All businesses large and small must keep records. The main reason businesses keep records is to determine whether they have made a profit or a loss. If a business is not making a profit, it faces a lot of operating pressures. If financial problems cannot be solved, the business may cease to exist. Financial Records (also called accounting records) are organized summaries of a business’s.
Financial information and activities.
A very small business can determine how profitable it is by simply using a business checking account to record income deposited and by writing checks for all payments.
The total receipts (deposits) less the total of all checks written tell the business owner if the business is making money. However, that does not really provide adequate information to fully understand the financial condition of the business.
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Businesses need far more complete and detailed records than a checkbook to satisfy their information needs. All companies must determine what records to keep, how to prepare and maintain them, and who should be responsible for the records. Once a records system has been developed, managers can then use the information to understand the business’s finances and complete financial planning.
Records – KEEPING SYSTEMS
Businesses handle financial records in various ways. A small-business owner can keep the records personally or employ a full-time or part-time bookkeeper or accountant.
Larger businesses establish an accounting department or use an accounting service organization. The record-keeping system a business adopts determines, in part, the way it will handle its records. Systems for keeping financial records may be simple or complex, and they may require almost no financial knowledge to use or may be highly technical. Today almost all business records systems are computerized.
Regardless of the type of record system a company selects, the system must be accurate, keep information safe and secure, and provide timely and accurate information.
Small Scale Record systems
Manual record systems in which all information was entered and analyzed by hand were used by businesses for thousands of years. If you have taken an accounting class, you have probably had experience with a manual records system. Few businesses other than some that are very small rely on manual systems today.
Easy-to-use and affordable accounting software that runs on personal computers has replaced most manual systems. However, standardized accounting forms and records systems for manual record keeping can be obtained at office supply stores. Many small firms rely primarily on their cash register to gather most of the information needed for their financial records.
In addition to printing receipts for customers, cash registers maintain printed tapes of the details of each sales trans- action. This information can be used to enter data into the business’s accounting records.
However, cash registers record only information on customer sales, which is an incomplete record of the financial transactions of the business. Records also have to be maintained of all purchases and payments as well as any income received that is not recorded in the cash register.
Large Scale Record systems
Today most large firms and many small ones use accounting software programs to record, process, and store information. A desk- top computer is adequate for most small companies, but larger firms need more complex systems that can process huge amounts of data quickly and accurately.
Large corporations employ many bookkeepers and accountants. Some prefer to hire outside firms to perform some of their required financial record keeping. Outsourcing is hiring an outside firm to perform specialized tasks for a business. A business outsources because the firm that is hired has specialized expertise that the business needs. Buying these expert services may be less expensive than creating a new department in the business. An example of outsourcing for financial services is contracting with a data-processing center.
A data processing center is a specialized business that provides a full set of computerized financial records to other businesses for a fee. A business transmits financial data to the data-processing center, which processes the data and prepares records and reports that the business needs.
Usually the center stores and maintains financial records for the business. Many firms use a data-processing center to outsource selected tasks, such as preparing bills for customers, keeping track of inventory, and preparing payroll records and checks. Banks and data-processing firms like ADP and EDS are popular for outsourcing.
Data can be transmitted over the Internet and reports returned overnight, even when the data-processing centers are located in other countries. Large companies require large and complex automated systems for keeping records. Accounting departments usually maintain these records, although the initial recording of transactions occurs throughout the organization.
An accounting department is commonly divided into several sections. Each section is typically responsible for handling one or more phases of accounting, such as cash records, receipt and payment records, depreciation records, and tax and payroll records. Most large stores with many branches use sophisticated cash registers connected to com- putters. Such a register is called a point-of-sale terminal.
When cashiers use bar code scanners to record sales, for example, each item sold is subtracted from the inventory recorded in the computer. The computer calculates when the store needs to reorder merchandise (based on predetermined inventory needs) and provides other valuable information for management. With point-of-sale terminals, scanners electronically read product codes stamped on merchandise, thereby speeding the checkout service for customers and reducing manual paperwork and labor costs for the store.
Products and their costs can actually be tracked continually from the point of production through the entire distribution process until the products are sold.
Types of Financial Records
Financial records in all types of businesses have similar characteristics. A few of the most common records kept by all businesses are discussed next.
1. CASH RECORDS
Cash is constantly coming into a business from customers and other sources, and cash must go out of the business to pay for things purchased. Regardless of how financial records are maintained, businesses follow similar procedures in accounting for cash.
2. CREDIT RECORDS
All businesses must deal with money that they receive as a result of the sale of goods or services to customers. Because most businesses sell on credit, they keep records showing what each customer owes and pays. This record is called an accounts receivable record.
When a credit sale is made; the salesperson completes an order, which is submitted to the accounting department. The accounting department enters the sale into the accounts receivable record and sends an invoice of the sale to the customer that identifies the payment terms and dates.
When payments are made by the customer, the payments are recorded in the business records. Businesses must also keep records showing money they owe and payments they make for all credit purchases. This kind of record is an accounts payable record. Each time a credit purchase is made, that purchase and its terms are recorded in the accounts payable record.
