The  objective of this blog is to covey basic accounting principles in chapter form and bring viewers up to date on the changes in the 2018 tax law.

CHAPTER 1 OVERVIEW

CHAPTER  2 ACCOUNTING CYCLE

CHAPTER 3   CHART OF ACCOUNTS

CHAPTER 4  SUBSIDIARY LEDGERS

CHAPTER 5  DEBIT (DR)  CREDIT (CR) THEORY/RULES

CHAPTER 6  THE ACCOUNTING FORMULA>A=L+ OE+S-EXP-DIV

CHAPTER 7  SAMPLE JOURNAL ENTRIES & SPECIAL JOURNALS

CHAPTER 8 TAX LAW CHANGES 2018

CHAPTER 9  CHOOSING A BUSINESS STRUCTURE (ENTITY, FORM)

CHAPTER 10 PASS THRU (FLOW THRU) ENTITY

CHAPTER 11 DEPRECIATION & AMORTIZATION EXPENSE

CHAPTER 12 SALES NEEDED TO BREAKEVEN

CHAPTER 13 INVENTORY CONTROL  

CHAPTER 14 BUDGETING

 CHAPTER 15 CLOSING ENTRIES

CHAPTER  16 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(GAAP)

CHAPTER  17 POINT OF SALES (POS)

CHAPTER  18 LIFO & FIFO INVENTORY/COST OF SALES (COS) METHODS

Accounting  is an information system for the  owners, creditors and investors of a business.

The purpose is to keep "score" about the success or failure of the business and hopefully help the business stay on a profitable track.

One can say it is Management By the Numbers. However, it is not that easy as one must drill under the numbers and find out what caused them to be what they are.

The Tax Return is prepared from the Accounting system' s 12 months of operations as the Tax Return is an annual report to the IRS .

To survive in any business keep in mind "Cash is King".  Follow the cash as a shortage usually means losses and abundance profits. EG. If the company you work for misses pay day, you can bet it will not be around much longer as how can it exist by not paying their own employees.

BEFORE EXLAINING THE "BOOKS & RECORDS" THE STEPS IN THE ACCOUNTING CYCLE WILL BE STATED.  THESE STEPS TAKE PLACE MONTHLY EACH AND EVERY MONTH FOR 12 MONTHS WHICH IS THE LENGTH OF THE BUSINESS YEAR

CREATE A CHART OF ACCOUNTS FOR GENERAL LEDGER...THE SOURCE OF THE INFORMATION SYSTEM>SUMMARIZED BY MONTHLY FINANCIAL STATEMENTS,

NAMELY INCOME AND  BALANCE SHEET

1.  ANALYZE THE BUSINESS TRANSACTION AS SUPORTED BY DOCUMENTS

2.  RECORD THE TRANSACTION IN THE GENERAL OR SPECIAL JOURNALS

3.  POST THE JOURNAL TRANSACTIONS TO THE GENERAL LEDGER (GL)

4.  LIST THE PRELIMINARY TRIAL BALANCE (TB) FROM THE GL

5.  PREPARE ADJUSTING ENTRIES IN GENERAL JOURNAL & POST TO GL

6.  PREPARE ADJUSTED TB

7.   PREPARE  INCOME  STATEMENT (IS)

8.  RECORD  CLOSING TEMPORARY GL ACCOUNTS (INCOME & EXPENSE)

            IN GENERAL JOURNAL &  POST TO GL

9. PREPARE POST CLOSING TB FROM GL

10. PREPARE BALANCE SHEET (BS)

THIS PROCESS IS TEDIOUS AND REPETITIVE  BUT COMPUTER SOFTWARE MAKES LIFE EASY.  STEPS ONE AND TWO MUST BE DONE MANUALLY BUT THE COMPUTER DOES EVERYTHING ELSE AT YOUR BECKONED CALL. THE CYCLE'S MAIN GOAL IS TO PRODUCE A MONTHLY IS AND THEN START THE PROCESS ALL OVER BUT COMPUTER SOFWARE GIVES YOU THE MONTHLY PROFIT/LOSS STATEMENT (IS) AS WELL AS THE YEAR TO DATE (YTD) IS . SO THIS GIVES ONE MORE TIME TO ANALYZE THE NUMBERS.

