Definitions

Income/Revenue

The gross increase in owner's equity resulting from the operations and other activities of the business.
The money that comes in and is earned. This is NOT the same as profit.

What a business EARNS by selling goods and/or services, etc.

Expenses

Decrease in owner's equity resulting from the cost of goods, fixed assets or services and supplies consumed in the operations of the business.
Can be for things or services. "The stuff we used and had to pay for to run our business"
Taxes paid by the business are expenses.
>> A transaction where you do not get something of value back. E.g. Purchase of a company car is not an expense because you get a car worth the same value in exchange, but paying an electricity bill is.

Money that's spent to EARN the income/run the business.
- Cost of Goods Sold (COGS)
- Overhead (rent, payroll, advertising, etc.)

Assets

Properties used in the operation or investment activities of a business.

Categories may include:
Cash (E.g. General Acct, Payroll Acct, Savings Acct, etc.)
Equipment
Inventory (e.g. Kitchen equipment, Delivery Equipment, etc.)
Vehicles
etc.

Stuff your company owns that has value.
Stuff you have a right to, but don't have yet.
- Includes cash/money/funds
  - Liquidity - how quickly an asset can be turned into cash.
    - Cash (most liquid).
    - Current Assets - E.g. Inventory, Supplies, Investments, Accounts Receivable (2nd most liquid)
    - Fixed Assets - E.g. Land, buildings, furniture & equipment, intangible assets - patents, copyrights, secret formulas/trademarked things such as your logo, etc. (3rd most liquid).
      Value can be assessed by: "Fair Market Value" (what someone is willing to pay for it), or "Comparable" recent purchases.
      + value of any improvements
      - depreciation

Asset Shift

An expense that can be "shifted" into / used to generate revenue.

E.g. Buying an industrial ice cream maker for $600.

Liabilities

Obligations that come due in the future.
Claims by creditors to the property (assets) of a business until they are paid.

Your creditor (the person or company you owe) has a legal claim on some of your assets.

- Purchased something on credit
- Borrowed something
- Loan - secured or unsecured (longer term loans)
- Credit line
- Customer credit/return (you owe them product or services)
Amounts the business owes to others.
- Current liabilities
  - Short term - usually paid off within a year
  - Usually smaller amounts (but not always)
  - Accounts Payable - Money you owe someone else that you will eventually pay (usually up to 30 days, for things like operating expenses, inventory, monthly bills, etc.)
- Long Term Liabilities
  - Longer terms - usually longer than a year
  - Larger amounts like mortgages or equipment loans

Equity

The value of the owner's share of the assets.

Equity is called different things, depending on the business structure:

- Owner's Equity (sole proprietorship)
  - Assets = Liabilities + Owner's Equity
  - Typical Equity Accounts:
    Capital = what the owner invests (+)
    Reserves = what the company earns (+)
    Draw = when the owner takes something out (-)
    E.g.
    Cash
    Product (if used for personal use - e.g. drinks from restaurant)
- Partner's Equity (partnership)
  - Assets = Liabilities + Partner Equity (Partners can have different claims to equity. E.g. Partner 1 = 70%, Partner 2 = 30%)
- Shareholder Equity (corporation)
- Creditor Equity = A Creditor (a person or company you owe) has a legal claim on some of your assets, and therefore has equity in the business, just like the owners.

Capital is not the same as Equity.

- Capital: What the owner/s invest in the company
  - What they actually PUT IN
    - Cash or money, equipment, buildings, vehicles, etc.

Dividend

A sum of money paid regularly (typically monthly, quarterly, or annually) by a company to its shareholders out of its profits (or reserves).

Common type of dividend is a cash payout, but some companies will issue stock dividends.

Cost of Goods Sold (COGS)

A s

Direct Materials Consumed

+ Direct Labour
+ Factory Overhead
+ Opening WIP
- Closing WIP
+ Opening Finished Goods
- Closing Finished Goods

Bill

A document received by a company from its suppliers requesting payment for goods or services.

