The Business Entrepreneur Seminars (Module 5 of 16)

™
Accounting 101: The Fundamentals
By:
Enrique R. Suarez
http://www.wix.com/suarezenrique/delta
suarezenrique@yahoo.com

™
| COURSE OUTLINE
Slide 4 of 150
The Language Of Business
This document is a partial preview. Full document download can be found on Flevy:
http://flevy.com/browse/document/the-business-entrepreneur-seminars-module-5-of-16-1306

™
| COURSE OUTLINE
Slide 7 of 150
Why you must understand it…
§ It’s easy to just say, “I’m a craftsperson and I know my craft
and that’s all I need to know. I’ll just hire someone to take care
of the numbers for me.”
§ The bottom line is this: Whoever is making the decisions for
the business needs to understand the basics of accounting and
what each of the financial reporting statements mean.
§ If you are going to let the person taking care of your numbers
make all of the decisions then you’ll be fine.
§ But let’s face it. You are most likely the one is who’s going to
make many of the critical decisions facing the business. This is
probably why you got into business in the first place—to call the
shots. Therefore, you need to at least understand the numbers
even if you let someone else keep the books for you.

™
| COURSE OUTLINE
Slide 10 of 150
Operating a simulated business…
§ Throughout this course you are going to get the opportunity to
operate a fictional bookstore and coffee bar.
§ This business will allow you the chance to experience first-hand
how accounting is performed and how the results can be used in
the decision-making process.
§ The important thing is that it allows you to learn the concepts of
accounting in a safe environment before implementing them in
the real world.
§ For many different kinds of transactions you are going to get to
see how money moves in and out of a business and how this
movement is recorded using the principles of accounting.

™
| COURSE OUTLINE
Slide 13 of 150
Your first scorecard…
§ To better understand how money moves in and out of your
business, you need a scorecard that shows two things: STUFF
YOU HAVE and WHO OWNS IT.
§ A simple scorecard you might use would look something like
this:
Who Owns ItStuff You Have

™
| COURSE OUTLINE
Slide 16 of 150
The first entry…
§ Since the $10.00 is yours that means it goes on the left side
of the scorecard as $10.00 in Cash.
§ But it also goes on the right side since you own the $10.00.
Let’s call this money “Your Investment”
§ Your scorecard would now look something like this:
Stuff You Have Who Owns It
Cash Your Investment$10.00 $10.00This document is a partial preview. Full document download can be found on Flevy:

™
| COURSE OUTLINE
Slide 19 of 150
Taking in more cash…
§ Your family decides to match your original investment
with a $10.00 loan to your business.
§ So what did you get from your family? Cash right? How
much? $10.00.
§ So how much total cash do you have so far? $20.00.
§ On the right side of your scorecard, who owns that cash?
Well, you own $10.00 of it from your original investment
and your family owns $10.00 of the cash.
§ Let’s take a look how this would look on your scorecard…

™
| COURSE OUTLINE
Slide 22 of 150
The inventory transaction…
§ Ask yourself, “I just bought $12.00 worth of what?” Books of
course.
§ These books are now “stuff you have.” And how much is this
stuff worth. $12.00. So we can now add these books to the left
side of your scorecard:
Cash Someone Else
Books You
Total Total
$20.00
$10.00
$32.00 $20.00
$10.00
$12.00

™
| COURSE OUTLINE
Slide 25 of 150
Now let’s buy some coffee…
§ It’s hard to run a bookstore and coffee bar with
only books, so you are going to need to buy some
coffee too.
§ Let’s buy a pound of coffee which will cost you
about $6.00. OK, this is not the best coffee mind
you—but hey—money’s tight.
§ See if you can figure out what you need to do to
get your scorecard to equal or balance.

™
| COURSE OUTLINE
Slide 28 of 150
Money Coming In

™
| COURSE OUTLINE
Slide 31 of 150
Taking in the cash…
§ You now have an additional $10.00 of cash so your new cash
balance is $12.00. Remember, you had $2.00 already in cash
before this.
§ But now your scorecard doesn’t balance…
Cash Someone Else
Books You
Coffee
Total Total
$12.00
$10.00
$30.00 $20.00
$10.00
$12.00
$6.00

™
| COURSE OUTLINE
Slide 34 of 150
Balancing your scorecard…
§ Your new scorecard therefore looks like this.
Notice that it does indeed balance with both sides
being equal once again.
Earnings (profit)Coffee
TotalTotal
YouBooks
Someone ElseCash
$12.00
$10.00
$26.00 $26.00
$10.00
$8.00
$6.00 $6.00

