Understanding Accounting for Profits: A Guide to Essential Financial Practices

1. Account for Profits Understand how to account for profits using basic accounting methods.

2. Accounting Basics

3. Essential Financial Records • Types of Accounts include • Accounts Receivable – money owed to a business by its customers • Accounts Payable – money owed to a vendor for merchandise, equipment, or other supplies • Purchase Order – a written form authorizing vendors to ship products at a specified price • Cash Receipts – any cash brought into the business • Cash Disbursements – any cash paid out by the business

4. To maintain accurate records, a business should record all financial activities of a business in a ledger or journal.

5. Financial Statements • Income Statement – summarizes the business’s income and expenses during a specified time period. Basic calculations for an income statement are • Net Sales = Total Sales – Sales Returns and Allowances • Gross Profit = Net Sales – Cost of Goods Sold • Net Income before Taxes = Gross Profit – Operating Expenses • Net Income = Net Income before Taxes – Taxes • Total Sales – Total amount received from the sales for a business • Sales Returns and Allowances – the credit granted to customers who have returned a damaged or unwanted good • Cost of Goods Sold – the cost to either manufacture or buy the merchandise to be sold • Operating Expenses – the costs incurred from operating the business which can include wages or rent • Variable expenses – change monthly • Fixed expenses – stay the same no matter the level of production • Income Taxes • Net Income – income earned after deducting sales returns and allowances, cost of goods sold, operating expenses, and income taxes from sales

6. Balance Sheet – the summary of a business’s assets and liabilities. Indicates the financial condition of the business. • Asset – anything of value that the business owns • Liability – the amount of money the business owes • Net Worth = Assets - Liabilities

7. Manage Your Cash Flow

8. Daily Transactions • Sales Tally – a calculation of the daily sales • Can be used to compare a store’s performance from year to year • Provides up-to-date information about what is selling and not selling • Allows the business to catch any discrepancies on a daily basis • Deposits should be made daily to ensure that large sums of money are not left in the store

9. Sales Reports • Uses of Sales Reports is important to a business in the following decisions • Merchandising Decisions • Pricing Decisions • Purchasing Decisions • Sales Quotas – a sales goal • Scheduling of employees

10. Data from Sales Reports can include • Total Sales • Department Sales • Product Sales • Average Dollar Sale • Average Units per Transaction • Hourly Sales • Goals

11. Auditing • Auditing – the process that ensures the accuracy of a business’s finances • Identifying Discrepancies – identifies errors • Protecting the Business – from dishonest employees • Verifying Accuracy

12. Computerized Accounting Systems

13. Point-of-Sale Systems • Some features of a POS system includes • Tracking Inventory • Tracking Purchasing Patterns • Reordering Merchandise • Printing Financial Statements • Identifying Sales Trends • Tracking Employee Productivity • Tracking Customers

14. Advantages of POS Systems include • Quick • Accurate • Up-to-Date Information