The Importance of Basic Accounting Knowledge in Business

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After completing my first year of business classes at West Chester University, I realized how important accounting knowledge is for any business major. Regardless of the field of business that you choose to pursue, whether it be marketing, management, economics, or finance, you will need to be able to have at least a basic understanding of accounting. Every business has to deal with observing and understanding source documents, income statements, balance sheets, and statements of retained earnings in order to be successful in today’s business world. Anyone interested in entrepreneurship who is looking to start their own business will have a definite advantage if they can understand financial statements of accounting. The truth is that accounting exists in our every day lives whether you realize it or not, so being educated in the field will do nothing but help you in a future business career.

The process of accounting will almost always begin with source documents. In the past, most of the source documents that CPA’s (Certified Public Accountants), auditors, and other accountants would have to deal with were tangible paper documents such as receipts from a recent purchase at a store. The accountant would then have to transfer these source documents into a journal to start the accounting process. Today, most of the source documents are electronic. When a purchase or sale is made between any two businesses or consumers, it is filed into a computer on an electronic database. This method has made accountant’s jobs far more simplistic, as they can they place the transaction directly into an electronic journal on Microsoft Excel.

The basic accounting equation that anyone who works in business should know, is that Assets= Liabilities + Equity. Assets include accounts such as cash, land, building, equipment, office supplies, inventories, and accounts receivable (money owed to you by a customer). The normal balance for these assets are a debit, which means if you are gaining any of the previous, you debit that amount of money towards that account. For example, if a sale is made in your store and a customer pays fifty dollars cash, then you would debit the cash account for fifty dollars. Liabilities include accounts payable (what you owe others on account), unearned revenue (you have been paid but haven’t performed a service), salaries payable (salary money owed to your employees), taxes payable, and interest payable. The normal balance that increases these accounts is a credit, unless the account is a contra account in which the opposite normal balance applies. Equity accounts include dividends (money owed to your stockholders), revenues and expenses. The normal balance for owner’s equity is a credit, but expenses made by your business are always treated as contra accounts. So for a transaction where a customer purchases something from your store on on account, you would debit accounts receivable and credit revenue. Each transaction is then recorded into a journal organized by month.

At the end of each month, the totals are added up from the journal and are placed into what are called “T-Accounts”. These are T-shaped charts with the debits on the left side and credits on the right. It is used to more easily find the ending balance of each account at the end of the month. After the totals of each account are found, you can now make an income statement to determine your amount of money lost or made during the month. The amount of income can be found by subtracting the expenses from your revenues. This is one of the most important financial statements that accountants have to deal with. Your income statement helps you determine if you are making profits or if you are losing money and need to improve a sector of your business.

Once you have transferred all of your journal entries into T-accounts and have made an income statement, you are then prepared to make a balance sheet. This is the basic accounting equation in which you make sure that Assets = Liabilities + Owner’s Equity. When you sum all of your asset accounts they should be equal to all of the liability and equity accounts as well. This is why anyone in any type of business should always have a basic understanding of the accounting process. With the knowledge of how money flows throughout a business, you can make wiser, more experienced decisions with your business, and protect yourself from losing money. It also allows you to take risks with your business and potentially gain a big return when it comes to the bottom line of your income statement. I’m pleased to say that I can now understand a company’s financial statements and comprehend the transactions that go on in every day business. Any business student will be more successful in their future career if they learn the crucial basics of accounting.



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Simple Personal Finance Checklist – Consider yourself as a Business

Why would you not consider yourself a business of ONE person? Or your family as a business of 3 or more people? Well that is exactly what you are – “Me Incorporated”, “I Inc”, “We Incorporated”. You truly must consider yourself a small family business. Like any business you have ongoing expenses (mortgage, rent, utilities, groceries), revenue (salary and other income) and major capital expenditures (house, vehicle, vacations, renovations).

Like any good ‘household business’, you need to do some planning. Set out a budget for the year, track your expenditures and retained earnings (savings). Yes, all of this looks, feels and is exactly like a well run business. On My Gosh! Don’t rush out and buy an accounting package to run your household. And no need to take a crash course on accounting or bookkeeping. You can accomplish all your financial tracking and planning requirements with some paper or by using a simple template with your favorite spreadsheet package – Microsoft Excel or even with Open Office.