THE FOUNDATION  OF THE ACCOUNTING INFORMATION SYSTEM  IS THE CHART OF ACCOUNTS WHICH ARE INDIVIDUAL "ACCOUNTS' WHICH COMPRISE THE GENERAL LEDGER. EG-IF YOU HAVE 10 BANK ACCOUNTS YOU MAV HAVE ONE GL ACCOUNT CASH OR 10 SEPARATE GL ACCOUNTS SO YOU KNOW THE INFO ABOUT EACH BANK ACCOUNT.  ANOTHER EXAMPLE IS SALES....ONE GL ACCOUNT OR SEPARATE GL ACCOUNTS FOR EACH PRODUCT SOLD.   THE  FINANCIAL STATEMENTS SUMMARIZE THE GL SO YOU CAN  HAVE ONE LINE FOR CASH AND ONE FOR SALES.

SAMPLE CHART OF ACCOUNTS ARE ALL OVER THE INTERNET AS WELL AS FROM THE SOFTWARE PURCHASED AND OFTEN BY BUSINESS TYPE OR INDUSTRY. ONCE YOU START THE CHART OF ACCOUNTS YOU CAN EXPAND/CHANGE AS YOUR BUSINESS REQUIRES.

ALL CHART OF ACCOUNTS HAVE 5 SECTIONS IN THIS ORDER>ASSETS, LIABILITIES, EQUITY, SALES, EXPENSES. EACH ACCOUNT  IS ASSIGNED A NUMERIC ACCOUNT #.

LARGE PUBLIC CORPORATIONS EVEN HAVE ALPHA/NUMERIC NUMBERS.  AND A FRANCHISE  LIKE DUNKIN DONUTS AND MACDONALDS HAVE UNIFORM CHART OF ACCOUNTS SO COMPARISONS CAN BE MADE BY STORE OR REGION OR FRANCHISE OWNER.

CERTAIN GENERAL LEDGER ACCOUNTS NAMELY, INVENTORY, ACCOUNTS RECEIVABLES (AR), ACCOUNTS PAYABLES(AP), FIXED ASSETS (FA) ARE CALLED CONTROL ACCOUNTS BECAUSE ALL YOU SEE IS ONE NUMBER NOT THE DETAIL THAT COMPRISES THE NUMBER.

THE SUSIDIARY LEDGER CONTAINS THE DETAIL EG. >AR ALL CUSTOMERS WHO OWE THE BUSINESS MONEY; AP ALL VENDORS/SUPPLIERS/ETC THAT BUSINESS OWES MONEY TO--UNPAID BILLS;   INVENTORY--GOODS WAITING TO BE SOLD>QUANTITY AND LOCATION; FIXED ASSETS--COMPUTERS,  CELL PHONES, FURNITURE/FIXTURES, CARS/TRUCKS,OWNED BUILDINGS, PATENTS, COPYWRIGHTS, INTELLECTUAL PROPERTY>DATE PURCHASED , COST, LOCATION.

 USING THE  CHART OF ACCOUNTS A JOURNAL ENTRY IS MADE BY DEBITING ONE ACCOUNT AND CREDITING ANOTHER BUT NOT LIMITED TO TWO ACCOUNTS AS LONG AS DEBITS=CREDITS MEANING THE ENTRY IS IN BALANCE. COMPUTER PROGRAMS WILL NOT ACCEPT A JOURNAL ENTRY UNLESS IT IS IN BALANCE.

THE "T" ACCOUNT  IS A SHORT CUT METHOD TO  MAKE AND FIGURE OUT A JOURNAL TRANSACTION BEFORE YOU ACTUALLY RECORD IT.   AGAIN DR TO LEFT AND CREDIT TO RIGHT AND EACH "T" IS A SEPARATE ACCOUNT.

                        CASH

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THE FIVE CLASSES OF ACCOUNTS HAVE DR/CR RULES

ASSETS---DR =INCREASE  CR=DECREASE

LIABILITIES--- DR=DECREASE   CR=INCREASE

EQUITY---DR= DECREASE  CR=INCREASE

SALES/INCOME----DR=DECREASE CR=INCREASE

EXPENSES ---DR=INCREASE  CR=DECREASE

DIVIDENDS IS A SPECIAL ACCOUNT & IT ONLY INCREASES VIA A DR

RETAINED EARNINGS IS SAME AS EQUITY

 THE FORMULA VERSION IS OFTEN EXPRESSED AS  A=L+OE+S-EXP-DIV

THIS IS A SUMMARY OF THE FINANCIAL STATEMENTS---BS AND IS.

