Sarah The Accountant: Accounting Basics #102

Accounting basics are presented through the story of Mr Wale. He is a savvy personality who sees the need for a parcel delivery service in his community. He has researched his idea and has prepared a business plan. And this plan fully documents the viability of his new business.

Mr Wale has also met with a lawyer to discuss the form of business he should use. Given his specific situation, they conclude that a limited liability company will be best. Mr Wale decides that the name for his corporation will be Direct Delivery Ltd. The lawyer also advises Mr Wale on the various permits that will be needed for the new company.

Mr Wale is smart and hardworking. But admits he is not comfortable with matters of accounting. He will need accounting software, but wants to meet a professional accountant before making his selection. So, he asks his banker to recommend a professional accountant who can explain accounting to someone without an accounting background. He wants to understand the financial statements and wants to keep on top of his new business. His banker recommends Miss Sarah, an accountant who has helped many of the bank’s small business customers.

Meeting Ms. Sarah the professional accountant

At his first meeting with Ms. Sarah, Mr Wale asks her for an overview of accounting, financial statements, and the need for accounting software. Based on Mr Wale’s business plan, Miss Sarah sees that there will likely be hundreds of transactions each year. She states that the accounting software will allow for the electronic recording, storing, and retrieval of those many transactions. Accounting software will permit Mr Wale to generate the financial statements and other reports he will need for running his business.

Mr Wale seems puzzled, so Miss Sarah gives him five examples of transactions that Direct Delivery Ltd. will need to record:

The basics

  • Mr Wale will no doubt start his business by putting some of his own personal money into it. In effect, he is buying shares of Direct Delivery’s common stock.
  • Direct Delivery will need to buy a sturdy, dependable delivery vehicle.
  • The business will begin earning fees and billing clients for delivering their parcels.
  • The business will collect the fees that were earned.
  • The business will incur expenses in operating the business, such as a salary for Mr Wale, expenses associated with the delivery vehicle, advertising, etc.

With thousands of such transactions in a given year, Mr Wale is smart to start using accounting software right from the beginning. Accounting software will generate sales invoices and accounting entries simultaneously, prepare statements for customers with no additional work, write checks, automatically update accounting records, etc.

Learn good habits to avoid bad returns

By getting into the habit of entering all of the day’s business transactions into his computer, Mr Wale will be rewarded with fast and easy access to the specific information he will need to make sound business decisions. Miss Sarah tells Mr Wale that accounting’s “transaction approach” is useful, reliable, and informative.

She has worked with other small business owners who think it is enough to simply “know” their company made 10 million naira. And this is based solely on the fact that it owns 10 million naira more than it did on January 1. Now those are the people who start off on the wrong foot and end up in Miss Sarah’s office looking for financial advice.

If Mr Wale enters all his transactions into the software, it will allow him print his financial statements with a click of a button.

In Parts 2 through 7, Miss Sarah will explain the content and purpose of the three main financial statements:

Income Statement
Balance Sheet
Statement of Cash Flows

Source: www.accountingcoach.com
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