accounting
Owner’s equity - a.k.a. Equity, Stock holder’s equity, Net worth
Creditor - person to whom you owe money
Notes payable - money owed to a bank or other lender
Assets = liabilities + owner’s equity
Inventory - goods that are available for sale to the cx at some point in time; raw materials, Work in process or finished goods
Inventory - provides company’s financial position
Cost of goods sold (COGS) or cost of production- cost of producing what you sell; calculated cost per unit; includes inventory and labor used; cost of doing business that is directly related to delivering a product or service
Expenses - cost of doing business; not directly related to delivering service or product; must be paid regardless of how much you make or sell; always reduces earnings
Beginning balance sheet - snapshot of business at start of accounting period.
Ending balance sheet - snapshot of financial position at end of accounting period.
Earning week to date is moved to retained earnings.
Profitability - the state of earning more then the cost of your product and/or service provided.
Accounts receivable - recording and tracking credit extended to customers; monetary value
Bad debt expense - credit that was extended but never collected.
Generally accepted accounting principles (GAAP) - rules for reporting financial performance; helps to ensure companies can be analyzed consistently.
Fixed asset - property, plant or equipment owned by a business that are not intended for sale; used over and over again; expected to last more than a year.
Notes payable - liability; an IOU; usually has a term of several years; someone else has claim to that money; money owed for money received
Accounts payable(vs notes payable) - money owed for goods or services received; short term, usually due within 30-60 days; usually no interest.
Purpose of income statement
-determine profit or loss (i.e. bottom line, net profit or net income)
Gross profit = sales - COGS
-big profit before expenses are subtracted
Net profit = gross profit - expenses
Indicating a loss
-use brackets around the amount (indicates a negative number)
-write loss in red
Income statement - summarizes the sales, costs, and expenses of a company over a period of time (also called profit and loss or P&L statement); act as a map; includes a sale, a purchase or an expense.
Cash statement a.k.a. cash flow statement
Types of accounting methods
-accrual method
-cash method
Accrual method
-accounts for things as you earn it, owe it or use it
-most accurate method
-account for things as they happen
-provides clearer picture of how well business is performing.
Cash method
-accounts for things as a business pays cash or receives cash
-do not sell product
-annual sales of $5 million or less
Federal tax law
*accrual method must be used if there’s inventory
Capitalizing
-acquiring major assets, like buildings, equipments or vehicles
-reflected in assets
Expensing
-purchases
-cost of running business, not directly related to delivering product or service
-e.g. rent, payroll, maintenance, insurance, etc.
Criteria to capitalize or expense an item
*time
-capitalize if longer than a year
-expense if less than a year
*cost
-capital more expensive than expense
Depreciation - method of cost recovery for fixed assets; applies for most fixed assets except for land; no effect on company’s cash position; takes place on papers only.
2 methods
* straight-line
-mount paid / number of years it’s expected to last
* accelerated - gov allows companies to recover cost at faster rate
-fixed asset depreciated twice the rate of straight-line dep.
-able to recover more of cost in early years
Net book value = purchase price - depreciation
- value of fixed asset decreases on paper
- value might go up over time in market place
Prepaid expenses - payments made in advance for which company has not yet received benefits; includes rent, insurance, employee benefits, etc.
- profit does not equal cash
balance sheet composition:
Assets liabilities
Cash accounts payable
Inventory notes payable
Prepaid expense owner’s equity
Fixed assets original investment
Retained investments
Earnings to date
Total assets total liabilities & owner’s equity