BALANCE SHEET HAS 5 SECTIONS & ACCOUNTS ARE CALLED PERMANENT ACCOUNTS

           1/   CURRENT ASSETS----CASH, RECEIVABLES,INVENTORY ETC. WHICH WILL TURN   INTO CASH IN LESS THAN ONE YEAR

           2/ FIXED ASSETS ALSO CALLED LONG TERM ASSETS---LAND, BUILDINGS, FURNITURE/FIXTURES, CARS, TRUCKS, COMPUTERS, PATENTS, COPYRIGHTS, INTELLECTUAL PROPERTY>HAVING A BUSINESS USE/LIFE OF MORE THAN ONE YEAR

           3/ CURRENT LIABILITIES----UNPAID BILLS ,EXPENSES,PAYROLL, CURRENT YEAR LOAN/MORTGAGE >DUE TO BE PAID IN LESS THAN ONE YEAR

           4/ LONG TERM LIABILITIES/DEBT----LOANS, BONDS, MORTGAGES PAYABLE OVER MORE THAN ONE YEARD

            5/ CAPITAL/EQUITY/RETAINED EARNINGS----SHOWS AMOUNT INVESTED(CAPITAL) &  CUMULATIVE PROFIT/LOSS(RETAINED EARNINGS).  ALSO REFERRED TO AS EQUITY VIA  ASSETS LESS LIABILITIES EQUALS EQUITY OR NET WORTH

INCOME STATEMENT HAS TWO SECTIONS & ACCOUNTS CALLED TEMPORARY

SALES LESS COST OF SALES EQUALS GROSS PROFIT

               LESS EXPENSES= OPERATING PROFIT/LOSS

                LESS TAXES= NET PROFIT/LOSS(BOTTOM LINE)

ACCOUNTS CALLED TEMPORARY AS THESE ARE CLOSED OR REDUCED TO ZERO IN THE ACCOUNTING CYCLE TO PREPARE  IS FOR SPECIFIC MONTH AND THEN START OVER. THE PROFIT OR LOSS IS CLOSED TO THE RETAINED EARNINGS ACCOUNT ON THE BALANCE SHEET.                

JOURNAL ENTRIES ARE REPETITIVE AS THERE ARE ONLY CERTAIN TRANSACTIONS

SALES----DR CASH OR AR AND CR SALES

EXPENSES   DR EXPENSE CR AP

COLLECT AR---DR CASH CR AR

PAY BILLS---DR AP  CR CASH

PURCHASE A FIXED ASSET----DR ASSET       CR  CASH OR LOAN PAYABLE

PAY OFF LOAN OR MTG MONTHLY----DR PAYABLE CR CASH

PURCHASE INVENTORY-----DR INVENTORY CR CASH OR AP

ALL ENTRIES ARE FINALIZED THRU CASH-AGAIN CASH IS KING

AGAIN EVERY JOURNAL ENTRY MUST BE BALANCED THE SO-CALLED   "DOUBLE-ENTRY BOOKKEEPING SYSTEM"  ENSURING DEBITS = CREDITS

SINCE  JOURNAL ENTRIES ARE NUMEROUS AND REPETITIVE TO SAVE POSTING AND CREATE SMALLER GENERAL LEDGERS SPECIAL JOURNALS ARE  CREATED

EG SALES  JOURNAL---DR AR CR SALES; PAYABLE JOURNAL---DR AP CR CASH;

CASH RECEIPTS---DR CASH    CR AR

THIS WAY YOU CAN CHOOSE TO POST FROM THIS SINGLE COLUMN SPECIAL JOURNAL DAILY, WEEKLY ETC THUS LIMITING POSTINGS AND CLUTTER TO GL

THE GENERAL JOURNAL STILL EXISITS  FOR ADJUSTING & CLOSING ENTRIES PLUS ANY OTHER ENTRY SUCH AS THE PURCHASE OF ASSETS OR ADDITIONAL CONTRIBUTION OR WITHDRAWAL OF CAPITAL

ALL EFFECTIVE 1/1/2018

EXEMPTION DEDUCTION GONE>$4050

STANDARD DEDUCED INCREASED TO $12000(S), $24000(MFJ), $18000(HH)

