Basic Accounting Equation
- To determine the figures needed to understand the viability & health of a business
Assets
- “things” owned by a business
- Cash
- Payment from customer (Accounts receivables)
- Equipment
- Lands
- Building
- Inventories
Liabilities
- Financial obligations the business owes to outside entities
- Money owed to suppliers
- Loans
- Mortgages
- Interest
- Taxes
- Salary
Owner’s equity
- Financial interest of the business owner
- Claims against the business assets
Cash Based Accounting
- Ideal for individual/small business
- Keep track of cash inflow and outflow
- Transaction is recorded when cash changed hand
Accrual Based Accounting
- Ideal for business with transaction by credit
- Record of sales revenue
- sales revenue is often recorded before payment is collected
- Record expense
- Transaction is recorded when it happened even when no cash is involved
Understanding the accounting process
Analysis
- Analyzing & understanding each transaction
- Type of transaction
- Credit
- Debit
- Which account will be affected and how
Recording
- Journalizing
- Recording daily business transaction in a Journal/Book of original entry
- Posting to the ledger
- Where the various journal entries are sorted into their appropriate accounts
Adjusting
- Usually perform by accountant
- Adjust entries to ensure the business’s financial situation is accurately reflected
- Depreciation of asset
Closing
- Income statement account are balanced out so that the revenue & expenses side of the statement are actually “closed”
- New opening balance start at zero
3 type of business financial statement
- Income statement/Financial report
- Summaries company’s profit/loss for a given period
- Balance sheet
- Report the assets, liabilities and owner’s equity at a point of time, usually month-end/year-end
- Cash flow statement
- Movement of cash
- Indicate net increase/decrease in cash during a given period
Basic accounting principle
Money measurement
- Evaluates a business based only on monetary characteristics
- Gross profit
- Net profit
- Cash on hand
Business entity
- Only consider a transaction’s effect on the business and not on the people involved
Going concern
- Base on assumption that a business will be successful in the long run
- Affect the accounting method valuates business assets and cost
Cost concept
- Record an asset’s value in terms of its original cost
Realization principle
- Focus on when revenue should be recorded
- Simplifies accountants job
- No need to speculate on assets value
- Record original cost
Cash Flow Principle
Cash equivalents
- Additional resources when sales don’t provide enough cash
- Safe short-term securities that can be converted to cash quickly (Liquid assets)
- Bonds with short maturity dates/money market funds
Working with capital to increase cash flow
Working capital
- The amount of cash available to run the business on a daily basis
Three Key Area to Focus
Inventory
- Raw material
- Work in progress
- Finish goods for sales
- Will take up large amount of cash if not manage properly
- The goal is to only buy what is needed when it’s needed
Account receivable
- Payment owed to company by their customer
- Main source of income
Account payable
- Credit available from bank and suppliers
- Buy supplies on credit improve cash flow
- Able to get supplies needed without using own money
Ways to increase working capital
- Reduce inventory
- Reduce account receivable
- Getting payment from customers on time or earlier
- Increase account payable
- Get longer credit terms from suppliers
The impact of economic float on cash flow
Float
- Funds in transit
Economic/Total business float
- Time between when a sales order is received and the customer’s cash for that order is receive
Remove holdups in sales process
- Optimize cash flow
- Make money work harder
Negating financial risk like a Pro
Default risk
- The possibility of not getting payment back
- Most investment are subjected to this risk but each one varies depending on type and situation
Inflation risk
- The chance of there being predicable increase in price for goods and services which devalues an investment over time
- More of a problem for long-term investment rather than short-term investment
- Affect initial investment sum and return
Maturity risk
- The possibility of missing out other more profitable opportunities while waiting for investment to mature
Liquidity risk
- The possibility of selling an investment to free up cash
