A brief summary on Accounting

Accounting is keeping financial records, recording income and expenditure, valuing assets and liabilities, and so on. Accountants, unlike bookkeepers, analyze financial records, and decide how to present them. There are several types of accounting:

-Managerial accounting is preparing budgets and other financial reports necessary for management.

-Cost accounting working out the unit cost of products, including materials, labor and all other expenses.

-Tax accounting calculating an individual’s or a company’s liability for tax.

-Creative accounting uses all available accounting procedures and tricks to disguise the true financial position of a company.

And bookkeeping is writing down the details of transactions (debits and credits). Bookkeepers have to record every purchase and sale that a business makes, in the order that they take place, in journals. At a later date, these temporary records are entered in or posted to the relevant account book or ledger. At the end of an accounting period, all the relevant totals are transferred to the profit and loss account. Double-entry bookkeeping records the dual effect of every transaction – a value both receives and parted with. Payments made or debits are entered of the left-hand (debtors) side of an account, and payments received or credits on the right-hand side. Bookkeepers periodically do a trial balance to test whether both sides of an account match.

Actually, bookkeeping is only a part of accounting – the record-making part. And accounting itself includes also analytic and interpretation part, it shows the relationship between the financial results and events, which have created them.

There are three main steps in making records in bookkeeping:

- Recording every purchase and sale that a business makes

- Entering these temporary records in the ledger – a book of secondary, final entry, containing individual accounts.

- Transferring all the relevant totals to the profit and loss account.

The main principle of bookkeeping is double-entry principle. It states that each transaction must be recorded as two separate entries: a value both received and parted with. Payments made or debits are entered on the left-hand (debtor) side of an account, and payments received or credits on the right-hand (creditor) side.

One of the functions of accounting is valuing assets, which are things of value or earning power to a firm. Assets can include cash, receivables, bank deposits, and trade investments: investments in other companies. Such assets are called current assets. Assets including land, plant, buildings, and furniture, are called fixed assets. Assets such as plant and equipment that over time wear out or become outdated are said to depreciate. A charge must be made for this depreciation or amortization in calculating a business’s profitability: the assets are depreciated or amortized by an amount each year. Also there are intangible assets, which may include such things as patents owned by the company, and goodwill, the value of the company as a functioning business or going concern with a client base, experienced management, and other benefits that a start-up may not have.

All the money that a company will have to pay to someone else in the future, including taxes, debts, and interest and mortgage payments is called liabilities. Long-term debts are long-term liabilities. The ratio of a firm’s debt to equity is its gearing or leverage; a firm with a high proportion of debt in relation to equity is highly geared or highly leveraged. Short-term debts and debts to suppliers are among its current liabilities.

In accordance with the principle of double-entry bookkeeping, the basic accounting equation is Assets = Liabilities + Owners’ (Stockholders’) Equity. This can be rewritten as Assets – Liabilities = Owners’ Equity or Net Assets. This includes share capital (money received from the issue of shares); share premium or paid-in surplus (any money realized by selling shares at above their nominal value), and the company’s reserves, including the year’s retained profits. Stockholders’ or shareholders’ equity or net assets are generally less than a company’s market capitalization, because net assets do not record items such as goodwill.

The amount of business done by a company over a year is called turnover. The reduction in value of a fixed asset during the years it is in use (charged against profits) is called depreciation. Debtors or account receivable are the sums of money owed by customers for goods or services purchased on credit. And sums of money owed to suppliers for purchases made on credit are called creditors or accounts payable. The inventory includes the value of raw materials, work in progress, and finished products stored ready for sale. The various expenses of operating a business that cannot be charged to any one product, process or department are called overheads.

There are various possible ways of recording debits and credits, valuing assets and liabilities, calculating profits and losses, etc. But there are about a dozen generally accepted “accounting principles” that accountants must follow in order to present “a true and fair view” of a company’s finances.

The principles are the separate-entity or accounting entity assumption (an enterprise is an accounting unit separate from its owners, creditors, etc.), the continuity or going-concern assumption (the business will continue indefinitely into the future), the unit-of-measure assumption (all transactions and other items to be accounted for must be in a single, supposedly stable monetary unit), the time-period or accounting period assumption (financial data must be reported for particular period, which makes accrual and deferral necessary), the revenue or realization principle (revenue is realized at the moment when goods are sold or when services are rendered). Consequently, the most common accounting system is historical cost accounting, which records assets at their original purchase price, minus accumulated depreciation charges.

