27
Nov

Basic Accounting Concepts for Non-Financial Professional

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

 

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