ITEMIZED DEDUCTIONS FOR PROPERTY TAXES & STATE TAXES CAPPED AT $10000

CHILD CREDIT NOW $2000 UP FROM $1000

1040 TAX RATES DROP 2% FOR EACH BRACKET>TOP 37%

BUT CORP RATE NOW 21% DOWN FROM 35%

ALT MIN TAX & OTHER AREAS BENEFIT AS INCOME RANGES EXPANDED

20% DEDUCTION ON PROFIT FOR BUSINESS PASS THRU TO 1040 WITH CERTAIN RULES

MAY BE NEW RULES TO SUPPORT HEAD OF HOUSEHOLD(HH)

1> SOLE PROPRIETOR> 1040 SCH-C

2> PARTNERSHIP> 1065 & K-1> 1040 SCH-E

3> LANDORD>1040 > SCH-E

4>SUB S>1120S & K-1>1040 SCH-E

5> C CORP> 1120C

6> LLC>SOLE PROP OR PSHIP OR SUB S OR C

7> NON-PROFIT>990(USUALLY A C CORP) 501c3 VIA APPROVAL OF FORM 1023 FROM IRS

ONLY THE C CORP IS NOT A PASS THRU ENTITY SO PROFIT & LOSS REMAIN WITH CORP WHILE PASS THRU PROFIT & LOSS GOES ON 1040 AND IS COSOLIDATED WITH ALL OTHER INDIVIDUAL INCOME/LOSSES

THIS CONCEPT MEANS THE PROFIT OR LOSS GENERATED BY THE BUSINESS PASSES TO THE INDIVIDUAL'S 1040;.BUT HIGHEST PERSONAL 1040 TAX RATE CAN BE 37%

BUT  NEW IN 2018 IS A 20% DEDUCTION ON PASS THRU PROFITS WITH CERTAIN RULES

ONLY THE C CORP IS NOT A PASS THRU ENTITY AND IS TAXED VIA THE 1120C TAX RETURN AT CORPORATE TAX RATES EFFECTIVE 1/1/2018 NOT EXCEEDING 21%>PROFITS & LOSSES STAY WITH 1120C

WHEN PURCHASED, FIXED ASSETS WHICH ARE BUSINESS ASSETS USED FOR MORE THAN ONE YEAR, BUSINESSES EXPENSE THESE ASSETS OVER THEIR USEFUL LIFE TO THE BUSINESS. THE IRS HAS USEFUL LIFE GUIDELINES FOR ASSETS LIKE THREE YEARS FOR COMPUTERS AND CARS AND ABOUT 25 YEARS FOR BUILDINGS.

ASSETS ARE CLASSIFIED AS TANGIBLE---CAN TOUCH IT---BUILDING, AUTO, COMPUTER AND INTANGIBLE---NOT A "HARD" ASSET;CANNOT TOUCH IT--PATENT. COPYRIGHT.

NOW THE BUSINESS GETS TO EXPENSE THE COST OF THE FIXED ASSETS ON THE INCOME STATEMENT.    FOR TANGIBLE ASSETS THE EXPENSE ON THE INCOME STATEMENT IS DEPRECIATION AND FOR INTANGIBLE AMORTIZATION.    ON THE IS THESE EXPENSES ARE CONSIDERED NON-CASH AS THE PAYMENT OF FIXED ASSETS IS DONE AT PURCHASE DATE VIA CASH AND LOANS.

LAND IS NOT ALLOWED TO BE DEPRECIATED AND MUST BE  REMOVED FROM COST OF BUILDING WHEN DEPRECIATING THE COST OF A BUILDING.

TO RECORD DEPRECIATION OR AMORTIZATION  IN THE JOURNAL BY INDIVIDUAL ASSET

DEBIT  DEPRECIATION EXPENSE (OR AMORTIZATION)

CREDIT ALLOWANCE FOR DEPRECIATION   (OR AMORTIZATION)

THE ALLOWANCE ACCOUNT HAS A NORMAL BALANCE AS A CREDIT AND IS CALLED A CONTRA ASSET ACCOUNT AS IT APPEARS IN FIXED ASSETS AS A REDUCTION OF THE COST OF THE ASSET.

FIXED ASSETS      $100000

LESS ALLOWANCE    $30000

BOOK VALUE                                       $70000

IF THE ASSET HAD A 10 YEAR USEFUL LIFE & DEPRECIATION WAS EQUAL EACH YEAR,

THEN THE ABOVE HAS BEEN USED IN THE BUSINESS FOR 3 YEARS. THE BOOK VALUE IS WHAT IS LEFT NOW AND IS CURRENT COST OF ASSET SHOULD WE SELL OR TRADE IT IN AND WILL DETERMINE THE GAIN OR LOSS ON THE ASSET.

