DOCUMENT RESUME

ED 373 254 CE 067 088

TITLE Record Keeping. Unit 17. Level 3. Instructor Guide.PACE: Program for Acquiring Competence inEntrepregeurship. Third Edition. Research &Development Series No. 303-17.

INSTITUTION Ohio State Univ., Columbus. Center on Education andTraining for Employment.

PUB DATE 94NOTE 43p.; For the complete set, i.e., 21 units, each done

at three levels, see CE 067 02.)6.2. Supported by theInternational Consortium for EntrepreneurshipEducation, the Coleman Foundation, and the Center forEntrepreneurial Leadership Inc.

AVAILABLE FROM Center on Education and Training for Employment, 1900Kenny Road, Columbus, OH 43210-1090 (order no.RD303-17 IG, instructor guide $4.50; RD303-17 M,student module, $3; student module sets, level1--RD301M, level 2--RD302M, level 3--RD303M, $45each; instructor guide sets, level 1--RD301G, level2--RD302G, level 3--RD303G, $75 each; 3 levels andresource guide, RD300G, $175).

PUB TYPE Guides Classroom Use Teaching Guides (ForTeacher) (052) Guides Classroom UseInstructional Materials (For Learner) (051)

EDRS PRICE MF01/PCO2 Plus Postage.DESCRIPTORS Behavioral Objectives; Bookkeeping; Business

Administration; *Business Education; *CompetencyBased Education; Computer Oriented Programs;*Entrepreneurship; Learning Activities;Microcomputers; Postsecondary Education;*Recordkeeping; Records Management; SecondaryEducation; *Small Businesses; Teaching Guides

IDENTIFIERS *Program for Acquiring Competence Entrepreneurship

ABSTRACTThis instructor guide for a unit on recordkeeping in

the PACE (Program for Acquiring Competence in Entrepreneurship)curriculum includes the full text of the student module and lessonplans, instructional suggestions, and other teacher resources. Thecompetencies that are incorporated into this module are at Level 3 oflearning--starting and managing one's own business. Included in theinstructor's guide are the following: unit objectives, guidelines forusing PACE, lists of teaching suggestions for each unitobjective/subobjective, model assessment responses, and overview ofthe three levels of the PACE program. The following materials arecontained in the student's guide: activities to be completed inpreparation for the unit, unit objectives, student reading materials,individual and group learning activities, case study, discussionquestions, assessment questions, and references. Among the topicsdiscussed in the unit are the following: the value of maintainingaccurate records, determining the records needed for a business, and

a plan for managing records. (KC)

UNIT 17LEVEL 3

PACETHIRD EDITION

`,1.;4CENTS ON EDOCADONANO MINING FOR EMPLOYMENT

COLLEGE OF EDUCATION111E ONO STATE UWE FISITV

Program for Acquiring-,Curnpetence in-Entrepreneurship

fte..ea rch & De, elopmen1 Series Ne. 30A-17

Objectives:

Explain the value of maintaining accurate records.

Determine all records needed for your business.

Develop a plan for managing your records.

U S DEPARTMENT OF EDUCATION

EDUCATIONAL RESOURCES INFORMA1I0'.

dT

CENTER iERIC1hi', document has been reproduced as

received limn the person or orgaiiilaueooriginating it

O Miner change,. have been made Inimprove reproduction quality

Points of View or opinion, Mated in thisdocument to not necessarily representofficial OF RI position or policy

"PERMISSION TO REPRODUCE THISMATERIAL HAS BEEN GRANTED BY

TO THE EDUCATIONAL RESOURCESINFORMATION CENTER (ERIC)

INSTRUCTOR GUIDE

Unit 17

Record KeepingLevel 3

HOW TO USE PACE

Use the objectives as a pretest. If a studentis able to meet the objectives, ask him orher to read and respond to the assessmentquestions in the back of the module.

Duplicate the glossary from the ResourceGuide to use as a handout.

Use the teaching outlines provided in theInstructor Guide for assistance in focusingyour teaching delivery. The left side ofeach outline page lists objectives with thecorresponding headings (margin questions)from the unit. Space is provided for you toadd your own suggestions. Try to increasestudent involvement in as many ways aspossible to foster an interactive learningprocess.

When your students are ready to do theActivities, assist them in selecting thosethat you feel would be the most beneficialto their growth in entrepreneurship.

Assess your students on the unit contentwhen they indicate they are ready. Youmay choose written or verbal assessmentsaccording to the situation. Model re-sponses are provided for each module ofeach unit. While these are suggestedresponses, others may be equally valid.

BEST COPY AVAILABLE

Objectives

1. DETERMINE THE COSTS THATWILL AFFECT PRICING

What are the costs that affectpricing?

2. IDENTIFY OTHER FACTORSTHAT WILL AFFECT YOURPRICING STRATEGY

How does market demand andsupply affect pricing?

Teaching Suggestions

Ask the class what costs affect the manufacturer's price forshoes. Record their suggestions on the board. Then write a Vin front of all variable costs and an F in front of all fixed costs.You may want to specifically discuss wages. If wages are paidas monthly salaries, they are a fixed cost. However, if wagesare paid on a variable hourly basis, then they may be consideredvariable costs.

Now, give the class a short case to work through. Suggest thatyou want to offer a one day workshop on pricing. Variablecosts include supplies $4.00 and lunch $6.00. Fixed cost includeroom rental $50.00 and instructors fee $100.00. If you expect15 people to attend, what is the Floor Price? ($20.00) If youplan on charging $30.00, what is the Profit Margin? ($10.00)

Start by asking students if the price of Big Macs decreasedwould the buy more. What about CDs? etc. List and discussseveral items that reflect the typical demand/price relationship.

Ask if they can think of items other than those listed in the textthat would have relatively inelastic demand. Answer: utilities.You might note that if the price of electricity increase suffi-ciently, we may be more likely to turn off our lights.

Now, ask the students if the cost to produce an item remains thesame, if the price decreases would the manufacture producemore or less of the item?

Illustrate this point using Graph 3. You may wish to change thenumbers to give the students additional practice examining theprofit maximization point. If you change the numbers, be surethe point of intersection represents the highest possible grosssales. Start by briefly reviewing the demand and supply curveseparately. Then, do the calculations to demonstrate the profitmaximization point.

Objectives Teaching Suggestions

What comprises a marketing stra-tegy?

How does the product life cycleaffect the marketing strategy andpricing?

3. ILLUSTRATE HOW MARKUPSTRATEGIES AFFECT YOURPRICING

How do different markup strate-gies affect your pricing?

4. DESIGN PRICING INCENTIVESFOR YOUR BUSINESS

What are pricing incentives?

What are the different types ofpricing incentives?

Ask students what the Four Ps of marketing are. Give specificexamples for each of the Four Ps. For example, promotion in-cludes advertising, sales, public relations and sales promotion.Emphasize that pricing ;s part of the marketing strategy. It is away of communicating to the consumer the product image.Would a $15,000 Rolls Royce still be a Rolls Royce?

Track the product life cycle of hand held calculators. Start inthe early 1970s when Texas Instrument twelve function calcula-tors were first mass marketed for $450.00. Follow through witha discussion of their market growth and maturity. Include a dis-cussion of the increase in competition and a decrease in price tothe current low of $5.00 to $10.00. Are hand held calculatornow in decline? Talk about the impact of PCs on the market.

Inquire if any of your students have been involved in retailpricing. Find out what percent of markup their store typicallyused. Give several examples. For example, since your storeused a 100 percent markup based on cost, then a coat which costthem $100 would be sold for $200. How much would the samecoat be sold for if the retail markup was 50% based on cost?($150).

Ask why a retailer would reduce the price of merchandise. Listthe answers on the board. Indicate that the same reduction inprice could produce different results.

Ask the students to imagine that they are a toothpaste manufac-turer. What are the different types of price incentives they mightoffer the retailer? Assuming that this toothpaste manufacturerpredetermines retail price, what are some of the tactical dis-counts they might offer the consumer?

4

Objectives Teaching Suggestions

5. DETERMINE APPROPRIATEPRICING STRATEGIES FORA BUSINESS

How do you determine appropriatepricing strategies for a business?

Ask students to imagine that they are the manufacturer of a self-vacuuming carpet about to be mass marketed. This product is aloose weave carpet with a central vacuum system underneath it.Go through the process of determining the appropriate pricingstrategy.

MODEL ASSESSMENT RESPONSES

1. The total cost of a product is the sum of the fixed and variable costs. Variable costs are the costs thatchange with the quantity of goods and services produced. Fixed costs are the costs which are constant atall levels of production. The floor price of a product is the sum of the total fixed cost divided by thenumber of units produced and the per unit variable costs.

2. The price of a product is also affected by market demand and supply, and marketing strategy, and competi-

tion as described in the product life cycle.

