Page 53 - Budgeting for Managers

Budgeting for Managers
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you closed last night. Last night’s closing at $25 plus the $350
from today total $375, so your cash account is reconciled with
the money in the cash register.
Expense accounts work much like income accounts, except
they’re used to make the second transaction for money leaving
the company. If we pay $20 cash for a meal at a restaurant, we
reduce our cash account by $20 to match the money leaving
our wallet and increase our expense account for food by $20.
The general ledger is every account with every transaction.
Even accountants usually avoid working inside the general
ledger. It is much easier to figure things out one or two accounts
at a time.
Cash vs. Accrual
The Internal Revenue Service allows organizations to track
money in one of two ways: on a cash basis or on an accrual
basis. Cash basis is just what it sounds like: you count the
money when the cash comes in. Accrual basis is used when we
want to track the actions that generate money, even if the
money isn’t transferred. If you work with invoices for your cus-
tomers and from your suppliers, a cash accounting system
wouldn’t keep track of those invoices. So, to make sure you
receive from your customers and pay your suppliers, you track
bills with accounts receivable and accounts payable. That way,
you can keep track of money owed to the business and money
the business owes others.

Account Types
In accrual accounting, we end up with all kinds of special
accounts. In addition to income and expense accounts, we track
accounts receivable, accounts payable, assets (the value of
things owned), liabilities (the value of things owed), and inven-
tory. We aren’t going to go into all of those here—the book
would be much too long. After you learn the basics of budget-
ing, you can take more time learning about the parts of
accounting most useful to you. If you want to start now, turn to
Chapter 11, Budgeting for Small Businesses, and look at the