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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

Accounting Quiz for Prospective Business Owners

While small business owners are generally eager to take on the challenges of marketing, sales and customer service, many would prefer to avoid accounting tasks. According to the New Jersey Society of Certified Public Accountants (NJSCPA), every small business owner should develop a basic understanding of accounting. Answer true or false to the following questions to see how you measure up:

Questions
1. The purpose of accounting is to determine whether a business is profitable or unprofitable?

2. A balance sheet shows a business's financial condition at a specific moment in time, usually at the close of an accounting period?

3. It is a good idea to have the same person prepare the company's checks and reconcile the company's checking account?

4. Accounts receivable, patents and machinery are all considered assets?

5. Under the accrual basis of accounting, revenues and expenses are not recorded until the cash is received or paid?

6. Retained earnings are what the business owner keeps?

7. An accounts receivable aging report displays the balance due from each customer and the number of days since the invoice was issued?

8. In double entry accounting, two people are responsible for entering financial transactions?

9. Assets less liabilities equal owner's equity?

10. You don't need to understand accounting if you have a CPA?

Answers
1. False. A business's accounting system produces a wealth of information. Think of income statements, balance sheets and cash flow statements as tools to help your business prosper. Used properly, these tools help you set budgets, identify sales trends, control costs and make quick, informed decisions that can boost profitability.

2. True. A balance sheet shows a snapshot of a business's assets, liabilities and net worth at a specific time, while an income statement represents the business's revenue and expenses over a period of time, such as a month or a year.

3. False. Every business needs to establish internal controls - processes that ensure transactions are properly recorded - to guard against losses resulting from employee oversights and fraud. A CPA can help you segregate duties so that no one individual controls all facets of a financial function.

4. True. Simply stated, assets include tangible items of value that your company owns (cash, real estate, furniture and equipment, and receivables) and intangible assets (patents, trademarks and goodwill). Liabilities are the opposite of assets. Liabilities, which include accounts payable and outstanding loans, represent your company's obligations to pay.

5. False. With the accrual method of accounting, when you sell a product the sale is recorded on the date the sale was made, even if the customer doesn't pay you until some time in the future. Likewise, if you incur an expense one month, but don't pay until the following month, the expense is recorded in the month incurred. Cash basis accounting recognizes revenue when cash is received and expenses when payments are made.

6. False. Retained earnings are profits of an incorporated business that have not been paid to the shareholders as of the balance sheet date. The earnings have been "retained" for use in the business.

7. True. An accounts receivable aging report lists the name of each customer with an accounts receivable balance, the total amount due from each customer and the number of days customer receivables are past due. It helps the business identify where to focus their collection efforts.

8. False. Double-entry accounting is a system that records each business transaction as two components (one as a debit and one as a credit). Since debits must always equal credits, double-entry accounting can help prevent or detect some bookkeeping errors.

9. True. The excess amount of assets over liabilities is equal to owner's equity. Owner's equity is equal to the sum of money originally used to start a business plus the earnings since inception, less any distributions to the owners paid out of the business.

10. False. A CPA serves as a critical resource to small business owners. He or she can help set up internal controls, prepare financial statements and tax returns, and provide important business and management advice. But an understanding of basic accounting principles is essential to your ability to carry out the day-to-day responsibilities of managing a business and making the decisions that will help it grow and prosper.

If you answered 7-10 of these questions correctly, you have a basic understanding of some of the accounting issues you will address as an entrepreneur. Those of you who answered 4-6 questions correctly should review a business primer, attend a basic accounting course or consult your CPA before launching a business. If you had fewer than four responses correct, private tutoring by your CPA may help you to better understand key accounting concepts relevant to operating a business. If you don't have a CPA, you can easily locate one online using the NJSCPA Find-A-CPA service. Visit www.findacpa.org to locate a highly qualified professional who is right for you.

If you would like to receive more information on various financial matters, subscribe to E-CPA, the NJSCPA's free, monthly email newsletter. To subscribe, visit www.njscpa.org/finances or email a subscription request to e-cpa@njscpa.org.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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