IF THE BOOK VALUE IS ZERO, IT IS SAID TO BE FULLY DEPRECIATED OR EXPENSED BUT CAN STILL BE USED IN THE BUSINESS.

BREAKEVEN SALES IS AN IMPORTANT PLANNING TOOL IN ANALYZING THE INCOME STATEMENT,       SIMPLY PUT IT MEANS WHAT SALES DOLLARS AND UNITS OF PRODUCT MUST I SELL TO COVER MY VARIABLE AND FIXED COSTS AND THUS END UP WITH A BOTTOM LINE OF ZERO.

VARIABLE COSTS ARE COSTS INCURRED ONLY WHEN YOU SELL YOUR PRODUCT OFTEN REFERRED TO AS COST OF GOODS SOLD OR COST OF SALES(COS)

FIXED COSTS  ARE ALL COSTS INCURRED TO OPEN YOUR DOORS WHETHER YOU SELL ANY PRODUCT OR NOT SUCH AS RENT, TELEPHONE,NON-SALES SALARIES ETC.

BREAKEVEN FORMULA>FIXED COSTS DIVIDED BY GROSS PROFIT  % = BREAKEVEN SALES. AN EXAMPLE FOLLOWS

SALES                                    $100000     100%

COS                                        -   65000        65%

GROSS PROFIT                         35000        35%

FIXED COSTS                       -    35000        35%

OPERATING PROFIT/LOSS        0                 0

TO PROVE THIS> 35000 DIVIDED BY .35= 100000  AND IF I SELL MY PRODUCT FOR 10 PER UNIT THEN I MUST SELL 10000 UNITS TO BREAKEVEN AND

IF I WANT TO MAKE A 20000 PROFIT BEFORE TAXES EXPAND THE FORMULA>35000+20000 DIVIDED BY .35 = 157143 OR ABOUT 15714 UNITS

PROOF> .35 TIMES 157143=55000

REACHING BREAKEVEN SALES ENABLES A COMPANY TO LOWER SALES PRICE & STILL CONTRIBUTE TO THE BOTTOM LINE BECAUSE AS LONG AS SALES PRICE COVERS COS THE GROSS PROFIT GOES DIRECT TO PROFIT BEFORE TAXES SINCE ALL FIXED COSTS HAVE BEEN COVERED.

MOST COMPANIES DO NOT REACH BREAKEVEN SALES TIL THE THIRD OR FOURTH QUARTER BUT LOWERING SALES PRICE CAN HELP TO REDUCE INVENTORY & EVEN WINNING SOME PROPOSALS AS YOUR PRICE UNDERCUTS THE COMPETITION.

TO BE SUCCESSFUL INVENTORY MUST BE MONITORED ON A REGULAR BASIS. KEY CONTROL FACTORS RELATE TO PURCHASING AND SALES.  THE GOAL IS KNOWING HOW MUCH PRODUCT TO ORDER AND WHEN. THE LEVEL OF CONTROL DIFFERS IF YOU MANUFACTURE THE PRODUCT RATHER THAN BUY THE PRODUCT FOR RESALE.

INVENTORY IS A CURRENT ASSET (COST) ON THE BALANCE SHEET UNTIL IT IS SOLD AND BECOMES A COST OF SALES ON THE INCOME STATEMENT. USUALLY CASH IS PAID UP FRONT FOR THE INVENTORY BEFORE CASH IS RECEIVED FROM THE SALE.

THE SALES PLAN SETS THE STAGE FOR PLANNING INVENTORY. INVENTORY SUPPORTS THE MARKETING/SALES PLAN. SALES IS BUDGETED FIRST BY MONTH BY INVENTORY ITEM AND THEN THE INVENTORY PURCHASING IS FORECASTED TO SUPPORT THE SALES PLAN. ONCE THE PLAN IS DEFINED ACTUAL RESULTS MUST BE MONITORED DAILY, WEEKLY, MONTHLY TO IDENTIFY AND RESOLVE PROBLEMS.

