Bookkeeping

Recording Business Transactions

Bookkeeping is the systematic recording of a business's financial transactions. For a food truck business, this means keeping a detailed account of every expense and income, from purchasing ingredients and paying for permits to sales made each day. It's crucial for understanding the financial health of the business, planning for future expenses, and preparing for tax obligations.

Voucher and Transactions

Source Documents: These are the receipts, invoices, and contracts—every piece of paper or digital record that proves a transaction happened. Think of them as the recipes and purchase receipts for your food truck's ingredients. They’re the base that verifies the financial transactions, like buying fresh produce or paying for a parking spot. The Notifications Section serves this purpose in the Simulation.

Preparation of Vouchers: Once you have your source documents, you prepare vouchers, which are summaries of these transactions prepared for accounting purposes. It's like summarizing a recipe for your signature dish, outlining the ingredients (expenses) and the expected taste (revenue). Vouchers act as a bridge between the transaction and its entry into the books.

Accounting Equation Approach: Remember the golden equation:

Assets = Liabilities + Equity.

Every transaction affects this equation, keeping your financials in balance. It’s like making sure every dish you serve has the right balance of flavors. For instance, buying a new blender (an asset) might mean taking out a loan (a liability) or using your earnings (equity), but either way, the equation must balance out.

Rules of Debit and Credit: In the culinary world of bookkeeping, Debit and Credit are the yin and yang, ensuring every transaction is balanced. Here’s a simple way to remember them:

Debit: Increases in assets or expenses, decreases in liabilities or income. It’s like adding more spices to your dish or reducing the amount of salt.
Credit: Decreases in assets or expenses, increases in liabilities or income. Imagine using less of an expensive ingredient or getting more customers to buy your special.

Double Entry System of Bookkeeping

The double entry system of bookkeeping is a key part of accounting that makes sure every money move touches two accounts in opposite ways. This keeps everything balanced according to the formula: What you own = What you owe + Your investment (Assets = Liabilities + Equity). It's a tried-and-true method that's helped businesses stay financially healthy for a long time. The system treats every transaction as having two effects on a business's money matters. Here's how it works:

Two-Account Impact: Every money move involves two accounts - one gets a debit (increase for assets/expenses, decrease for liabilities/equity), and another gets a credit (the opposite).
Balance Is Key: The total of debits and credits must always match, keeping the financial balance in check.
First Recorded, Then Detailed: Money moves are first noted in a main book, then detailed in specific accounts.

For a food truck, this means getting a full picture of money in and out, like when buying ingredients decreases cash but increases what you have to sell.

Books of Original Entry - Journal

The journal is where every transaction is first written down. It includes the date, which accounts to change, and by how much. For example, if you buy $500 of supplies on credit:

Debit: Inventory or Food Supplies Expense $500
Credit: Accounts Payable $500

This shows you have more supplies but also more debt.

In the Simulation, this information is captured in the Notifications Section.

Process Accounting Data

Using the Double Entry System To keep track of finances, follow these steps:

Spot the Transaction: Notice every business activity, like buying supplies or making sales.
Figure Out Affected Accounts: Each transaction changes at least two accounts.
Choose Debit and Credit: Decide which account increases or decreases, using debits for upping assets/expenses and credits for the rest.
Write It Down: Record these changes in the journal, listing the accounts and amounts.
Detail It in the Ledger: Move this info to specific accounts for a complete overview.

Illustration Consider a food truck business deciding to upgrade its grill. The purchase is $10,000, paid half in cash and half through a bank loan.

Identify the transaction: Purchasing new cooking equipment.
Determine affected accounts: Equipment (Asset), Cash (Asset), and Bank Loan (Liability).
Debit and Credit:
- Debit Equipment for $10,000 (increasing assets).
- Credit Cash for $5,000 (decreasing assets).
- Credit Bank Loan for $5,000 (increasing liabilities).
Record in the journal and post to the ledger.

Books of Prime Entry

Books of prime entry, also known as special journals, are the specialized tools of the accounting world. Each one has a specific job that makes keeping track of money much clearer and more organized for small businesses, like food trucks. Let's explore these tools and see how they help.

