Chapter 7 Financing and Accounting PDF

Because learning changes everything. ® Chapter 7 Financing and Accounting Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Learning Objectives Explain th...

Because learning changes everything. ® Chapter 7 Financing and Accounting Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Learning Objectives Explain the importance of proper accounting when starting a business. © McGraw Hill 2  Importance of Proper Accounting When Starting a Business Entrepreneurs must determine Most new entrepreneurs can if they will use cash- or meet their accounting needs accrual-basis accounting with available software. system. Some of the key reports that the new businessperson should be prepared to generate. Chart of accounts, petty cash register, check register, expense accounts, inventory accounts, accounts payable, and payroll. © McGraw Hill 3  Accounting decisions to be made when starting the business Decide on using a: Cash or Accrual-basis accounting system © McGraw Hill 4  It recognizes expenses as they are paid A cash- It recognizes revenue as based it is generated Only very small accounting businesses use this system An accrual- ▪ It’s the more typical method based Expenses and revenue accounting are recorded regardless system of when cash is received © McGraw Hill 5  Some of the key reports that new business should be prepared to generate 1. Chart of accounts 2. Petty cash register 3. Check register 4. Expense Accounts 5. Inventory Account 6. Accounts payable 7. Payroll © McGraw Hill 6  Chart of Accounts A chart of accounts is simply a listing of each type of activity (income or expense) and each type of asset within the company o Account numbers are assigned by the business person o Income, expense and asset categories are usually listed in that order o Account numbers for each of the categories should leave space for new categories to be added later o There are usually far more expense categories than income categories Table 7.1 shows the chart of accounts of an electronic manufacturer © McGraw Hill 7  Table 7.1: Chart of Accounts: Electronics Manufacturer 1 Number Category Number Category 10 Basic Tube 105 C O G S: End Caps 20 Premium Tube 106 C O G S: Packaging 30 Basic Service 107 C O G S: Shipping 40 Unlimited Service 120 Utilities 101 C O G S*: Wooden Tubes 130 Security System 102 C O G S: Diodes 140 Paper 103 C O G S: Circuit Boards 141 Letterhead/Business Cards 104 C O G S: Resistors/Capacitors 142 Office Supplies Note: C O G S equals cost of goods sold. © McGraw Hill 8  Table 7.1: Chart of Accounts: Electronics Manufacturer 2 Number Category Number Category 150 Internet Supplier 220 Licenses 160 Auto Leases 300 Production Machinery 170 Insurance 310 Tools 180 Advertising 400 Building Mortgage 200 Payroll 500 Payroll Taxes 201 Benefits 510 State Taxes 210 Telephone (cell and office) 520 Federal Taxes © McGraw Hill 9  Petty Cash Register Petty cash is used for times when a check is inappropriate o It’s similar to a bank savings account ▪ The owner writes a check to “Petty Cash” for whatever amount they want to keep on hand ▪ A small lockbox is used for petty cash and a register is maintained, much like a savings account register ▪ As it depletes, a new check is written to the fund © McGraw Hill 10  Check Register Creating a listing of all checks that have been written and all that have cleared through the bank is essential. Made easier by online banking. Entrepreneur must record and balance the company account on a monthly basis. © McGraw Hill 11  Expense Accounts Daily or weekly listing of expenses allows a monthly tracking and ultimately, an annual recording of all expenses. Entrepreneur will have to: Use check register and Record credit card interest Break payments up by petty cash register to as an interest expense. card type. record all outflow of funds. © McGraw Hill 12  Inventory Account WHAT IT CONTAINS Factors to include the item, the quantity, an item number, a unit cost, and a total cost. Inventory should be taken at scheduled times during the year and an exact match should be completed between starting inventory, units sold, and ending inventory. Second record should be kept to track inventory ordered and inventory received. Shrinkage: Difference between what is sold and what was brought into the business. © McGraw Hill 13  Accounts Payable Separate accounts payable record should be maintained for each creditor. All invoices should be Date paid. recorded with a Amount paid. record of Check number or transfer payment, tracking number. including: © McGraw Hill 14  Payroll Record should be maintained for every employee. Employee record should be maintained that tracks every payroll check issued to the employee. Record will list all of the items that make up the check. Date, check number, and number of hours worked. Base pay and overtime hours worked. Overtime pay rate, gross pay, and taxes. Benefit deductions and net pay. © McGraw Hill 15  Profit and Loss Statement (P&L Statement) Financial statement that summarizes the revenues, costs, and expenses incurred during a specific period of time. It gives information about the performance of the business. Brief and easily understood document that should be prepared monthly. © McGraw Hill 16  Table 7.2: Profit and Loss Statement Total Income in dollars NA 93,060 NA Expenses in dollars, not all shown NA NA NA Account Number 120 1,084 NA NA Account Number 140 110 NA NA Account Number 160 1,340 NA NA Account Number 200 47,900 NA NA Account Number 201 14,370 NA NA Total Expenses NA 68,530 NA Profit (Pretax) NA NA 24,530 © McGraw Hill 17 © McGraw Hill 18  Managing Data Flow Entrepreneur needs to recognize that new businesses will differ in the time frames that they need to obtain data based on their industry and experience. New firms do not have the complex information measurement methods of established firms, but they should have the same basic philosophy. Key is obtaining data in a timely manner that is tied to the strategic needs of the firm. © McGraw Hill 19  Chapter Review Chapter began by examining two important operational issues directly tied to the start-up of a new venture. Next section examined the several means of obtaining financing. Final section examined the development of a firm’s accounting system and method of data gathering and handling. © McGraw Hill 20  Because learning changes everything. ® www.mheducation.com Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.