Just like a well run business, your household budget and tracking your spending is best served using a visible record of events; namely, financial records, bank or check register. It is just like tracking your road trip progress using a map. If you know where you are now, then you will have some idea when you will arrive at your destination. In life, money or finances allows you to get to your personal destinations or dreams. A visible financial roadmap of your ‘Me Incorporated’ finances, mapping your progress, seems logical.

Running your ‘Household Business’, like corporate business, requires a few processes to keep track of your finances:

1) Establish a yearly and monthly household budget. Consider all your expenses – weekly, monthly, quarterly and yearly outlays of money. You will be surprised at the length of this list and all the places you spend your money.

2) Track monthly your actually spending and income against the budget you established in step 1. This will help you see the ‘peaks and valleys’ of spending or seasonality aspect of your expenses. Over time, you will come to know these expense ‘peaks and valleys’ and this will help you maintain a positive cash flow. Bottom line: have money in the bank to pay all your expenses and still have some left over (retained earnings). Your single biggest challenge in running any household (or business) is always having enough money in the bank to pay the bills; especially, the unexpected ones. Having a buffer of savings will help with these ‘peaks’ in expenses.

3) Track all your bank account activity. Track and enter in your Bank or Check Register every deposit, every electronic (ATM, web, PayPal, debit machine) transaction and every analog (check, money order) withdrawal. And reconcile your bank statement every month. Know exactly how much money you have available in your bank account(s).

4) Especially track your spending through credit cards and lines of credit. These are potentially the ‘run away’ expenses. Remember only once a month do you see the visible record of your credit card spending. Compound that with the fact that most people have more than one credit card. This can easily result in multiple ‘spending surprises’ each month. Be diligent in tracking your use of credit card transactions. Breakdown the credit card expenses into their respective budget items – gas, groceries, clothing, entertainment, etc. This will help you separate normal household expenditures from other shopping incidentals. You will come to see your spending patterns and can now make adjustments. Just like your bank account, reconcile your credit card statement every month.

All this personal bookkeeping every month can be done with pen and paper or set up a personal finance and budgeting template using your favorite spreadsheet software. Using an electronic spreadsheet allows for all of the mundane calculations to be processed automatically, reducing monthly reconciliations to a simple 5-10 minute endeavour. Whether you choose an analog or digital approach to your personal finance bookkeeping, these visible records are the most effective way to plan and control your personal finances and reduce one of the major stress points in your life – Your Financial Health.

Just in case you don’t know who Jordan Goodman is…. Jordan E. Goodman is “America’s Money Answers Man” and a nationally-recognized expert on personal finance. He is a regular contributor to Public Radio International’s The Marketplace Morning Report and is a daily guest on radio and television call-in shows across the country, answering questions on personal financial topics. He appears frequently on NBC’s The Today Show, PBS, MSNBC, CNN, CNBC, and Nightline. For 18 years, Mr. Goodman was on the editorial staff of Money magazine, where he served as Wall Street correspondent. While at Money, Mr.Goodman reported and wrote on virtually every aspect of personal finance. In addition, he served as weekly financial analyst on NBC News at Sunrise for 9 years and the daily business news commentator on Mutual Broadcasting Systems America in the Morning show for 8 years. He is the author / co-author of three best-selling books on personal finance including Everyone’s Money Book (over 200000 copies sold) and Barron’s Dictionary of Finance and Investment Terms and The Money Answers Dictionary. His upcoming books are 6 special focus editions of Everyone’s Money Book on College, Credit, Financial Planning, Real Estate, Retirement Planning and Stocks, Bonds and Mutual Funds. Jordan is also a speaker and seminar leader on personal finance topics for business executives, students, associations, investment clubs, employees and others.
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How to Buy a Business Using a Home Equity Loan

How to Finance your Dream Business

Business buyers are always on the lookout for ways to acquire financing than can help them start a business or purchase an already existing one. If you intend to buy a business, your options may be limited depending on the value of your assets, your credit history and the incentives the seller is willing to offer. As a smart business buyer, you should thoroughly assess every business opportunity and go for one that is worth your investment. There are some cases when the best financing option is right in front of you, such as a home equity loan. This type of business loan is definitely worth considering.