Special Purpose Books include:

Cash Book: This is where all cash transactions are recorded, whether it's money coming in (income) or going out (expenses). It's essentially the detailed record of the business's cash flow.
Petty Cash Book: A mini-version of the Cash Book for tracking small, daily expenses. It could be for things like buying small kitchen items or covering parking fees.
Purchases Book: Here, you note down everything you buy on credit, such as ingredients for your food truck that you'll pay for later.
Sales Book: This one keeps a record of sales made on credit. It helps track what customers owe you for meals they've bought but not yet paid for.
Purchases Return Book: If you ever have to return something you've bought, like spoiled vegetables, you'd record that here.
Sales Return Book: This is for when customers return something they've bought, like a meal that wasn't up to standard.
Journal Proper: This book is for everything that doesn't fit into the other categories. It could be for fixing mistakes or making special notes about unusual transactions.

Why Use These Books?

Having these different books offers several benefits:

Efficiency: Focusing on specific types of transactions in separate books speeds up the recording process.
Accuracy: Organizing transactions this way helps avoid mix-ups, ensuring the records are correct.
Ease of Tracking: It's much simpler to find specific transactions when they're organized by type.
Simplifies Ledger Work: Information from these books can be moved directly into the main ledger, making the overall accounting process smoother.

How to Use These Books

Cash Book and Petty Cash Book: For handling all cash-related transactions or small spending. For a food truck, this means tracking daily earnings and minor purchases, streamlining the management of cash flow.

Sales Journal and Purchases Journal: The sales journal is for noting down credit sales, like when you cater an event but get paid later. The purchases journal is for credit purchases, like ordering a lot of ingredients now and paying next month. These help keep track of what money is coming in and what's going out.

Sales Returns Journal and Purchases Returns Journal: These journals are for when sales or purchases are reversed. They ensure that your records accurately reflect the business's real income and expenses.

General Journal: This is the catch-all journal for entries that don't fit elsewhere, like year-end adjustments or correcting mistakes.

Posting Ledger Entries from Books of Prime Entry

After recording transactions in the special journals, the next step is to move these details into the ledger. Think of the ledger as the main folder where all financial information is stored, sorted by each type of account.

Process:

Find the transaction in the special journal.
Figure out which accounts are involved and how they're affected.
Enter the transaction into the ledger for each account, making sure that what you add to one account (debit) is balanced by what you subtract from another (credit).

Imagine your food truck buys ingredients worth $1,000 on credit. In the ledger, you'd increase your "Purchases" account (showing you spent more) and your "Accounts Payable" account (showing you owe more).

Understanding Different Kinds of Discounts:

Trade Discounts are price cuts suppliers give you when you buy things, usually in large amounts or to keep doing business together. These discounts aren't noted down as discounts; instead, you just record the purchase at the lower price.
Cash Discounts are rewards for paying early. These are recorded because they actually reduce how much you spend and owe.

The Cash Book's Two Jobs: The cash book has a dual role. It works as both a journal, tracking all cash transactions, and as a ledger account, showing the total cash or bank balance.

For example, if "Gourmet on Wheels" fills up the fuel tank and pays cash, this transaction lowers the cash balance and records the fuel expense in one go in the cash book.

Handling Electronic Payments and Receipts: Nowadays, a lot of payments and receipts are digital. These are recorded by noting the date, amount, and what the transaction was for, directly affecting the cash book or bank column.

If you get paid for a big job via bank transfer, it's marked as income in the bank column. Paying a bill online? That's an expense, marked in the same place but as money going out.

Managing Petty Cash with the Imprest System: The imprest system keeps petty cash in check by starting with a set amount for small, day-to-day costs. As you spend this money, you collect receipts, and then fill the fund back up to the starting amount, recording the spent money based on those receipts.

Let's say "Gourmet on Wheels" has $100 in petty cash. They use $75 for minor expenses over a week. At the end of the week, they add $75 back to the petty cash, resetting it to $100, and note down the expenses.

Business Documents

Business documents play a key role in keeping track of transactions and financial activities in any business, including small ones like food trucks. Let's dive into some common business documents, understand their purposes, and see how they're used in real-world scenarios.

