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When it comes to asset related transactions, cash and accounts receivable transactions are pretty self-explanatory and also the most commonly recorded. It is the inventory and fixed asset transactions that can be confusing at times. We will focus on the purchase of office related items in this article.
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Sometimes it can be confusing as to where an item should be recording in your lists of accounts. This is especially true if it is a transaction that you have never recorded before. Understanding how your chart of accounts is organized can make it easier to determine which accounts you should use for each new transaction.
This is a basic organizational layout of any chart of accounts, and the types of items entered under each category:
Balance Sheet Accounts:
Assets
- Current Assets -Cash accounts, Accounts Receivable and Inventory
- Fixed Assets – Items that will depreciated over a period of years. Vehicles, furniture, equipment, buildings and real estate.
Liabilities
- Current Liabilities – Accounts payable and any portions of debt that will be paid within the current year.
- Long term Liabilities – Mortgages and other long term debts.
Owner’s Equity
- Owner’s Contributions – Initial startup costs and other contributions
- Retained Earnings – Accumulated profits and/or losses
Income Statement Accounts:
Operating Revenue – Gross sales
- Cost of Goods Sold – Direct costs of sales: purchases, labor for services, materials, subcontracted labor
Operating Expenses – Administrative salaries, office expense, rent, utilities, insurance etc
Non-operating Revenue – Sales of assets, refunds
Non-operating Expenses – Penalties, fines etc.
This, of course, is still a very broad overview. Be watching for more detailed explanations of these accounts in our future blog posts.
Tags: Accounts Receivable, Administrative Salaries, Balance Sheet, Cash Accounts, Chart Of Accounts, Current Assets, Current Liabilities, Detailed Explanations, Earnings, Equipment Buildings, Fixed Assets, Gross Sales, Income Statement, Long Term Liabilities, Losses, Office Expense, Operating Expenses, Profits, Startup Costs, Term DebtsBusinesses need money to operate and unless your business has retained some earnings to draw from, you might need to go out and raise capital. Although there are complexities that blur the lines, you can broadly think of all capital as falling into two categories:
Loan-based funding includes borrowing money from the bank or offering a bond or promissory note to private lenders. Ownership-based funding is essentially where you sell a piece of the ownership in the company as a share or stock. You’re probably already familiar with these concepts. But what I want to talk about in this blog post is how each type of funding impacts your financial statements. Knowing this will help inform you about the best choice for your situation when it comes time to raise some capital.
Tags: Balance Sheet, Best Choice, Borrowing Money, Cash Flow Statement, Complexities, Creditor, Debt Repayment, Dividends, Financial Statements, Income Statement, Liabilities, Liability Side, Net Profit, Operating Expenses, Private Lenders, Proceeds, Promissory Note, Selling Shares, Share Issues, ShareholdersWe’ve been taking apart the income statement to help you better understand it and so that you can find money-saving, profit-increasing opportunities inside of it. This is the fourth and final step in the process and here we are getting close to the bottom line!
So far we’ve…
But those are not the only people who have their hand in the cash register! Let’s not forget banks and the government. In this fourth and final section of the income statement breakdown, we need to make sure they get their share.
Like the other sections, you add up the various expenses you have here and subtract it from Net Profit. This section is sometimes called “Non-Operating Expenses”. If you have shareholders, some of their payouts go here, too.
Now let’s look at this part of the income statement and we’ll compare how the accrual and cash-based system work so you can see both in action:
Tags: Accrual, Banks, Bottom Line, Cash Register, Gross Profit, Income Report, Income Statement, Money, Net Income, Net Profit, Net Sales, Operating Expenses, People, Shareholders, Statement NumbersThis is part 3 of a 4 part series on the income statement. Taking the time to understand each part of your income statement will help you to save money and make more money in your business.
In the Revenues section of your income statement, you started with Gross Sales and ended with Net Sales. In the Cost of Goods Sold section of your income statement, you had the choice of either using the accrual method or the cash method to take the Net Sales number and end up with Gross Profit.
Now, we’re looking at operating expenses. Operating expenses, as the name implies, are the expenses associated with running your business. These expenses might include salaries, advertising, supplies, rent, insurance, utilities, and depreciation. These are added up and subtracted from the Gross Profit number we calculated in the last section of the income statement. The number we’ll end up here is sometimes called Net Profit and sometimes called “Income”.
Let’s keep building on the income statement of the fictional business we’ve been talking about, but we’ll use both the accrual example and the cash example so you can see how both work:
Tags: Accrual Method, Business Expenses, Business Salaries, Cash Method, Depreciation, Gross Profit, Gross Sales, Income Statement, Insurance, Money, Net Profit, Net Sales, Operating Expenses, Raw Materials, Running, Shipping, Subtotal, Taking The Time
