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Bookkeeping & Accounting
​Blog

Business Entity COncept

7/17/2018

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Business entity concepts limits the economic  data in an accounting system to data related to directly to the activities of the business. This makes the business be seen as an entity separate form its owners, creditors, or other business.

A business entity can be created in the following:
  • Proprietorship: owned by one individual. 
  • Partnership: owned by two or more individuals.
  • Corporation: organized under state or federal statutes as a separate legal taxable entity.
  • Limited liability company: combines the attributes if a partnership and a corporation.​
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Suspense Account

6/26/2018

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Suspense account in the books of an organization in which items are entered temporarily before allocation to the correct or final account.

The suspense account is used because the proper account could not be determined at the time that the transaction was recorded.

A suspense account is normally located in the general ledger. Any amount that is posted to the suspense account should be there on a temporary basis only, as this amount needs to be investigated and posted to the correct account.
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Most accounting systems contain a suspense in their chart of accounts, but this is something that you should avoid using unless there are no other options.
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Deferred Revenue

6/15/2018

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Deferred Revenue is when a customer pays for services or goods in advance. They work has not been performed, but will be done a later date that is set by the business owner and customer.

Since the company has received payment, but has not done the work. The cash received is a liability on the balance sheet under deferred revenue.

The cash in deferred revenue is recorded as a sale only after the work has been done. The amount would be deducted from deferred revenue on the balance sheet and recorded as a sale in the profit and lost statement for the month that the work was done.

This helps keep sales accurate for company that received payments earlier than expected.
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An issue with deferred revenue can be that you spend the money before doing the work. If the customer decided to cancel the service or good. The money would need to be paid back and if the money is already spent. This can cause cash flow issue in the business operation. 
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ROLE OF ETHICS IN ACCOUNTING AND BUSINESS (PART 2 OF 2)

6/6/2018

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Two factors can go wrong that makes manager and companies do unethical practices.

1. Failure of Individual Character:
An ethical manager and accountant is honest and fair. However, mangers and accountants often face pressures from supervisors to meet company and investor expectations. In many cases, manager and accountant justify small ethical violations to avoid such pressure. These small ethical violations can build up to big violations as the company financial problem start to emerge.

2. Culture of Greed and Ethical Indifference:
By their behavior ad attitude, senior mangers set the company culture. Senior mangers create the culture that is influence through out the organization. If the senior manager is corrupt by greed and indifference. There influence will set the tone of behavior with there coworkers in the workplace.
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Reconciliation  Discrepancy

5/29/2018

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Reconciliation Discrepancy is a transaction that has been deleted or altered after the account for the month, quarter, or year has been reconcile (closed).

Usually the discrepancy occurs when the withdraws and deposits in the accounting system match the bank account withdraws and deposits and the balance of difference is still off.

This should be an indication that there is a discrepancy in the account. If your accounting system is able to generate a reconciliation discrepancy report it will be easy to find the exact amount off for the transaction.

If your accounting system doesn’t have the option to generate a reconciliation discrepancy report. You will have to manually look at each transaction in the general ledger to find the discrepancy that is missing from the bank statement.
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Once you find the discrepancy you will have to undo the reconciliation from the previous period and redo the reconciliation process to able to move forward and close the month, quarter, or year in the future.

Having no reconciliation discrepancy will make it easier to track on transaction, so that reports are accurate, easier to reconcile during the period you are closing, and have no duplicate transactions. 
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What is Bad Debt Expense?

5/24/2018

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Bad Debt Expense is a decision made by the owner that decided that a customer is not going to pay for their services or products. 

Usually when a sale occurs. Customer have an agreement with the owner to pay for the services or product by certain amount of time. Some payment can be due on the same day, while, other can be paid in 15, 30, or 60 days as an example. 
When services or product have been completed by the business owner. The owner records the sale on the profit and loss statement and records money owed on account receivable on the balance sheet. 