Home Equity

Home equity is a banking term defined as “the market value of a homeowner’s unencumbered interest in the property.” To make it simpler, it is the value of your home minus the amount you owe on it. For instance, if your home is worth 0,000 and your mortgage balance is 0,000, your home equity is 55.6 percent of 0,000. Most lending institutions and banks provide home equity loans.

Rules in Home Equity Loans

Before you risk the equity of your house on business financing, it is best to take a closer look at some factors. After all, buying a business is a risky endeavor. There are factors that you need to consider including loan rates, the amount of money you need to buy the business, and the current value of your home. The interest rate fluctuates with the current mortgage market but it also depends on the loan size and your credit rating. The first thing you need to do is to determine if a home equity loan is the right option for you. First, get a current appraisal of your property. From that figure deduct all debts and outstanding mortgages, and divide the sum by the appraised value of your property. If this number is 50 percent or more, it means that a home equity loan is a suitable financing option. Business advisors like an accountant, a business attorney, and a business broker can give you an estimate on the amount of money you’ll need to buy a business. Once the cash payout of the loan is determined, the lender will give you a quote on interest rates and calculate a monthly payment.

Cash Flow Forecasting

When the banker has given you a monthly payment scheme, the next thing to do is business forecasting. By researching ahead of time, you will have a good idea on the amount of money your business will earn on a monthly basis. To determine your net profit, you have to subtract your monthly expenses. In some cases, you will pay off a home equity loan from a pre-tax operating profit. Your tax advisor or CPA can give recommendations on the best methods to make payments. There are also situations when you have to draw a salary equal to the monthly dues or get a personal loan for the business. Interest payments offer tax savings to the borrower and the company. These laws can be complex, but situations differ depending on the type of network you will form as you start the business and the way the loan is written. Expert advice is definitely worth the investment.

Other Ways to Obtain a Home Equity Loan

There are alternative ways for you to obtain a home equity loan if you want to buy an existing business. The seller may offer financing to cover a part of his asking price or in some cases, even the entire purchase price. The US Small Business Administration or SBA loan is also a good option, where the federal government gives a guarantee on the business loan. Overall, the best way to secure financing is to have multiple options available.

WSB TV Atlanta – Illegal Aliens and Mortgage Loans part 1
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Day 573 / 365 – How to fix the credit crunch


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Day 287 / 366
Monday
I’m working on a plan to fix the credit crunch and prevent a world wide recession. Basically it involves me buying a couple of new lenses, a flash and a new bike and lots of other goodies. Yeah, something like that anyway.

8 Reasons to Use a Business Credit Card

Credit cards are fast becoming a business necessity. They’re flexible, easy to use, convenient and offer users the ability to make purchases instantly, anywhere in the world.

We’ve spent some time analysing credit cards aimed at businesses and have put together a list of our top 8 reasons to use a company credit card.

Easy tracking of expenses and purchases – Using a credit card for business purchases makes it easier to track expenses. The majority of credit card providers offer comprehensive expense reporting (both online and off) which can save you countless administration costs and a lot of hassle.
No more petty cash – Petty cash used to be the most popular way to pay for small, incidental purchases but the days of the petty cash tin are well and truly over. These days it’s more common for companies to make purchases online or over the phone. Providing key staff members with a credit card that’s attached to a business account means you can make instant purchases and reconcile expenses quickly and easily. 3. Rewards and incentives. The majority of business credit card programs offer rewards and incentives for users. Organisations can save money on a variety of goods and services from petrol to air travel, insurance and other professional services.
Build business credit – One of the most important reasons for applying for a business credit card is to build your business credit. This will come in handy if you need to take out a business loan in the future. Responsible use and a consistent payment history will be great assets to your credit rating.
Separate business and personal finance – If you’re a small business owner you’ll know how important it is to separate business and personal finance. Having a business credit card will help with this division and will come in especially handy around tax time. Remember to keep your accounts separate and don’t be tempted to make personal purchases on your business credit card (or vice versa).
Large purchases or unexpected expenses – There may come a time when you need to buy supplies, make a one-off payment or pay a large bill. Business credit cards help you to make these one off payments quickly and are more convenient than applying for a business loan.
Embrace the quiet times – Cash flow is a major concern for all businesses and even more so if you have employees or creditors that rely on your payments. A business credit card can help you cover the quiet times and the seasonal lulls.
Say goodbye to cash – Having cash on-site or carrying it around with you is not a good idea. Business credit cards reduce the need for ready cash making your business less of a target for theft or loss.