Business Documents Overview

Invoice: This is a bill sent to customers after they purchase products or services. It details what they bought, how much it costs, and how they can pay. For a food truck, this might be used for catering events, listing the menu items served and the total cost.
Debit Note: If a business returns goods to a supplier, perhaps because they were damaged or incorrect, they send a debit note. This document explains why money should be returned to the buyer or subtracted from what they owe.
Credit Note: This is the opposite of a debit note. If a customer returns something or is overcharged, the business sends them a credit note, which can reduce the amount they owe on a future purchase or serve as a refund.
Statement of Account: This is a summary of all transactions between the business and a customer or supplier over a period. It shows what was bought, returned, and paid for, and what might still be owed.
Cheque: A written order to a bank to pay the specified amount from the writer's account to the person or business named on the cheque. Food trucks might use cheques to pay for supplies or services.
Receipt: This confirms that payment has been made. For a food truck, receipts are given to customers who pay in cash or by card, showing what they bought and how much they paid.

Completing Pro-forma Business Documents

Pro-forma documents are like templates or drafts. Filling them out correctly ensures that all necessary information is captured and communicated. For example, when creating an invoice, it’s important to include:

The date of the transaction
A unique invoice number
The buyer and seller's contact information
A detailed list of products or services provided, with prices
The total amount due, including taxes
Payment terms, such as due date and methods accepted

Use of Business Documents as Sources of Information

These documents not only facilitate transactions but also serve as vital records for financial management and reporting.

Invoice and Credit Note: Help track sales and returns, influencing inventory management and financial forecasting.
Cheque Counterfoil: The part of the cheque kept by the writer as a record of the payment, useful for tracking expenses.
Paying-in Slip: Used when depositing money into a bank account, helping reconcile cash sales with bank deposits.
Receipt: Proves that a transaction occurred, supporting expense tracking and tax filings.
Bank Statement: Provides a comprehensive view of all bank transactions, crucial for reconciling the business's bookkeeping with the bank's records.

Mini-Case Study

Imagine "Gourmet on Wheels" catered a local event, serving 200 meals. They issue an invoice detailing the menu items, quantities, and total cost. After the event, the organizer realizes they were overcharged for 10 meals they didn't order. "Gourmet on Wheels" issues a credit note to correct this, reducing the organizer's total bill.

To pay the adjusted invoice, the organizer writes a cheque to "Gourmet on Wheels." The food truck keeps the cheque counterfoil as a record of the payment. Upon depositing the cheque, they fill out a paying-in slip, which, along with the bank statement and receipt given to the organizer, helps "Gourmet on Wheels" keep accurate financial records.

Ledger

Understanding how to manage ledger accounts is like getting to know the control panel of your food truck's financial operations. It helps you keep track of what's coming in, what's going out, and where you stand financially. Let's break down how to prepare, post, balance, and interpret ledger accounts, and understand the division of the ledger into sales, purchases, and general (nominal) ledgers. In the Simulation, all of these records are handled automatically in the Notifications section. You can use the filters to see your records.

Preparing Ledger Accounts

Think of each ledger account as a specific bin where you sort and keep track of different types of transactions. For example, you might have a bin for "Fuel Expenses," another for "Ingredient Purchases," and another for "Sales Revenue." Each bin needs to be labeled correctly and set up to record two main things: debits (increases in assets or expenses, decreases in liabilities or equity) and credits (decreases in assets or expenses, increases in liabilities or equity).

Posting Transactions to the Ledger Accounts

Posting transactions is like taking notes of every purchase or sale and then putting those notes into the right bin. Here's how it works:

From the Journal: First, you have your notes (transactions recorded in the journal or special books), where every transaction is dated and includes what was bought or sold and for how much.
To the Ledger: You take each transaction and place it in the correct bin (ledger account), noting whether it's a debit or a credit.

For example, if "Gourmet on Wheels" buys $500 worth of ingredients with cash, you'd put a note for $500 in the "Ingredient Purchases" bin as a debit (since you're increasing your expenses) and another note for $500 in the "Cash" bin as a credit (since you're decreasing your assets).

Balancing Ledger Accounts and Making Transfers

At the end of a period, like a month or a year, you need to see what's left in each bin. This process is called balancing the accounts. You total the debits and credits separately and then calculate the difference to find the balance. This balance shows whether you have more or less of something compared to the start of the period.