3. Markup is a percent added to variable costs to cover fixed cost and profit for the business. Companies mayuse either a standard markup of a variable markup system. The variable markup system is common formanufacturers or retailers who stock a wide variety of products.

4. The most common types of pricing incentives are:

a. Tactical Discounts which are temporary consumer price reductions.

b. Quantity Discounts which are granted to buyers who purchase in large quantities.

c. Cumulative Discounts which encourage consumers to continue to buy from one supplier over an

extended period of time.

d. Trade Discounts which are given to distributors as a reward for either stocking or pushing a product.

e. Cash Discounts which are offered to distributors as incentives for paying for their products as early

as possible.

Pricing reductions may be interpreted by consumers in a variety of ways. For example, consumers mayinterpret a price reduction as an attempt to attract new customers, take customers away from competitors,increase usage rates among existing customers, or a means of discouraging existing customers from switch-ing to competitors.

5. The procedure for selecting an appropriate pricing strategy is as follows:

a. Determine buyer needs, wants, and desires.

b. Determine market position.

c. Evaluate your competition.

d. Conduct a complete analysis of costs.

e. Prepare product or service line financial statements.

f. Assess your existing and future operations.

g. Communicate to employees, distributors, and retailers.

h. Communicate to buyers and users.

i. Monitor results.

Incorporates the needed competencies for creating and operating a small business at three levels of learning, with experiences and

outcomes becoming progressively more advanced.Level l Understanding the creation and operation of a business.Level 2 Planning for a business in your future.Level 3 Starting and managing your own business.

Self-contained Student Modules include: specific objectives. questions supporting the objectives, complete content in form of answers

to the questions. case studies, individual activities, group activities, module assessment references. Instructor Guides include the full text

of each student module and lesson plans, instructional suggestions, and other resources. PACE,Third Edition, Resource Guide includesteaching strategies, references, glossary of terms, and a directory of entrepreneurship assistance organizations.

For information on PACE or to order, contact the Publications Department at theCenter on Education and Training for Employment, 1900 Kenny Road, Columbus,Ohio 43210-1090

(614) 292-4353, (800) 848-4815.

Support for PACE, Third Edition provided in whole or in part by:

International Consortium for Entrepreneurship Educationand

International Enterprise AcademyCenter on Education and Training for Employment

The Ohio State University

The Coleman Foundation

Center for Entrepreneurial Leadership Inc.Ewing Marion Kauffman Foundation

RecordKeeping

UNIT 17LEVEL 3

Your Potentialas an

Entrepreneur

Nature ofSmall Business

BusinessOpportunities

Global MarketsThe

Business Plan

Help forthe

Entrepreneur

Types ofOwnership

Marketing Location PricingAnalysis Strategy

Financingthe Business

LegalIssues

BusinessManagement

HumanResources

Promotion Selling

FinancialAnalysis

Customer RiskCredit (,.j Management

Operations

1k

CENTER ON EDUCATIONAND TRAINING FOR EMPLOYMENT

COLLEGE OF EDUCATIONTHE OHIO STATE UNIVERSITY

Progr for A.c mringCompetence inEntrepreneurs

Research & Development Series No. 303-17

1

RECORD KEEPING

BEFORE YOU BEGIN . . .

1. Consult the Resource Guide for instructions if this is your first PACE unit.

2. Read What are the Objectives for this Unit, on the following page. If you thinkyou can meet these objectives now, consult your instructor.

3. These objectives were met in Level 1 and Level 2:

Level 1

Discuss the reasons for keeping business records.

Identify the elements of effective record keeping.

Describe different types of records needed by small business.

Identify sources of record-keeping assistance.

Level 2

Explain the importar ;e of effective record keeping.

Identify records necessary for effective inventory control.

Explain records u:,ed for financial management.

Identify records used for effective human resource management.

Describe facility/equipment maintenance records.

Discuss the value of using external record keeping assistance.

4. Look for these business terms as you read this unit. If you need help with themeanings, ask your instructor for a copy of the PACE Glossary contained in theResource Guide.

Budget systems PerpetualDouble-entry bookkeeping Petty cashElectrical Physical inventoryJust-In-Time (JIT)

9Copyright © 1994, Center on Education and Training for Employment,

The Ohio State University. All rights reserved.

3

RECORD KEEPING

WHAT ARE THE OBJECTIVES FOR THIS UNIT?

Upon completion of this unit you will be able to

explain the value of maintaining accurate records,

determine all records needed for your business, and

develop a plan for managing your records.

WHAT IS THIS UNIT ABOUT?

This unit is designed to assist youthesmall business ownerto determine all therecords needed for your business and todevelop a plan to effectively manage yourbusiness using these records.

You will learn why you should keep records,who can maintain them, and the sources offinancial data. Then you will examine theconcept of double-entry bookkeeping. Next,you will explore the following types ofrecords: (1) journals or books of originalentry, (2) ledgers or books of various ac-counts, (3) merchandise inventory, and(4) budget systems.

In this unit, you will also have an opportun-ity to learn more about applying computersto small business problems. The advantagesand disadvantages of computers will be iden-tified for you. In addition, you will learn

more about the kinds of savings and im-provements that can result from computeriz-ing the record-keeping function.

WHY SHOULD A NEWBUSINESS OWNER KEEPRECORDS?

As you start your business venture, youmight wonder, "Why go to all the troubleand fuss of keeping business records if,during the first year or so of operation, mybusiness will be small?" Actually, there aremany reasons for having a good record keep-ing system. As a small business owner, youmay be most interested in the following rea-sons for record keeping:

Awareness of profitability

Awareness of sales growth

-to

4

Return on investment to you, the owner

Calculation of profit

Federal tax and reporting requirements

State tax and reporting requirements

Local tax and reporting requirements

Information for your creditors (people orfirms you might owe money)

Information for the investors in yourbusiness (stockholders or partners)

Control of investment in inventory

Control of investments in accountsreceivable

Control of investments in building andequipment

Cash forecasting (avoiding "cash-outs")

WHAT ARE SOURCEDOCUMENTS?

Complete bookkeeping records follow thesame pattern for all businesses. Every busi-ness transaction is recorded on some kind ofsource document. The source documents areused for recording business transactions, asthey occur, in either a series of journals orin a single combination journal. This isknown as a book of original entry. Journalsare considered the first level of businessrecords.

Journal entries are sorted and summarized inthe book of accounts or general ledger. Asa result, the general ledger accumulates thesales and expense items by categories. Itbecomes the second level of business rec-ords. Basically, the general ledger is a rec-ord of the balance of the assets and liabili-ties, and the net worth of the business.

These records are used to construct the threecritical summary financial statements usedby all business:

The Income Statementto determineyour profit performance

The Balance Sheetto control the finan-cial condition of the assets and liabilitiesof the business.

The Cash Flow Smtementto preventcash shortages and consequent defaults.

Problems arise wher business owners do notunderstand accounting and fail to keep prop-er records. The owners do not know if thebusiness is operating at a profit or loss untilthey compute the "bottom line" at tax time,or at the end of the year when an accountantis hired to analyze the operation. The busi-ness owner needs to know where the busi-ness is going on a day-to-day basis. Yearlyfinancial reports are important and useful,but timely knowledge on operating condi-tions is even more important if the smallbusiness owner is to make effective businessdecisions.

Basic to the sound financial management ofyour business is an accounting system that iseasy to maintain and furnishes all the neces-sary information. Many self-checking de-vices exist in a well designed system. Forexample, the accuracy of accounts in the

ledger may be proven by taking a trial bal-ance that is prepared as a part of the work-sheet. Financial statements are preparedperiodically from the worksheet to showwhat the business is worth and how well thebusiness is doing. Good record keeping isnot just a necessity but it is also a tool.How well you use that tool will determine toa large degree the success of your business.

WHO SHOULD MAINTAINTHE BUSINESS RECORDS?

In the initial stages of the business, you maywish to take charge of the records. An ac-countant can help you set the books up, butthe experience of "doing the books" willgive you a feel for the importance of recordsand show you how they can help you runyour business. It will also help you deter-mine what parts of the system can be dele-gated to someone else. In addition, the ex-perience of doing the books will help youteach someone else how to do the job.

WHY HAVE ANACCOUNTANT?

You may find that you have too many de-mands on your time and that there are moreprofitable things for you to do than keep therecords. Remember, there are two criticalaspects of a record keeping system: keepingthe records and using them to make deci-sions. The first can easily be delegated.You may find that you are not spendingenough time on the "using" aspect. If this isthe case, you may wish to train an employeeto take over and maintain all or parts of the

5

record keeping system. Other alternativesinclude hiring a person who keeps books fora number of small businesses; this is gener-ally known as a freelance bookkeeper. Youmight also employ an accountant or engagethe services of a public accounting firm. Itmay cost more to engage a rziiutable ac-countant or a public accounting firm. How-ever, an accountant can save you moremoney than you may realize.

