Importance of good records
This chapter is about how to start an accounting system. All companies, even the smallest need good records. Each company must submit an income tax return, just like individuals. Even non-profit organizations need an accounting system. The purpose of this tutorial is to help Virtual Business students learn the basics of accounting. You will need to produce a number of accounting records in order to obtain a business loan. Due to the nature of how VE companies operate, the accounting department must be familiar with a number of accounting records: balance sheet, income statement, payroll, cash flow analysis and break even analysis. All of these forms are the accounting department's responsibility in producing the business plan. To make your job a little easier, we will create these forms using Bromley's Formal Wear and Tuxedo Rentals. The company is divided into two divisions: Tuxedo Rentals, a service business and a formal wear division for the bride and bridesmaids, which is a merchandising business with inventory. After you have decided on what type of business your company will be, classify it as to a service or merchandising business. A service business supplies a service to customers. A merchandising business has a physical product that it sells and carries an inventory of these items. Many of the forms are the same for both types of businesses, but there are some differences in the financial statements.
Chart of Accounts
The first thing that we are going to do is create a chart of accounts. I have done this for you in the two boxes to the right. Remember that we are looking at two different companies: The service business is called Bromley's Tuxedo Rentals. The merchandising business is Bromley's Formal Wear. The service business chart of accounts is in the middle box and the merchandising business chart of accounts is in the box on the far right. Open the template for your type of business. These are Microsoft Word documents, key in the chart of accounts that you will be using. This chart of accounts is what you will be using for your own company as well, with the exception of the name of the company.
Divisions in a chart of accounts
There are five sections in the chart of accounts for a service business and six for the merchandising business.
- The first section is entitled "Assets". These items have a monetary value. For example, furniture and fixtures, office supplies and office equipment have a certain cash value.
- The second section is called "Liabilities" these are amounts of money owed to others. A note payable is an amount owed to an individual or a bank for money that your company has borrowed. Accounts payable are amounts of money owed to suppliers of merchandise to your company. There are a whole set of liabilities related to your payroll also.
- "Stockholders Equity" is the next section. There are two accounts here: common stock and retained earnings. Common stock is the amount of money invested by shareholders in the company and retained earnings is the amount of net income earned in the accounting period.
- The next section is called "Revenue". Here is where you record your sales for services or merchandise.
- The merchandising business has a section called cost of merchandise. This is where the purchases of merchandise for resale are kept.
- The next section is the "Expense" section. This is where you will keep track of all the monies needed to create your sales. As you can see there are many of them. Each one should describe the kind of expenditure.
- Each section of the chart of the accounts is associated with a number.
- Assets are in the first section, liabilities in the second section, stockholders equity in the third, revenue in the fourth, purchases in the fifth and expenses in the sixth.
- Each account in each section is given a number.
- The first account in the assets is called number 1. Therefore, the account number for cash is 11. The first number one tells us that it is an asset account.
- The second number 1 tells us that it is the first account in this series. The account number for example, of the third expense account would be 63, etc.
- If your have lots of accounts use 100 for assets, 200 for liabilities, 300 for stockholders' equity, 400 for revenue and 500 for purchases and 600 for expenses.
- Both Bromley companies have lots of expenses, so we would use the format of 100's, 200's etc. The account number for the first expense would be 610, 611 for the second, etc.
- In the merchandising chart of accounts for the formal wear company, there is one special expense called, "Purchases".
- This account is used to record merchandise bought from suppliers which is later then sold to your customers.
Now it is time for you to prepare a chart of accounts for your own company. Use the templates in the projects box to create your chart of accounts. You may have additional accounts that are particular to your business. Make sure that you put them in the proper categories. Make sure you answer the questions at the bottom of the screen and record your answers on your worksheet form. If you have any special assets or expenses that pertain only to your company, please include them in your chart of accounts. Remember, make sure you use the correct format :chart for service or merchandising business.
Take the test for chapter 1 and record your score on your worksheet for this chapter. Turn it into your instructor.
Service Business Statements
Bromley's Tuxedo Rentals Chart of Accounts
Furniture and Fixtures
Accumulated Depreciations Furniture
Accumulated Depreciation Office Equipment
Workers' Comp Payable
Federal Income Tax Payable
FICA Tax Payable
Medicare Tax Payable
Federal Unemployment Tax Payable
State Unemployment Tax Payable
Sales Tax Payable
SDI Tax Payable
STOCKHOLDERS' EQUITY (3)
Sales Returns and Allowances
Payroll Taxes Expense
Legal and Accounting Expense
Bad Debts Expense