Once attempts have been made to collect and issue arises with the customer on payment. The accounts receivable is deducted and increase to allowance for doubtful account on the balance sheet to show that there is a risk that money might not be collected, but still have a possibility that it might be paid.
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Once you realized that the customer is not going to pay for services or product. You would deduct the allowance for doubtful account from the balance and increase bad debt expense on the profit and lost statement to show a loss in operation for work no paid. 
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Intangible Assets

5/15/2018

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Intangible Assets are intellectual property that is not physical in nature, but have value that a company owns for business operation.

Item that are consider Intangible Assets are:
  • Patents, 
  • Trademarks 
  • Copyrights
  • Business Methodologies
  • Goodwill
  • Brand recognition

Intangible Assets are not physical assets like machines or buildings.

They can be creative ideas that company use to differentiate themselves from competitors in Marketing and Products. Customers lists and relationship that is build to keep revenue streams flowing into the company. Contracts they have with partners and employees. 
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Retain Earning

5/1/2018

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Retained earnings are the profits that a company has earned to date, less any dividends or other distributions paid to investors. a company cumulative earnings since the corporation was formed. In most cases, companies retain earnings to invest them into areas where the company can create growth opportunities, such as buying new machinery or spending the money on more research and development.

Formula for retain earning:
Beginning retained earnings + Profits/losses - Dividends = Ending retained earnings

Benefits have of having retained earnings is companies to have financial resources to reinvest in their operations, creating growth. Retained earnings fund several projects such as research and development and facility construction, renovation and expansion. Companies also use retained earnings to purchase equipment and other assets as well as pay off company debts and liabilities.
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What is An Index Fund?

4/2/2018

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An index fund is an investment fund that attempts to replicate the performance of a given index of stocks or some other investment type.

An index fund does not pick and choose its investments, but instead holds all of the stocks or bonds on an index.

It amounts to a person or a committee of people sitting down and coming up with a list of rules as to how to construct a portfolio of individual holdings because, in the end, the only thing you can actually do is invest in individual common stocks or bonds, presuming we're limiting our discussion to equity and fixed income markets.

Since an index fund owns all of the investments in the index, there is no picking winners and losers.
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Role of Ethics in Accounting and Business (Part 1 of 2)

3/26/2018

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The objective of accounting is to provide relevant, timely information for user decision making. Accountant must behave in an ethical manner so that the information they provide users will be trustworthy and, thus, useful for decision making.

Managers and employees must also behave in an ethical manner in managing and operating a business. Otherwise, no one will be willing to invest in or loan money to the business. 

Ethics are moral principles that guide the conduct of individuals. Unfortunately, business managers and accountants sometimes behave in an unethical manner. 
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Pros & Cons of Establishing a LLC for your Business

3/12/2018

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A limited liability company (LLC) is a corporate structure whereby the members of the company cannot be held personally liable for the company's debts or liabilities. Limited liability companies are essentially hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship.

Pros:
  • Limited Liability
  • Pass Through Federal Taxation on Profits
  • Management Flexibility
  • Easy Startup and upkeep 
  • You have the flexibility of being taxed as a sole proprietor, partnership, S corporation or C corporation.
  • Less paperwork and lower filing costs
  • Members can receive revenues (and write off forfeitures) that are larger than their individual ownership percentage.

Cons:
  • Limited Liability has limits
  • Self employment tax
  • Consequence of member turnover
  • As an LLC member, you cannot pay yourself wages.
  • Investors may be more likely to put their money into a corporation, making it harder to raise financial capital.
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The Accounting Cycle

3/5/2018

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1. Identify the transaction from source documents, like purchase orders, loan agreements, invoices, etc.

2. Record the transaction as a journal entry.

3. Post the entry in the individual accounts in ledgers. Traditionally, the accounts have been represented as Ts, or so-called T-accounts, with debits on the left and credits on the right.

