Basic Accounting for Small & Medium Scale Business


Luke 16:2 King James Version (KJV)

And he called him, and said unto him, How is it that I hear this of thee? Give an account of thy stewardship; for thou mayest be no longer steward.

The knowledge of basic accounting process is very important for small and medium enterprises (SMEs). Whether your business is on a small scale or a medium scale, having this knowledge and applying it enables you to keep proper financial records for your business, which in turn can help you monitor the financial health of your business.

In keeping these records, you need to have a proper understanding of the different types of records you have to keep. These records are referred to as FINANCIAL STATEMENTS.

There are four types of financial statements namely Income Statement, Statement of Shareholders’ (Owners’) Equity, Cash Flow Statement and Balance Sheet.

 

INCOME STATEMENT

The Income Statement is also referred to as the Profit and Loss account. It shows how much profit or loss you have made in your business for a particular period of time. When your revenue or income exceeds your cost or expenditure, it means you have made a profit. However, when your cost or expenditure exceeds your revenue or income; that implies that you have made a loss.

If you are into trading, that is buying and selling of goods or products, you deduct the cost of the goods or products sold for the period in review and subtract from the sales made during the same period. This will give you the gross profit. During the course of running your business, you would have incurred some expenses like rent, light bills, transportation, fuel and so on. These expenses are then subtracted from the gross profit to arrive at the net profit. If the expenses exceed the gross profit, it means you have a net loss.

If you are into provision of services, then there will be no need for cost of goods sold. Instead, you will start with your gross revenue from the services you provided for the period and continue from there.

 

STATEMENT OF SHAREHOLDER(S)’ EQUITY

The Statement of Shareholder(s)’ Equity informs you of the amount the shareholder(s) or owner(s) of the business have in the business at the period in review.

In this statement, you will find the Capital that was invested by the owner(s), the net profit or loss made, which can also be referred to as retained earnings (if it is a profit) and the amount that has been drawn out of the business by the owner(s) for personal use, usually referred to as drawings. The sum total of these will give you the net worth of your business. The net profit made during the period is added to the initial Capital invested and the drawings are subtracted to give the net worth.

However, this statement can be included in the Balance Sheet. If this is the case, you will discover that there will be three financial statements to prepare instead of four.

 

CASH FLOW STATEMENT

The Cash Flow Statement can also be referred to as the Cash Book. This statement deals specifically with the inflows and outflows of cash into and out of your business.

Basically, there are two sides to the Cash Flow Statement: the debit side and the credit side. The debit side gives details of the inflows of cash into your business. For example, the cash inflows from Capital invested, sales made, loan received, returns on investments, debt payments received and so on are recorded on the debit side. On the other hand, the credit side gives details of the outflows of cash out of your business. If you purchase some goods for resale, buy assets like machinery, furniture and fittings, motor vehicles, paid rent and so on, all these will be recorded on the credit side.

At the end of a particular period, you deduct the amount on the credit side from the amount on the debit side to get your debit balance. This will show you the amount of cash available for your business at that point in time.

BALANCE SHEET

A Balance Sheet will show you in details what your business owns, what it owes and the net worth at a particular point in time.

It is a financial statement that reveals the financial position of your business as at a particular date. While the Cash Book, for instance, will give you information for a particular period, say a month, the Balance Sheet will give you information for a particular date.

The Balance Sheet will give you details of your business’ assets, liabilities and shareholder(s)’ equity or capital as it is usually referred to.

Assets are valuable things that your business owns. They can either be used in the production of goods and services or they can be sold for income for your business. They can be physical like furniture and fittings, plant and machinery, inventory of goods in the store, cash and so on or non-physical like trademarks and patents.

Assets can be divided into fixed and current assets. Fixed Assets are those that are used in the production of goods and services and are not meant for resale in the ordinary course of your business. Examples are furniture and fittings, plant and machinery, motor vehicles and such like. Current Assets are those that are meant for resale or expected income within one year. The inventory of goods in your store and the debts you expect to collect are examples.

Liabilities can be divided into Long-Term and Current Liabilities. Long-Term Liabilities are those debts your business can settle after a year while Current Liabilities are those your business needs to settle within one year. An example of a Long-Term Liability is a loan from the Bank. The rent you have to pay, salaries and wages that have accrued, debts for purchases of goods on credit are some examples of Current Liabilities.

