Accounting Workbook For Dummies
As a business manager, taking care of your company’s accounting needs is top priority. Correctly preparing a financial statement involves knowing all the information that needs to appear on the statement. Making a profit keeps you in business, so follow the financial statements closely, make adjustments if needed, and follow some basic rules for presenting accounting information to your business’s managers.
Formulas and Functions for Financial Statements
As the business manager, you’re in control of your business’s accounting needs, so you need a strong understanding of the ins and outs of financial statements, including what goes on them and in what order. If you don’t prepare them correctly, they won’t reflect a true picture of your business’s financial status. Keep the following important rules and points in mind as you prepare and use your business’s financial statements.
Assets = Liabilities + Owners’ Equity
Liabilities and owners’ equity are the two basic types of claims on the assets of an entity. The two-sided nature of the accounting equation is the basis for double entry accounting that records both sides of the entity’s transactions — what is received and what is given in the economic exchange.
Rules for debits and credits
Use the following figure for credit and debit basics:
Financial effects of revenues and expenses
Revenue = Asset increase (debit) or Liability decrease (debit)
Expense = Asset decrease (credit) or Liability increase (credit)
Connections between income statement and balance sheet accounts
Sales revenue → Cash and Accounts receivable
Cost of goods sold expense ← Inventory
Operating expenses → Cash
Operating expenses ← Prepaid expenses
Operating expenses → Accounts payable
Operating expenses → Accrued expenses payable
Depreciation expense ← Fixed assets
Interest expense → Accrued expenses payable
Income tax expense → Accrued expenses payable
Transactions (and certain other events) → Original Entries in Journals → Postings in General Ledger Chart of Accounts → End-of-Period Adjusting Entries → Preparation of Financial Statements, Tax Returns, and Internal Accounting Reports → Closing Entries at End of Year
Making Accounting Adjustments to Reach Profit Potential
Having your business reach a profit is important; if it doesn’t, sooner or later the business will fail. As a business manager, you want to keep a close eye on the financial statements and make the necessary (and legal) accounting adjustments to your financial records as needed. These helpful tips can help you make the necessary adjustments to your business’s net income, eye two different profit analysis models, and communicate the reports to your managers.
Adjustments to net income for determining sash flow from operating activities
Accounts receivable, inventory, and prepaid expenses are operating assets used in the profit-making process.
Accounts payable and accrued expenses payable are operating liabilities used in the profit-making process.
Operating asset increases and operating liability decreases are negative adjustments (decrease cash flow from operating activities)
Operating asset decreases and operating liability increases are positive adjustments (increase cash flow from operating activities)
Depreciation and amortization expenses are positive adjustments (increase cash flow from operating activities)
Cardinal Rule: Make all cash flow adjustments to net income; do not simply add back depreciation and amortization, which could be seriously misleading.
Two profit analysis models for management decision making
Contribution margin minus fixed expenses model:
|Less variable costs per unit||$60|
|Equals contribution margin per unit||$40|
|Times annual sales volume, in units||120,000|
|Equals total contribution margin||$4,800,000|
|Less fixed operating expenses||$3,000,000|
|Equals operating profit||$1,800,000|
Excess of sales over breakeven model:
$3,000,000 annual fixed operating expenses ÷ $40 contribution margin per unit = 75,000 units breakeven point (volume)
|Annual sales volume for year, in units||120,000|
|Less annual breakeven volume, in units||75,000|
|Equals excess over breakeven, in units||45,000|
|Times contribution margin per unit||$40|
|Equals operating profit||$1,800,000|
Guidelines for internal accounting reports to managers
When you’re preparing financial information for your business’s managers, follow these tips:
Follow the organizational structure (responsibility accounting)
Orient your report based on whether organization unit is a profit center or a cost center
Know the mind of the manager
Highlight significant factors and deemphasize non-significant factors