Accounting Basics for New Entrepreneurs
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Questions and Answers

What is the primary purpose of a chart of accounts in a company?

  • To manage product inventory levels
  • To list each type of income, expense, and asset (correct)
  • To summarize annual financial reports
  • To track employee payroll records

Which category typically has more entries in a chart of accounts?

  • Liability categories
  • Expense categories (correct)
  • Income categories
  • Asset categories

What structure is commonly observed in the ordering of categories within a chart of accounts?

  • Liabilities, expense, then asset
  • Assets, liabilities, then income
  • Income, expense, then asset (correct)
  • Income, asset, then expense

What should be considered when assigning account numbers in the chart of accounts?

<p>They should leave space for future categories (B)</p> Signup and view all the answers

In the chart of accounts example, what does 'C O G S' stand for?

<p>Cost of Goods Sold (D)</p> Signup and view all the answers

What is the primary difference between cash-basis and accrual-basis accounting?

<p>Cash-basis recognizes expenses when cash is paid, while accrual-basis recognizes them when incurred. (C)</p> Signup and view all the answers

Which of the following reports is NOT typically generated by a new business?

<p>Revenue report (C)</p> Signup and view all the answers

What type of accounting is most commonly utilized by very small businesses?

<p>Cash-basis accounting (B)</p> Signup and view all the answers

Why is proper accounting critical when starting a business?

<p>It helps businesses comply and manage financial responsibilities effectively. (C)</p> Signup and view all the answers

Which of these accounting methods recognizes expenses at the time they are paid?

<p>Cash-basis accounting (A)</p> Signup and view all the answers

Which statement about accrual-basis accounting is true?

<p>It records expenses and income regardless of cash flow. (D)</p> Signup and view all the answers

When deciding on an accounting system, which of the following considerations is crucial?

<p>The specific cash flow patterns of the business. (B)</p> Signup and view all the answers

What is one of the first decisions entrepreneurs must make regarding accounting?

<p>Deciding between cash-basis and accrual-basis accounting. (B)</p> Signup and view all the answers

What is the primary purpose of using petty cash?

<p>To manage everyday small expenses. (D)</p> Signup and view all the answers

Which category number corresponds to payroll expenses?

<p>200 (A)</p> Signup and view all the answers

Why is it essential to create a check register?

<p>To record and balance the company account monthly. (B)</p> Signup and view all the answers

What type of account is categorized under number 300?

<p>Production Machinery (C)</p> Signup and view all the answers

How often should entrepreneurs record and balance their accounts?

<p>Monthly (C)</p> Signup and view all the answers

What is essential when managing the petty cash register?

<p>Maintaining a small lockbox and register. (D)</p> Signup and view all the answers

What additional expense should be recorded along with credit card payments?

<p>Interest Expense (C)</p> Signup and view all the answers

What must be done as petty cash depletes?

<p>Write a new check to replenish the fund. (B)</p> Signup and view all the answers

What is included in the inventory account records?

<p>The item, quantity, unit cost, and total cost (B)</p> Signup and view all the answers

What does shrinkage in inventory refer to?

<p>The difference between what is sold and what was brought into the business (A)</p> Signup and view all the answers

What should be maintained for each employee in the payroll records?

<p>A record that tracks payroll checks with detailed information (C)</p> Signup and view all the answers

How often should the profit and loss statement be prepared?

<p>Monthly (B)</p> Signup and view all the answers

What is essential to track in accounts payable?

<p>Each creditor's separate account and related invoices (A)</p> Signup and view all the answers

What does a profit and loss statement summarize?

<p>Revenues, costs, and expenses over a specific period (B)</p> Signup and view all the answers

What details should be included for payroll checks issued to employees?

<p>Base pay, overtime hours, and all deductions (D)</p> Signup and view all the answers

What type of document is the profit and loss statement considered?

<p>A brief and easily understood financial document (C)</p> Signup and view all the answers

What should new firms prioritize when obtaining data?