Company law specifies that shareholders must be given certain financial information. Companies generally include three financial statements in their annual reports. The profit and loss account or income statement shows revenue and expenditure. The balance sheet shows a company’s financial situation on a particular date, generally the last day of the financial year. The third financial statement has various names, including the source and application of funds statements, and the statement of changes in financial position. This shows the flow of cash in and out of the business between balance sheet dates. Sources of funds include trading profits, depreciation provisions, sales of assets, borrowing, and the issuing of shares. Application of funds includes purchases of fixed of financial assets, payment of dividends, repayment of loans, and – in a bad year – trading losses.

Companies generally include three financial statements in their annual reports.

The profit and loss account or income statement shows revenue and expenditure. It usually gives figures for total sales or turnover and costs and overheads. The first figure should obviously be higher than the second, i.e. there should be a profit. Part of the profit goes to the government in taxation, part is usually distributed to shareholders (stockholders) as a dividend, and part is retained by the company.

The Balance Sheet is a document that shows the totals of money received and money paid out by a company and the difference between them. The balance sheet includes two parts: 1. Assets and 2. liabilities and share capital. Both parts should always be balanced.

The item current assets include cash, marketable securities, accounts receivable and stock-in-trade. Thus these assets appear to be working assets. Current assets are the assets, which a company can convert quickly into cash, usually stock and accounts receivable falling due within one year. Cash includes bills, petty cash fund and money on deposit.

Marketable securities are a short-term investment of surplus or temporary free assets. Normally these assets are allocated into commercial securities or federal bonds. As securities can be required at short notice they are to be easily realized and be subject to price fluctuations as little as possible. The balance sheet shows their nominal cost, their market value is given in brackets.

Account receivables are amounts owed to a business by suppliers of goods and services. Usually customers are allowed a 30, 60 or 90 day’s period of time within which they are to effect a payment. However. Some customers are not able to pay owing either to financial difficulties or contingency. Hence, the amount is to be reduced for the reserve allowance for bad debt.

Stock-in-trade includes raw materials to be used for production and semi-finished goods. The stock-in-trade value is defined either by its cost or cost market value. The preference is given to a lower one.

Capital assets include property, premises, plant and machinery, and equipment. They are not meant for sale but for the goods production, storage and transportation. This category comprises land, buildings, machinery, equipment, furniture and vehicles. Thus, net capital assets reflect the volume of investment made into property, plant and machinery, and equipment. Capital assets lose their value with age and use. The real cost of capital assets may gradually lose their value as a result of obsolescence of machinery. New modern technologies make the old equipment obsolescent. Thus, depreciation is a gradual loss in the value of something, such as a vehicle, a machine or any asset that wears out with use and age. The land cannot be depreciated; its value stays unchanged year after year.

Prepayments and deferred charges include, for instance, insurance against fire prepayment or lease prepayments etc.

Deferred charges are similar to prepayments. For instance, a manufacturer allocates money into research work, positive results of which and profit will be seen many years later. So costs are to be discounted within the years to follow.

Intangibles like patents, goodwill and trademarks are not physical substances and are differently evaluated by various companies or may not be evaluated at all.

The third financial statement has various names, including the source and application of funds statement, and the statement of changes in financial position. This shows the flow of cash in and out of the business between balance sheet dates. Sources of funds include trading profits, depreciation provisions, sales of assets, borrowing, and the issuing of shares. Applications of funds include purchases of fixed or financial assets, payment of dividends, repayment of loans, and – in a bad year – trading losses.

Finally I’d like to speak about the last aspect – aspect of human factor in accounting. Accounting is not completely objective, because it’s not a collection of arithmetical techniques, but a set of complex processes and most accounting reports depend on people’s skills and opinion. So to be professional accountant it’s not enough just to study all rules and order of filing documents. You should feel the inner principles of all these numbers.