™
| COURSE OUTLINE
Slide 37 of 150
Reducing the inventory…
§ Recall that you sold 2 cups of coffee which cost you $.10 a cup.
Therefore, you need to reduce your inventory by $.20. You
used to have $6.00 of coffee so now you have $5.80 as follows:
Cash Someone Else
Books You
Coffee Earnings (profit)
Total Total
$13.00
$10.00
$26.80 $26.00
$10.00
$8.00
$5.80 $6.00

™
| COURSE OUTLINE
Slide 40 of 150
The second scorecard…
§ As we have concluded, your first scorecard doesn’t tell you
everything that happens in your business.
§ For instance, can you tell by looking at your first scorecard
what your total sales were for the entire first day? Does it
tell you what the costs of providing your product were?
Does it tell you how you made your earnings? The answer
is of course, “No.”
§ Would a business want to know all of these things? Of
course it would. So we need to create one more scorecard.

™
| COURSE OUTLINE
Slide 43 of 150
What the new scorecard tells you…
§ As you can see, your second scorecard tells you how you
arrived at your earnings found on your first scorecard.
§ It tells you the cost structure of your business and
ultimately if its making money or not.
§ We will return to this second scorecard in the next section
as we encounter another kind of cost in operating your
business.
§ But for now, let’s look at another way in which money can
come into your business—that being a new loan.

™
| COURSE OUTLINE
Slide 46 of 150
Taking in the proceeds from a loan…
§ Let’s add the loan proceeds of $20.00 to your scorecard. So you
get what in? Cash. And whose money is it? Remember, the
money is not yours. It’s someone else's. So your scorecard
should look like this:
Cash Someone Else
Books You
Total Total
$33.00
$10.00
$46.80 $46.80
$30.00
$8.00
$5.80 $6.80
+ $20.00 + $20.00

™
| COURSE OUTLINE
Slide 49 of 150
Money Going Out

™
| COURSE OUTLINE
Slide 52 of 150
Selecting your inventory…
§ You decide that you are fine on coffee for now, but you
feel you could do better with your book sales if you had a
wider selection.
§ You decide to purchase 5 more books. If you recall, the
publisher charges you $4.00 per paperback so the new
books will cost you $20.00 in total. (5 times 4)
§ Remember, you are essentially just turning some cash into
inventory—changing one type of asset into another.
Therefore, all of your scorecard entries will take place on
the left side of the card. Let’s look at these changes…

™
| COURSE OUTLINE
Slide 55 of 150
The expense transaction…
§ Let’s say the rent for the space you are renting for your
bookstore comes due and its $5.00. You would complete this
transaction as follows to get your scorecard to balance:
Cash Someone Else
Books Equity
Total Total
$13.00
$15.00
$46.80 $46.80
$30.00
$28.00
$5.80 $1.80
- $5.00
- $5.00

™
| COURSE OUTLINE
Slide 58 of 150
Adding your expenses…
§ Why do we call your new total “gross profit” you might ask.
Because we haven’t taken out all of the costs of doing business
yet. Once we subtract your expenses (the cost of being in
business) you then arrive at your “net profit” which is
sometimes referred to as “the bottom line” shown below:
Sales $11.00
minus Cost of Sales $4.20
equals Gross Profit $6.80
minus Expenses
equals Net Profit

™
| COURSE OUTLINE
Slide 61 of 150
Making payments to satisfy debt…
§ Another way that money can go out of your business is to satisfy
the payment of a debt you owe, sometimes called a “liability.”
§ If you recall, you were able to build-up your inventory by
borrowing $20.00 from the bank and from an initial loan from
your family for $10.00.
§ Let’s say your family is happy for now (you’ve got to love
family) but the banker on the other hand is ready to start
receiving a portion of the loan you owe him.
§ Remember, the banker expects not only his original principal
back ($20.00) but also a fee for using his money called
“interest.” The banker is expecting you to pay $1.20 back at this
time. The $1.00 will go toward paying back the original loan
and the additional $.20 will go toward the interest you owe.