<p>Timely data aligned with strategic needs (A)</p> Signup and view all the answers

What total income is reported in the profit and loss statement?

<p>$93,060 (B)</p> Signup and view all the answers

Which account number corresponds to the largest expense listed?

<p>Account Number 200 (D)</p> Signup and view all the answers

What is the pretax profit reported in the statement?

<p>$24,530 (A)</p> Signup and view all the answers

Which of the following statements is true about new businesses?

<p>They must recognize industry-specific data needs. (B)</p> Signup and view all the answers

What is a common challenge that new firms face in data handling?

<p>Absence of established measurement methods (C)</p> Signup and view all the answers

What was the primary focus during the initial examination of the chapter?

<p>Operational issues related to start-ups (B)</p> Signup and view all the answers

What type of data measurement methods do new firms typically lack?

<p>Complex information measurement methods (B)</p> Signup and view all the answers

Study Notes

Importance of Proper Accounting When Starting a Business

  • Entrepreneurs can use accounting software to meet their accounting needs.
  • Entrepreneurs should know the difference between cash-basis and accrual-basis accounting.

Accounting decisions to be made when starting the business

  • Decide between cash-basis or accrual-basis accounting systems.
  • Cash-basis accounting recognizes expenses when paid and revenue when generated.
  • Accrual-basis accounting recognizes expenses and revenue regardless of when cash is received.

Some of the key reports that new business should be prepared to generate

  • Chart of accounts
  • Petty cash register
  • Check register
  • Expense accounts
  • Inventory accounts
  • Accounts payable
  • Payroll

Chart of Accounts

  • A chart of accounts lists each type of activity (income or expense) and each type of asset within the company.
  • Account numbers are assigned by the business owner.
  • Income, expense, and asset categories are usually listed in that order.
  • Account numbers for each category should leave room for new categories.
  • There are usually more expense categories than income categories.

Petty Cash Register

  • Petty cash is used when a check is inappropriate.
  • It's similar to a bank savings account.
  • The owner writes a check to "Petty Cash" for a specific amount.
  • A lockbox is used for petty cash, and a register is maintained.
  • When petty cash depletes, a new check is written to the fund.

Check Register

  • A list of checks written and cleared is essential.
  • Online banking makes this easier.
  • Entrepreneurs must record and balance the company account monthly.

Expense Accounts

  • Daily or weekly expense listings allow for monthly tracking and annual recording.
  • Use the check register and petty cash register to record all outflow of funds.
  • Record credit card interest as an expense, breaking payments down by card type.

Inventory Account

  • The inventory account tracks items, quantities, item numbers, unit costs, and total costs.
  • Inventory should be taken at scheduled times to match starting inventory, units sold, and ending inventory.
  • A separate record tracks inventory ordered and received.
  • Shrinkage is the difference between what is sold and what was brought into the business.

Accounts Payable

  • Maintain a separate accounts payable record for each creditor.
  • Record all invoices with payment date, amount paid, tracking number, and check number or transfer.

Payroll

  • A record should be maintained for every employee.
  • An employee record tracks every payroll check issued.
  • The record lists the components of each check: date, check number, hours worked, base pay, overtime hours, overtime rate, gross pay, taxes, benefit deductions, and net pay.

Profit and Loss Statement (P&L Statement)

  • Summarizes revenues, costs, and expenses incurred during a specific period.
  • Provides information about business performance.
  • Should be prepared monthly and presented in a concise and easily understandable format.

Managing Data Flow

  • Entrepreneurs need to recognize that new businesses will differ in the time frames they need to obtain data based on their industry and experience.
  • New firms may not have complex data measurement methods like established firms, but they should have the same basic philosophy.
  • Data should be obtained in a timely manner and tied to the strategic needs of the firm.

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Explore the significance of accounting for entrepreneurs starting a business. Understand the differences between cash-basis and accrual-basis accounting, and familiarize yourself with essential financial reports like the chart of accounts and expense accounts.

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