4.At the end of the reporting period (usually the end of the month), create a preliminary trial balance of all the accounts by:
(a) netting all the debits and credits in each account to calculate their balances and
(b) totaling all the left-side (i.e., debit) balances and right-side (i.e., credit) balances. The two columns should be equal.

5.Make additional adjusting entries that are not generated through specific source documents. For example, depreciation expense is periodically recorded for items like equipment to account for the use of the asset and the loss of its value over time.

6.Create an adjusted trial balance of the accounts. Once again, the left-side and right-side entries - i.e. debits and credits - must total to the same amount. (To learn more see, Fundamental Analysis: The Balance Sheet.)
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7.Combine the sums in the various accounts and present them in financial statements created for both internal and external use.

8.Close the books for the current month by recording the necessary reversing entries to start fresh in the new period (usually the next month).

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The Three Types of Business that Operate to make a Profit.

2/26/2018

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Services Business: provides services rather than products to customers.
  • Examples of services business are:
    • Auto Shops
    • Printing Centers
    • Lawyers
Merchandising Business: sell products they purchase from other business to customers.
  • Example of merchandise business are:
    • Retail Stores
    • Amazon
Manufacturing Business: change basic inputs into products that are sold to customers.
  • Example of merchandise business are:
    • Ford
    • Samsung
    • Nestle
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Asset Deprecation

2/2/2018

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Depreciation is the systematic reduction of the recorded cost of a fixed asset. 

Examples of fixed assets that can be depreciated are buildings, furniture, leasehold improvements, and office equipment. The only exception is land, which is not depreciated. The purpose of depreciation is to charge to expense a portion of an asset that relates to the revenue generated by that asset. This is called the matching principle, where revenues and expenses both appear in the income statement in the same reporting period, which gives the best view of how well a company has performed in a given accounting period.

There are three factors to consider when you calculate depreciation, which are:
  • Useful life
  • Salvage value
  • Depreciation method
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Depreciation has nothing to do with the market value of a fixed asset, which may vary considerably from the net cost of the asset at any given time.

To Calculate Depreciation for an asset is:
1. Write down the asset’s purchase price.
2. Estimate the salvage value, or how much the asset will be worth when it's no longer useful.
3. Calculate Depreciable Cost: purchase price - salvage value.
4. Estimate the asset's lifespan, which is how long you think the asset will be useful for.
5. Find the amount of Depreciation per Year by calculating depreciable cost/asset's lifespan.


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What is Money Laundering and Why it is Illegal.

12/11/2017

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Money Laundering is the concealment of the origins of illegally obtained money, typically by means of transfers involving foreign banks or legitimate businesses.

The Three stages of Money Laundry:
  1. Placement –This is the movement of cash from its source. On occasion the source can be easily disguised or misrepresented. This is followed by placing it into circulation through financial institutions, casinos, shops, bureau de change and other businesses, both local and abroad.
  2. Layering – The purpose of this stage is to make it more difficult to detect and uncover a laundering activity. It is meant to make the trailing of illegal proceeds difficult for the law enforcement agencies.
  3. Integration – This is the movement of previously laundered money into the economy mainly through the banking system and thus such monies appear to be normal business earnings. This is dissimilar to layering, for in the integration process detection and identification of laundered funds is provided through informants.

Money Laundering is illegal because it is tied to a crime. The process of money laundering gives freedom to launderers  to convert their money earned form illegal sources to legal one which may reach to criminals, terrorists and other organizations and can be used to unstable the world.

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Red Flags that may cause the Internal Revenue Service to Audit any Business (Part 2)

11/16/2017

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1. Claiming Rental Losses:
      Passive loss rules prevent the deduction of rental real estate losses, but there are two important exceptions:
  • actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income.
  • estate professionals who spend more than 50% of their working hours and over 750 hours each year materially participating in real estate as developers, brokers, landlords or the like.
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2. Taking an Alimony Deduction:
Alimony paid by cash or check is deductible by the payer and taxable to the recipient, provided certain requirements are met. payments must be made under a divorce or separate maintenance decree or written separation agreement. The instrument can’t say the payment isn’t alimony. 