™
| COURSE OUTLINE
Slide 64 of 150
Subtracting the interest expense…
§ Let’s remove the interest expense of $.20 from your profits as
follows. Notice your new net profit balance of $1.60.
Sales $11.00
minus Cost of Sales $4.20
equals Gross Profit $6.80
minus Expenses
-Rent $5.00
-Interest $.20
equals Net Profit $1.60

™
| COURSE OUTLINE
Slide 67 of 150
Adjusting your earnings…
§ Since these profit distributions come out of your earnings let’s
first subtract them from your income scorecard:
Sales $11.00
Cost of Sales $4.20
Gross Profit $6.80
Expenses
-Rent $5.00
-Interest $.20
-Owner Distributions $.60
Net Profit $1.00

™
| COURSE OUTLINE
Slide 70 of 150
When might money be owed to you?
§ In certain instances you may decide to offer “credit” to your
customers.
§ Basically, this means that the customer receives your product or
service now but agrees to pay you at a later date.
§ Now, why would you do such a thing? One reason is simple:
giving your customer flexibility in making payments can
increase the sale of your products and services. It’s as simple as
that.
§ Certain kinds of customers such as businesses usually request
such payment terms to help them balance the flow of money
coming into and going out of their businesses.

™
| COURSE OUTLINE
Slide 73 of 150
Accounting for the cash…
§ Next, let’s add your new earnings to your scorecard. Also,
remember, both John and Paul paid cash, so you need to
increase your cash by $20.00:
Cash Someone Else
Books Equity
Total Total
$31.20
$15.00
$65.00 $57.00
$29.00
$28.00
$5.80 $13.00
+ $20.00

™
| COURSE OUTLINE
Slide 76 of 150
Accounting for the sales…
§ You start this transaction the same way you did when you
received cash from John and Paul. Let’s account for these sales
and costs on the income scorecard:
Sales $51.00
Cost of Sales $20.20
Gross Profit $30.80
Expenses
-Rent $5.00
-Interest $.20
-Owner Distributions $.60
Net Profit $25.00
2 books @ $10.00 = + $20.00
2 books @ $4.00 = + $8.00

™
| COURSE OUTLINE
Slide 79 of 150
Balancing the scorecard…
§ By adding the accounts receivable amount of $20.00 to the
left side of your scorecard, it again balances:
Accounts Rec.
TotalTotal
EquityBooks
Someone ElseCash
$15.00
$69.00
$29.00
$25.00
+ $20.00
$31.20
$69.00
$12.00
$5.80
$20.00

™
| COURSE OUTLINE
Slide 82 of 150
Money You Owe

™
| COURSE OUTLINE
Slide 85 of 150
Accounts Rec.
TotalTotal
EquityBooks
Someone ElseCash
Adding the new inventory…
§ Since you are gaining 4 books of inventory at $16.00 you need
to increase your book inventory by this amount. Your scorecard
will now be out of balance:
$15.00
$69.00
$29.00
$25.00
$51.20
$85.00
$28.00
$5.80
$0.00
+ $16.00

™
| COURSE OUTLINE
Slide 88 of 150
Balancing your scorecard…
§ To pay your supplier you need to reduce both cash and your
accounts payable by $16.00 as shown below:
Accounts PayableAccounts Rec.
TotalTotal
EquityBooks
Someone ElseCash
$35.20
$69.00
$28.00
$5.80
$0.00
$15.00
$69.00
$29.00
$25.00
$0.00
- $16.00
- $16.00

™
| COURSE OUTLINE
Slide 91 of 150
Your cash scorecard…
§ We are going to keep your cash scorecard somewhat simple. In
fact, we are going to set it up in a similar way to your checking
account register.
§ In a nutshell, we are going to start with your beginning cash
balance, add any cash taken in, and then subtract any cash going
out.
§ The difference between what you take in and what goes out
we’ll call your “cash flow.”
§ If you take your cash flow number and add it to your beginning
cash balance number you will have you ending cash balance.
§ This ending cash balance then becomes the beginning cash
balance for the next period.

™
| COURSE OUTLINE
Slide 94 of 150
Next, lets’ add any cash in…
§ Cash comes into your business in one of several
ways:
– Cash Sales
– Accounts Receivable Collections
– New Loans
– New Investment
§ Let’s start with any cash sales…This document is a partial preview. Full document download can be found on Flevy:

™
| COURSE OUTLINE
Slide 97 of 150
Your new loans…
§ During the two days you have been open you have taken in two
loans as follows:
– $10.00 from your family, and
– $20.00 from the bank
§ These loans total $30.00. We’ll enter this into your cash
scorecard:
Add Cash In
-Cash Sales $31.00
-Accounts Receivable Collections $20.00
-New Loans $30.00
-New Investment

™
| COURSE OUTLINE
Slide 100 of 150
Inventory you have left…
§ After selling your merchandise you still have $33.80 worth of
inventory left in stock that you have paid for.
§ We’ll enter this into your cash scorecard:
Minus Cash Out
-Expenses Paid $26.00
-Inventory On Hand $33.80
-Principal Payments

