JMLABS INSTITUTE ONLINE

lecture 2C2A:

Before any business can get started you should have a marketing plan or strategy which includes a marketing research  results with a specific target area of prospective customers, a proposal to aquire loans and capital, and a 4 or 5 year business plan which project your growth, use of working capital and depreciation.

To set up general ledger accounts you can use the following checklist.

1.	What kind of business is it?   grocery store, pawn shop, loan co., auto sales, etc.
2.	What type of business is it?   sole proprietor, partnership, corporation, etc. 
3.	What size is the business?	small business, $100k business, $300k business, big business, etc.
4.	What are the qualifications of the bookeepers?  college degreed, trained on-the-job, self-trained, etc.
5.	What are the necessary accounting standards?  government funded restrictions, auditability requirements, etc.
6.	How much money is budgeted for accounting services and supplies.
7.    	How much time is scheduled to complete to bookeeping system?  
8.	Are there any critical completion dates?  
9.	What equipment is available or required?
10.	What accounting cycle will you use?
11.	Will you need an certified public accountant for any portion of your bookeeping procedures? 

In the example we use here, we'll assume our business is a carwash business, a sole proprietor, small business,  with self-trained bookeepers, normal auditability system, $400/year accounting budget, 2 months until startup, no critical dates, 2 PCs for bookeeping programs, quarterly accounting cycle, and an accountant will do our taxes at the end of each year.  Considering these limitations we have decided to have 20 BALANCE SHEET accounts.

ASSET ACCOUNTS:					LIABILITY ACCOUNTS:
CASH								INSURANCE PAYABLE
INVENTORIES						FICA PAYABLE
SUPPLIES							ACCTS. PAYABLE
ACCTS. RECEIVABLE					INCOME TAXES PAYABLE
ACCM. DEPRECIATION					UNEMPL. TAXES PAYABLE
				
FIXED ASSETS 						LONG TERM DEBT 
BUILDING							OWNERS EQUITY
VEHICLES
EQUIPMENT

The asset accounts are what wealth you actually have in the business.  the liability accouts are what is owed by the business.  Your NETWORTH = ASSETS - LIABILITIES.   If you have $40,000 assets and $15,000 liabilities, your networth is ..

$40k -$15k = $25k.   

If you have a $130,000 home with $60,000 worth of unpaid mortgages, an $90,000 balance on the home, $20,000 in cash savings,  a new hummer paid for $40,000, and another $40,000 worth of credit card debt,  your networth is ..

$130k + $20k + $40k - $90k - $60k - $40k = $0.00    "You aint worth a quarter?!!"

You may be flashing big bank rolls and cars, but don't get the "big head" because if you lose the ability to pay off your liabilities, your "castle" may come crumbling down any day and you could be sitting on a park bench with some other hobos telling how you lost it all, when you never really had it all.  You were just "frontin".   Lets move on.

Each account (book) is set up with 4 main fields of data.

acct no.		acct. name			debits		credits
100			CASH				$22,000			$0
110			ACCT.REC.				$0			$0
120			VEHICLES			  	$0			$0
130			ACCT. PAY.				$0		$22,000

DEBIT:  To debit a asset account means to put money into it or to add to it.
CREDIT:  To credit an asset account means to take money from it.
DEBIT:  To debit a liability account means to take money from it..
CREDIT:  To credit an liability account means to put money into it or to add to it.
	
As an example of this, lets use cash to buy a used delivery van for the business.  
We will credit cash $12,000 and debit vehicles $12 ,000.

acct no.		acct. name			debits		credits
100			CASH				$22,000		$12,000
110			ACCT.REC.				$0			$0
120			VEHICLES			$12,000			$0							
130			ACCT. PAY.				$0		$22,000
	
Another example of this, let's buy a used delivery van for the business on credit.  
We will credit account payable $8,000 and debit vehicles $8,000.
Here we are adding to an asset account (debit) and adding to a liabilty account (credit).

acct no.		acct. name			debits		credits
100			CASH				$22,000		$12,000
110			ACCT.REC.				$0			$0
120			VEHICLES			$12,000			$0
							  $8,000
130			ACCT. PAY.				$0		$22,000
										  $8,000

(c)JML2002