Bookkeeping – Various Terms (Lesson 26)

The prior 25 lessons introduced new terms to the reader. This is a summary of the terms learned and their corresponding meaning.

In the previous 25 lessons this manual covered a lot of different terms. This lesson is merely a summary of the various terms a bookkeeper encounters.

(Lesson 1) Account types – There are six major sets of accounts; three (assets, liabilities, equity) used with the balance sheet and three (revenue, cost of sales, expenses) found on the income statement.

(Lesson 2) Dual Entry – An accounting data entry system requiring equilibrium between the sides, one side is referred to as debit and the other is offsetting as a credit.

(Lesson 3) Books – A set of documents consisting of journals (original source entry) and ledgers (accounts logging one side of the original entry).

(Lesson 4) Assets – Business resources customarily ending with debit values.

(Lesson 5) Liabilities – Business debt (capital from third parties) that is identified and reported using credits.

(Lesson 6) Revenue – Primarily sales, this section of the income statement reports all forms of earnings from regular operations.

(Lesson 7) Cost of Sales – The direct costs (sometimes called prime costs) for the respective sales; traditionally includes materials, labor, subcontractors and other production costs.

(Lesson 8) Expenses – These are general forms of expenditures (overhead) than cannot be directly attributable to the sale of a product or service.

(Lesson 9) Current Earnings – The profit or loss calculated on the income statement. If a profit, it carries a credit value; if a loss, a debit value. The result is reported as the last line item in the equity section of the balance sheet as ‘Current Earnings’.

(Lesson 10) Equity – The bottom section of the balance sheet that reports owner’s investment and lifetime earnings to date.

(Lesson 11) Chart of Accounts – A list of the respected ledgers for a business. It traditionally starts out with asset accounts, moves onto liability accounts, then equity, revenue, cost of sales and finally expenses (all six types of accounts).

(Lesson 12) Contra Accounts – Accounts used to assist the reader of financial values making the information clearer. All contra accounts carry balances that are opposite of the type of account group reported. Example: with sales, returns are a contra account to adjust sales to the actual amount sold. Returns are debits in an otherwise credit balance group.

(Lesson 13 & 14) Parenthesis in a Presentation – Contra values are displayed in parenthesis when reported with both the balance sheet and income statement.

(Lesson 15) Complex Entries – Many entries require more than just one debit and one credit. When multiple debits and/or credits are utilized for a single entry in the journal it is referred to as a complex entry.

(Lesson 16) Trial Balance – An accountant’s report used to ensure proper organization of accounts, visual confirmation of no errors and assurance that all debits equal all credits.

(Lesson 17) Parent-Child Accounts – An account structure used to simplify reporting but separates information into smaller increments. One account, the parent, serves as the summation account while other accounts (children) identify distinct information of the parent value. For example:

Communications (Parent Account):
  – Office Phone System
  – Cell Phones
  – Internet
  – Radios
  – Cable

(Lesson 18) Numbering System – A progressive number system corresponding with the type of account, group, and unique identifier for a particular account. For example:

Account # 2123
    2  = Liabilities
      1  = Current Liabilities
        2  = Accounts Payable
           3  = Subcontractors Payable

(Lesson 19) Extraordinary Event – A significant event such as a sale of a business line, net proceeds related to a catastrophic incident, labor strike etc. that impacts the bottom line by more than 3%.

(Lesson 20) Balance Sheet Presentation – A well organized and formatted report identifying current assets, fixed assets and other assets tied to a specific moment in time.

(Lesson 21) Income Statement Presentation – A well organized and formatted report covering an accounting cycle (period of time) identifying total net revenue, gross profit, operating income and net profit.

(Lesson 22) Control Accounts – A single function account used with multiple third parties; examples include accounts receivable (customers), accounts payable (vendors) and payroll liabilities (tax authorities, benefit providers and employees).

(Lesson 23) Schedules – Original source documentation usually in the form of spreadsheets calculating accrual entries via the general journal. Examples include depreciation, bank reconciliations, tax obligations, payroll compliance and owner’s equity.

(Lesson 24) Accounting Equation – A simple formula acting as the backbone of financial information and information exchange: Equity = Assets less Liabilities or Assets = Liabilities plus Equity.

(Lesson 25) Cash or Accrual – Two distinctly different ways to determine profitability and financial condition of a business. Accrual is the preferred and logical reporting format for all businesses. It is required for publicly traded companies. Cash reporting is allowed for tax purposes for all small businesses and is endorsed by professionals to determine tax obligations.   


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;
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  • 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
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Value Investment Club

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