A document that outlines the amount of money a company owes to its suppliers or vendors for goods or services received.
It is typically by the supplier or vendor to request payment from the company.
When you receive a bill, it indicates that you have a pending liability to pay the specified amount to the supplier within an agreed-upon time.

Invoice

A document issued by a company to its customers requesting payment for goods sold or services.

A document issued by a business to request payment from its customers for goods sold or services rendered.
It outlines the details of the transaction, including the items or services provided, the quantity, the price, any applicable taxes, and the total amount due.
An invoice typically includes payment terms, such as the due date by which the customer is expected to make payment.

Purchase Order

A document issued by a company to a supplier to request specific items

Imagine there are books that you want to buy from a bookstore. A Purchase Order is like a note you write to the bookstore telling them exactly which book you want, how many copies you need, and how much you are willing to pay for each book. It's like a shopping list you send to the bookstore so they can get the book ready for you. Once the bookstore gets your Purchase Order, they will gather the books you requested and give you a call to come pick them up. It's to ensure you get the exact things you want, and a way for the bookstore to know what to prepare for you.

Purchase Requisition

A wish list containing items requested by staff that the boss (or purchasing department) will reject or purchase

A Purchase Requisition is like making a wish list for things you need. When you realise you need something, like a new book, you write it down on a list and give it to your parents. They will then go out and buy those things for you. In business, a Purchase Requisition is a list of things a company needs to buy. Employees write down what they need and then give it to their boss or the purchasing department. The boss or purchasing department will then decide if they can buy those things and go out to get them. It's like writing down what you need so someone else can get it for you.

Accounts Payable

Money your company owes to others for stuff you've bought.

Relatively low amounts for relatively short period time (relative to the business)
Usually for debts intended to be paid in less than a year

Current Liabilities

Amounts that are due longer than a year, but may not be large.

Long Term Debts/Financing

Long term debts, usually relatively large.

Statement of Cash Flows

Classifying items in a Statement of Cash Flows requires understanding the nature of the transaction and how it impacts cash flow.

Understand the Three Sections of the Statement of Cash Flows
- Operating Activities: Transactions related to the core operations of the business, such as revenues and expenses. Think: cash inflows from sales or cash outflows for salaries, utilities, and inventory.
- Investing Activities: Transactions involving the acquisition or disposal of long-term assets like property, equipment, or investments.
- Financing Activities: Transactions affecting the company's equity and borrowings, such as issuing stock, repaying loans, or paying dividends.

Ask Key Questions About Each Account
- Does this transaction relate to day-to-day business operations (e.g., sales, payments to suppliers)? → Operating
- Does this involve the purchase or sale of long-term assets or investments? → Investing
- Does this involve raising or repaying capital (debt or equity)? → Financing

Operating Activities

Cash received from customers
Cash paid to suppliers and employees
Interest paid or received (in most cases)

Investing Activities

Purchase or sale of equipment or property
Cash outflows for investments (e.g., buying shares in another company)

Financing Activties

Borrowing or repaying loans
Issuing or repurchasing shares
Paying dividends

Accounts Receivable

Short-term amounts due from buyers to a seller who have purchased goods or services from the seller on credit.

Money people owe you for their purchases that you gave them time to pay.

Ways to track total accounts receivables:

Aggregated value
- Track one aggregated value in your Accounts Receivable account (as one lump sum)
Divided by types
- Residential receivables
- Commercial receivables
- etc.

You also need to track receivables broken down by customer.

Bad Debt

Money your customer owes you - relatively small amounts that are due in relatively short periods of time.

Write Off
Send to Collections Agency
- Pursue bad debt (collect on consignment - agency gets a percentage of debt recovered)
- Purchase bad debt

Transfer the balance from Receivables to Expense (usually called "Bad Debt" or "Write Off").

Plan For Debt

Before extending credit, have a plan.