If they’re used responsibly, business credit cards can help you run your business better and even save you some money.

Auditorium – Accounting on an iPhone? Who knew


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Softline Pastel – a member of the Softline Group and a local leader in accounting, payroll and business software — has launched Pastel My Business Online, its first online accounting system, which targets small to medium businesses (SMBs).

“Very often, products become complicated by the sheer volume of features added to it over time," says Softline Pastel managing director Steven Cohen, who explained that by developing Pastel My Business Online from scratch, the company had the opportunity to design the software specifically for business owners who were either starting out with very little bookkeeping knowledge, or who only wanted a basic system.

See tinyurl.com/pastel-online

Wahid’s Belief – learn which accounting method is superior for your big business

Author comments: I have expressed about an ‘Accrual basis accounting and cash basis accounting’ method and the difference between these methods through a short, essay & plain approach in one of my articles “Wahid’s guess” I believe the learners would have understand about both of accounting method,

 

Now, in this article I have presented that which accounting method is better for an organization accounting structure, Again I have explained the meaning of two methods and others important elements for comprehend an students and readers so as to  below

 

Introduction: In cooperation Accrual and Cash are methods are approved by generally accepted accounting principles (GAAP) for small business. Only the Accrual method is acceptable for large businesses. For the reason that of Social Security Administration’s (SSA) dealing of income from self-employment, one method may be beneficial over the other, during this article I have mentioned which accounting method is better for an organization accounting structure

 

 

Meaning Accrual basis Accounting:

It is a method of accounting in which transaction are entered in the books of accounts, In accrual basis accounting, income is reported in the financial period it is earned, anyway when it is received, and expenses are deducted in the financial period they are incurred, In the Accrual method of accounting transactions are recorded when they happen rather than when the money is received or paid. This makes the accounting slightly more difficult because business  are dealing with goods that have been purchased but not paid for and sales that have been made but the cash has not been collected. Business record both revenues and expenses when they occur. For that reason, the focus is on the recording of flow of resources like labour, goods, services and capital. The related cash flow may take place after some time or it may or may not take place in the same accounting period.

 

Meaning Cash basis Accounting:

In the Cash method of accounting the business is run like a checkbook. When goods and services are purchased and paid for, they are recorded. When products are sold and the cash collected No consideration is given to the “due” fact of the transaction. This system of accounting is simple to understand and as such needs less skill on the part of the accountant. Its whole focus is on cash management. The recognition trigger is simply the flow of cash. Budgetary and legislative compliance is easier under this system. An example of the cash basis would be a sale of goods in January, but the money is not received from the customer until February. Under the Cash Basis of accounting, this would be considered income in February. If attendance at a trade show was planned for May but had to be paid for in March, in a cash basis accounting it would be expensed when it was paid for in March. This method of accounting.

 

 

Recompense or Advantages of the Accrual method Accounting

 

The method of Accrual Accounting as retaining the advantages of the Cash Accounting System overcomes its limitations or restrictions by addition of Cash Flow Statement in the Financial Statement of the entity. The major rewards are as below

 

I. As the accrual method shows the recede and flow of business income and debts more exactly, it may depart you in the gloomy as to what cash funds are obtainable,

 

II. Accrual accounting helps in the measurement of financial presentation by properly reflecting surplus/deficit as all expenses whether paid or not and all incomes whether received or not are duly accounted for.

 

III. Accrual accounting afford comprehensive information on expenses which helps in knowing the cost consequences of policies and enables comparison with different policies. Also, information about calculation of financial assistance can be extracted from the accounts, which helps in its validation. This ensures the adoption of best policy, which in turn assures best use of sparse resources. It also helps in determining the future sustainability of programmes

 

IV. Accrual method provides disclosures on account of dependent assets and dependent liabilities so that risk connected with the guarantees issued and letters of console given can be better assessed by the user of the financial statements

 

V. Accrual method discloses the Accounting Policies used in the groundwork of Financial Statements for better accepting and approval of the Financial Statements.

 

Restrictions Limitations of Accrual method accounting: this could result in serious cash flow problem. For case in point, your income ledger may show thousands of dollars in sales, although in reality your bank account is empty for the reason that your customers haven’t paid you yet.