™
| COURSE OUTLINE
Slide 103 of 150
Notice the ending balance…
§ The ending cash balance of $35.20 is significant.
§ If you look back at your original scorecard, you will see
that your cash balance is exactly this amount.
§ The cash scorecard is how you keep track of this balance
over a period of time as we’ve just done.
§ From now on going forward, your ending cash balance of
$35.20 will now become your beginning cash balance and
you would just repeat the exercise.This document is a partial preview. Full document download can be found on Flevy:

™
| COURSE OUTLINE
Slide 106 of 150
Figuring “depreciation”…
§ Taking a large cost such as that of a piece of expensive
equipment and expensing it across it’s useful life is called
“depreciation.”
§ To see how this works, let’s return to the example of your
bookstore and coffee bar. Let’s say you are interested in buying
a new coffee maker that will cost you $24.00.
§ You conclude that this coffee maker will probably last you two
years. So instead of just expensing the entire coffee maker at
the time you make the purchase, it makes more sense to spread
its cost out over the 2 years it will produce value for you.
§ One simple way to do this is to just take the $24.00 and divide it
by the two years which gives you $12.00 of expense to
depreciated each year for the next two years.

™
| COURSE OUTLINE
Slide 109 of 150
Adjust your cash score card…
§ Your cash scorecard would now be something like:
Beginning Cash Balance $0.00
Add Cash In
-Cash Sales $31.00
-New Loans $30.00
-New Investment $15.00
Minus Cash Out
-Equipment Purchased $24.00
-Principal Payments $1.00
Equals Ending Cash Balance $11.20

™
| COURSE OUTLINE
Slide 112 of 150
Making the scorecard balance…
§ In order to make your scorecard balance, it’s necessary to make
one last entry.
§ Remember, depreciation is the reduction in the cost of your
coffeemaker due to wear and tear over the the passage of time.
§ Once you expense depreciation on your income scorecard and
you remove the amount from your earnings over time, then you
need to reduce the value of this asset.
§ The way to do this is set-up one final account on your scorecard
where you can keep track of any depreciation. Your
depreciation is used to reduce the value of your coffeemaker—at
least on paper. Let’s take a look at this final transaction…

™
| COURSE OUTLINE
Slide 115 of 150
The double-entry system…
§ One other thing you might have noticed when working with
your scorecard is that whenever you made one transaction entry,
you always had to make a second entry to make your scorecard
equal or balance.
§ This is known as the “double-entry” system of accounting.
§ Today, many computerized accounting systems such as
QuickBooks and PeachTree allow you to make one entry. The
accounting system then actually makes the second entry for you.
This is called a “single-entry” accounting system.
§ While a single-entry system makes your life much easier, you
still need to remember the double-entry nature of accounting
that you learned when creating your scorecard—you need to
know what is going on behind-the-scenes.

™
| COURSE OUTLINE
Slide 118 of 150
The first scorecard…
§ As you may recall, the main scorecard you used in running your
bookstore and coffee bar was this one. In accounting, this
scorecard is called the “Balance Sheet.”
Accounts Payable $0.00
Earnings (profit) $24.00
Total $68.00
Equity $15.00
Someone Else $29.00
Depreciation -$1.00
Coffeemaker $24.00
Accounts Rec. $0.00
Coffee $5.80
Total $68.00
Books $28.00
Cash $11.20

™
| COURSE OUTLINE
Slide 121 of 150
Grouping your assets…
§ Adding the Current and Fixed Asset categories would look
something like this:
-Depreciation -$1.00
-Coffeemaker $24.00
Total $68.00
Fixed Assets
Assets
Current Assets
-Coffee $5.80
-Books $28.00
-Accounts Rec. $0.00
-Cash $11.20
Accounts Payable $0.00
Earnings (profit) $24.00
Total $68.00
Equity $15.00
Someone Else $29.00
Who Owns It

™
| COURSE OUTLINE
Slide 124 of 150
Let’s group the right side…
§ Grouping the right side of your balance sheet into liabilities and
equity would look like this:
-Earnings (profit) $24.00
-Equity $15.00
Total $68.00
Owner’s Equity
Liabilities
-Accounts Payable $0.00
-Notes Payable $29.00
Liabilities & Equity
-Depreciation -$1.00
Current Assets
-Coffee $5.80
-Books $28.00
-Accounts Rec. $0.00
-Coffeemaker $24.00
Total $68.00
Fixed Assets
-Cash $11.20
Assets

™
| COURSE OUTLINE
Slide 127 of 150
The second scorecard…
§ The second scorecard we created was used to track your sales
and expenses. It resulted in the amount of earnings shown on
your balance sheet.
§ We called this scorecard your income scorecard. In accounting,
this scorecard is called an “Income Statement.”
§ An income statement, sometimes called a profit and loss
statement (P&L), is a financial document which shows income
earned and expenses incurred.
§ The resulting difference between your income and your
expenses is called your net profit—what is often referred to as
the “bottom line.”
§ This statement tells you if your business is profitable or not.