AN INVENTORY AGING REPORT IS A USEFUL TOOL AS IT AGES INVENTORY BY 15, 30, 60,90+ DAYS OLD FROM PURCHASE DATE. INVENTORY THAT DOES NOT MOVE OR BECOMES OBSOLETE THUS HAS NOT BEEN SOLD AND HAS NO SALE TO COVER ITS COST SO IT WILL BECOME AN EXPENSE ON THE INCOME STATEMENT--AN UNPLANNED EXPENSE UNLESS YOU CAN DISPOSE VIA DEEP DISCOUNTS TO RECOVER AT LEAST THE INVENTORY COST.

OTHER CONTROL REPORTS INCLUDE SALES BY PRODUCT, BY CUSTOMER, BY SALESMAN.  A SOFTWARE PROGRAM CALLED "POINT OF SALES' (POS) PRODUCES THESE REPORTS DAILY INCLUDING INVENTORY MOVEMENT AND ON HAND INVENTORY.

SALES BACKLOG IS A COMPANIES' BEST FRIEND.   THIS MEANS CUSTOMERS HAVE COMMITTED TO PURCHACE THE PRODUCT BUT WANT DELIVERY AT A FUTURE DATE.

THIS MAKES THIS ASPECT OF INVENTORY PLANNING EASY.  IT IS NOT UNUSUAL TO SEE SALES BACKLOG FOR THE NEXT 1-3 YEARS AND IT CAN BE A SIGNIFICANT PART OF TOTAL SALES FOR THE YEAR.

INVENTORY TURNOVER RATIO> COST OF GOODS SOLD DIVIDED BY INVENTORY. USUALLY COMPUTED FROM YEAR END BALANCE SHEET AND INCOME STATEMENT.

INVENTORY IS PER THE BALANCE SHEET AND COST OF GOODS SOLD IS PER THE INCOME STATEMENT.

THE HIGHER THE REULTING NUMBER THE MORE EFFICIENT THE INVENTORY IS BEING MANAGED.> 6 WOULD MEAN YOU REFILL INVENTORY EVERY 60 DAYS; 12 WOULD MEAN EVERY 30 DAYS. THE PRODUCT/INDUSTRY AND LEAD TIME TO ATTAIN/PURCHASE THE INVENTORY CAN ALL EFFECT THE TURNOVER. BUT ALL COMPANIES WANT TO TURNOVER (SELL) INVENTORY AS FAST AS POSSIBLE .

BUDGETING IS AN OPERATIONAL AND FINANCIAL PLAN ATTEMPTING TO FORECAST THE FUTURE. IT IS NORMALLY PREPARED ABOUT 6 MONTHS BEFORE THE ACTUAL BUSINESS YEAR BEGINS. SO FOR THE 12/31/2019 YEAR THE BUDGET SHOULD BE FINALIZED BETWEEN JUNE-SEPTEMBER 2018. THE BUDGET IS SUPPORTED IN DETAIL BY QUANTITATIVE DETAIL AND ECONOMIC ASSUMPTIONS. THE PLAN IS COMPRISED  MONTH BY MONTH FOR THE 12 MONTH BUSINESS YEAR.

THE PROCESS BEGINS WITH THE SALES FORECAST AND ONCE FINALIZED PROCEEDS TO THE OTHER OPERATIONAL BUDGETS LEADING TO THE INCOME STATEMENT---PRODUCTION/DIRECT LABOR/DIRECT MATERIAL/ SELLING GENERAL AND ADMIN EXPENSES(SGA). IF THE BUSINESS DOES NOT MANUFACTURE, THEN THE PRODUCTION BUDGET MERELY BECOMES THE PURCHASING BUDGET FOR PRODUCT PURCHASED FOR RESALE.

NEXT ARE THE FINANCIAL BUDGETS---CAPITAL EXPENDITURES/CASH FLOW/BALANCE SHEET.  AGAIN ECONOMIC FORECASTS SUCH AS WHEN BILLS WILL BE PAID AND WHEN CUSTOMERS WILL PAY US ARE NOTED AS PART OF THE BUDGET PROCESS.

CAPITAL EXPENDITURES ARE NEW FIXED ASSETS SUCH AS EQUIPMENT, RENOVATIONS, EXPANSION, ETC, WHICH NORMALLY REQUIRE OUTSIDE  FINANCING.

THUS CASH SHORTAGES AND OVERAGES CAN BE DETERMINED ON A MONTH BY MONTH BASIS TO DETERMINE BANK LOAN NEEDS AND PAYMENTS.