3. Writing off a Loss for a Hobby:
You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit. 

4. Deducting Business Meals, Travel and Entertainment:
A large write-off will set off alarm bells, especially if the amount seems too high for the business or profession. Agents are on the lookout for personal meals or claims that don't satisfy the strict substantiation rules. To qualify for meal or entertainment deductions, you must keep detailed records that document for each expense the amount, the place, the people attending, the business purpose and the nature of the discussion or meeting.

5. Failing to Report a Foreign Bank Account
IRS scrutinizing information from amnesty seekers and is targeting the banks that they used to get names of even more U.S. owners of foreign accounts. Failure to report a foreign bank account can lead to severe penalties. Make sure that if you have any such accounts, you properly report them. This means electronically filing Fin CEN Form 114 to report foreign accounts that total more than $10,000 at any time during the previous year. And those with a lot more financial assets abroad may also have to attach IRS Form 8938 to their timely filed tax returns

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Internal Control for Business Owner to Prevent Fraud in there Finances.

11/2/2017

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As an Owner of a Business delegating task to other can be more efficient and effect to help grow the business. Focusing on the most important aspect of the business where it more crucial than the other small task that you have to deal with might be time consuming.

When you assigned task to other you need their trust and confidence in their ability to complete the objective. When it comes to the bookkeeping of the business. You should create procedures and control to make sure that a bookkeeper doesn't commit fraud. Because you give the bookkeeper access to financial records that doesn't mean you can just forget the small details because you don't handle it any more.

Here are a few tips to help prevent fraud from bookkeepers that might try to get away with it:
  • Looking at monthly bank statements and cleared checks.
  • Looking at credit card statements and monthly charges; verifying payments are made to the card each month and the balance seems reasonable.
  • Looking at online banking history; asking questions about transactions which seem unfamiliar.
  • Looking at payroll reports and paycheck amounts; making sure everyone is receiving gross wages in the proper amount.
  • Not giving checking signing authority or access to a signature stamp to the bookkeeper.
  • Having procedures in place to prevent inventory theft.
  • Having Petty Cash procedures in place to prevent theft of cash from the cash box or cash register.
  • Being “scam aware” of letters and emails pitching services that may not be needed, or which business owners or their bookkeepers can do for free, such as renewing city or county business licenses.
  • Looking at your P&L and Balance Sheet on a regular basis.
  • Requiring timely reports, and looking at them.

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Red Flags that may cause the Internal Revenue Service to Audit any Business(Part 1)

10/23/2017

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1. Making a Lot of Money:
IRS statistics for 2016 show that people with an income of $200,000 or higher had an audit rate of 1.70%, or one out of every 59 returns. ​The audit rate drops significantly for filers making less than $200,000: Only 0.65% (one out of 154) of such returns were audited during 2016, and the vast majority of these exams were conducted by mail. understand that the more income shown on your return, the more likely it is that you'll be hearing from the IRS.

2. Failing to Report All Taxable Income:
The IRS gets copies of all of the 1099s and W-2s you receive, so be sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.

3.Taking Higher-than-Average Deductions:
If the deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you actually owe.

4. ​Running a Small Business:
Schedule C is a treasure trove of tax deductions for self-employed people. But it's also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don’t report all of their income. The IRS looks at both higher-grossing sole proprietorship and smaller ones. Other small businesses also face extra audit heat, as the IRS shifts its focus away from auditing regular corporations. The agency thinks it can get more bang for its audit buck by examining S corporations, partnerships and limited liability companies. So it’s spending more resources on training examiners about issues commonly encountered with pass-through firms.

