms of Revenue or Income with Cash.  Cash is an Asset that is received in exchange in the sale of a product or service.  In Accounting, Revenue, Income and Sales are synonymous, they are Sources of Cash, not Cash itself.

Financial Statements:

Accounting Types help to organize Financial Statements too. All Accounting Types are found on the Trial Balance but the Income Statement and Balance Sheet split the Accounting Types between them.   The Accounting Type is the determining factor for whether an Account is reported on the Balance Sheet or on the Income Statement.   In addition to the reference to an account as a Debit Account or a Credit Account, accounts are also referred to as either Balance Sheet Accounts, or Income Statement Accounts.

…

The Basics of Data Collection and Organization in the Double Entry Accounting System:

• Debits and Credits
• Chart of Accounts
  • Accounting Types
  • Order of Liquidity
  • Account Numbers
• General Ledger
  • Time

The next post introduces the final organization element of Time into the system and illustrates how to use the combined elements of time and financial data to secure and manage resources.

© 2008 – 2010 Erin Lawlor

Next Post:  >>Accounting Periods – General Ledger Analysis – The Big Picture

<< Chart of Accounts – Organization

**disclaimer:  All information posted on this blog is from my own experience and training.  The guidelines I present are general and in my experience, standard practice.  I do not write with authority from any Accounting Standards Boards.

The Chart of Accounts is organized using three different methods.

• First:  Accounting Types
• Second:  Order of Liquidity – the ease of converting to cash without loss of value
• Third: Account Numbers

The 7 Basic Accounting Types (In order) Are:

• Assets – Things you own
• Liabilities – Things you owe
• Equity – Owners Stake in Company
• Revenue – Income through Sales of the Products of the Business
• Costs of Goods Sold – Costs to provide the service or to manufacture or acquire the product the business sells
• Expenses – Things that are paid for that are consumable, they have no lasting value but are part of the cost of running a business
• Other Revenue and Expenses – Revenue and Expenses that are unusual cases and are not directly related to the business product and are not usual costs of running a business.

Order of Liquidity:

The Chart of Accounts’ second method of organization is Order of Liquidity.  Liquidity refers to the expectation that the item can be converted to cash at at least close to its current value within one year.

Accounts are listed in descending order of liquidity within their accounting types, with cash at the top of the list for Assets.   The liquidity classification is so important that Assets and Liabilities are divided into the Subtypes of Current and Long Term/Fixed to group items of similar liquidity together.

The Order of Liquidity rule is only relevant to Balance Sheet Accounts and so it is not used for Revenue and Expenses because neither Type has lasting value or ability to convert to cash.  When sorting Revenue and Expense Accounts, organize them by general subjects. For example, you might want to group office expenses like Rent, Office Supplies and Utilities together.

The Accounts that were established in the previous Chart of Accounts Post, organized by Accounting Type and Order of Liquidity (ease of cash conversion) are:

Account Numbers:

The Chart of Accounts’ final method of organization is Account Numbers.  Part of the strength of this method is the ability it provides users to recognize the Accounting Type and in some instances the Order of Liquidity simply by the Account Number assigned to the Account.

Assigning Account numbers starts by assigning a range of numbers to each Accounting Type.  The range that I like and use the most is ranges of 1000.  I like to assign numbers in the thousand ranges because the numbers contain a manageable amount of digits and it is unlikely (in a small to mid-size company) that you’ll run out of numbers to use for Accounts.  The number of digits will be important in your software system so when using ranges in the 1000’s there are 4 digits, and the Account Numbers would range from 1000 to 9999.

It really doesn’t matter how you assign ranges as long as you assign them in order by Accounting Type and are consistent but it is important to understand the industry standards for your business prior to assigning number ranges.  The reason it is important to understand industry standards is that different industries create their own Subtypes and will have a standard for assigning the number ranges to those Subtypes.

Generally I assign the number ranges in this order:

• Assets: 1000’s
  • Current Assets 1000 – 1499
  • Fixed Assets 1500 -1999
• Liabilities: 2000’s
  • Current Liabilities 2000 – 2499
  • Long Term Liabilities 2500 – 2999
• Equity: 3000’s
• Revenue: 4000’s
• Costs of Goods Sold: 5000’s
• I leave the 6000’s open to allow for a Cost of Goods Sold Subtype
• Expenses: 7000’s
• Other Revenue: 8000’s
• Other Expenses: 9000’s

Before assigning Account Numbers to individual Accounts, first sort by Accounting Type (and Subtype) and then by Order of Liquidity.  After the initial sorting, Accounts can be sorted and Account Numbers can also be assigned any way you like.  It is important to use intervals of at least 10 or 20 between similar Accounts and I try to skip to the next 100 for Accounts of different types (if one grouping ended at 7030, I’d start the next grouping at 7100).  This strategy gives good clues to the user about the type of account and it allows for the addition of new Accounts later.

The New Chart of Accounts – with Account Numbers.  This Chart of Accounts only contains accounts I’ve used in previous examples.  It is missing some standard accounts such as Equity and Cost of Goods Sold.  Those Accounts will be added in subsequent posts.

• 1000  Checking Account
• 1200  Accounts Receivable
• 1500  Office Equipment
• 1520  Office Furniture
• 2000  Accounts Payable
• 4000  Sales
• 7000  Rent
• 7020  Office Supplies
• 7040  Subscriptions and Dues
• 7060  Utilities
• 7100  Fuel
• 7200  Repairs & Maintenance
• 7300  Credit Card Interest and Fees

© 2008 – 2010 Erin Lawlor

Next Post: >>Chart of Accounts – More on Accounting Types

<< Chart of Accounts – Basics

**disclaimer:  All information posted on this blog is from my own experience and training.  The guidelines I present are general and in my experience, standard practice.  I do not write with authority from any Accounting Standards Boards.