SINCE THE BUDGET IS A FORECAST, AN APPROACH IS TO BUDGET AT THREE LEVELS OF SALES---THE MOST LIKELY; WORST CASE; OPTOMISTIC CASE.  ALSO LOOK  AT THE PAST THREE YEARS ACTUAL FINANCIALS WHILE DOING THE FUTURE BUDGET.  THE THREE LEVEL APPROACH SHOWS THE BUSINESS WHAT DECISIONS MUST BE MADE RE PERSONNEL HIRING,FIRING,AND OTHER EXPENSES INCREASES/DECREASES AS YOU ENTER THE WORST OR OPTOMISTIC LEVEL. IT IS HARD WORK BUT PAYS DIVIDENDS IN THE END.

THE FINAL PROCESS IS COMPARING ACTUAL RESULTS TO THE BUDGET MONTHLY AND DETERMINING THE REASONS FOR FAVORABLE AND UNFAVORABLE DIFFERENCES ON THE INCOME STATEMENT, CASH FLOW, BALANCE SHEET LINE BY LINE.  THE FINANCIAL TEAM AND BUDGET ANALYSTS ONLY HAVE "12 BULLETS IN THEIR GUN" OR 12 MONTH -ENDS TO MAKE DECISIONS.   DECISIONS MADE IN MARCH HAVE AN EFFECT OF 9 MONTHS WHILE THOSE MADE IN SEPTEMBER ONLY A 3 MONTH EFFECT SO "SHOOT FAST AND STRAIGHT"

SOME COMPANIES ONLY  ANALYZE A LINE ITEM IF THE DIFFERENCE IS OVER A CERTAIN DOLLAR AMOUNT OR A CERTAIN PERCENT. THIE GOAL OF THIS PROCESS IS TO KEEP THE COMPANY LIQUID AND PROFITABLE AND ASSIST MANAGEMENT IN MAKING MONTLY DECISIONS TO ATTAIN THESE GOALS.

THIS MONTHLY ANALYSIS MUST BE PERFORMED QUICKLY. FOR EXAMPLE, 1/2019 HAS ENDED SO WE NEED THE ACTUAL FINANCIAL STATEMENTS QUICKLY SO THE ANALYSIS CAN BEGIN AND DECISIONS MADE AND IMPACT FEBRUARY. QUICKLY MEANS BY THE 5TH OF FEBRUARY FOR EXAMPLE. ANY LATER AND YOUR DECISIONS MAY NOT IMPACT FEBRUARY AT ALL. THIS "WAR ROOM " ANALYSIS MAY REQUIRE BURNING THE "MIDNITE OIL" BUT THAT IS NORMAL IN THIS ACCOUNTING GAME.

CHAPTER 15 CLOSING ENTRIES 

BASICALLY THIS TERM MEANS YOU ARE CLOSING THE BOOKS WHICH IS DONE EVERY MONTH SO AN INCOME STATEMENT CAN BE PREPARED FOR THAT MONTH. OTHER TERMS SUCH AS MONTH END CLOSING OR MONTH END MEAN THE SAME THING. WHAT HAPPENS IS THAT FOUR JOURNAL ENTRIES ARE PREPARED EITHER MANUALLY OR BY THE COMPUTER AT EVERY MONTH END/CLOSING.

    1~ CLOSE ALL INCOME ACCOUNTS >DR INCOME CR INCOME SUMMARY

      2~CLOSE ALL EXPENSE ACCOUNTS>DR INCOME SUMMARY  CR EXPENSES

      3~CLOSE INCOME SUMMARY >IF A PROFIT DR INCOME SUMMARY CR RETAINED EARNINGS.  IF A LOSS CR INCOME SUMMARY DR RETAINED EARNINGS

      4~CLOSE DIVIDEND ACCOUNT>DR RETAINED EARNINGS CR DIVIDEND

THUS THE RESULT IS ALL INCOME ACCOUNTS AND ALL EXPENSE ACCOUNTS HAVE A ZERO BALANCE THUS ONLY BALANCE SHEET ACCOUNTS REMAIN WITH A BALANCE. THAT IS WHY BALANCE SHEET ACCOUNTS ARE CALLED PERMANENT ACCOUNTS AND INCOME STATEMENT ACCOUNTS CALLED TEMPORARY AS THEY ARE CLOSED EACH AND EVERY MONTH FOR THE 12 MONTHS.