5.​Taking Large Charitable Deductions:
If your charitable deductions are disproportionately large compared with your income, it raises a red flag. That's because the IRS knows what the average charitable donation is for folks at your income level. Also, if you don't get an appraisal for donations of valuable property, or if you fail to file Form 8283 for noncash donations over $500, you become an even bigger audit target. And if you've donated a conservation or façade easement to a charity, chances are good that you'll hear from the IRS. Be sure to keep all of your supporting documents, including receipts for cash and property contributions made during the year.


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The difference between Financial and Managerial Accounting

8/27/2017

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Accounting is needed in every business, which, effect the aspect of the operation and reporting to keep the business up float in the current market.
When it comes to Financial Accounting; the process of recording, summarizing and reporting a great number of transactions resulting from business operations over a period of time. These transactions are summarized in the preparation of financial statements, including the balance sheet, income statement and cash flow statement that become the company's operating performance over a specified period.
Some of the benefits of Financial Accounting are:
  • Avoiding Regulatory Investigations and Sanctions
  • Facilitates comparative study of transactions
  • It help preparing in bank reconciliation statement.
  • Financial reporting for government and banks and shareholders.
  • It help in tax management.
 
Managerial Accounting is the process of identifying, measuring, analyzing, interpreting and communicating information for the pursuit of an organization's goals. This branch of accounting is also known as cost accounting. Managerial accounting handles margin analysis, the amount of profit or cash flow generated by the sale from a specific product, customer, store or region. Managerial accounting also manages constraints within a production line or sales process.
Benefits for Managerial Accounting are:
  • Planning
  • Controlling
  • Decision-making
  • Problem-solving
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Bank Reconciliation Benefits

8/6/2017

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In bookkeeping, a bank reconciliation is a process that explains the difference on a specified date between the bank balance shown in an organization’s bank statement, as supplied by the bank, and the corresponding amount shown in the organization's own accounting records.
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Benefits for Reconciling Account:
  • Verify if data has been enter correctly.
  • Shows if checks issued have been cashed.
  • Keeps track of all transactions that been incurred throughout the month to make sure there isn’t any double entry in the accounting software made by a person.
  • Helps you identify bank fees and other hidden expenses you might not know you are paying.
  • Detects Fraud
  • Prevents Overdraft
  • Identifies Bank Errors
  • Accurate Balance
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Horizontal Analysis

7/30/2017

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What Horizontal Analysis does is compare the net income of the current period with the net income of the prior period.

This Analysis is used to determine how a company is growing overtime.  Also to compare a company's growth rates in relation to its competitors and industry. 

The formula for Horizontal Analysis has two process:

First you have to establish if the company net income increase or decrease from the prior year to the current year:
(Net income Current Year)-(Net income Prior Year)=(Increase or Decrease Amount)

Than you would divide the difference of increase or decrease amount to the prior year net income.
Difference of Increase or Decrease Amount/Net Income Prior Year=Percent Amount

This would give you the percentage of the company growth rate.

Here’s an example how to use the horizontal Analysis:
Company A:
  • 2015 Net Income: $96,350.00
  • 2016 Net Income: $125,589.00
Company B:
  • 2015 Net Income: $350,756.00
  • 2016 Net Income: $310,278.00
Company C:
  • 2015 Net Income: $15,000.00
  • 2016 Net Income: $40,250.00
First you would solve for the company net income increase or decrease from the prior year to the current year:
  1. Increase of $29,239.00
  2. Decrease of $40,478.00
  3. Increase of 25,250.00
After you would solve to get the percent amount by dividing the difference of increase or decrease amount to the prior year net income.
  1. $29,239.00/$96,350.00= 30%
  2. $40,478.00/$350,756.00= 12%
  3. $25,250.00/$15,000.00= 168%
The Results show that Company A growth has increase a medium rate while Company B rate has decrease 12%. Company C has grown rapidly during the year. If these company were competing in the same market. The results show that Company B has been losing customer to Company A and C. Company C looks to be a threat to the two company as it establish its self as a true contender.
 