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When payments are made to the creditor, they are also recorded so the company has an accurate record of what they owe on each account.
3. DEPRECIATION RECORDS
An asset is anything of value owned? Businesses need to have a variety of assets, such as buildings, vehicles, equipment, and inventory, for use in their normal operations.
The value of an asset decreases through use over time. This gradual loss of an asset’s value due to age and wear is called depreciation.
For example, a Jiffy Lube franchise owner buys a computerized diagnostic tool that costs $16,000. The owner knows from experience that at the end of five years the equipment will not be worth any more than$1,000. The owner estimates, therefore, that the equipment will wear out or depreciate at the average rate of $3,000 a year:
$16,000 — $1,000 = $15,000 value lost
$15,000/5 years = $3,000 depreciation per year
When the diagnostic equipment loses its usefulness, it must be replaced. Therefore, depreciation represents a cost to the business.
Fixed Assets are expensive assets of a business that are expected to last and be used for a long time. Buildings, land, and expensive equipment are common examples of fixed assets.
Except for land, fixed assets depreciate over time. A business records the value of fixed assets on its books when it purchases them. They become part of the property the business owns. As the assets wear out or become less valuable, the business is allowed by law to charge the loss in value each year as an operating expense.
Property may also decrease in value because of obsolescence. That is, even though the asset is still usable, it becomes out-of-date or inadequate for a particular purpose. An older computer, for example, may not have the capacity to run new software or manage the number of transactions as a business grows.
Even though the computer still functions, it is obsolete and no longer as valuable to the business. Therefore, obsolescence is a form of depreciation. The financial loss due to depreciation is very real, although it usually can- not be computed with great accuracy.
Therefore, the Internal Revenue Service (IRS) provides rules and procedures that businesses must follow in calculating depreciation. Businesses need to maintain depreciation records and use them in their planning so they have money available to replace assets when they wear out.
4. SPECIAL ASSET RECORDS
Financial statements list assets and their values, but they do not provide detailed information about these assets. As a result, a business must keep special records.
For example, a business should maintain a precise record of insurance policies, showing such details as type of policy, the company from which it was purchased, amount, premium, purchase and expiration dates, and the amount to be charged each month as insurance expense.
A business also maintains detailed special records for all fixed assets, such as trucks and forklifts. These records provide such information as asset description, date of purchase, cost, monthly depreciation expense, and asset book value. Asset book value is the original cost less accumulated depreciation.
In the Jiffy Lube example above, the equipment depreciates at a rate of $3,000 per year. At the end of the second year, the $16,000 equipment will have an asset book value of $10,000:
$3,000 depreciation X 2 years = $6,000 accumulated depreciation
$16,000 — $6,000 = $10,000 asset book value at the end of year 2
5. TAX AND PAYROLL RECORDS
Federal and state income tax laws require every business to keep satisfactory records in order to report its income and expenses, file required forms, and calculate and pay all required taxes.
The law requires employers to withhold a certain percentage of each employee’s wages for federal income tax purposes. It must do the same for Social Security, Medicare, and Medicaid.
Other payments that employers must make to federal and state governments are for business taxes and government-sponsored unemployment compensation insurance. For business planning as well as for tax purposes, businesses must keep detailed payroll records for each employee: hours worked, wage or salary rate, regular and overtime wages paid, and all types of deductions and withholding made from the employees’ wages.
Companies also record the value of benefits paid for each employee such as health insurance, paid vacation, and retirement benefits.
Each employee must fill out a W-4 form that provides information on the number of family members and exemptions. Using this information and a table furnished by the Internal Revenue Service, the employer determines the amount to withhold from the employee’s paycheck.
Employers submit payments of these withholdings to the IRS. Most companies use a computerized payroll system to maintain personnel records, to calculate payroll, and to process payments for each employee.
6. PROTECTING BUSINESS RECORDS
All financial records of a business, including personal information about customers and employees, must be maintained and retained for many years.
Information must be secure from theft and misuse and also should be protected from hazards of nature such as fire, floods, hurricanes, and earthquakes. Also, the growing threat of terrorism offers other types of threats to businesses. Every business, therefore, should have secure areas such as vaults and safe rooms for records and secure areas for computer equipment and data storage.
Fireproof and secure filing cabinets and other types of storage devices are also needed for maintaining important and frequently used documents. Methods to provide access to authorized people must be developed while keeping the information from those who are not authorized to access it.
Important documents such as mortgages, deeds, leases, contracts, and other critical but infrequently used documents may be better placed in bank safe deposit boxes or other secure locations if there is no adequate protection in the business.
Companies protect their computer records by using such precautions as firewalls and passwords to keep out intruders. Most large organizations have security personnel or consultants who regularly review computer systems and look for attempts to “hack” or illegally access information from the computer systems.
Companies should also store backup copies of electronic records in a secure off-site location. Service companies rent storage space on their computers or in their climate-controlled data warehouses for safe record archiving and protection.