No other business term is so misunderstood, misstated, misleading or deceiving as the words ‘net profit’. Accounting defines net profit as the amount earned after all associated costs and expenses are subtracted from the associated sales. The larger or more public the company the more reliable the dollar value as stated on the bottom line. But in small business, the more likely the value is inaccurate as stated in the financial report.
Accrual accounting is a method of accounting whereby all current information is included in the financial reports. It’s counterpart is cash accounting whereby only actual cash income and cash expenses are included in the accounting reports. Accrual accounting is more acceptable because it portrays a more accurate picture of the business financial situation.
Accounting’s primary purpose is to measure economic activity. There are several different methods to determine the economic value generated in your business each year. In accounting this is referred to as sets of books. There are four basic sets of accounting books. Each has a different purpose and end goal.
This is the most often asked question by all new businesses. Should I be on the cash or accrual basis of accounting for tax purposes? The common layman would always answer ‘CASH BASIS’ for tax purposes. They say this because they understand that you only pay the tax on the cash that you keep. But for us tax preparers and authorities on this subject, the answer is ‘IT DEPENDS’.
‘Fixed costs’ is a business term used mostly in cost accounting. It has several meanings based on its usage. The most common definition associated with fixed costs is expenses that must be paid regardless of production or sales volume. The best example is rent for a company. It doesn’t matter whether you produce or sell one widget or several thousand, the rent must still be paid.
So why is it important to understand fixed costs? How is it used in cost accounting and in financial reporting? Finally, what are examples of fixed costs?
Accrual accounting is the preferred method of accounting for all business operations. Any publicly traded company must comply with the principles of accrual accounting. Small business operations can choose between cash and accrual accounting for their records. Although cash accounting is the easiest to work with as a small business operation, accrual accounting will provide a more accurate picture of the financial status and affairs of any business operation.
Simply stated, accounting is the measurement of economic activity. Its primary principle is to report information to the user so that (s)he can make informed decisions. The primary reporting format is in the form of dollars. There are two important reports used by pretty much 99% of all business operations to determine the status of the business operation. These are the income statement and the balance sheet.