The selection of an accountant rests with theowner. Your banker may be able to recom-mend an accountant, or you may prefer adeal with a large accounting firm. Manysmall business owners have found a goodaccountant through recommendations fromtheir friends and other owners.

04

WHAT SHOULD YOU DISCUSSWITH YOUR ACCOUNTANT?

The accountant will become more valuableto the firm upon becoming familiar with thetechnical aspects of your business. There-fore, you will need to be able to discussyour financial concerns with your accoun-tant. Some of the services that the accoun-tant can provide include the following:

Preparing tax returns and planning taxprograms

Reviewing and developing a firm's ac-counting needs

Assisting in the selection and training ofa bookkeeping staff

Advising on records and systems man-agement

6

Preparing financial statements (includingthe trial balance); also auditing recordsto safeguard a firm's assets

Assisting in review and study of finan-cial statements

Helping determine a firm's cash flov,and capital requirements

Assisting in establishing budgets andexpense controls

Helping set up sound credit policies

Providing purchasing and inventory con-trols

Working with a firm's attorney and otherprofessional consultants to provide soundfinancial management, draft contractsand leases, and determine adequate insur-ance coverage

Acting as a sounding board for the entre-preneur

Source: Managing for Profits, p. 128

The business owner should try to meet withthe accountant at least once a month. Suchmeetings should be held when financialstatements for the period have been preparedand at a time when there will be no interrup-tions. Performance in the previous month iscompared with that of a year ago, with thepreceding month, and with industry stan-dards. Any major deviations may be discus-sed. Next, plans for the current month maybe discussed along with problems and futureplans. This particular meeting can be veryhelpful from the standpoint of understandingthe financial aspects of the business opera-tion. For additional information regarding

the financial aspects of operating the busi-ness, see PACE Unit 18, Financial Analysis.That unit will help you to utilize your rec-ords to plan for the future.

Regardless of who keeps the business rec-ords and how they are maintained, a smallbusiness record keeping system should pro-vide you with the following information:

Daily

Cash on hand

Bank balance (keep personal and busi-ness funds separate)

Daily summary of sales and cash receipts

All errors in recording collections on ac-counts are corrected

A record of all monies paid out by cashor check is maintained

Weekly

Accounts receivable (take action on slowpayers)

Accounts payable (take advantage of dis-counts)

Payroll records that include name andaddress of employee, social securitynumber, number of exemptions, dateending the pay period, hours worked,rate of pay, total wages, deductions, netpay, check number

Taxes and reports to state and federalgovernment (sales, withholding, socialsecurity, etc.)

3

Monthly

All journal entries are classified accord-ing to like elements (these should begenerally accepted and standardized forboth income and expense) and posted tothe general ledger.

A profit-and-loss statement for the monthis available within a reasonable time,usually 10 to 15 days following the closeof the month.. This shows the income ofthe business for the month, the expenseincurred in obtaining the income, and theprofit or loss resulting. From this, takeaction to eliminate loss (adjust markup,reduce overhead expense, pilferage, in-correct tax reporting, incorrect buyingprocedures, failure to take advantage ofcash discounts).

A balance sheet accompanies the profit-and-loss statement. This shows assets(what the business has), liabilities (whatthe business owes), and the investmentof the owner.

The bank statement is reconciled, (thatis, the owner's books are in agreementwith the bank's record of the cashbalance).

The petty cash account is in balance.(The actual cash in the petty cash boxplus the total of the paid-out slips thathave not been charged to expense shouldtotal the amount set aside as petty cash).

All federal tax deposits, withheld in-come, and FICA taxes (Form 501 andstate taxes are made.

An aging schedule for accounts receiv-able, showing transactions by date of

7

sale. This schedule indicates all bad andslow accounts (i.e., 30,60, 90 days pastdue)

Raw material and work in process inven-tory is reduced to the lowest level con-sistent with customer satisfaction. Forretail, What moves slowly? Reduce.What moves fast? Increase.

The monthly budget is compared to ac-tual expenditures and appropriate con-trols or revisions are instituted.

Source: Keeping Records in SmallBusiness. Management Aids Number 1.017.

As you study the information in this unit aswell as that in Unit 18 titled, "FinancialAnalysis," you will be able to obtain thisinformation and utilize it in your businessoperation.

The financial records of a business start withinformation that reflects a transaction. Atransaction can be a sale of goods or pur-chase of your firm's primary service. Therecords may consist of the following:

Adding machine tape

Cash register tape

Sales book invoices or receipts

Canceled checks and deposit slips fromyour bank's statement

Any other piece of paper that has finan-cial information recorded on it

Your records can take many forms. Regard-less of the devices you use, time between the

8

transaction and the recording of the transac-tion is an important element. If a cash regis-ter tape or a duplicate sales receipt is used,these acts are performed simultaneously.Cash registers will automatically providetotals of different types of transactions.Sales book forms must be summarized byrunning adding machine totals of the slips.Transactions should be recorded simultane-ously or shortly thereafter to avoid misplac-ing any documents or forgetting to recordthe sales or purchases. With an electroniccash register you may be able to incorporatethese "point-of-sale" transactions into theappropriate journals.

WHAT IS DOUBLE-ENTRYBOOKKEEPING?

Double-entry bookkeeping is a systembased on basic accounting equation that spe-cifies that a companies assets will equal itsliabilities plus its capital. Therefore, anytransaction will always effect two accountsin opposite directions to maintain the equa-tions balance. The rule is that for everydebit there must be a credit. It performs thefollowing functions:

Records every transaction twice

Provides for an accuracy check

Leads to a process of recapping theentries whereby the total of debits mustequal the total of credits

Entries are recorded twice. The recording ofone transaction requires the debiting andcrediting of two accounts. Table 1 is a deci-sion table or a matrix that illustrates relation-

ships between bookkeeping entries (debitsand credits) and the accounts of your busi-ness.

The colUmn on the left-hand side of thetable shows some typical accounts your busi-ness would have in a financial statement.Across the top of the table are the columnsfor the two entries that could be made to anaccount (debit or credit) and what the nor-mal balance of the account is. Assume yourfirm has had a cash sale. This transactionwill increase cash and income. The increasefor cash is a debit entry (+) and the increasefor sales, which is a source of income, is acredit or (-) entry. The journal entry thenshould reflect that a debit is made to thecash account and a credit entry is made tothe sales account for merchandise sold.

In summary, every transaction must consistof debits and credits that offset or balanceeach other. Assets and expenses are in-creased by debits and decreased by credits.Liabilities and income are increased by cred-its and decreased by debits.

Record-keeping devices should be construct-ed so that they are easy to use, reflectaccurately what took place, and containenough information for further summary andutilization. Records can be categorized intothe following areas:

Journals or books of original entry

Ledgers of books of various accounts

Merchandise inventory

Budget systems

9

Table 1Decision Table of Debit and Credit Entries

Type of Account Debit Entry Credit EntryNormal Balance inFinancial Statement

Asset + -

Examples: (Increase) (Decrease) DebitCashAccounts receivableInventoryEquipment

Liabilities +Example: (Decrease) (Increase) Credit

Accounts payable

Capital - +Example: (Decrease) (Increase) Credit

Net worth

Income +Example: (Decrease) (Increase) Credit

Sales

Expense +Example: (Increase) (Decrease) Debit

Salaries

° Nonfinancial records (personnel, qualitycontrol, insurance, etc.)

Each category will be discussed here.

WHAT JOURNALS AREMOST COMMONLYUSED BY SMALLBUSINESSES?

Journals or Books of Original Entry. Thesales journals, accounts receivable records,

accounts payable records, and payroll rec-ords are record-keeping devices that providesignificant information for financial controlof the firm. These journals are most oftenused by small businesses.

Sales Journals. The foundation of yourrecord-keeping system is the sales journal(or a similar type of journal). The mostcommonly used are cash register tapes orsalesbook receipts. These are essential,original journal entry records. The cashregister not only stores daily operating cash,but also records each transaction in the formof a printed transaction that will appear onthe tape. It may contain the date of the

10

transaction, the amount, symbols to denotetype of merchandise sold, and possibly a se-quential number after each entry. The sales-book receipts or cartons contain basically thesame information as a cash register tape, butcan also provide a brief description of thetransaction. Since this journal is eitherhandwritten or typed, it is more flexible thana cash register tape. Usually, a business thathas a large volume of transactions will uti-lize a cash register, whereas, a business withfewer transactions will use salesbookrecords.

WHAT ARE ACCOUNTSPAYABLE AND RECEIVABLESYSTEMS?