Document terms and conditions.
Decide who will chase late payments and how.
Choose a debt collection agency (if applicable) and communicate with them before debts occur (they may have specific wording/contracts they require you to send the customer before the debt is incurred.

Terms (Invoice Terms)

Terms are displayed as "Net X" or "n/X", where X = your chosen number of days before the invoice is due (E.g. "Net 30" or "n/30).
Net = Balance minus any previous payments or credits
An invoice is due ON day X (due at the company you are making the payment to).
Based on calendar days, not business days
First day counted is the day AFTER the invoice date (E.g. If Invoice Date is 1 July, then first day counted is 2 July)

Reports

Cash accounting systems do not report any income or expenses until the cash actually changes hands.

Cash Basis

Recorded when MONEY received or paid out.

Cash accounting systems do not report any income or expenses until the cash actually changes hands.
- Investopedia.com
Income is recorded when the money is actually RECEIVED (regardless of when the sale occurred).
Expenses are recorded when the money is actually PAID OUT (write and send cheques, hand over cash money, etc.)
May be ideal for businesses who do not extend credit.

Accrual Accounting involves stating revenues and expenses as they occur, not necessarily when cash is received or paid out.

Accrual Basis

Recorded when GOODS OR SERVICES received, not when you pay for it.

Accrual Accounting involves stating revenues and expenses as they occur, not necessarily when cash is received or paid out.
- Investopedia.com
Income is recorded at the time of the sale transaction.
When the goods or services are given, even if you're billing them.
Expenses are recoded when incurred (when the goods or services are Received)
May be ideal for businesses who do extend credit to customers and/or maintain inventory.

General Ledger

A record of all the accounts that a business uses to record its transactions. It is used to prove the equality of debit and credit balances of the business's accounts.

All your accounts' debit and credit activity within a specified date range including year-to-date balances.

The statement provided describes a General Ledger report, which summarizes all your accounts' debit and credit activity within a specified date range, including year-to-date balances.

The General Ledger summarises all the transactions entered through the double-entry bookkeeping method.

Profit & Loss

The Profit and Loss Report summarises the income and expenses of an organisation within a specific period. It compares the actual financial results to the budgeted amounts and may also include comparisons to previous year figures.

How much is left after the expenses are subtracted from the income/revenue?

Shows Income and Expenses
Determine if Profit or Loss
Over a Period of Time

Profit/Loss = Income - Cost of Goods Sold - Expenses (PL=I-COGS-E)

Called a "Statement of Activities" for a non-profit.

Balance Sheet

Where do we stand right now?

Value of Assets, Liabilities and Equity
At a specific point in time
What are all the Assets?
- Including Accounts Receivable
Who has a right to them?
- Including Accounts Payable
SNAPSHOT of a particular point in time.

Trial Balance

A basic financial statement showing the balances of all accounts in your ledger. It helps you check that your accounting records are correct and balanced before preparing final financial reports.
Note: A Ledger is a record of financial transactions.

Account List: It lists all the accounts you use, like cash, accounts payable, and sales.
Debits and Credits: Each account shows how much has been recorded as a debit or credit. Debits increase assets and expenses, while credits increase liabilities and revenue.
Account Balances: You see the current balance for each account, either as a debit or credit.
Total Debits and Credits: It adds up all the debits and all the credits. In a balanced trial balance, these totals should be equal.
Reporting Date: It shows balances as of a specific date.
Error Checking: A balanced trial balance helps find mistakes. If debits and credits don’t match, there’s likely an error somewhere.

Statement of Owner's Equity

Shows how Equity changes over time
Value at the beginning of the period
Reasons for increases of decreases
Value at the end

Accounts Payable

Accounts Receivable

Considered 'Current Assets'

Cash Flow

Principle of Estimates

Matching Principle

The matching principle is an accounting concept that dictates that companies report expenses at the same time as the revenues they are related to. Revenues and expenses are matched on the income statement for a period of time (e.g., a year, quarter, or month).

Other Reports

Budgets
General Ledgers
Adjustment Entry Reports
Etc.

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