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?

They should leave space for future categories Signup and view all the answers

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

Cost of Goods Sold Signup and view all the answers

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

Cash-basis recognizes expenses when cash is paid, while accrual-basis recognizes them when incurred. Signup and view all the answers

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

Revenue report Signup and view all the answers

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

Cash-basis accounting Signup and view all the answers

Why is proper accounting critical when starting a business?

It helps businesses comply and manage financial responsibilities effectively. Signup and view all the answers

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

Cash-basis accounting Signup and view all the answers

Which statement about accrual-basis accounting is true?

It records expenses and income regardless of cash flow. Signup and view all the answers

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

The specific cash flow patterns of the business. Signup and view all the answers

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

Deciding between cash-basis and accrual-basis accounting. Signup and view all the answers

What is the primary purpose of using petty cash?

To manage everyday small expenses. Signup and view all the answers

Which category number corresponds to payroll expenses?

200 Signup and view all the answers

Why is it essential to create a check register?

To record and balance the company account monthly. Signup and view all the answers

What type of account is categorized under number 300?

Production Machinery Signup and view all the answers

How often should entrepreneurs record and balance their accounts?

Monthly Signup and view all the answers

What is essential when managing the petty cash register?

Maintaining a small lockbox and register. Signup and view all the answers

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

Interest Expense Signup and view all the answers

What must be done as petty cash depletes?

Write a new check to replenish the fund. Signup and view all the answers

What is included in the inventory account records?

The item, quantity, unit cost, and total cost Signup and view all the answers

What does shrinkage in inventory refer to?

The difference between what is sold and what was brought into the business Signup and view all the answers

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

A record that tracks payroll checks with detailed information Signup and view all the answers

How often should the profit and loss statement be prepared?

Monthly Signup and view all the answers

What is essential to track in accounts payable?

Each creditor's separate account and related invoices Signup and view all the answers

What does a profit and loss statement summarize?

Revenues, costs, and expenses over a specific period Signup and view all the answers

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

Base pay, overtime hours, and all deductions Signup and view all the answers

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

A brief and easily understood financial document Signup and view all the answers

What should new firms prioritize when obtaining data?

Timely data aligned with strategic needs Signup and view all the answers

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

$93,060 Signup and view all the answers

Which account number corresponds to the largest expense listed?

Account Number 200 Signup and view all the answers

What is the pretax profit reported in the statement?

$24,530 Signup and view all the answers

Which of the following statements is true about new businesses?

They must recognize industry-specific data needs. Signup and view all the answers

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

Absence of established measurement methods Signup and view all the answers

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

Operational issues related to start-ups Signup and view all the answers

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

Complex information measurement methods 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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Description

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.