This example illustrates a single-entry system used by Henry M. Brown, who is the sole proprietor of a small automobile body shop. Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting.
These sample records should not be viewed as a recommendation of how to keep your records. They are intended only to show how one business keeps its records.
Click here to view Daily Summary of Cash Receipts. [Opens in separate window.]
This summary is a record of cash sales for the day. It accounts for cash at the end of the day over the amount in the Change and Petty Cash Fund at the beginning of the day.
Henry takes the cash sales entry from his cash register tape. If he had no cash register, he would simply total his cash sale slips and any other cash received that day.
He carries the total receipts shown in this summary for January 3 ($267.80), including cash sales ($263.60) and sales tax ($4.20), to the Monthly Summary of Cash Receipts.
Petty cash fund. Henry uses a petty cash fund to make small payments without having to write checks for small amounts. Each time he makes a payment from this fund, he makes out a petty cash slip and attaches it to his receipt as proof of payment. He sets up a fixed amount ($50) in his petty cash fund. The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. When the totals on the petty cash slips approach the fixed amount, he brings the cash in the fund back to the fixed amount by writing a check to "Petty Cash" for the total of the outstanding slips. (See the Check Disbursements Journal entry for check number 92.) This restores the fund to its fixed amount of $50. He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal.
Click here to view Monthly Summary of Cash Receipts. [Opens in separate window.]
This shows the income activity for the month. Henry carries the total monthly net sales shown in this summary for January ($4,865.05) to his Annual Summary.
To figure total monthly net sales, Henry reduces the total monthly receipts by the sales tax imposed on his customers and turned over to the state. He cannot take a deduction for sales tax turned over to the state because he only collected the tax. He does not include the tax in his income.
Click here to view Check Disbursements Journal, Part 1. [Opens in separate window.]
Click here to view Check Disbursements Journal, Part 2. [Opens in separate window.]
Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. All checks are pre-numbered and each check number is listed and accounted for in the column provided in the journal.
Frequent expenses have their own headings across the sheet. He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage.
Henry does not pay personal or non-business expenses by checks drawn on the business account. If he did, he would record them in the journal, even though he could not deduct them as business expenses.
Henry carries the January total of expenses for materials ($1,083.50) to the Annual Summary. Similarly, he enters monthly total of expenses for telephone, truck, auto, etc., in the appropriate columns of this summary.
Click here to view Employee Compensation Record. [Opens in separate window.]
This record shows the following information:
- The number of hours Henry's employee worked in a pay period.
- The employee's total pay for the period.
- The deductions Henry withheld in figuring the employee's net pay.
- The monthly gross payroll.
Henry carries the January gross payroll ($520) to the Annual Summary.
Click here to view Annual Summary. [Opens in separate window.]
This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. As in the journal, he keeps each major expense in a separate column.
Henry carries the cash receipts total shown in the annual summary ($47,440.95) to Part I of Schedule C(not illustrated). He carries the total for materials ($10,001.00) to Part II of Schedule C.
Caution. A business that keeps materials and supplies on hand generally must complete the inventory lines in Part III of Schedule C. However, there are no inventories of materials and supplies in this example. Henry buys parts and supplies on a per-job basis; he does not keep them on hand.
Henry enters annual totals for interest, rent, taxes, and wages on the appropriate lines in Part II of Schedule C. The total for taxes and licenses includes the employer's share of social security and Medicare taxes, and the business license fee. He enters the total of other annual business expenses on the "Other expenses" line of Schedule C.
Click here to view Depreciation Worksheet. [Opens in separate window.]
This worksheet shows the information used in figuring the depreciation allowed on assets used in Henry's business. Henry figures the depreciation using the modified accelerated cost recovery system (MACRS). He also chooses to deduct $24,000 of the cost of the tow truck purchased and placed in service in his trade or business during the year. This is the "section 179 deduction." He also chooses to deduct the special depreciation allowance for the properties that qualify. The allowance is an additional 30% or 50% of the property's cost or other basis (after subtracting the section 179 deduction). Depreciation, the section 179 deduction, and the special depreciation allowance are discussed in Publication 946. Henry uses the information in the worksheet to complete Form 4562, Depreciation and Amortization (not illustrated).
Tip. Henry must take depreciation in the year it is allowable. He cannot deduct in the current year the allowable depreciation he did not take in a prior year. If he does not deduct the correct depreciation, he may be able to make a correction by filing Form 1040X, Amended U.S. Individual Income Tax Return, or by changing his accounting method. For more information on how to correct an incorrect depreciation deduction, see chapter 1 in Publication 946.
Click here to view Bank Reconciliation. [Opens in separate window.]
Henry reconciles his checkbook with his bank statement and prepares a bank reconciliation for January as follows:
- Henry begins by entering his bank statement balance.
- Henry compares the deposits listed on the bank statement with deposits shown in his checkbook. Two deposits shown in his checkbook-- $701.33 and $516.08--were not on his bank statement. He enters these two amounts on the bank reconciliation. He adds them to the bank statement balance of $1,458.12 to arrive at a subtotal of $2,675.53.
- After comparing each canceled check with his checkbook, Henry found four outstanding checks totaling $526.50. He subtracts this amount from the subtotal in (2). The result of $2,149.03 is the adjusted bank statement balance.
- Henry enters his checkbook balance on the bank reconciliation.
- Henry discovered that he mistakenly entered a deposit of $600.40 in his checkbook as $594.40. He adds the difference ($6.00) to the checkbook balance of $2,153.03. There was a $10.00 bank service charge on his bank statement that he subtracts from the checkbook balance. The result is the adjusted checkbook balance of $2,149.03. This equals his adjusted bank statement balance computed in (3).
The only book adjustment Henry needs to make is to the Check Disbursements Journal for the $10 bank service charge. He does not need to adjust the Monthly Summary of Cash Receipts because he correctly entered the January 8 deposit of $600.40 in that record.