SESSION TWELVE

BUSINESS FINANCIAL RECORDS

OBJECTIVE:

At the end of this topic the trainee should be able to understand and use basic financial
records.

RATIONALE:

An adequate record keeping system helps increase the chances of survival and reduces
the probability of early failure of business. The business records assist the entrepreneur
to keep In touch with the business, spot business trends, keep control of costs, borrow
money from financial institutions and control of his business assets. Records are also
needed for tax and legal purposes.

KEY ITEMS:

-Purchase journal: goods for sale bought on credit

-Sales Journal: goods sold on credit.

-General Journal: assets and miscellaneous transactions.

-Ledgers: records of assets, liabilities and owner equity.

-Trial balance and balance sheet: shows the various balances from the ledgers.

SUMMARY.

The success or failure of a business can depend on the keeping of good financial
statements. These financial statements are used to make business decisions.
BASIC BUSINESS RECORDS

A business cannot operate successfully without proper

Record-keeping. One of the main reasons for business failure is the lack of adequate
records, and especially the lack of adequate financial records. Keeping business records
is a form of store-keeping. Small business owners/managers can know the current
financial position of their business with accurate and up-to-date records.

Having a good record-keeping system can answer the following questions.

1. How much is the business worth?

2. How much profit is the business making?
3. How much do credit customers owe the business?
4. How much does the business owe its creditors?
5. How much tax should the business pay?

IMPORTANCE OF KEEPING GOOD RECORDS

When starting your business, you might wonder “Why go to all the trouble of keeping
business records?” Actually, good records are needed for several reasons, including the
following:

-Your records are the way you keep in touch with the day-to-day, week-to-week, and
month-to-month operations of the business.

-Your records will help you spot business trends, such as high and low points in sales,
operating costs, inventory levels, and credit totals.

-Your records will help you keep control of costs and develop realistic, competitive,
profit producing prices. In addition, they will help you identify losses, such as theft,
inadequate cost control, and other factors.
KEEPING BUSINESS RECORDS.

Business records are important for entrepreneur to succeed. Records help you to see
from where the business has come. They help you to see where the business is going.

There are two types of records:

A. Those required by law: NOTE: It is up to the entrepreneur to keep good records,

not the government.
B. Those to improve business success.

You will need to keep records:

-To keep up with day-to-day business actions.

-To find out where the business is going.

-To help keep costs of products and services down.

-In order to file tax statements.

-To show people who might put money into your business how the company is doing.

-To see what has happened to your products and services.

Entrepreneurs need to keep records that are helpful to the business

-Records should be easy to keep.

-The records should be easy to understand.

-Records should be up-to-date.

-They should show what is true.

-You can make decisions by what the records indicate.

-You need records that are accurate.

All records should agree with each other:

-Records that agree are a sign that there are no errors.

-If your records agree, then decisions can be made.

Many companies that make computers have software that helps entrepreneurs to keep
up-to-date records. All businesses will keep some type of records:

-Checkbooks are a type of record system.

-Daily sales and cash statements are kept by many companies.

-Bank statements can be a source of business records.

-Payroll records are a kind of business records.

Records should be used to keep up with many aspects of the business such as: sales,
cash flow, payments, money owed to the businesses by customers, inventory, and
depreciation.

Records should be kept in a good file system:

-Sales should be filed alphabetically according to who supplies the material.

-How people are paid should be filed by the date they were paid.

-A good filling system will help you to keep up with your records because: records
need to be found quickly and records need to be kept in a safe place.

GENERAL BOOKS OF ACCOUNT

A business needs some form of Journal. A journal is used to record all business
transactions. The information for each transaction or journal entry comes from the
original source documents such as sales slips, cash register tapes, check stubs, and
purchase orders.

General ledgers are kept to record transactions and balances of individual accounts—
assets, liabilities, capital, sales and expenses.

At the end of each fiscal year or accounting period, accounts are balanced and closed.
Sales (income) and expense account balances are transferred to the summary of revenue
and expenses and are used in the income statement. The remaining Asset, liability, and
capital accounts provide the figures for the balance sheet.

The use of too many accounts should be avoided. Break down sales into enough
categories to show a clear picture of the business. Use different expense accounts
covering frequent or substantial expenditures but avoid minute distinctions which will
tend to confuse rather than clarify. Use miscellaneous expense for small unrelated
expense items.

ACCOUNTS RECEIVABLE CONTROL

A few rules should be followed to keep accounts receivable current. First, be sure bills
are prepared (when goods are shipped or service is rendered) and mailed to the correct
addresses. Keep a close watch on larger accounts.

