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Accounting Basics  - Kevin Nott
 

Accounting Basics - Kevin Nott

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    Accounting Basics  - Kevin Nott Accounting Basics - Kevin Nott Presentation Transcript

    • Accounting Basics for Non-Financial Individuals
    • What is Accounting?
      • The practice of recording financial activity of an organization or individual
      • The measure of sources and uses of financial resources
      • Tool used for making economic decisions about the entity
    • A Crash Course in Accounting
    • Basic Measuring Tool: The Account
      • Accounts are “buckets” used to classify and accumulate the results of similar transactions
      • Each transaction adds to or takes away from the balance in the “bucket”
      • The quantity of accounts used depends upon wants and needs for accounting detail
    • The Chart of Accounts
      • Systematic listing of all accounts
      • Accounts are named and usually numbered
      • Called General Ledger accounts or GL accounts
    • Types of Accounts
      • Assets
      • Liabilities
      • Equity
      • Revenue
      • Expenses
      • Each account is classified as one of these types
      • Each account type is a source or use of financial resources
    • Assets
      • Assets are a use of financial resources
      • Owned property -- tangible and intangible with market value
      • Classified as Current or Fixed
    • Current Assets
      • Assets that will be converted to cash or expenses within 12 months during the normal course of business
      • Listed in order of liquidity (how quickly it can be converted into cash)
      • Examples: Cash, Accounts Receivable, Inventory, Prepaid Expenses
    • Fixed Assets
      • Assets that will not be converted to cash or expensed within the next 12 months
      • Depreciated or amortized (expensed) over the life of the asset
      • Examples: Furniture, Buildings, Vehicles
    • Liabilities
      • Liabilities are a source of financial resources
      • Debts of the organization
      • Classified as Current or Long-Term
    • Current Liabilities
      • Obligations that will be paid for or converted to revenue with the next 12 months as a normal course of business
      • Listed in order of maturity
      • Examples: Accounts Payable, Payroll Taxes, Short-term Bank Loans
    • Long-Term Liabilities
      • Obligations that will not be paid or converted to revenue within the next 12 months
      • Examples: Mortgages, Long-term Bank Loans
    • Equity
      • Equity is a source of financial resources
      • Investment by owners into the organization
      • Equity has two parts
        • Paid in capital (Stock)
        • Retained Earnings (Profits left in the business by the owners)
    • Revenue
      • Revenue is a source of financial resources
      • Sales of goods and services
      • Amount the customer is charged
    • Expenses
      • Expenses are a use of financial resources
      • Costs incurred in the normal course of business
      • Two types of expenses
        • Cost of Goods Sold (Direct, Variable)
        • Overhead (Fixed, Indirect, SG&A)
    • Cost of Goods Sold
      • Directly associated with revenue (sales) from the same period
      • Fluctuate proportionately with revenue
      • Examples:
        • Labor on a job (including burdens)
        • Building materials
        • Permits
        • Subcontracted work
        • Sales commissions (including burdens)
    • Fixed Costs
      • Costs that do not fluctuate periodically with revenue
      • Semi-variable costs that cannot be assigned directly to revenue
      • Examples:
        • Marketing costs
        • Office staff wages
        • Building rent
        • Vehicle leases
        • Office supplies
    • Recording Transactions with Double Entry
      • Every accounting transaction has two sides -- the source of the resource and the use of the resource
      • The two sides are equal and offsetting
      • Both sides must be recorded
    • Introducing: Debits and Credits
      • The accounting terms used to describe the two sides of the transaction are debits and credits.
    • Debit
      • The side of the transaction that records the use of the financial resource
      • Abbreviated as DR
    • Credit
      • The side of the transaction that records the source of the financial resource
      • Abbreviated as CR
    • All Things Must Be Equal
      • Uses = Sources
      • Debits = Credits
    • The Trial Balance Shows it All
      • A trial balance is a listing of all accounts and their account balances
      • Debit balances are listed in the debit column
      • Credit balances are listed in the credit column
      • The two columns MUST equal -- Balance
    • Transaction Entry Types
    • Example
      • A new service van is purchased using a bank loan for the full amount of the purchase price