If your business makes sales on a creditbasis, you will be carrying accounts receiv-able. Accounts receivable is a ledger or abook of account for your business. It isessential that you maintain a record for eachcustomer. Some small firms use a 5" X 8"card for each customer and record each cred-it sale and payment. Many firms use a linedledger sheet (similar to Figure 1) which isthen maintained in a loose-leaf notebook orledger.

In a double-entry bookkeeping system, an in-crease in accounts receivable would be en-tered as a credit sale as:

Debit - Accounts Receivable

Credit Sales

The originating transaction would be thesales slip. Regardless of the type of book-keeping system used, the total figure for

individual accounts due to the businessshould agree with the total amount of ac-counts receivable shown on the balanceentry.

The example provided in Figure 1 illustratesa customer paying $80 toward her outstand-ing bill. This results in a decrease inaccounts receivable which in entered asfollows:

Credit Accounts Receivable

Debit - Cash

Note that the $80 payment also shows up inFigure and Table 2 discussed in the nextseveral pages.

Another essential record that must be main-tained is an accounts payable record-keepingsystem. Accounts payable are what yourfirm owes others for items such as purchasesof inventory, services such as repairs, ortaxes due for payroll. When you receive theactual shipment of inventory, keep any ship-ping documents that accompany the ship-ment. These need to be compared with theinvoice to verify actual receipt of the goods.You may incur liabilities and regardless ofhow you incur them, it is necessary to main-tain an up-to-date accounts payable system.Such a system is shown in Figure 2, whichis both accurate and easily understood. Likethe accounts receivable records, it is veryimportant to be able to know at any giventime the amount owed a creditor.

A typical entry for an accounts payabletransaction in a double-entry bookkeepingsystem would be purchasing inventory fromsuppliers. It would be recorded as follows:

Debit - Inventory

17

11

Name: Clair Ann Briggs Phone: (614) 455-27481482 C StreetOntario, OH 43220

DateSales SlipNumber Charge (Debit) Payment (Credit) Balance

12/19/9_ 1003 $80.00 -0-

Figure 1. Sample ledger entry

Credit Accounts payable

The source document that originates thetransaction would be an invoice from thesupplier. After the transaction has beenentered as a journal entry, it should then beentered in an accounts payable ledger similarto Figure 2. The example provided in Fig-ure 2 represents a payment of $185 towardyour bill with this supplier. It would berecorded as follows:

Debit - Accounts Payable

Credit Cash

To summarize, an accounts payable ledgersheet and an accounts receivable record arealmost identical. They differ in that acharge to an account receivable is a debit,whereas a charge to an account payable is acredit. Also, a payment on an accountpayable is a debit.

WHAT IS NEEDED FORPAYROLL RECORDS?

Another essential record that must be main-tained is a payroll register. An accountant's

Zv

worksheet, lined to form columns, is easy touse and inexpensive for payroll records.Loose-leaf worksheets may be purchased inany bookstore or office supply store. Payrollinformation might be collected via a timecard, sign-in sheet, or some other type ofrecord that itemizes hours per day workedby an employee. Even if you are the soleemployee, you must still maintain this timeand attendance certification record. A pay-roll sheet should include the followinginformation:

Employee's name

Total hours worked

-Regular

-Overtime

Gross pay

Deductions

-FICA (Social Security)

-Federal withholding

-State and/or local withholding

(if applicable)

-Miscellaneous

Net pay amount

Check number

12

Name: R.U.S.H. Phone: (614) 555-15221098 Morris RoadColumbus, OH 43221

DateInvoiceNumber Charge (Credit) Payment (Debit) Balance

12/31/9_ 307 $185 -0-

Figure 2. Sample accounts payable record

WHY SHOULD YOUCONTROL CASHFLOW?

In addition to the journals of original entry,every firm must develop record-keeping de-vices for controlling the cash income andoutgo. Controlling cashflow is an absolutenecessity for your business. Your firm'sability to meet its monthly expenses willdepend upon your ability to control or moni-tor cashflow. You will also be able to rec-oncile bank statements with your records.

HOW DO YOU CONTROLCASH FLOW?

To supervise cashflow effectively, it is

important to maintain the following records:

Daily sales and cash summary

Journal of sales and receipts

Cash disbursement journal

The daily sales and cash summary performsthe following functions:

Reconciles what you actually have incash and what your sales receipts sayyou should have in cash

Summarizes sales and amounts receivedon accounts that will be used in complet-ing other journals

HOW IMPORTANTIS THE DAILY SALESAND CASH SUMMARY?

The first section of Figure 3 pertains to totalcash receipts. It includes monies receivedon accounts receivable or accounts due tothe firm (line 2). This total will again ap-pear in the journal of sales and receipts, andwill serve as a reference when posting to thegeneral accounts. In Figure 3, a "miscel-laneous" category (line 3) is included, whichreflects the receipt of any cash for purposesother than sales. Any amount in this cate-gory will also appear in the journal of salesand receipts. Looking ahead to the oppor-tunities to computerize your business, notehow many separate manual operations arerequired to record the results of eachtransaction.

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DATE

Receipts

1. Cash sales $ 435.002. Accounts receivable $ 80.003. Miscellaneous $ 10.00

4. TOTAL CASH RECEIPTS $ 525.00

Cash Count

5. Cash in RegisterChecks $ 65.00Currency $ 695.00Change $ 25.00

6. Cash and checks in vault $ 785.007. Petty cash slips $ 35.008. TOTAL CASH $ 825.009. Less bank deposit $ 500.0010. TOTAL CASH $ 325.00

Total Sales

11. Cash sales - Line 1 $ 435.00

12. Charge Sales $ 75.0013. TOTAL SALES $ 510.00

By:

Figure 3. Sample daily sales and cash summary

The second section of Figure 3 is an itemi-zation of the actual cash count, includingany checks. After the total cash count (line8) is arrived at, any bank deposits (line 9)are subtracted, leaving an amount of cash onyour premises for the next day's business,the "ending cash" (line 10).

The third section, cash reconciliation, com-pares what the firm should have (line 15),with the actual count at the close of theday's business (line 8). The total cash

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's (line 4) added to the ending cashfrom the previous day (line 10) enables youto calculate what your total cash should be.Any differences are adjusted on lines 13 and14 to arrive at a reconciliatory figure.

The last section, total sales, breaks out thefirm's sales by two categories-those paidfor in cash or by check (line 1), and thosecharged by customers. Your business carriesthe amounts of these sales as accounts re-ceivable (line 12). This item (charge sales)

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will appear again in the journal of sales andreceipts.

The form shown in Figure 3 requires the sig-nature of the person who prepared it. Theowner may not be the one who keeps therecords and prepares financial statements.Questions may arise; therefore, the book-keeper/statement preparer should be easilyidentified.

The importance of this worksheet cannot beoverestimated; it is a tool that you shoulduse in controlling the finances of your busi-ness. In addition, you may want to establishor indicate some other types of receipts foryour particular business.

WHAT IS A JOURNAL OFSALES AND RECEIPTS?

One report that serves as o control overyour cashflow and also summarizes dailyactivity is the journal of sales and receipts.To complete this form, the following shouldbe done:

1. Each day you should enter both debitand credit items from the daily sales andcash summary and make sure total debitsfor each day equal total credits for eachday.

2. Each month you should summarize theseentries and make entries to the generalledger or book of accounts.

This schedule also serves the function of atrial balance. The trial balance sums up thedaily debits and credits and serves as a post-

ing medium for the general ledger or bookof accounts.

Table 2 shows the debits and credits on thesame page; however, it would be more prac-tical to set up separate columnar sheets forthe debits and credits. The entries are refer-enced with line numbers from the daily salesand cash summary to show where the entriescame from.

The entries and their corresponding generalledger accounts are shown in Table 2.

WHAT IS A CASHDISBURSEMENT JOURNAL?

An essential component of any financialcontrol and record-keeping system is main-taining an accurate and up-to-date cash disbursement journal. Table 3 is a sample of acash disbursement journal. It includes thefollowing necessary information:

Date

Payee (to whom the check is issued)

Check number

Amount of check

Suggested group of general ledger ac-counts that will be affected by thedisbursement

Since it is imperative to have receipts for alldisbursements, the use of a checking accountis recommended. The record of a canceledcheck is also a reliable document for verifi-cation in income tax record keeping.

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Table 2Daily Entries and General Ledger Accounts

Type of Entry Columns Heading General Ledger Account

Debit Charge Sales Accounts Receivable

Debit Bank Deposit Cash

Debit Today's Ending Cash Cash

Debit Cash Short Cash

Credit Collections on Account Sales

Credit Yesterday's Ending Cash Accounts Receivable

Credit Miscellaneous Cash

Credit Miscellaneous Income

Table 3Sample Page from Cash Disbursement Journal

Date Payee CheckNo.

