Small Business Accounting - Starting a Company
Balance Sheet, Income Statement & General Ledger for a New Business
Starting a brand new company can be a daunting task. There are a million and one things that have to be accomplished before opening day. Before opening day, one important task is deciding how to setup the chart of accounts. Creating general ledger accounts is an important decision because it's the precursor to the development of the financial statements.
General Ledger Chart of Accounts and the Income Statement
Whether a new company is using accounting software or keeping books manually, choosing the appropriate general ledger accounts is an important decision. Choosing the appropriate GL accounts is especially important for the formation of the income statement. The income statement is an important tool that shows the profitability of the company. Setting up the proper chart of accounts allows the entrepreneur to analyze income, as well as expenses for maximum efficiency.
Revenue Accounts - General Ledger and Income Statement
If a new business has various categories of generated revenue, the entrepreneur may want to analyze each category separately. In order to examine the sales, gross profit and other forms of income in each category from the income statement, separate general ledger accounts should be established for each category. As an example, let’s see how a parts store, that also has a repair shop, might set up their revenue chart of accounts.
- Parts Counter Sales
- Parts Counter Cost of Sale
- Wholesale Parts Sales
- Wholesale Parts Cost of Sale
- Shop Parts Sales
- Shop Parts Cost of Sale
- Parts Discounts
- Parts Appreciation (Depreciation)
- Labor Sales
In this example, the business owner can analyze each segment of parts sales separately. Gross profit would be shown on the income statement as the difference between the sale and the cost of sale. The parts discounts and appreciation GL accounts would be considered income that’s not generated from sales. Labor sales in this example don’t have a cost of sale GL account (although it could) because the cost of labor would be expensed.
Expense Accounts - General Ledger and Income Statement
Just like analyzing revenue accounts, examining expense accounts is equally important. The income statement usually reports fixed and operating expenses separately. For purpose of analyzing and looking at trends in expenditures, choosing appropriate operating expenses GL accounts is more important. Operating expenses fluctuate with production and sales volume, where fixed expenses remain somewhat constant. Using the same example, let’s see how the auto parts and repair shop might choose operating expense GL accounts.
- Managers Commission
- Parts Commission
- Labor Payroll
- Supplies
- Freight
- Vehicle Maintenance
- Equipment Maintenance
- Advertising
- Inventory Control
The Initial Balance Sheet for a New Business
The balance sheet is the financial statement that shows the net worth of the company or owner’s equity. In simple terms the formula is:
Assets – Liabilities = Owner’s Equity
The balance sheet should actually be produced before any other financial statement. As soon as the new company is formed, there should be assets, liabilities and owners equity established before the doors even open. As an example of an initial balance sheet, let’s assume the entrepreneur put up $150,000 towards the assets and borrowed the remainder needed to open the business.
- Cash $20,000
- Inventory $130,000
- Shop Equipment $100,000
- Vehicles $30,000
- Furniture $20,000
Total Assets $300,000
- Accounts Payable $150,000
- Owner’s Equity $150,000
Total Liabilities and Owner’s Equity $300,000
The income statement is the primary financial statement that determines the amount of the company’s income tax liability. Since the creation of the general ledger accounts determines the formulation of the income statement, a certified public accountant should be consulted. A certified public accountant can also give professional advice to help maximize the company’s financial analytical tools.
Small Business Accounting - Starting a Company
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Starting a Small Business - Bookkeeping Basics
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