Accounting Concepts and Principles

Accounting is the measurement of economic activity for a business operation. It is customarily reported via financial information. Learn about the basic accounting concepts and the associated principles used in accounting to report financial information.

Insolvency – Detection

Insolvency

Insolvency refers to the ability to pay bills in a timely manner.  It does not mean bankruptcy but long-term insolvency is a underlying factor of bankruptcy.  Many owners and/or managers of small business have no idea of how to determine if the company is insolvent or headed towards the inability to meet their day to day obligations.

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Cash Flow From Operations – Understanding Cash Flow (Part II)

Cash Flow From Operations - Understanding Cash Flow (Part II)

To understand the cash situation, the cash flows statement is an additional report included in financial statements to basically convert the accrual basis balance sheet and income statement into a cash basis report.  This way, management gets the best attributes of both accrual and cash basis accounting.

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Cash Flow From Operations – Basic Formula

n a pure cash only operation, the profit as reported on the income statement would also be cash flow from operations.  But modern-day business is not pure in how it is conducted.   Companies agree to pay suppliers at a later time, payroll is weekly or monthly, benefits that are paid in the future are offered to employees, credit is extended to customers; the list can go on and on.

Working Trial Balance

Working Trial Balance

The accounting profession uses various tools to generate accurate accounting information at the close of accounting cycles (monthly, quarterly and annually). The primary document is the working trial balance.  It is very similar to the traitional trial balance except there are additional columns used to identify various adjustments and the corresponding source documents (work papers).

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Gross and Net Sales

Gross and Net Sales

Many of the business performance standards are measured against a baseline. For the bulk of production and operation performance tools the baseline is net sales. The key to an accurate performance standard is having an exact sales figure.

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Amortization of Financing Costs

Amortization of Financing Costs

When a business acquires a loan there are typically closing costs involved.   Generally Accepted Accounting Principles (GAAP) require these financing costs to be amortized (allocated) over the life of the loan.  There are several principles the reader needs to understand to properly calculate and assign these costs to the financial statements.

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Break-Even Analysis – Fundamentals

Break-Even Analysis - Fundamentals

Breakeven analysis is a managerial (cost) accounting tool used to examine the relationship of price to cost of a product.   It also considers various sales volumes and the effect on profit given the different relationships of price to cost.   The breakeven analysis is an essential tool in maximizing profit with the least amount of resources.

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Treasury Stock – Fundamentals of Stock

Treasury Stock

Those corporations doing well and flush with cash sometimes buy back stock from their investors. Once purchased back by the company the stock is called treasury stock. However, in small business, buying back stock can significantly alter the entire corporate control ownership and impact the long term outcome and direction of the company.

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