Amt.Check(CR)

PayrollInc.Tax(CR)

DeductSoc.Sec.(CR)

Genl.Desc.(CR)

LedgerAmt.

Inven-tory(DB)

Sala-ries

(DB)

Genl. LedgerDesc. (CDB)

12/19/92 F.T. Help(2 wk.sal.)

101 $257 25 18 $300 ,

12/19/82 ABC 102 $325 $325SupplyCo.

12/26/82 Mr. 103 S75 Rent $75Landlord

12/30/82 I.R.S. 104 $18 Payrolltax

$18

12/31/92 R.U.Sales

105 $185 Accts.pay

$185

Just as the journal of sales and receipts wassummarized monthly to serve as a postingreference to a general ledger, the cash dis-bursement journal is similarly summarizedmonthly and used as a posting reference tothe general ledger.

In the cash disbursement journal shown inTable 3, the four columns on the right -handside of the form represent debit entries to thegeneral ledger, whereas the four columnsfollowing the check number denote creditentries to the general ledger. To establish

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this journal inexpensively, obtain or cons-truct a supply of columnar worksheets simi-lar to the payroll worksheet previouslymentioned.

WHAT IS THEPETTY CASH FUND?

In most businesses the owner will have oc-casional small disbursements for incidentalitems. To avoid having to write manychecks for small amounts, it is wise to havea fixed amount of cashknown as a pettycash fundfrom which to make small pay-ments.

Each time a payment is made from the fund,a petty cash slip similar to the one shown inFigure 4 should be made out. If an invoiceor receipt is available, it should be attachedto the petty cash slip for filing. The total ofthe unspent petty cash and the petty cash

slips should equal the fixed amount of thepetty cash fund. When the petty cash fundis spent, a check is made out to "PettyCash." Petty cash slips should be canceledor marked in such a way as to prevent theirreuse. The slips should be grouped accord-ing to the accounts to be charged. Chargesto each account should be totaled and en-tered in the cash disbursement journal.

HOW IS THE BANKRECONCILIATIONSTATEMENT USED?

A control device for the cash disbursementjournal is the bank reconciliation form, asshown in Figure 5. It is used to adjust thebank balance for any deposits and checksthat have not been processed by the bank.The adjusted bank balance is compared withthe balance that your check stubs show plusor minus any corrections or service charges.

No. Date:

RECEIVED OF PETTY CASH

Amount:

For:

Charge to:

Approved by:

Received by:

Figure 4. Petty cash slip

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1.

2.

Balance per bank statement

Add deposits not credited

Date: December 31, 19

$325.00

Date Amount$500.00

$500.00$825.00

3. Deduct outstanding checksNo. Date Amount105 12/31 $185.00106 12/30 $ 18.00 $203.00

4. Adjusted bank balance $622.00

5. Balance per checkbook $623.00

6. Add corrections

7. Deduct bank service charge $ 1.008. Adjusted checkbook balance $622.00

Figure 5. Sample bank reconciliation form

Failing to keep track of the amount in achecking account can result in having acheck returned for insufficient funds andconsequent overdraft charges. This can-not only be embarrassing, it can also beexpensive.

For these reasons, it is important that thisreconciliation be performed immediatelyupon receipt of the bank statement. Thelonger any errors exist, either on your rec-ords or on the bank's records, the more diffi-cult it will be to locate any discrepanciesbetween the bank balance and your balance.

,..

WHAT IS THEGENERAL LEDGER?

The general ledger, or book of accounts, isused to state accurately the financial pictureof the business as of any given date. Gener-ally, it uses information taken from the jour-nals or books of original entry. The generalledger records the balance of the assets andliabilities, and net worth of the business, inaddition to accumulating the sales and ex-pense items by categories. At the close ofthe business year, the sales and expenseitems are transferred to the profit and lossaccount. This profit-and-loss account is thentransferred to the capital account. Balancesof all other categories of accounts in thegeneral ledgerassets, liabilities, and net

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worth balancesappear on the balancesheet.

An account number is assigned to each itemin the ledger. These numbers help the book-keeper establish the proper sequence of ac-counts and also facilitates the posting oftransactions to these accounts from the jour-nals of original entry.

The number of accounts that should be es-tablished depends upon the particular activityof the business, but there are certain basicaccounts that all businesses use in stating thefinancial records of their particular activity.The lists of accounts in the following sec-tions are not complete; however, th y are theones most commonly used. Expanding thenumber and defining some additional cate-gories is appropriate if the situation dictates.For example, your firm may have oneparticular asset items that may not be listedhere, such as organization expenses, good-will, and, if you are a manufacturing con-cern, materials and supplies.

WHAT ABOUT ASSETSAND THE LEDGER?

The first category of a general ledger ac-count lists assets. Assets are considereditems that a firm owns. Some typical ac-counts are these:

Account No. 101 - Cash in bank

Account No. 102 Cash in vault

Account No. 201 Accounts receivable

Account No. 210 - Prepaid expenses

Account No. 220 Inventory

Account No. 280 Building

Account No. 290 - Equipment

WHAT ABOUT LIABILITIESAND THE LEDGER?

The second category of a general ledgeraccount is the liabilities of the business.These items consist of debts:

Account No. 321 - FICA tax payable

Account No. 322 - Federal Withholdingtax payable

Account No. 323 - State withholding taxpayable

Account No. 390 - Mortgage payable(long-term)

Account No. 395 - Notes payable (long-term)

Debts payable within one year and those thatare long term are differentiated in the fol-lowing list.

WHAT ABOUT NET WORTH?

The third category of accounts is includedin the "net worth" section of the generalledger. It consists of the record of balanceof the owner's investment in the business.This group of accounts also reflects theaccumulation of profit-and-loss balancesfrom the income and expense statement. A

typical list of these accounts would be asfollows:

Account No. 400 - Proprietorshipaccount

Account No. 401 - Proprietorship with-drawals

Account No. 410 - Retained earnings

Usually the first account, proprietorship ac-count, reflects the original investment plusany additional investments that the ownermakes in the business. Tne balance of thisaccount would be a credit balance, as itreflects amounts invested by the owner. Thesecond account is the withdrawal account.This account will show a debit balance, as itrepresents the amount of withdrawals theowner has made from the business. Thisdoes not represent the owner's salary, butrather a withdrawal of previously made in-vestments in the business. The last item inthis category, retained earnings, representsthe accumulation of earnings over the years.It is hoped, this balance will be a creditbalance; however, if a business is operatingat a loss, this balance will appear as a debit.

WHAT ABOUT INCOMEAND THE LEDGER?

The fourth category of accounts in the gen-eral ledger consists of those accounts thatreflect or show the income of the business.These accounts show a credit balance, andthe entries to these accounts originate fromthe sales journals that the business maintains.This group of accounts is closed out at theend of the business year, and the amounts

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are transferred to the profit and loss state-ment. Some typical accounts would be asfollows:

Account No. 500 - Retail sales

Account No. 510 Service income

Account No. 590 - Miscellaneous income

WHAT ABOUT EXPENSESAND THE LEDGER?

The fifth category of accounts of the busi-ness listed in the general ledger are theexpenses. Expense accounts represent thelargest category of accounts. It is advisableto establish accounts that represent frequentor substantial expenditures. However, try toavoid establishing separate expense accountsfor items that are insignificant or infre-quently used. Some typical Expense ac-counts are listed below:

Account No. 600 Salaries and wages

Account No. 601 - Payroll taxes

Account No. 602 - Contract labor (part-time help from firms that supply ser-vices)

Account No. 610 - Utilities

Account No. 611 - Telephone

Account No. 612 - Rent

Account No. 620 - Office supplies

Account No. 621 - Postage

Account No. 630 - Insurance

Account No 631 - Interest on debt

Account No. 640 - Depreciation

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Account No. 650 - Travel

Account No. 651 - Entertainment

Account No. 660 Advertising

Account No. 690 Miscellaneous

All expense items should be paid by bankchecks. You should write the number of thegeneral ledger account of the particular ex-pense item on the check stub at the time thecheck is written.

WHAT IS INVENTORY?

Inventory is a large item for manufacturing,wholesaling, and retailing businesses. Foraccounting purposes, there are three kinds ofinventories: raw materials, work in progress,and finished goods. Take a closer look ateach of these.

Raw materials refers to items that havebeen acquired but are not a part of work inprogress. For example, a craft store thatproduces its own handbags and belts wouldstock leather as raw materials inventory.

Work in progress refers to costs incurred inworking on goods that have been started buthave not yet been completed (as of the dateof the balance sheet describing the currentstate of the business). The work-in-progressinventory usually includes three cost ele-ments: raw materials currently being work-ed on, direct labor, and factory overhead.

Finished goods refers to the items mostoften carried by retail store inventories. It

represents the total costs incurred to producesales units that have not yet been sold.

