Kasfia Rashid - “Money Matters with Kash the Bookkeeper”
Hello! Welcome to Money Matters with me, Kash the bookkeeper, the accounting show with NO NUMBERS! We are at the end of our accounting tour and our season! Need to catch up? Click here for all of the prior shows: https://feed.pod.co/money-matters-with-kash-the-bookkeeper
We have covered it all; Assets to Tax return and most things in-between. Last week we discussed why keeping good, “clean” books and records is so important to a business’ success. Today is our Summary of the Season! Like every good trip, you have to look at the pictures and fully appreciate the experience, once you are back home.
Each show has been accompanied by detailed notes to make the subject matter easy to understand and apply. Click back to each show’s notes for a deeper, fuller understanding of each concept.
Show Objectives - The Why
Money matters is all about the fundamental basics of the accounting language, Assets, Liabilities, Owner’s Equity, Revenue and Expenses. These building blocks of business can be arranged and rearranged for a customized experience. Once you understand the basics of any language it is much easier to communicate using that language.
Every decision of a company, big and small, at one point or another goes through the Accounting Department. If you want to have a sustainable, healthy business, you have to not only know your numbers, you have to be able to USE them! The solution to every business problem can be found in your accounting system and reports.
What You Need to Know - The What
The five basic principles of accounting are:
Assets: Things you own!
Assets include cash, accounts receivable, prepaid expenses, property, land, buildings, vehicles, equipment, and investments outside of the company. They should be categorized according to liquidity and separated by “Current” or “Non-current” classifications. Once you own something you can leverage it. Assets have an obligation to help grow and sustain your business. You can think of them like “worker bees” in your business. Making sure your “worker bees” are working efficiently and effectively is essential if you want to run a successful business.
Liabilities: Things (and people) you owe.
Liabilities include credit cards, loans, notes payable and accounts payable. Similar to assets, they should be categorized according to liquidity and separated by “Current” or “Non-current” classifications. Liabilities are a vital aspect of a company because they are used to finance operations, paying for large expansions, controlling cash flow, and they can also make transactions between businesses more efficient
Owner’s Equity: Your worth in the company.
The accounting definition of owners’ equity is the “owners’ claim to company assets after all of the liabilities have been paid off.” Inside of the broad owners’ equity category there are several different subcategories we need to consider. Contributions or “owner investments” is when an owner puts money or other assets into the company. Withdrawals or “owner distributions” happen when an owner takes money or other assets out of the company.
Revenue: Money, money, money in exchange of a good or service-of course.
Out of all the accounting concepts this is most probably the easiest to explain and understand. Revenue is the total amount of money generated by the sale of a product or a service related to the company’s primary operations. It is the money that people give us in exchange for a solution to their problem.
Revenue is not the amount of money that the business owner is left with once the business operations have been completed. That is a different concept called income. Because of this revenue is sometimes called top line revenue, as it sits on the very top of the second financial statement, the profit and loss statement. Conversely, income is on the bottom of the financial statement and is most often referred to as bottom line revenue.
Expenses: Money spent to generate revenue or keep business running
“The Business Cost includes all the costs (fixed, variable, direct, indirect) incurred in carrying out the operations of the business. It is similar to the real or actual costs that include all the payments and contractual obligations along with the book cost of depreciation on both the plant and equipment.”
In other words, it’s the money that is spent to provide a solution to clients (cost of goods sold), keep the business running (operating expenses), and allow the business owner to meet their desired level of success (owner’s distributions).
The concept of cost of goods sold has its own section in accounting and financial statements. Cost of goods sold is the total amount of money it takes to provide a product/service for sale. In accounting this term is most often used in any product based industry, however, the concept can be used for both product and service based businesses.
Expenses can be further subdivided into Operating Expenses and Non-Operating expenses. Operating expenses are expenses related to the main activities of the business : Rent, Utilities, Advertising, Office Supplies, Etc. Non-operating expenses include everything not directly related to the running of the business : Interest, investment losses, etc.
The two basic financial statements are:
Balance Sheet: Assets = Liabilities + Owner’s Equity
When valuing a company or considering an investment opportunity, Analysts and investors normally start by examining the balance sheet. The balance sheet is a snapshot of a company's assets and liabilities at a single point in time, not spread over the course of a year such as with the income statement.
The balance sheet is one of three important financial statements intended to give investors a window into a company's financial condition at a specific point in time.
A strong balance sheet usually means high assets, including a large cash reserve, very little or no debt and a high amount of shareholder's equity. All else being equal, a company with a solid balance sheet can endure tough economic cycles compared to one with a weaker financial footing.
Profit and Loss : Revenue - Expenses = Net Income
This financial report is the one investors and key financial persons in a company look at to answer the questions: how much did we make, how much did we spend, and where can we do better next time around?
Using the Profit and Loss statement, business owners can generate powerful ratios to supercharge their growth. Ratios like Revenue over Expenses (Current ratio) , Profit Margin ( Net income ( after tax) over Sales), Operating Margin ( Operating Income over net sales) to name a few. These ratios help business owners project revenue, control costs, and attract investors!
Lastly, the Profit and Loss statement is the birthplace of the tax return! It’s the chicken that came before the egg.
What You Need to Do - The How
Most small businesses were started because of a passion, a dream! Not to keep receipts or run spreadsheets. Sigh; but here we are.
To run a successful business you have to understand the way your business operates. 82% of business fail due to poor cash flow management. The easiest way to avoid that is to keep easy to understand, correct, records that are reviewed often and leveraged.
Here are my top 10 tips to keep your books as clean as a bookkeeper’s!
Previous: The importance of bookkeeping
Next: Season 4 Intro
Written by Kash the bookkeeper
Check out the last QuickBooks Online Tutorial you will never need here! https://kashthebookkeeper.com/master-your-bookkeeping-in-60-minutes/
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