The Shareholder(s)’ equity is the amount of money you have in the business or the net worth. It is important to note that the Assets of your business will equal the Liabilities and the Shareholder(s)’ Equity as stated below:

ASSETS = LIABILITIES + SHAREHOLDER(S)’ EQUITY

The above equation implies that your assets are being financed by the liabilities your business incurs and your investment as the owner(s) of the business. In order to know your net worth from the above equation, subtract the liabilities from the assets of your business.

 

AN ILLUSTRATION

June 1, 2008    –           Mr. Bizman started business N50,000 cash

June 3, 2008    –           He bought furniture and fittings worth N5,000

June 4, 2008    –           He bought generator for N4,000

June 5, 2008    –           He bought fuel N200

June 5, 2008    –           He bought goods for resale N10,000

June 5, 2008    –           Transportation N1,000

June 6, 2008    –           Sold goods N7,000 in cash

June 6, 2008    –           Sold goods on credit to Mr. Balet N2,000

June 10, 2008  –           Sold goods N5,000 in cash

June 12, 2008  –           Bought goods on credit from Mrs. Carlon N7,500

June 15, 2008  –           Withdrew N2,500 for personal use

June 17, 2008  –           Sold goods N12,000 in cash

June 18, 2008  –           Mr. Balet paid N1,500

June 19, 2008  –           Paid Mrs. Carlon N7,000

June 20, 2008  –           Sold goods N5,000 in cash

June 26, 2008  –           Paid salaries N2,000

June 28, 2008  –           Stock of goods N1,000

June 30, 2008  –           Paid rent N500

June 30, 2008  –           Paid light bill N300

 

INCOME STATEMENT

Profit and Loss Account for the month ended June 30, 2008

N N
Purchases 17,500 Sales 31,000
Less Closing Stock 1,000
Cost of goods sold 16,500
Gross Profit c/d 14,500  
31,000 31,000
Fuel 200 Gross Profit b/d 14,500
Transportation 1,000
Salaries 2,000
Rent 500
Light Bill 300
Net Profit c/d 10,500  
14,500 14,500
  Net Profit b/d 10,500
 

 

STATEMENT OF SHAREHOLDER’S EQUITY

Shareholder’s Equity as at June 30, 2008

                                                                                                N

Capital                                                                               50,000

Add Net Profit (Retained Earnings)                                10,500

                                                                                           60,500

Less Drawings                                                                                2,500

                        Net Worth                                                  58,000

 

 

 

 

CASH FLOW STATEMENT

Cash Book for the month ended June 30, 2008

Date      Particulars   Amount (N) Date      Particulars   Amount (N)
1/6/2008 Capital   50,000 3/6/2008 Furniture and Fittings   5,000
6/6/2008 Sales   7,000 4/6/2008 Generator 4,000
10/6/2008 Sales   5,000 5/6/2008 Fuel   200
17/6/2008 Sales   12,000        “ Purchases 10,000
18/6/2008 Mr. Balet   1,500        “ Transportation 1,000
20/6/2008 Sales   5,000 15/6/2008 Drawings   2,500
      19/6/2008 Mrs. Carlon 7,000
      26/6/2008 Salaries   2,000
      30/6/2008 Rent   500
             “ Light Bill   300
             “ Balance b/d 48,000
    80,500     80,500
         

 

BALANCE SHEET

Balance Sheet as at June 30, 2008

   N      N        N    N
Current Assets Current Liabilities
Cash 48,000 Accounts Payable 500
Account Receivable 500 Total Current Liabilities 500
Inventory 1,000  
Total Current Assets 49,500 Shareholder’s Equity
Shareholder’s Net Worth 58,000
Long-Term Assets  
Furniture and Fittings 5,000  
Generator 4,000  
Total Long-Term Assets 9,000  
     
Total Assets 58,500   58,500
 

 

NOTES

Account Receivable – The amount of N500 is the amount due from Mr. Balet who paid N1,500 from his debt of N2,000

Inventory – N1,000 represents the amount for the stock of goods at the end of the Accounting period

Account Payable – The amount of N500 is the amount due to Mrs. Carlon after the payment of N7,000 from the debt of N7,500 owed to her

The above indicates a healthy balance in the business in the sense that there is a debit cash balance, the accounts payable and receivable are minimal, there is an inventory of stock which can be replenished from the cash available, the shareholder’s net worth has increased. Remember, he started a business with a Capital of N50,000.

If you are yet to set up records for your business, I encourage you to do that.

Reference

http://www.dummies.com/how-to/content/choosing-a-format-for-a-balance-sheet.html

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