For example, after recording all transactions, "Gourmet on Wheels" finds that the "Fuel Expenses" bin has a total of $1,000 in debits and no credits, meaning they spent $1,000 on fuel. This balance is then used to prepare financial statements, showing how much was spent on fuel during the period.

Interpreting Ledger Accounts and Their Balances

Looking at the balances in each bin (ledger account) can tell you a lot about your business. A high balance in the "Sales Revenue" bin compared to the "Ingredient Purchases" and "Fuel Expenses" bins could mean you're making a good profit. But, if the "Fuel Expenses" bin is almost as high as the "Sales Revenue" bin, it might be time to find ways to save on fuel.

Recognizing the Division of the Ledger

Ledgers are often divided into three main types:

Sales Ledger: Keeps track of all sales made on credit. It's like having a bin for each customer who owes you money.
Purchases Ledger: Keeps track of all purchases made on credit. It's like having a bin for each supplier you owe money to.
Nominal (General) Ledger: This is for everything else, like expenses, revenue, assets, and liabilities. It's a collection of bins for all the different aspects of your business operations.

Accounting for Depreciation

Depreciation is a way to account for the gradual loss of value of long-term assets, like the food truck itself, its kitchen equipment, or any other big purchases that are used over several years. Imagine you buy a brand-new grill for your truck. Over time, this grill won't be as shiny and new; it'll wear out or become outdated. Depreciation helps you keep track of this decrease in value in your accounting books.

Factors Causing Depreciation

Several factors can cause assets to lose value:

Wear and Tear: Just like your grill gets less efficient with daily use, many assets decline in performance over time.
Obsolescence: Sometimes, assets become outdated. New technology might make your current equipment less valuable because there's something better out there.
Time: Certain assets, like permits or licenses, have a fixed useful life and expire after a certain period.

Purpose of Accounting for Depreciation

Depreciation serves several purposes:

Fair Financial Picture: It ensures that the financial statements accurately reflect the value of the assets and the cost of using them.
Cost Matching: Depreciation helps match the cost of using the asset with the income it generates, giving a more accurate picture of profitability.
Tax and Reporting: It allows businesses to deduct the depreciation expense from their income, potentially reducing taxes.

Methods of Depreciation

There are a few different ways to calculate depreciation:

Straight-Line Method: This method spreads the cost of the asset evenly over its useful life. If your grill costs $1,200 and you expect to use it for 4 years, you’d depreciate it by $300 each year ($1,200 cost divided by 4 years).
Reducing Balance Method: This method depreciates the asset by a fixed percentage each year, based on its remaining value, not its original cost. If you choose to depreciate the grill by 25% annually, the first year, you’d depreciate it by $300 (25% of $1,200), the next year by $225 (25% of $900), and so on, reflecting a faster decrease in value at the start.
Revaluation Method: Occasionally used for assets that might increase in value, like real estate. This method involves adjusting the asset's value on the balance sheet based on current market values, which can lead to depreciation if the value decreases or even appreciation if the value increases.

Choosing the Most Appropriate Method

The best method depends on how the asset is used and how its value decreases over time:

Straight-Line is great for assets with a steady, predictable decline in value and utility.
Reducing Balance fits assets that lose value quickly in the first few years.
Revaluation suits assets like property, which might not depreciate in the traditional sense.

Cost or Revaluation Model for Value of Non-Current Assets

Managing the value of non-current assets—long-term assets like kitchen equipment or the food truck itself—is crucial for small business owners to keep their financials accurate. Let's delve into the cost model and revaluation model for valuing these assets, and explore how to record depreciation, disposal, and revaluation in the financial records.

Measuring the Value of Non-Current Assets

Cost Model: This approach values an asset based on its purchase cost minus any accumulated depreciation and impairment losses. It's straightforward, using the original cost and subtracting the wear and tear over time.

Revaluation Model: This method periodically adjusts the asset's value to reflect its current market value. If an asset's market value goes up, the business can show a higher asset value; if it goes down, the asset value decreases.

