Accounting Tips

Recipe for Accounting Principles

Ingredients

• 3 Ice cubes
• 2 ½ ounces of bourbon
• 3 Mint leaves

Directions

• Place ice cubes in a glass
• Add the bourbon and a splash of water
• Crush one mint leave around outside of glass
• Squeeze juice from two mint leaves into glass
• Sip the julep slowly and read the boring article which follows
• Repeat the recipe as needed

Accounting might not be the most exciting subject in the world, but it is an essential component of running a profitable business.

Most companies don’t do their accounting by hand. For routine accounting, most companies use accounting software such as QuickBooks, Peachtree or more specialized programs for specific industries. Do some research to see if your industry has a dedicated accounting software — it’s worth the effort. They are excellent programs that save you time and energy, but it is good to know what the program is doing so that you can interpret the figures correctly and catch anything unusual. After all, a computer is no substitute for the human mind. Perhaps the following tips will be of some help!

Like all professions – medical, legal, even my own humble profession of box-making – accountants have their own vocabulary which sometimes makes simple things look complicated to the uninitiated. Actually, a good deal of accounting is basically common sense. The most basic system used is called “double entry” which simply means that each entry in your accounting must have a corresponding entry to balance it out.

There a few reports which are important. They include:

• Balance Sheet
• Profit & Loss Statement
• Sales Report
• Cash Flow
• Production Reports

The Balance Sheet shows the health of the company. It is divided into 3 parts — assets (which are debits), liabilities, and stockholder equity (which are credits). The debits must be offset by credits of the same amount

Simply put, the assets are what the company owns and the liabilities are what the company owes. Equity is what is left over if the liabilities are subtracted from the assets. This is also known as “Book Value”.

The assets and liabilities are divided into current, fixed and other.

A current asset is one which can be converted to cash in one year (Accounts Receivable, Inventory).

A Fixed Asset is something that has been purchased but is not an expense. (Machinery, Autos).

Other Assets are items which are neither current nor fixed (Investments).

A current liability is one which has to be paid in one year (Accounts Payable to Suppliers, Short Term Loans).

The Profit & Loss Statement shows the results of an operation for a given period of time. Simply put, if you sell something for more than it costs there is a profit. If you sell something for less than it costs, there is a loss.

These statements have several parts. This is a brief run-down of the various parts of a Profit and Loss Statement, to help you get your bearings when using accounting software.

When your company makes a sale, an invoice is created. The debit entry is marked as Accounts Receivable (usually with customer name and invoice number). The credit entry is marked as Sales.

When you receive payment for your sale, it is charged (debited) to Undeposited Funds. It is credited to Accounts Receivable, along with the customer name and invoice number. This reduces the amount the customer owes. When the funds are deposited in the bank, the Bank Account is debited and the credit goes to Undeposited Funds. This cancels the Undeposited Funds entry and increases the Bank Account.

When you purchase an item for your company (raw materials, supplies, spare parts etc.) the amount is charged (debited) to the proper expense account and the credit goes to Accounts Payable (with the Suppliers name).

When you pay for your purchase, Accounts Payable is charged and the Bank Account is credited. This reduces the amount you owe the supplier (the person or company you purchased the item from) and the amount you have in the Bank Account.

If you purchase a fixed asset –- for example, a delivery truck — the purchase shows up as a debit in the proper subcategory (in our example, it might be to “Vehicles –- Truck”). The credit goes to Accounts Payable if you are going to pay within a short time (usually a fiscal year). If you are going to finance it, the credit will go in notes payable in the proper subcategory.

Buying a fixed asset does not affect your profit line, since it is not an expense. However, it does affect your cash flow. To recover the cost of a fixed asset, you use something called depreciation. The theory behind depreciation is that each fixed asset has a useful life, and the cost of this item must be recovered during the useful lifespan of the item. For example, if a machine costs $100,000 and is expected to be productive for 10 years, you must recover $10,000 per year ($833.33 per month) to recover the cost of buying the equipment. This cost must be included in your selling price in addition to your regular cost of expenses. The Internal Revenue Service allows this to be deducted from your income, but it also specifies the useful life of various types of fixed assets.

The sales report, as the name implies, is a recording of sales for a given period. There are many ways to organize a sales report. Three of the most useful are:

• By Customer
• By Salesmen
• By Item

Each of these has its own advantages. Looking at your sales by customer can tell you if you are gaining or losing business in various areas, sales by item can reveal which of your products is the most popular, and sales by salesman is invaluable in finding out how your employees’ success rate changes over time.

The production report shows which type of product is generating the most business. This is very important for management. It also tracks the efficiency and hours of usage for each machine, if your company manufactures goods.

The cash flow report is also very valuable to all levels of your business, but especially to management. It allows you to plan future payments, business expansion, and fixed asset purchases. It can be presented in various forms. The following is one of the most used:

Cash generated from:

Net Profits………………………….$ xxxx
Depreciation…………………………. xxx
Reduction in Accounts Receivable……….. xx
————————————————
Total Cash Provided…………………..$ xxxxx

Cash applied to:

Decrease in Accounts Payable…………..$ xxxx
Increase in Inventory…………………..xx
Purchase of Machinery…………………..xx
————————————————
Total Cash Applied……………………$ xxxx

Net Cash Flow: $ xxx

Depreciation is classed as an expense and reduces the net profits, but it is a non-cash expense. Change in Accounts Receivable, Accounts Payable and Inventory all affect the Cash Flow and can be a source of cash — or a big drain on your company’s finances. A good understanding of the principles behind accounting can keep your accounts and inventory focused on your bottom line.

Related Blogs

• Get free credit score | XJJXB
• What Professions Are The Most Demanded Now? « Self Made Champions of the Internet
• Tea health homemade diet fat Rejection | Weight Loss Everyday
• Web Talk Proxy » Blog Archive » The Case of Proxies Payable to …
• MIND Will Report Q1 2010 Results on May 6, 2010
• The Luxury Spot » FASHION » Fashionable Flow
• What can I Make for suppers that doesn’t use wheat or sugar and limited dairy.? | The Diet Mag
• ShuBee Business Tips » Blog Archive » Balance Sheet
• How to Measure the Effectiveness of a Social Media Marketing Campaign | Okina Dojo Profitable Online Business
• Richard Koo on balance sheet recessions » Investment Postcards from Cape Town
• Learn About Waste Stationary Compactors And Containers For Your Industry | Green Living Utopia
• Advantages of Business Credit Cards | FavStocks
• Richard Koo on balance sheet recessions | FavStocks
• Celebrities Weight Loss Secret –It Works Body Wrap featured at …
• Seed Salad | ES Gardening
• What is a good place to train an Ice Pokemon from level 30 to level 50 in Pokemon Diamond?
• KC-135 testing aims at fueling efficiency, cost savings | Air …
• Microsoft Silverlight 4 Business Application Development …
• Firefly Sweet Tea Bourbon Review | BourbonBlog
• 3CX VoIP blog » Configuring AVM FritzBox as a Firewall with 3CX Phone System