Brief Lines About Business Valuation Orlando

Today, I am going to discuss business valuation Orlando. I think it is a very important topic, which is closely related to the small business financing information provided in the different websites. The following few lines will give you a foundation on business valuation for you to question the numbers presented by the seller or allow you to realize when a fair price is presented to you or discovering a bargain.

Owners of businesses for profit have traditionally been concerned with the value of their assets, perhaps with an eye to selling, perhaps with the thought of acquiring another facility. Only a careless businessperson would be insensitive to this matter. Likewise, first-timers who are looking for business opportunities need to have some criteria for deciding whether the market is offering anything of value.

The concept of goodwill valuation has been around for more than fifty years in our court systems, mainly as it pertains to the separation of martial assets in divorce proceedings. Most state courts have, over the years, held that the portion of a company’s value that can be attributed to the owner manager is not being considered a divisible martial asset. This means that the owner-manager spouse is not entitled to a portion of this asset.

In most of the times, a business has value in excess of its net tangible assets like cash, receivable, inventory, fixed assets, other tangible assets, minus total liabilities to the extent that profits, or projected profits, established it to a degree that buyers will pay a price for the business that exceeds the value of the net tangible assets. When this is the case, the task will turn to determine a proper allocation of the goodwill value between business and personal. The purpose of these lines is to introduce you to the concept of goodwill valuation. If you find yourself in a divorce or C-corporation situation and you thing that a portion of the value of your business might reside with you personally, investigate the subject with a trained and experienced CPA firms or business appraiser.

The gift & tax valuations are prepared for many reasons. Federal income tax laws provide an incentive to provide gifts to charity while taxing some gifts to children, friends and other parties. Wealthy individuals need to consider gift tax provisions to minimize income and estate taxes. Gift & Estate tax valuation includes the market value of gifts to charity, market value of conservation easements and gifts in excess of annual limit. Finally, there are some well established and experienced CPA firms are providing their legal services to their clients. For more information and details, please do not hesitate to visit their valuable website.

A Brief On And The Various Requirements For SBA Loans

SBA 7(a) Loan 

The most basic types of loans from SBA is the 7(a) program. But what is it and why do you want it? The best source is directly from the horses mouth But I think I can summarize it a bit quicker:

 

The SBA 7(a) loan program is designed to get your small business growing, Now the SBA doesn’t directly you loan you capital rather backing business owners when they apply for loans through local lenders. Now there are many types of 7(a) loans, a wide variety that should include your needs and some go all the way up to $2 million dollars.

 

Now in order for you to get this loan you will have to prove your self eligible, and that your are trustworthy and have a good financial record. “Good character, management capability, collateral, and owner’s equity contribution are also important considerations for this loan”.

 

What are the Requirements for getting an SBA loan? Well the first requirements that need to be met are those of the individual lenders, and infact the reason for SBA loans is because you don’t meet those lenders requirements specifically not having enough collateral or they have other worries about your ability to repay.

 

The 7(a) is a harder to loan to get, you are required not only to show basic information about your company, but about you character, you history, and your record for financial success. You need to sell yourself to the SBA You also need to fit in the small business category and be a for profit business. Also don’t apply if your capable of providing the funds for the project from your own company.

 

The 7(m) microloan requirements is that it is for less than $35,000, and that the money will not be used for things like real estate or refinancing your debt. There are other requirements for this loan though, which are normally set by the lender.

 

To get the 504 Loan is simple, all you need to do is prove that you will use the loan for profit and that it falls into the size standards of the SBA, that you net income in the last two years can not have exceed $2.5 million and must not have a net work of $7.5 million dollars.

 

These requirements are there to A) make sure you don’t default on the loan and B) Ensure that you are in fact using this to grow a small business.

IN BRIEF

IN BRIEF
Enterprise Qatar to go live by year-end Enterprise Qatar (EQ), a QR2bn initiative for small and medium enterprises (SMEs), will formally go live towards the end of 2010, according to its top officials.

Read more on Gulf Times

Financial Accounting: A Mercifully Brief Introduction

Product Description
A concise, readable and irreverent introduction to financial accounting. The book uses easy to understand examples that gives the reader the “why” behind accounting principles…not just the “how”. The reader is alerted to the limitations of accounting as well as its strengths. The book describes some of the most common forms of accounting frauds.

Financial Accounting: A Mercifully Brief Introduction