These inventoriesraw materials, work inprogress, and finished goodsall exist forthe same ultimate purpose. That is, sale tocustomers. However, each of the inventoriesis in a different stage of readiness for sale.Inventory costs usually are broken down intoinvoice price, plus transportation chargesfrom the seller to the buyer. Accurate mea-sures of inventory are important becausethey are used to reflect your net earnings fora given period. In addition, accurate inven-tories are crucial to the daily planning, con-trol, and cost efficiency of your business.

HOW MUCH INVENTORYDO YOU NEED?

What is the ideal amount of inventory thata business should carry at any one time?The answer is basically simpleenough in-ventory should be maintained so that saleswill never be lost, but not so much that itties up capital or becomes outdated. It naysound easy, but in practice it becomes verydifficult to achieve an ideal inventory level.

To maintain the proper inventory level, thefollowing areas should be considered:

Retail

The number of brands of a particularitem

The quantity on hand (may be either toomuch or not enough)

"Stock" items as fads or fashions

Manufacturing

The production rate for each specific_product

The frequency of supplier deliveries foryour raw materials

The "smoothness" of your productionprocess

The number of brands of a particular itemwill depend, of course, upon your customers,demands. To satisfy customer needs, youwill need to identify customer buying pat-terns in order to define what they want.Keeping the proper quantity on hand andstill justifying the investment is a dilemmathat the entrepreneur continually faces. Onetemptation is to take advantage of quantitydiscounts to obtain the lowest per unit cost.If you do this, you may have to buy an ex-cess quantity of inventory and tie up yourcapital. Knowing whether or not a stockitem is a fad that could quickly lose itsappeal will also affect how much inventoryyou purchase.

Calculating stock turnover rates can alsohelp the business owner determine howmuch inventory should be kept on hand.The turnover rate can be computed by usingthis formula:

Cost of Goods SoldAverage Inventory

Stock Turnover Rate

Stock Turnover Rateis the number oftimes during a givenperiod the averagestock is sold.

This formula produces the number of timesduring a given the average stock (inventory)is sold.

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For example, a business whose profit-and-loss statement shows a cost of goods sold of$100,000 and an average inventory of$25,000 would have a turnover of four.

However, a higher turnover rate does notalways mean greater profits. The turnoverdoes not reflect the profits on sales that werelost because no inventory was available forsale. Your business may have a very highturnover on inventory, but if customers aregoing away dissatisfied because of poor se-lection or lack of availability of certainitems, then your profits are not beingmaximized.

Having the ideal investment in inventory isalways desired. For retail businesses, turn-ing away sales because of understocking ismore harmful than having markdowns on ex-cessive inventory items. Tracking your salesrecords by item is crucial in preventingeither costly condition. Obtaining the properinventory balance requires an accurate antici-pation of your customer needs, coupled witha realistic investment.

For manufacturing businesses, the costs ofexcessive inventory levels can be even morecritical in limiting your developing a compe-titive operation. The costs of excessive in-ventory levels are associated with the fol-lowing costs:

Excess storage space devoted to rawmaterial and work in progress inventory

Excess handling costs associated withmoving the materials in and out of thevarious temporary stock locations withinthe factory

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Inventory may be used as a "crutch" toavoid correcting equipment maintenance,floor layout, and production problems

Obsolete or degraded inventory is oftensalvaged at very low value

Excessive inventory is associated withquality control rejects from suppliers andwork-in-progress problems

The concept of Just-In-Time (JIT) productionhas been developed to allow a much lowerminimum level of inventory effectively re-ducing the above costs.

WHAT ARE THE FUNCTIONSOF INVENTORY CONTROLSYSTEMS?

There is a wide variety of inventory controlsystems, each of which supports four basicbusiness functions in accounting and inven-tory management:

CountingTwo types of inventorycounting systems, perpetual and physical,are used by most businesses. These twosystems are combined in many busi-nesses, often with the support of compu-terized tracking and automatic input ofinventory data via electronic cash reg-isters and/or bar code scanners.

Decision makingDecisions are aboutwhen and how much to order.

Reportingboth "exception" and regularmanagement reports are needed to allow

the owner to take corrective actions or torefine inventory policies.

ForecastingYour record-keeping sys-tem can be used to forecast the demandfor supplies.

A variety of specific control techniques havebeen developed to manage inventory suc-cessfully.

WHAT IS A PERPETUALINVENTORY?

When continuing records are kept of receiptand withdrawal of inventory, the process iscalled "perpetual inventory." With thissystem, the business owner has a runningtally on the current stock of an item. Foreach item, a record is kept as it is broughtinto 'the business, stocked, and sold. Rec-ords are maintained on perpetual inventorycards, pages, tags, or via electronic means.In retail operations, sales tickets, or point-of-sale cash register input are often used tomaintain perpetual inventory information.

There are several different types of recordsfor keeping perpetual inventory, and a vari-ety of information can be maintained withthese records. A sample perpetual inventoryform is illustrated in Table 4.

You will find that typical inventory recordsmay also include the item, the stock number,the reorder point, and the supplier. Whenadditional inventory is received, the numberis added to the balance. When items areissued for use or are sold, the withdrawal issubtracted from the balance. The amount ofinventory on hand for a particular item can

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Table 4Sample Perpetual Inventory Card

Perpetual

Item:

Inventory Card

Pur. Req. orStock Req.

Date No. Put in Stock Withdrawn Balance

03/03/9 2525 1,000 1,000

03/10/9 502 100 900

03/15/9 1208 1,000 1,900

03/18/9 503 1,000 900

03/20/9 1720 1,000 1,900

03/22/9 505 200 1,700

03/24/9 507 300 1,400

be easily determined by looking at the bal-ance on the record.

The development of electronic cash registers,as well as mini-computers have made main-taining perpetual inventory systems veryeasy for small businesses. At the end of theyear, perpetual inventory records are addedup and compared with the periodic physicalinventory. Major differences may be inves-tigated and perpetual inventory records arecorrected.

A variety of "bin" systems can be adapted toyour business that serve to integrate thedecision-making rules regarding when andhow much to buy with the basic countingoperations. For example, in the "two-bin"system, you divide your storage locationsinto two portions or compartments. Whenthe first location is depleted, the backup

compartment is opened and an order isplaced for the specified quantity of items.The quantity of items in the second compart-ment is designed to last for the "lead-time"that it takes to obtain more stock from thesupplier.

WHAT IS A PHYSICALINVENTORY?

Taking physical inventory consists of count-ing and listing the goods in stock with theircost and resale price. A company-wide phy-sical inventory is usually taken once or twicea year, which covers the previous accountingperiod. From time to time, the businessowner may also desire to take a physicalinventory on a particular line of goods.

24

Even if a perpetual inventory system ismaintained, these physical counts are re-quired to check the accuracy of the unitbalances on the individual record cards.With such information, mistakes or lossesdue to spoilage and theft, and whether or nota profit has been made, can then be deter-mined. A sample inventory sheet is pre-sented in Figure 6. This is the formnormally used for the physical inventory.

more timely reports, valuable product andvendor analysis, lower inventories because ofbetter sales trend forecasting, better turn-over of goods because of better stock selec-tion, and fewer clerical employees requiredfor the reporting function. Current dataregarding daily sales volume, inventorylevels, sales ratio figures and even profit-and-loss statement reviews are availablewithin hours. With technological advances,

Dept. Name:

Fixture

Inventory SheetDept. No.

No. Counted by: Checked by:

ClassNo.

Descrip-tion Quan. Unit Price Seal

TotalResaleValue

Tnisd

Sheet Total

Figure 6. Sample inventory sheet

WHAT IS AN ELECTRONICINVENTORY SYSTEM?

The costs involved in using electronic dataprocessing can be justified by increasedsales, reduced expenses, or by the provisionof timely information necessary to imple-ment your business plan. Businesses thathave adopted electronic inventory controlhave pointed to many advantages, such as

more and more small businesses will haveaccurate and current information available ina short time period. The data entry burdensof inventory systems have been lessened agreat deal by the advent of portable bar codereaders that allow much greater accuracy andspeed in identifying and counting receipt,movement, and verification of inventorystock.

WHAT ARE BUDGETSYSTEMS?

The most successful small business firmsare those that

keep double-entry bookkeeping records,

have their accounts audited or checkedby an experienced accountant,

take an inventory of merchandise morethan once a year, and

operate under a financial budget.

A budget is an estimated plan for the future.It helps the small business owner keep ex-penses in line with income. Use of a budgetshould prevent overbuying and help to antic-ipate when borrowing is necessary. Actualprocedures vary according to the type ofbusiness. The business budget plan is madeup of several different types of budgets, suchas sales, merchandising, purchasing, advertis-ing, and so forth. Most of the budgeteditems are based on planned sales. They aredeveloped for a given time periodusually6 months. Many businesses use "electronicspreadsheets" to develop and track budgetinformation.