Recording Depreciation and Disposal

When a food truck depreciates its assets or disposes of them, specific ledger accounts and journal entries are needed:

Depreciation: Each period, depreciation expense is recorded with a debit to the Depreciation Expense account and a credit to the Accumulated Depreciation account for the asset. Journal Entry for Depreciation:
- Debit: Depreciation Expense
- Credit: Accumulated Depreciation
Disposal of Assets: When disposing of an asset, its cost and accumulated depreciation are removed from the books. If the disposal is through a sale, any difference between the sale price and the net book value of the asset is recognized as a gain or loss. Journal Entries for Disposal:
- Remove the asset:
  - Debit: Accumulated Depreciation
  - Credit: Asset account
- Record the sale:
  - Debit: Cash/Bank (for the sale amount)
  - Debit: Accumulated Depreciation (to remove it)
  - Credit: Asset account (for the original cost)
  - Credit or Debit: Gain or Loss on Disposal (for any difference)

Sale of Non-Current Assets

When a food truck sells an old piece of equipment:

Remove the asset's cost and its accumulated depreciation from the books.
Record the cash received.
Calculate and record any gain or loss on the sale.

This involves using a Disposal Account to keep track of these transactions.

Acquisition and Revaluation of Non-Current Assets

Acquisition: When buying a new asset, record the purchase price as a debit in the asset's ledger account and credit the Cash/Bank or Accounts Payable account.
Revaluation: If an asset's market value changes, adjust its book value. If the value increases, debit the asset account and credit a Revaluation Surplus account. If the value decreases, reverse this entry, impacting only the surplus account to the extent there is a previous surplus.

Calculating Profit or Loss on Disposal

The profit or loss is the difference between the sale proceeds and the net book value (cost minus accumulated depreciation) of the asset at the time of sale.

Profit: If sale proceeds > net book value.
Loss: If sale proceeds < net book value.

Recording the Effect of Depreciation

Statement of Profit or Loss: Depreciation expense reduces the net profit.
Statement of Financial Position (Balance Sheet): The asset's book value is reduced by accumulated depreciation, and if applicable, the revaluation surplus is adjusted for increases in asset value.

Inventory Valuation

Valuing inventory accurately is crucial for businesses, including small ones like food trucks. It's about knowing how much the items you plan to sell—like ingredients for your dishes—are worth. Let's explore how inventory is valued, why it's important, the challenges involved, and a specific method called the net realisable value method.

Valuation of Inventory at Lower of Cost and Net Realizable Value

When valuing inventory, businesses often use the rule of the "lower of cost and net realizable value" (NRV). This means:

Cost: What you originally paid for the inventory items.
Net Realizable Value (NRV): The amount you expect to sell the inventory for, minus any costs you'll incur to make the sale (like additional cooking or packaging).

You compare these two values and use whichever is lower to value your inventory. For a food truck, if you bought tomatoes for $200 but think you can only sell dishes made with them for $150 after considering remaining shelf life and demand, you'd value the tomatoes at $150, the NRV, because it's lower than the cost.

Importance of Inventory Valuation

Getting the inventory valuation right is key because:

Gross Profit: Overvaluing inventory can inflate your gross profit, while undervaluing can deflate it. Gross profit is your sales revenue minus the cost of goods sold (COGS), and inventory valuation directly affects COGS.
Profit for the Year: Accurate inventory valuation affects your net profit. Overstated inventory can lead to overstated profit, and understated inventory can do the opposite.
Equity and Asset Valuation: Inventory is an asset on your balance sheet, and its valuation impacts the overall worth of your business. Incorrect inventory valuation can mislead you and others about the business's financial health.

Difficulties of Valuing Inventory

Valuing inventory can be challenging because:

Market Conditions: Prices and demand can fluctuate, affecting the NRV.
Perishability: Food items can spoil, making it hard to predict their realisable value.
Seasonality: Demand can change with seasons, affecting both cost and NRV.

The Net Realisable Value Method

The NRV method values inventory considering the expected selling price minus the costs to complete and sell the items. For food trucks, this involves estimating:

How much each dish made with the inventory will sell for.
The costs of preparing, cooking, and serving those dishes.

If "Gourmet on Wheels" has a batch of avocados bought for guacamole and expects they can only make and sell guacamole worth $300 from them, with an extra $50 in costs to prepare and serve, the NRV would be $250 ($300 expected sales - $50 costs). If the avocados were initially bought for $300, they'd now be valued at $250, the NRV, because it's lower.