Accounting Workbook For Dummies
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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.

Accounting equation

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

Bookkeeping cycle

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:

Sales price $100
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

About This Article

This article is from the book:

About the book author:

John A. Tracy is a former accountant and professor of accounting. He is also the author of Accounting For Dummies.

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