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Value Investing - Business and Economic Principles
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Value Investing - Business and Economic Principles
Value Investing - Business and Economic Principles

Guidance and Knowledge for Value Investors

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Bookkeeping - Introduction and Basic Understanding / By David J Hoare MSA / 07/29/2015 01/18/2021

Bookkeeping – Account Types (Lesson 1)

This site is dedicated to the investment strategy known as Value Investing. There are over 590 articles on this site about business tenets, principles and standards. During 2020, this site’s Value Investment Fund earned a 35.46% return. All of it was documented in the Value Investing Section. If you want to learn about value investing, click on the Value Investing tab in the header above.

There are six account types used in accounting.

To fully grasp the concept of accounting a bookkeeper must accept that there are six (6) different types of accounts. All the reports, ledgers, journals and entries revolve around these six types of accounts. Bookkeeping is the function of entering data based on the economic transaction into the respective type of account. This lesson identifies these six accounts and explains the basic purpose. The following identifies each type of account and is followed by a short description.Acccounting is the process of recording economic activity, organizing  and presenting the data to concerned parties in an understandable format. Bookkeeping is merely the recording of the actual economic transactions.

Assets

Assets refer to the value of a possession. Possessions may be physical in nature such as a vehicle or intangible such as money owed to the business by a customer. The most commonly used asset on the books of a business is the cash account. Therefore, cash is an asset, it is the most important asset. Every business operates using cash and when the business operation is sold, the goal is to have more cash transferred to the owner than he initially invested. When cash is tight or low, operations become more difficult to maintain and therefore, more stressful for all involved.

Assets include:

  • Cash
  • Accounts Receivable- amounts owed to a business from customers
  • Inventory
  • Fixed – permanent physical assets such as vehicles, equipment and real estate
  • Other -legal rights or long-term receivables.

Asset type of an accounts are customarily reported on the balance sheet in the upper half.

Liabilities

On the opposite side of assets are liabilities. The most common liability in business is accounts payable. These are the amounts owed to suppliers or subcontractors for goods and services provided to the business. These vendors allow the business to pay later for these goods and services. Other liabilities include amounts owed for payroll and the associated benefits provided to employees.

With business, owing money is not a good situation as debt creates drag in business operations. As debt builds most businesses experience insolvency issues and ultimately fail. The liabilities are found in the bottom half of the balance sheet.

Equity

The equity section of the balance sheet identifies the value of the investment made by the owners of the company. In most presentation formats it reveals the initial investment, lifetime earnings to the beginning of the fiscal period and the current earnings for this year. In addition, this section also states how much money has been withdrawn by the owners of the company.

Revenue

Most individuals confuse revenue and sales. Revenue is more comprehensive and includes the subset of sales. Revenue can include interest earned on the cash deposits, fees charged to customers for late payments and more. Sales are confined to the primary purpose of the business.

Revenue is customarily reported in the upper section of the income statement or the more common title: profit and loss statement (P&L).

Cost of Sales

Cost of Sales is the more generic term referring to the costs associated with the corresponding sale. There are a multitude of different names associated with cost of sales and include:

  • Cost of Goods Sold (used in retail)
    • Cost of Services Rendered (used in professional services)
    • Costs of Construction
    • Cost of Meals Served (used in food service)
    • Costs of Transportation (hauling and mass transit)

Each industry uses their own title corresponding to their respective function. The most common term is cost of goods sold.

Value investing utilizes a buy low, sell high tenet of systematic processing with buying and selling stock investments. Along with patience, value investors reap substantially greater returns than most of the market measurment indices (DOW, Russell 2000, S&P, etc.). During 2020, this investment fund earned a 35.5% return while the DOW generated a 6.9% return. To date, the Investment Fund is 2.8X the return of the DOW and 3.0X the S&P 500 and the Composite 1500 Index. When you subscribe, you receive access to all existing articles, books, lessons, webinars and reports explaining how value investing works. For more information, click here: Membership Program.

In addition, each week, the subscriber receives additional articles, reports and buy/sell points for high quality stock purchases. Follow along as the fund updates regularly and discover how to invest like a pro and earn excellent returns on your investment.

Subscription ($99.99) is for one year of access to the value investing pool of information and formulas.

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Expenses

The final type of an account is expenses. These are your customary operational costs such as rent, insurance, office operations, management costs, marketing and so on. They are typically reported in the lower part of the P&L.

In general, the P&L subtracts both cost of sales and expenses from the revenue to determine profit for the business over a period of time (accounting cycle often one month in small business). Other names for expenses include overhead, general, operating and administration.

Summary – Account Types

The purpose of understanding the six account types before moving on with other lessons is that you’ll soon learn that all data entered in the books of record are logged to one or more of these account types. In future lessons you will begin to understand that there is a relationship that exists between these account types and how they interact with each other. For this lesson, the goal is to understand that there are only six account types and no more. Only six!

  1. Assets
  2. Liabilities
  3. Equity
  4. Revenue
  5. Cost of Sales
  6. Expenses

Act on Knowledge.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

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    Value Investing is the Absolute Best Wealth Accumulation Method.

    Value investing is a systematic process of buying stock at low prices and selling once the stock price recovers. Its foundation is tied to four principles:
      1) Risk Reduction
      2) Intrinsic Value
      3) Financial Analysis
      4) Patience
    Learn about value investing and gain access to lucrative information that will improve your wealth. Expect annual returns in excess of 20%. The investment club’s results during 2020 were 35.4% and year-to-date for the second year it is tracking well over 52%. Lifetime to date, the Fund is 2.8X the return for the DOW and 3.0X the S&P 500.

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    Value Investing is the Absolute Best Wealth Accumulation Method.

    Value investing is a systematic process of buying stock at low prices and selling once the stock price recovers. Its foundation is tied to four principles:
      1) Risk Reduction
      2) Intrinsic Value
      3) Financial Analysis
      4) Patience
    Learn about value investing and gain access to lucrative information that will improve your wealth. Expect annual returns in excess of 20%. The investment club’s results during 2020 were 35.46%. The investment fund outperformed the DOW by a factor of 2.9X, 2.6X the S&P 500 and 2.6X the S&P Composite 1500.

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