90% of small businesses fail due to poor financial management, lack of internal controls, and...
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Transcript of 90% of small businesses fail due to poor financial management, lack of internal controls, and...
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Accounting 101
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Why do so many small businesses fail?
90% of small businesses fail due to poor financial management, lack of internal controls, and inadequate
planning.
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Why do you need to understand and create accurate financial reports for your business?
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Financial Accounting it primarily concerned with the recording and reporting of economic data and activities for a business.
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Bookkeeping
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Managerial Accounting uses both the financial data and estimated data to run
the day to day operations and in planning future activities.
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The Bookkeeping Process
Cash vs. Accrual Accounting
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Cash-basis Accounting
A method of accounting based on cash flow.
This method is really only accurate and effective with businesses that have no Accounts Receivable, Accounts Payable or Inventory.
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Accrual-basis Accounting
A method of accounting based on when a transaction occurs, regardless of whether cash changes hands.
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The Bookkeeping Process
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Reporting Standards
Uniform standards are important. These rules known as the Generally Accepted Accounting Principles are universal. They are the “rules” of the accounting world.
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Chart of Accounts
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Balance Sheet – Statement of Financial Position
The balance sheet provides the truest picture of the long-term health of your business.
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Current Assets
Assets that are either cash or can be converted to cash in less than one year.
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Fixed Assets
Assets that can not easily be turned into cash and typically depreciate over time (with the exception of land)
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Other Assets
Other Assets include all long term investments and intangible assets which may be assigned a value for determining the total sale price of a business.
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Liabilities
Are the amounts the business owes to creditors.
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Current Liabilities
Are debts that the company will pay off in one year or less.
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Long Term Liabilities
Are debts the company owes that will not be repaid within the next 12 months.
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Understanding Transactions
Balance Sheet Accounts
AssetsLiabilities & Owner's
Equity
Debit Credit Debit Credit
Increases Decreases Decreases Increases
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Income Statement
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Every business transaction affects at least two accounts.
Assets= Liabilities + Equity
Date Debit Credit1-Nov 1350
1350
12-Nov 13501350
Paid creditors on account
Purchased supplies on account
JournalDescriptionMaterials Accounts payable
Accounts payable Cash
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5 Categories of an Income Statement
Income, Revenue, SalesCost of Goods Sold (Direct
Costs)Expenses (Indirect Costs)
Other IncomeOther Expenses
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Income, Revenues or Sales
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Cost of Goods Sold – Direct Costs
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Gross Profit/Gross Margin
Formula: Sales – COGS = Gross ProfitFormula: Gross Profit/Sales x 100 = Gross Profit Margin
Income 100,000 100%- Materials - 15,000 15%
COGS - Labor - 25,000 25%- Permits - 4,000 4%- Subcontractor- 2,000 2%
Total 46,000 46%Gross Profit 54,000 54%
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Expenses - Indirect Costs, SG&A Expenses
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Net Operating Profit
Formula: Gross Profit – SG&A Expenses = Net Operating Income(SG&A – Selling, General and Administrative Expenses)
- Income 100,000100%
- COGS 46,000 46%- Gross Profit 54,000 54%- Expenses 38,000
38%- Net Op Profit 16,000
16%
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Other Income & Other Expenses
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Net Profit Before TaxesFormula: Gross Profit – Expenses – Other Expenses +Other Income = Net Profit
Formula: Net Profit/Sales x 100 = Net Profit Margin
This represents the profits of the company before final adjustments are made for federal and state taxes.
- Sales 100,000 100%- COGS 46,000 46%- Gross Profit 54,000 54%- Expenses 38,000 38%- Net Op Profit 16,000 16%- Other Income 1,000- Other Expense 2,000- Net Profit 15,000 15%
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Statement of Cash Flows
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Classifications for Statement of Cash Flows
Operating ActivitiesInvesting Activities Financing Activities
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Operating activities
Cash received from:
Sale of goods or servicesCollections of receivablesInterest on loans and bondsDividends on equity securitiesInsurance/Lawsuit settlementsRefunds from suppliers
Cash paid to:
Acquisition of materialsCreditors for interestEmployee compensationTaxes, fees, fines, penaltiesCustomer refundsLawsuit settlementsCharitable contributions
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Investing Activities
Cash received from:
Sale of property, plant, equipment and other productive assetsSales of a business unitCollections of principal on debt instruments of other companySale of loans
Cash paid to:
Acquire property, plant, equipment and other productive assetsAcquire another businessMake loans to and/or purchase loans from another companyAcquire debt or equity investments in other companies
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Financing Activities
Cash received from:
Issuing equity such as stockIssuing bonds, mortgages, notes and other forms of short- term or long-term borrowing
Cash paid to:
Owners of the company in the form of dividends or other distributionsRepayment of amounts borrowed on short-term and long-term debt
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Cash flow is the barometer of a business!
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Managing a Profitable Company