WHAT IS A SALES BUDGET?

The sales budget is a forecast of the salesfor a month, several months, or a year. Esti-mated sales may be computed on the basisof sales territories, salespeople, particularcommodities or services, and other items.

25

Sometimes independent estimates are madeon all these bases and, after some compro-mises, a final sales budget ;- compiled.Sometimes sales estimates are Jared withthe idea of developing sales qi is or goalsfor salespeople. These estima provide agoal for sales, as well a basis for preparingthe merchandising, purchasing, and otheroperating budgets.

The following factors may be used as aguide to budget sales:

Previous sales

Economic trends

Weather conditions

Shifting population

Sales force

Availability of merchandise

Buying habits

Season of the year

When starting a new business, it is advisableto investigate the experiences of other oper-ators in the same line of business and securewhat information can be obtained fromwholesalers, manufacturers, and professionalor trade asso,iation people.

WHAT ARE MERCHANDISINGAND PURCHASING BUDGETS?

The merchandising and purchasing budgetsare prepared after the sales budget, sincethey are closely correlated. When these bud-gets are developed, the kinds of stock to

9

26

have on hand and the time when they shouldbe available are determined. Maximum andminimum supplies are established. Pur-chases are planned, cash needs are estimated,sources of supply are checked, delivery datesare scheduled and requisitions and orders aretentatively planned. Orders are sometimesplaced in advance, subject to cancellationlater; or, minimum orders are placed, subjectto increase later.

Blanket purchase orders or open accountsmay be developed with key vendors to re-duce paperwork and increase the efficiencywith which you can execute continuing or-ders. Using these types of budgets will helpyou develop positive relationships with yourvendors.

WHAT IS THEADVERTISING BUDGET?

The advertising budget is a plan of spendingfor advertising, based on estimated sales.Advertising should be kept within some rea-sonable bounds, for it is not true that saleswill always be in direct proportion to adver-tising. You should check industry sourcesfor the relative amounts spent on advertisingwithin your industry and size category.With accurate records of sales and advertis-ing over time you can begin to develop agood understanding of any actual relation-ship between the amount, type, and timingof your advertising expenditures on yoursales. Because of the nature of the inter-relationship between sales and advertising,these two budgets should be plannedtogether.

ARE THERE OTHERRECORD-KEEPING NEEDS?

In addition to the record-keeping needs dis-cussed to this point, most small businessowners find it essential to keep other typesof records. They may include legal docu-ments, permits, licenses and certifications.

Types of legal records include the following:

Application to the appropriate govern-mental entity registering your businessname.

Application for and copy of a federalemployer identification number.

Application for and copy of a sales taxidentification number. This is necessaryfor businesses that are required by law tocollect sales taxes or that purchase mer-chandise that is for resale and not subjectto sales tax.

Application for and copy of state Unem-ployment Insurance Number. This isnecessary for businesses that pay com-pensation with the exception of emunera-tion of sole proprietors and partners.

Application for and copy of Worker'sCompensation Insurance Numbers foreach risk category of worker.

Application and copy of licenses re-quired by federal, state, and locallegislation.

Leases on premises used for businesspurposes.

Copies of partnership agreements andother agreements between the partners.

Copy of corporate kit with stock certifi-cates, seal and articles of incorporation.

Copies of purchase agreements betweensuppliers and the business.

Copies of contracts between the businessand its clients, plus other contracts re-lated to the business.

A record of business assets containingpurchase or title documents, warranty orguarantee statements, repair records, etc.These records should contain lists ofproperty, serial numbers, and values forequipment used in the business.

Insurance records containing differenttypes of insurance policies, policy num-bers, coverage, and premium due dates.

Other employee compensation records (afile of the application form, W-2 with-holdings statements, medical records,insurance forms, emergency phone num-bers, etc.).

Quality control documentation records.

Customer records.

Supplier records.

A record of customer suggestions, com-plaints, and correspondence.

Lists of clients, with aGdresses, phonenumbers, and purchase history.

Other documents applicable to the partic-ular industry and locality.

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Lists of product specifications, blue-prints, and bills of material for eachproduct you produce.

HOW ARE COMPUTERS USEDIN SMALL BUSINESSES?

Computers are key management tools thatallow you to integrate various record keep-ing systems into a "management informationsystem." Just as your existing paper record-keeping systems are interrelated, your com-puter will link each key record into a clearpicture of your business operations.

You will use a computer to increase sales,improve productivity, and to cut costs byassisting you in conducting the followinggeneral business functions:

Automatically collecting and storing

information about the business

Making routine decisions in areas likereminders of project due dates, sendingbilling notices, mailing sales announce-ments to key customers, etc.

Producing financial statements and man-agement reports essential for profitableoperations

Meeting government reporting and docu-mentation requirements

Receiving and transmitting informationto other businesses and your customers

If you choose to develop a fully integratedcomputer system, here are some of the spe-cific computer applications that apply to a

4

28

particular business in addition to routinepreparation of financial statements and man-agement ratio analyses:

Utilize market data in computerized formfrom private and public sources

Target potential customers and imple-ment sales plan

Take customer order and assist your cus-tomer service workers to provide accu-rate information

Take customer inquiry regarding ship-ment delays and help resolve customercomplaints

Evaluate customer credit

Check inventory status

Revise product design to customer speci-fications

Provide an accurate product cost estimateand customer quote

Order parts from suppliers via electronictransmission of parts specifications anddrawings

Manufacture product

Chart and document product and processquality progress

Check on the status of a customer pro-ject/product

Prepare shipping documents and custom-er invoices

Automatically send customer billing

reminders

Any job requiring accuracy, speed, and/orrepetitive processes with simple decision-making options, or keeping track of largevolumes of information, should be consid-ered for conversion to computer assistedoperation.

Costs of computer hardware and applicationsoftware to perform the above tasks in asmall business are now remarkably low andcan be justified easily by a cost/benefitcomparison. However, these low acquisitioncosts tend to hide several very significantcosts that need to be factored into your cost/benefit analysis:

Staff training costs in the new systemsand procedures.

A period of reduced productivity as theconversion to any new system is made.

The possibility that you will have to hirespecialized personnel at higher salaries.

Although a great deal of specialized ap-plication software is now available formany businesses, it is probable that youwill need assistance in customizing andinstalling these programs to work exactlythe way your procedures require.

An intangible factor to consider when com-puterizing your business is that the opera-tions of your business will become depen-dent upon reliable operation of the overallsystem. This means that service problemswith your hardware or software, as well asany failure by a key employee can effective-ly "shut you down" until they are resolved.

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You will want to spend a considerableamount of your time investigating the ser-vice reputation of the computer hardwareand software vendors with who you willdeal. In addition, you will not want tobecome dependent on a single employee thathas sole knowledge of how to operate yoursystem.

SHOULD I PROTECT MYRECORD-KEEPLNG SYSTEMFROM DAMAGE OR LOSS?

Every small business owner has the respon-sibility to maintain the security of essentialbusiness records. A fire causing the loss ofyour accounts receivable journals could de-stroy your ability to bring in cash from theseaccounts. These types of losses will general-ly not be covered by your insurance policies.

At the business site, you can utilize fireproofstorage cabinets for critical records. Dupli-cate records should be stored off site forcomplete protection. Computer recordsshould be protected on site by a policy spe-cifying regular "back-ups." Copies of thesebackups should also be stored off site. It isnot sufficient to have a policy calling forbackup data, you must ensure that this policyis carried out to the letter.

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ACTIVITIES

The following activities are designed to helpyou apply what you have learned in thisunit.

INDIVIDUAL ACTIVITY

1. Develop a list of resources on recordkeeping for use in your business. In-clude the Small Business Administra-tion publications that you might obtainfree of charge. Obtain those resourcesthat will be of assistance to you.

2. Determine who will keep the recordsfor your business.

3. Determine your need for an accountant.If you decide that you need an accoun-tant, determine how you will select thataccountant. Also, decide what servicesyou desire to have the accountant per-form.

4. Determine the nature of the informationthat you desire to have on your busi-ness on a daily, weekly, and monthlybasis. Also, decide how you will ob-tain this information.

5. Determine the type of bookkeeping sys-tem that you will use: single-entry ordouble-entry.

6. Select your journals or books of origi-nal entry.

7. Select your lodgers or books of variousaccounts.

8. Determine the techniques you will useto track sales.

9. Develop a system to keep track of youraccounts payable.

10. Develop a system to keep track of youraccounts receivable.

11. Determine the nature of the payrollrecords that you will keep.

12. Develop a system for keeping a pettycash account.

13. Select your inventory control system.Select or develop cards or forms thatyou will need to record perpetual in-ventory (if utilized). Develop or selectany forms that you will utilize to rec-ord physical inventories (if utilized).