      • We record an increase (debit) to Vehicles (Asset) for the purchase price of the van
      • We record an increase (credit) to Bank Loans (Liability) for the amount borrowed
    • Let’s add a twist
      • We borrow money to purchase the van but we have a cash down payment as well
      • We record an increase (debit) to Vehicles (Asset) for the purchase price of the van
      • We record an increase (credit) to Bank Loans (Liability) for the amount borrowed
      • We record a decrease (credit) to Cash (Asset) for the amount of the down payment
    • The Accounting Equation Assets = Liabilities + Owners’ Equity where Owners’ Equity includes accumulated profits (losses) and Revenue - expenses = profit (loss)
    • Making Sense of it all with Financial Reports
      • Reports that show the financial situation of an organization
      • Balance Sheet
      • Income Statement
    • Balance Sheet
      • Statement of Current Financial Condition
      • Standardized format
      • Is a “snap shot” of the organization’s financial position at that moment in time
      • Used to demonstrate the financial makeup of an organization
      • Shows current and long-term assets and liabilities
    • Income Statement
      • Statement of Profit and Loss
      • Representation of financial activity over a period of time
      • Demonstrates organizations ability to generate financial resources (profits) from operations
      • Net balances are transferred to Equity on the Balance Sheet at the end of each period
    • Periodic Reporting
      • An organization’s “life” is divided into segments called accounting periods.
      • Most common periods are month, quarter and year
      • A reporting is made at the conclusion of the accounting period
    • The Reporting Year
      • Calendar Year -- Jan 1 to Dec 31
      • Fiscal Year -- Any other annual period
    • Reporting Frequency
      • Depends upon the needs of the organization
      • Shorter periods provide more timely information
      • Longer periods smooth out aberrations
      • Most organizations employ both
    • Cash versus Accrual
      • Cash Basis Accounting: Recognize revenue and expenses when cash is exchanged
      • Accrual Basis: Recognize revenue and expenses when earned or incurred
    • The Matching Principle
      • Expenses must be recognized in the same accounting period as the revenue they generate
    • Financial Analysis Making Sense of Financial Statements
      • Financial statements have meaning
      • They tell a story
      • They help in looking at the future
      • A close look often reveals hidden and unknown facts critical to the organization
    • Best Practices
      • The theoretic “Best” way to do something
      • The most efficient and effective method of accomplish a task
      • A benchmark for performance
    • Gross Profit
      • Variable profit
      • Sales less cost of sales
      • Measured in dollars and percentage (margin)
    • Net Profit
      • Net Profit is gross profit less fixed expenses
      • Profit left after all expenses are paid
      • Net profit becomes equity at the end of each accounting period
    • Breakeven Revenue
      • The projected revenue needed to pay all fixed (overhead) expenses
      • After breakeven, all additional Gross Profit = Net Profit
      • Calculating Breakeven
      • (Revenue x Gross Margin %) – Fixed Expenses = 0
      • Revenue x Gross Margin % = Fixed Expenses
      • Revenue = Fixed Expenses / Gross Margin %
    • Working Capital
      • Measures the amount of Cash that is available to fund operations
      • Calculating Working Capital
      • Current Assets – Current Liabilities
    • Current Ratio
      • Measures the organizations ability to pay it’s current obligations
      • Should be greater than 1
      • Calculating Current Ratio
      • Current Assets / Current Liabilities
    • Debt to Equity Ratio
      • Measures the indebtedness of the organization
      • Excessive debt is dangerous as it carries payment obligations
      • Smaller is better
      • Calculating Debt to Equity
      • Total Liabilities / Total Equity
    • Return on Assets
      • Assets are the resources used by an organization to earn a profit
      • Return on Assets measures how effective the assets are used
      • Measured as a percentage
      • Larger is better
      • Calculating ROA
      • (Net Profit / # months in period x 12) / Total Assets
    • Return on Equity
      • Equity represents the owners investment in the organization
      • Often called Return on Investment or ROI
      • ROI measures the profit that is generated on the owners investment
      • Bigger is better
      • Calculating ROI
      • (Net Profit / # months in period x 12) / Equity
    • Help is Available
      • Your Accountant
      • Local colleges
      • School District extension services
      • Profit Point LLC
        • Kevin Nott
        • 850-1716
        • [email_address]