™
| COURSE OUTLINE
Slide 130 of 150
The money you earned goes at top…
§ An income statement begins with money that you have earned
from selling something.
§ There are several different names given to the money you make
selling stuff. Some companies call it “revenue.” Some call it
“sales.” Some call it “income.”
§ Whatever title is used it is almost always found at the top of any
income statement.
§ The important thing to remember is that it is not in all cases cash
in hand. Sales are monies you have earned but not necessarily
collected if you offer any kind of credit to your customers. For
you bookstore and coffee bar you earned $51.00.

™
| COURSE OUTLINE
Slide 133 of 150
The costs of being in business…
§ Right after the gross margin is presented, your income
statement then shows your business expenses, sometimes
called fixed expenses.
§ Fixed expenses are the costs of being in business.
§ They usually do not vary with the sales level of your
business. For instance, whether you decide to open for
business or not today, you still owe rent.
§ Examples of fixed expenses include such things as salaries,
insurance, rents, advertising, utilities, and interest
payments.

™
| COURSE OUTLINE
Slide 136 of 150
Profitability over a period of time…
§ It’s important to remember that your income statement
presents sales and expense activity over a period of time as
opposed to your balance sheet which shows your financial
condition at a point in time.
§ In our scenario, your bookstore and coffee bar was open
for two days. Therefore, your income statement represents
activity for that two day period.
§ Your balance sheet, on the other hand, shows your
financial condition at the end of the second day. This is
important to remember.

™
| COURSE OUTLINE
Slide 139 of 150
The format of the cash flow statement…
§ In its simplest form, a cash flow statement is
presented in the following format:
– Beginning Cash Balance
– Plus Cash Inflows
– Minus Cash Outflows
– Equals Ending Cash Balance

™
| COURSE OUTLINE
Slide 142 of 150
Beginning cash balance…
§ The cash flow statement works in a similar fashion to the
register of your checkbook.
§ You start with a balance of money. You add any deposits
and then figure your new cash balance. You also subtract
any checks written and once again figure your new cash
balance.
§ Since your bookstore and coffee bar was a start-up
business, you actually had a zero beginning balance of
cash. So this is where we came up with the $0.00
beginning cash balance.

™
| COURSE OUTLINE
Slide 145 of 150
The ending cash balance…
§ The ending cash balance shown on any cash flow
statement is carried over as the cash balance to your
balance sheet.
§ This number is calculated by taking the beginning cash
balance for the accounting period, adding any sources of
cash, and then subtracting any uses of cash.
§ This number is not to be confused with the “cash flow of
the business. The cash flow is simply the difference
between your cash inflows for the period and your cash
outflows.

™
| COURSE OUTLINE
Slide 148 of 150
The flow of cash over time…
§ As a last point, it’s important to remember that your cash flow
statement also presents activity over a period of time:
Cash Flow Statement for January 1 – January 2
Beginning Cash Balance $0.00
Cash In
-Cash Sales $31.00
-New Loans $30.00
-New Investment $15.00
Cash Out
-Equipment Purchased $24.00
-Principal Payments $1.00
Ending Cash Balance $11.20

1
Flevy (www.flevy.com) is the marketplace
for premium documents. These
documents can range from Business
Frameworks to Financial Models to
PowerPoint Templates.
Flevy was founded under the principle that
companies waste a lot of time and money
recreating the same foundational business
documents. Our vision is for Flevy to
become a comprehensive knowledge base
of business documents. All organizations,
from startups to large enterprises, can use
Flevy— whether it's to jumpstart projects, to
find reference or comparison materials, or
just to learn.
Contact Us
Please contact us with any questions you may have
about our company.
• General Inquiries
support@flevy.com
• Media/PR
press@flevy.com
• Billing
billing@flevy.com

The Business Entrepreneur Seminars (Module 5 of 16)

Recomendados

Recomendados

Mais conteúdo relacionado

Destaque

Destaque (17)

Mais de Flevy.com Best Practices

Mais de Flevy.com Best Practices (20)

Último

Último (20)

The Business Entrepreneur Seminars (Module 5 of 16)