14. Discuss electronic inventory controlsystems that might be utilized in yourbusiness with a cash register sales-person and a computer salesperson.

15. Develop an overall budget for yourbusiness. It should include sales, mer-chandising, purchasing, and advertisingbudgets.

16. Select any other records that you willkeep for your business.

17. Talk with a computer salesperson abouthow microcomputers might be used inyour business. Select any business ap-plications that you will computerize.Also, determine the policies that will berequired as you conduct the transitionfrom manual to computer-assisted oper-ations. How will these policies need to

be changed when you are fully con-verted?

18. Visit your local SBDC (Small BusinessDevelopment Center) or SCORE (Ser-vice Corps of Retired Executives) of-fice to determine the type of assistancethey can provide you and your firm.

19. On a separate piece of paper, completethe following checklist regarding yourrecords:

Have you planned a system of rec-ords that will keep track of yourincome and expenses, what you oweother people, and what other peopleowe you?

Have you worked out a way to keeptrack of your inventory so that youwill always have enough on handfor your customers, but not morethan you can sell at the lowestpossible financing cost?

Have you planned on how to keepyour payroll records and take careof tax reports and payments?

Do you know what financial state-ments you should prepare?

Do you know how to use these fi-nancial statements?

Have you obtained standard operat-ing ratios for your type of businessthat you plan to use as managementguides?

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Do you know an accountant whowill help you with your records andfinancial statements?

20. If your business has been operating andyou haven't done this previously, makean appointment to discuss the followinginformation with your accountant:

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How much business am I doing?

What are my expenses? Which ex-penses appear to be too high?

What is my gross profit margin?My net profit?

How much am I collecting on mycharge business?

What is the condition of ny workingcapital?

How much cash do I have on handand in the bank?

How much do I owe my suppliers?

What is my net worth; that is, whatis the value of my ownership of thebusiness?

What are the trends in my receipts,expenses, profits, and net Worth?

Is my financial position improvingor growing worse?

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How do my assets compare withwhat 1 owe? What is the percentageof return on my investment?

How many cents out of each salesdollar are net profit?

What can we do to improve thebusiness operation?

Which of the above items should Ibe reviewing (and/or producing my-self) on a more regular basis?

GROUP ACTIVITY

1. Attend one or more of the followingseminars:

Selecting an Accountant for YourSmall Business

Inventory Control and your SmallBusiness

Analyzing Your Records to ReduceCosts

Free business computer applicationsseminars conducted by the computerhardware and software vendors.Select topics appropriate to yourindustry, e.g., Equipment Mainte-nance Management, Payroll Person-nel Benefits, Sales Management,Manufacturing Solutions, orSelecting a Business Computer.

2. Select another person to work with inthis activity. You should select a per-son whom you trust, because you willbe discussing aspects of your businessoperation with this individual. Get aStudent Record Checklist from your in-structor. Use it as you discuss yourrecord keeping with the other individ-ual. The other individual will evaluatethe information that you provide andgive assistance on how you night im-prove your system.

You may wish to share the records thatyou are using with the person withwhom you are working. Are you usingtoo many records? Are the records thatyou are using at their best or can theybe improved? How can they he im-proved? Should you be keeping otherrecords? You and your "partner" willhave an opportunity to learn as youevaluate the record keeping process thateach of you is using.

CASE STUDY

Bob and Mary are two college students whooperate a seasonal lawn care service. Theyhave been in business for two seasons andexpect continued growth this spring. Theyare beginning to develop a significant clientbase and plan to hire additional employeesas the business grows. Major investments inequipment are also needed to support theprojected growth. Their concern is to beable to provide continued service to their"old" customers while building new custom-ers. In the past they have also had problems

DISCUSSION QUESTIONS

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with unpredictable expenses for supplies andequipment repairs.

You are their business teacher and they haveinformally asked you for advice on improv-ing their business. As an instructor, you arevery familiar with general business record-keeping systems but are not specifically fa-miliar with the lawn care business. You willwant to speak with several successful busi-nesses of this type to gather information be-fore advising your students.

1. Is there a "record-keeping" solution for Bob and Ruth's need to continue to service existingcustomers?

2. Can you suggest ways that improved records can reduce and make expenses morepredictable?

3. Are seasonal businesses prone to special record-keeping problems? What are they?

4. What records are especially important for a lawn care business?

5. Outline the p.-ocess that will be involved in operating this firm's record-keeping system forone week during the summer. Indicate which employee will enter each type of record andwhat types of information will be recorded. Also diagram the connections between the vari-ous records that are kept.

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ASSESSMENT

Read the following questions to check your knowledge of the topics presented in this unit.When you feel prepared, ask your instructor to assess your competency on them.

1. Describe double-entry bookkeeping.

2. Name the record-keeping devices that you will use in your business.

3. Several record-keeping needs are described below. Identify the nature of the record that willmeet each need in a small business situation.

A system that will allow you to classify your sales transactions ty department or mer-chandise line, salesperson, taxable versus nontaxable items, and cash versus charge sales.

These records are needed to document the cash taken in each day. They are a combina-tion of a day's cash sales plus payment for prior sales (charges), deposits on future sales(lay-away or special orders), and any miscellaneous income.

For each customer to whom you extend credit you should keep a separate record onwhich you post charge and payment transaction, along with the date and a running bal-ance due.

These records refer to each account that sells to you on credit.

These records show the weekly hours worked, gross pay, deductions for state and federalincome taxes, FICA withholdings, and net pay to each employee.

Depending on the type of business, you will need a control system to keep track of yourmerchandise and equipment. Keep in mind that the cost of maintaining the system shouldnot outweigh the potential for loss.

This record provides a monthly listing of deposits, checks cashed, and the remaining bal-ance of your bank account. It should be compared with your records to detect errors orto record bank charges and to locate any "lost" or "misplaced" checks.

In most businesses, the owner will have occasional small disbursements that are simplypaid in cash rather than by writing a check. This account is needed to cover theseexpenses.

4. A small business owner has several options with regard to who can keep the business records,as well as how they are maintained. Identify the option that you plan to use in your businessand explain why you choose ;L.

5. List the record-keeping functions that might be performed using a microcomputer.

6. Identify the factors that you will use to evaluate your business records.

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REFERENCES

Cohen, William A. The Entrepreneur and Small Business Problem Solver, 2nd ed. New York:John Wiley and Sons, 1990.

J. K. Lasser Institute. How to Run a Small Business. New York: McGraw-Hill, Inc., 1994.

Lasselle, Richard C. Record KeepingThe Total Concept. Boston: Houghton MifflinCompany, 1982.

Lerner, Joel J. Bookkeeping and Accounting. New York: McGraw-Hill, Inc., 1988.

Pinson, L., and Jinnett, Jerry. Keeping the Books, 2nd ed. Dover, NH: Upstart PublishingCompany, Inc., 1993.

Ragan, Robert C. Step-by-Step Bookkeeping. New York: Sterling Publishing Co., Inc., 1982.

Riehm, Sarah L. The Teenage Entrepreneur's Guide, 2nd ed. Chicago: Surrey Books, 1990.

Steinhoff, D., and Burgess, J. Small Business Management Fundamentals, 5th ed. New York:McGraw-Hill Book Company, 1989.

Tate, Curtis Jr. Managing for Profits: A Guide for the Growing Business. Homewood, IL:Dow Jones-Irwin, 1984.

U.S. Small Business Administration. Record Keeping in Small Business, No. FM 10, SBA, P.O.Box 15434, Fort Worth, Texas 76119, 1988.

U.S. Small Business Administration. Financial Record-keeping Systems for Small BusinessManagement Series, No. 32. Washington, DC: U.S. Government Printing Office, 1985.

Level 3

PACE

Unit 1. Your Potential as An Entrepreneur

Unit 2. The Nature of the Small Business

Unit 3. Business Opportunities

Unit 4. Global Markets

Unit 5. The Business Plan

Unit 6. Help for the Entrepreneur

Unit 7. Types of Ownership

Unit 8. Marketing Analysis

Unit 9. Location

Unit 10. Pricing Strategy

Unit 11. Financing the Business

Unit 12. Legal Issues

Unit 13. Business Management

Unit 14. Human Resources

Unit 15. Promotion

Unit 16. Selling

1:4> Unit 17. Record Keeping

Unit 18. Financial Analysis

Unit 19. Customer Credit

Unit 20. Risk Management

Unit 21. Operations

Resource Guide

Instructor's Guide

Units on the above entrepreneurship topics are available at the following levels:

Level 1 helps you understand the creation and operation of a businessLevel 2 prepares you to plan for a business in your futureLevel 3 guides you in starting and managing your own business

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