At the end of each month, “age” your accounts receivable. List accounts and enter
amount that are current, unpaid for 30days, and those 60 days and over are unpaid.
Your system should help you collect those accounts.

Pay close attention to customers’ complaints about bills. If a complaint is justified,

propose an adjustment and reach an agreement with the customer. Do this promptly.

If a customer is delinquent, try to obtain a promise of payment on a definite date. If

payment is not received on the date promised, ask the customer to explain why and get
a new promise.

If you don’t know a customer who asks for credit, use a simple form listing name,
address, telephone number, place of employment, bank and credit references. Make
sure that credit is warranted beore you grant it.

Daily receipts summary. A summary of the cash received by the business on that day
should be prepared daily. All money accounted for on the daily receipts summary
should be deposited daily in the business checking account. The daily receipts summary
includes:

-Cash sales for the day.

-Total amount received for money owed to the business (accounts receivable).

-total deposited in business checking account.

THE DAILY SALES AND CASH SUMMARY (CASH BOOK)

The daily sales and cash summary provides you, the business owner, with two
important types of information. First, it provides information about whether the cash
you have at the end of the day matches the amount that your sales receipts indicate you
should have in cash. Consider the following daily sales and cash summary.

At the end of the day you count your cash and it total $520. This is your daily cash
summary. You check and find that credit sales for day were $ 60. Adding this $60 to
your cash sales result in a daily summary of $580. When you total the sale receipts and
the account receivable income, you get $570. There is a problem because of a $570
difference. You should then ask a series of questions: Was incorrect change given to
customer? Was an error made in recording the selling price?

It’s better to complete a Daily Summary Form and find and correct the error that day
than have to find it at the end of the month. Second, the daily sales and cash summary
provides data that can be used in completing other records that tell you how well
business is doing.

Although forms for a daily sales and cash summary vary, all forms should include the
following basic information:

Date:

Cash received:

Charge Sales made:

Income received on accounts receivable (money owed to the business):

Total Cash received:

More detailed daily sales and cash summaries might break these entries down to
provide additional information to meet specific record keeping needs. The following
information shows the daily sales and cash summary form for July7, 2020, for a firm
whose cash sales for the day totaled $624, charge sales totaled $ 150, and the amount
received from credit customers’ accounts was $ 70.
The completed daily sales and cash summary should look like this:

Date: July 7, 2020

Cash Sales $ 624

Charge Sales 150

Accounts receivable 70

Total sales and cash received 844

RECORDING ACCOUNTS RECEIEVABLE

Many small businesses extend credit to their customers. A set of records for these sales
needs to be kept. This set of records is known as the Accounts Receivable Journal.
Perhaps your firm will extend its own credit to its customers. If it does, you will need to
keep records of what your credit customers owe and how much they have paid. This is
really your only account of how much they owe your business.

SMALL BUSINESS FINANCIAL CHECKLIST

What an owner-manager should know:

DAILY

-Cash on hand.

-Bank balance (keep business and personal funds separate).

-Daily summary of sales and cash receipts.

-That all errors in recording collections on accounts are corrected.

-That a record of all monies paid out, by cash or check, is maintained.

WEEKLY

-Accounts receivable (take action on slow payers).

-Accounts payable (take advantage of discounts).

-Payroll (records should include name and address of employee, social security
number, number of exemptions, date ending and the pay period, hours worked, rate of
pay, total wages, deductions, net pay, check number)

-taxes and reports to state and federal government (sales, withholding, social security,
etc).

MONTHLY

-That all journal entries are classified according to like elements (these should be
generally accepted and standardized for both income and expense) and posted to
general ledger.

-That a profit and loss statement for the month is available within a reasonable time
(usually 10 to 15 days following the close of the month). This shows the income for the
business for the month, the expense incurred in obtaining the income, and the profit or
loss resulting. From this, take action to eliminate loss (adjust mark-up? reduce overhead
expense? Pilferage? Incorrect tax reporting? Incorrect buying procedures? Failure to
take advantage of cash discounts?).

-That a balance sheet accompanies the profit and loss statement. This shows assets
(what the business has), liabilities (what the business owes), and the investment of the
owner.

-The bank statement is reconciled (that is, the owner’s books are in agreement with the
bank’s record of the cash balance).

-The petty cash account is in balance (the actual cash in the petty cash box plus the total
of the paid out slips that have not been charged to expense total the amounts set aside
as petty cash).
-That accounts receivable are aged, i.e. 30, 60, 90 days etc. past due (work all bad and
slow accounts).

-That inventory control is worked to remove dead stock and order new stock. (What
moves slowly? Reduce. What moves fast? Increase).