Frequently Asked Questions
Sometimes accounting terminology can sound like a different language. Here are some terms and explanations.
What are Assets, Liabilities, and Equity?
You will see these terms on the financial report, the Balance Sheet. Think of it as a balanced equation where the left side total equals the right side total. On the left side are the assets of the business, including cash, buildings, vehicles and large equipment. On the right side are the liabilities and equity. The liabilities are the debts, short or long-term, for the business. It can include loans, unpaid bills and payroll tax liabilities. The equity of the business comes from the owner’s investment and the net profit of the business over time.
What is an Accounting Period?
Just as we have a calendar divided into days, weeks, months, and years, the accounting reports have time periods. A business fiscal year is a twelve month period that can be based on a calendar year, but other variations are July 1 to June 30 or October 1 to September 30th. Once a fiscal year is chosen, it is best practice to keep that fiscal period going forward. Certain reports cover a period of time, a month, quarter, or year and reports can be customized to show percentages or comparisons with previous years. Other reports are for a specific date, usually at the end of an accounting period.
Understanding Cost of Goods Sold
We understand that when we purchase a product or make a product to sale there will be costs involved. There are two types of costs for the goods sold. Direct costs are the wholesale costs of goods, direct labor costs, costs of parts, and overhead costs that are directly related to making the product. Indirect costs are related to distribution or sales force costs. The calculation for Cost of Goods Sold is used in filing taxes and in understanding where strengths and weaknesses are in selling a product.
Understanding the Difference between Cash and Accrual Basis
Cash is the simplest method for accounting purposes and is most like our wallet, in the days when we used to carry currency and change! We spend or receive money and it flows in and out. But what do we do when we know that next week we have a large payment due that covers a period of time, such as insurance or property taxes? In that case, the accrual basis can account for that by entries that cover a period of time. Sales and expenses are recorded even if the cash was not received or the bills paid. Most business owners want to know both! An accurate financial position can be done on an accrual basis, while the cash balances can be monitored and reported on a daily or weekly basis.