 

The Restrictions or limitations of cash method accounting:

 

The method of cash accounting gives a wrong picture of income received, as advance tax receipts are recognized as income the major Restrictions or limitations are as below

I. It does not provide the complete picture of the financial position i.e. information on assets and liabilities are not available for fixed assets (land, building, machineries, heritage assets etc.)

II. It does not give the full information on current assets e.g. accrued income like outstanding royalty, fees, service charges, tax arrears etc. other than No information about capital work-in-progress like dams, power plants, roads and bridges etc. is available

III. It ignores certain transactions by not recording expenditure already incurred but payment not made e.g. supplies made, salary, telephone charges, overdue interest etc. and also revenue earned but cash not received e.g. license fees, services delivered (electricity, water etc.)

IV. It gives a wrong picture of income received, as advance tax receipts are recognized as income.

V. It provides room for fiscal opportunism e.g. tax revenues can be collected in excess during a particular period followed by high incidence of refunds together with interest, payments can be easily deferred and passed on to the next financial year, revenue due in the future could be compromised by providing for one time payments.

 

Due to the above disadvantages, it is not potential to get the real picture of the management financial performance and position.

 

Recompense or Advantages of the cash method accounting: the cash method provides a more exact picture of how much actual cash your business has; it may offer a confusing picture of longer-term profitability. Under the cash method, for case, firm books may show one month to be hugely profitable, when really sales have been slow and, by coincidence, a lot of credit customers paid their bills in that month. To have a firm and true thoughtful of business’s finances,

 

Mode of choosing an Accounting Method: When, how, & why we can choose whichever accounting method from both. (Accrual & cash method accounting) Most small businesses (with sales of less than million per year) are free to accept either accounting method. When we must use the accrual accounting method. We must use the accrual method if: our business has sales of more than million per year, or our business stocks an inventory of items that we will sell to the public and our  gross receipts are over million per year. Inventory includes any commodities our sell, as well as supplies that will physically become part of an item intended for sale. Either method we use, it’s important to realize that either one gives we only a partial picture of the financial status of our business

 

Techniques to choose which accounting method is better for organizations accounting structure

 

The cash method and the accrual method (sometimes called cash basis and accrual basis) are the two principal methods of keeping track of a business’s income and expenses. In most cases, we can choose which method to use. In this article I have explain. How they work and the advantages and disadvantages of each. so we can choose the better one from both accounting method for our business.

 

These methods are different only in the timing of when communication, including sales and purchases, are credited or debited to your accounts. Here’s how each works: the cash method. The cash method is the more normally used method of accounting in small business. Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid.

 

Case in point: One of the businesses finishes a job in November, and doesn’t get paid until three months later in January. Beneath the cash method, we would record the payment in January. Beneath the accrual method, we would record the income in our November books.

 

The accrual method transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In additional income is counted when the sale occurs, and expenses are counted when we receive the goods or services. We don’t have to wait until you see the money, or actually pay money out of our checking account, to record a transaction.

 

Another case in point: We purchase a new computer on credit in October and pay ,000 for it in December, two months later. Using the cash method, we would record a ,000 payment for the month of December, the month when the money is actually paid. Under the accrual method, we would record the ,000 payment in October, when we take the computer and become obligated to pay for it.

 

Why Accrual Accounting vital?

 

The extent of economic events that occur over a period of time has become more and more complex in the 21st century. There is now a common shove near accrual accounting as a technique of growing the international comparability of national economic accounting standards.

 

For this reasons of equally government and corporate decision-making strategy as well as fundamental analysis, it is important to calculate economic trial in the time period when they essentially occur as opposed to the period when monetary dealings are made. In some cases, payments under government social programs, such as Medicaid grants, are dependent on formulas attached to personal income; inaccurate revenue inference may lead to beneath- or overpayment of curriculum settlement. Further commonly, accrual dimension of economic series is significant for the accurate estimate of economic trends over time.

 

Conclusion: The best represents the authentic condition (in other words the “true and fair” view) should be used. If proceeds from tax is not calculable and is vague or complicated to understand, then the accurate standard would be to identify such income on cash basis. The accrual-based system that basically follows the ethics of conservatism and measurability requires that we “expected no gains, but afford for losses”. In the background of government accounting, recognizing expenditure on accrual basis meets the criteria of conservatism, measurability and achievability

 

The fundamentals of accounting explained in a couple of minutes
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