CHAPTER 16 (GAAP) GENERALLY ACCEPTED           ACCOUNTING PRINCIPLES

ACCOUNTING PRINCIPLES AND STANDARDS FOR RECORDING ACCOUNTING TRANSACTIONS AND REPORTING INCOME STATEMENTS, BALANCE SHEETS AND CASH FLOW STATEMENTS ARE SET FORTH BY THE FINANCIAL ACCOUNTING STANDARDS BOARD(FASB) OF NORWALK CT 06856 WHICH HAS A VERY DETAILED WEB SITE CONTAINING PRONOUNCEMENTS. PROJECTS, BOARD MENBERS, ETC. GAAP IS ISSUED BY THE FASB.  ALL CORPORATIONS-PRIVATE, PUBLIC-NON-PROFIT-MUST FOLLOW GAAP. FASB's PREDESSOR WAS THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS WHICH STILL EXISTS AND ALL CPA's MUST CERTIFY TO GAAP STANDARDS WHEN CERTIFYING FINANCIAL STATEMENTS.THE SECURITY AND EXCHANGE COMMISSION(SEC)MONITORS PUBLICLY TRADED CORPORATIONS TO ASCERTAIN ADHERENCE TO THEIR RULES AND REGULATIONS.

CHAPTER 17 POINT OF SALES (POS)

POS IS A COMPUTER SOFTWARE SYSTEM USED MOSTLY BY A BUSINESS WHICH RECORDS SALES AT A CASH REGISTER. EXAMPLES OF SUCH RETAIL BUSINESSES INCLUDE DUNKIN DONUTS, KOHLS, MCDONALDS, SHOP RITE, HOME DEPOT ETC.

THE CASHIER SCANS THE PRODUCT BEING SOLD AT THE REGISTER AND THE ACCOUNTING ENTRIES MADE ARE A DR TO CASH/CHECK/CREDIT CARD AND A CR TO SALES FOR THE SPECIFIC PRODUCT SOLD. ALSO A DR TO COS-COST OF SALES AND CREDIT TO INVENTORY AS PRODUCT IS NO LONGER IN INVENTORY. 

AS YOU CAN SEE MOST OF THESE COMPANIES HAVE MULTIPLE STORES IN VARIOUS STATES SO THE SALES PRODUCTS COMPOSE A STANDARD CHART OF ACCOUNTS, THIS WAY SALES AND SALES BY PRODUCT CAN BE ANALYZED BY STORE BY STATE BY OWNER ETC. THE SYSTEM ALSO GIVES A WARNING WHEN INVENTORY IS LOW AND IT IS TIME TO REORDER.

CHAPTER 18 LIFO/FIFO INVENTORY COST SYSTEM

MY ACCOUNTING PROFESSOR INTRODUCED THIS TOPIC BY SAYING HIS 2 DOGS WERE NAMED LIFO/FIFO. BUT THEY ARE ACTUALL INVENTORY ACCOUNTING METHODS TO ESTABLISH WHAT IS THE INVENTORY COST FOR COS WHEN A PRODUCT IS SOLD.

IN ONE'S INVENTORY THERE EXISTS MANY ITEMS OF THE SAME PRODUCT PURCHASED AT DIFFERENT TIMES AT DIFFERENT PRICES. SO WHEN THE PRODUCT IS SOLD WHAT PRICE DOES ONE USE FOR COST OF SALES. ACCOUNTING PRINCIPLES STATES THE BUSINESS HAS ONE OF TWO CHOICES-LIFO>LAST IN FIRST OUT OR FIFO >FIRST IN FIRST OUT. SO LIFO MEANS A PRODUCT SOLD USES THE LAST PURCHASE PRICE FOR COS AND FIFO THE OPPOSITE OR FIRST OR OLDEST PURCHASED. THE BUSINESS SELECTS ONE METHOD AND CANNOT CHANGE. IN A PERIOD OF INFLATION MEANING RISING PRICES LIFO WILL SHOW COS HIGH HIGH, PROFITS LOW AND INVENTORY LOW WHILE FIFO WILL SHOW COS LOW PROFIT HIGH AND INVENTORY HIGH RE VALUATION. OVER THE LONG RUN BOTH METHODS SHOW THE SAME RESULTS. FOR WHATS ITS WORTH MOST COMPANIES USE THE LIFO METHOD.