Notes on Accounting ================================================================== References ~ ================================================================== See URL : http://www.myownbusiness.org/s7/ http://en.wikipedia.org/wiki/Balance_sheet http://en.wikipedia.org/wiki/Income_statement (Profit and loss) http://en.wikipedia.org/wiki/Cash_flow_statement http://www.principlesofaccounting.com Know your TIN : http://www.knowyourtin.com/2010/01/what-is-tin-number-difference-between.html ================================================================== Accounting Statements ~ Methods of Accounting ~ Cash Basis Method~ Accrual Method ~ Balance Sheet ~ Profit and Loss Statement (aka Income/Earnings/Operating Statement) ~ Cash Flow Statement ~ How to calculate 'Retained Earnings' ? ~ What is Sundry Debtors and Creditors ? ~ Key Terms ~ Open Source CRM ~ ================================================================== Accounting Statements ~ ================================================================== These are 3 important accounting statements of a business: * The balance sheet tells how much the business is worth. * The profit and loss statement tells if your business is profitable or not * The cash flow statement predicts your cash balances into the future. Methods of Accounting ~ ================================================================== Before you start, you will need to decide what form of accounting your business will use. There are two major types: Cash Basis Method ~ * you recognize income when you receive the cash and you recognize expense when you pay the bill. Most service businesses operate on the cash basis because it is much simpler to understand. Accrual Method ~ * Here you match revenue with expense regardless when the cash may or may not be collected. If you sell a product to a customer and he doesn't pay you for 30 days, the sale is recorded in the books on the day that you made the sale. When the money comes in the "accounts receivable" is then turned into cash. The same with expenses: if you incur an expense on one month but don't pay until the next month, the expense will be recognized in the month in which you incurred the expense. If you're in manufacturing or deal with inventory, the Internal Revenue Service generally requires that you be on accrual basis. =================================================================== Balance Sheet ~ =================================================================== It includes current assets and liabilities. Most liquid item listed first. Owner's Equity is listed as total assets minus liabilities. Total Assets = Total Liabilities + Owners Equity ; (Hence Balance Sheet). Example For Small Business Balance Sheet: =================================================================== Assets: =================================================================== Cash $6,600 Accounts Receivable $6,200 Tools and equipment $25,000 (minus depreciation, optional) Total $37,800 =================================================================== Liabilities =================================================================== Accounts Payable $30,000 Total liabilities $30,000 =================================================================== Owners' equity =================================================================== Capital Stock $7,000 (For big business, minority share holder value will be shown in a breakup. Includes Common Stock + Preferred Stock. This is the paid stock value (e.g $10 per share when it was issued) Retained Earnings $800 (Net income minus divident paid accumulated value till date. It includes all money spent for buying assets. Huge figure here does not imply huge cash since money may have been spent on assets. ) Total owners' equity $7,800 (It is computed as assets - liability) Note: Owner's equivity can be negative !!! (for a loss making company and no body wants to buy the stock as well.) =================================================================== Total (liabilities + Owners Equity) = $37,800 =================================================================== Note: Owners Equity can be negative Total Credit = Total Debit. Increase in expenses is treated like (Debit) operation and falls under assets. Unnecessary Expenses will likely lower the owner's equity. =================================================================== Profit and Loss Statement (aka Income/Earnings/Operating Statement) ~ =================================================================== - Indicates how total revenue (top line) is transformed into net income (bottom line) - It presents the period of time (for the last year, etc) Example: Debit Credit Revenues GROSS REVENUES (including INTEREST income) 296,397 -------- Expenses: ADVERTISING 6,300 BANK & CREDIT CARD FEES 144 BOOKKEEPING 2,350 SUBCONTRACTORS 88,000 ENTERTAINMENT 5,550 INSURANCE 750 LEGAL & PROFESSIONAL SERVICES 1,575 LICENSES 632 PRINTING, POSTAGE & STATIONERY 320 RENT 13,000 MATERIALS 74,400 TELEPHONE 1,000 UTILITIES 1,491 -------- TOTAL EXPENSES (195,512) -------- NET INCOME 100,885 =================================================================== Expenses can include following: - Cost of Goods Sold (COGS) / Cost of Sales : Cost of production minus (selling + admin, sales people cost) - General Admin Expenses : salaries of officers / executives, legal and professional fees, utilities, insurance, depreciation of office building and equipment, office rents, office supplies, etc - Depreciation / Amortization - the charge with respect to fixed assets / intangible assets that have been capitalised on the balance sheet for a specific (accounting) period. - R&D expenses - Non-operating section expense includes Tax, cost of borrowing (interest) =================================================================== Cash Flow Statement ~ =================================================================== - IAS (International Accounting Standard) 7 defines cash flow std. - Reflects firm's liquidity - Includes only Cash and Cash equivalent inflows and outflows. - The cash flow statement is a cash basis report. - Report on operating, investing, financing activities - Non-cash activities are usually reported in footnotes. Example: Cash flows from (used in) *operating* activities Cash receipts from customers 9,500 Cash paid to suppliers and employees (2,000) Cash generated from operations (sum) 7,500 Interest paid (2,000) Income taxes paid (3,000) Net cash flows from operating activities: *2,500* Cash flows from (used in) *investing* activities Proceeds from the sale of equipment 7,500 Dividends received 3,000 Net cash flows from investing activities *10,500* Cash flows from (used in) *financing* activities Dividends paid (2,500) Net cash flows used in financing activities *(2,500)* . Net increase in cash and cash equivalents *10,500* Cash and cash equivalents, beginning of year *1,000* Cash and cash equivalents, end of year *$11,500* =================================================================== How to calculate 'Retained Earnings' ? ~ =================================================================== Last year's retained earnings + (this year income after tax - dividend paid) ================================================================== What is Sundry Debtors and Creditors ? ~ ================================================================== Debtors = In general means Customers to whom the goods are sold on credit. Sundry = Various Therefore Sundry Debtors means Debtors for various reasons and not merely for Credit Sales. Debtors = Buyers; Creditors = Suppliers; ================================================================== Key Terms ~ ================================================================== * Account ------- A record that is kept for each asset, liability, equity, revenue, expense, and dividend component of an entity. * Chart of accounts A listing of the accounts of an entity * Control account The total of all subcomponent account records for an account; e.g., the sum of all individual accounts receivable * credit The nature of an action to an account to indicate an increase (liabilities, equity, and revenue) or decrease (assets, expenses, and dividends); usually right-justified in an entry * debit The nature of an action to an account to indicate an increase (assets, expenses, and dividends) or decrease (liabilities, equity, and revenue); usually left-justified in an entry * general ledger A record of the accounts comprising financial statements, and their respective balances * journal A chronological listing of the transactions and events of an organization, in debit/credit format * journalizing The process of recording transactions and events into the journal * posting The process of transferring journal entry effects into the respective general ledger accounts. * subsidiary account A subcomponent account record providing individual balance details; e.g., the record for one customer out of a group of customers comprising all accounts receivable * T-account An abstract representation of an account, with the left side of the "T" representing debits and the right side credits * trial balance A listing of account balances from the ledger, used to test the equality of debits and credits Open Source CRM ~ http://www.knowyourtin.com/2010/01/what-is-tin-number-difference-between.html CiviCRM - Especially for Non-profit orgs, can work alongside drupal, etc. Opentaps : Based on apache OfBiz; integrated with VOIP. CRM + ERP OpenCRX - Enterprise class. role based security; Based on tomcat and MySQL vtigerCRM - Forked from SugarCRM; Based on LAMP; Fully OpenSource; Chennai based ? Free ERP: Compire - Java Based; Adempire is fork of compire Dolibarr - Easy to develop/use; PHP, MySQL, PostgreSQL OpenERP - Java based