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AMORTIZATION Schedule for big purchases

7/10/2017

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Amortization is the process of allocating the cost of an asset over a period of time. It also refers to the repayment of loan principal over time. Typically amortization is used when you are requiring an asset that has a big price tag that you would pay over time. For example, if you were going to take out new machinery for your business or something personal like taking out a mortgaging for a house.
 
An Amortization Schedule shows the beginning and ending balances of the loan and the amount of payment that is applied to the principal and interest during each payment period. The amortization schedule would show the amount that the loan would be paid off during an amount of time. Each installment goes toward a portion of the loan’s interest and its principal.
Some benefits of using amortization schedule when considering making a big purchase are:
  • Offer a clear set of monthly payments.
  • Exposed to different amortization schedules that allow flexibility depending on their financial power.
  • Pay less interest over the remaining amount of the principle (loan). As the loan balance decreases, the amount of the interest that is also accruing decreases.
I created a template you can use whenever you are considering making a large purchase down below. If you have any question how to use it. Please don't hesitate to ask. =)
amortization_schedule.xlsx
File Size: 20 kb
File Type: xlsx
Download File

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Ratio of Liabilities to Stockholders' Equity

6/25/2017

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Analyzes:
Ratio of Liabilities to Stockholders' Equity Formula

Description: Analyzing the ability of a company to pay its creditors.

Total Liabilities/Total Stockholder’s Equity=Ratio of Liabilities to Equity.

Why is this formula important to analyze?
The Ratio of Liabilities to Stockholder’s Equity is important to analyze because is measures the degree which the assets of the business are financed by the debt and the shareholders equity of the business.

Both total liabilities and stockholders’ equity figures are obtained from the balance sheet of a business. Lower values of the ratio are favorable indicating less risk. Higher ratio is unfavorable because it means that the business relies more on external lenders; a higher risk.

​For example, let say we were analyzing Company A, B, and C.
  • Company A had total liabilities of $2,234,256.00 and Stockholders’ Equity of $5,300,250.00
  • Company B had total liabilities of $4,236,456.00 and Stockholders’ Equity of $3,560,879.00
  • Company C had total liabilities of $5,456,893.00 and Stockholders’ Equity of $7,987,564.00
Solutions:
  • Company A: $2,234,256.00/$5,300,250.00= 0.42
  • Company B: $4,236,456.00/$3,560,879.00= 1.19
  • Company C: $5,456,893.00/$7,987,564.00= 0.68
Results:
Company A shows favorable results since there ratio is lower than the other company on the list. It shows that there assets are financed more with investors or the owner cash. Company B show unfavorable results because they are using more of a credit line to support their business. They show more of risk because they need to pay off the lenders to keep them from defaulting on their payments.  Company C is doing alright since there ratio is not extremely high and show that they can continue to operate without much credit.   
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​Why Shoebox bookkeeping is a bad idea

5/28/2017

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Shoebox bookkeeping is a process of throwing all financial information into a ‘shoebox’ and that at the end of the year this is given to an accountant to record for taxes. All information is thrown in that might be important to the accounting process in a box. Simply dumping the paperwork into a single place and deciding that they will address it at a later date, at which time it will likely be too late to fix problems that might arise.
This includes:
  • Sales receipts
  • Expense receipts
Knowing the sales you make each month and the cost to run the business to make it a profit is crucial when know if you indeed making a good amount of income. Also it helps to project income and expense with a budget and statement of cash flow.
A good accounting system is critical to getting good financial information. So why don’t people always have one in place for their business? Excuses include:
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  • I don’t understand finance and accounting
  • I’m no good at math and accounting means I have to be a whiz with numbers
  • To understand accounting I need to learn bookkeeping
  • I save money by not paying a bookkeeper
  • I don’t know where to find a bookkeeper
  • I run my business based on gut feel
  • I don’t understand financial statements
 
No, shoebox accounting is not a good way to run the Profit end of your business. This can make it a hassle to finish and time consuming to complete.

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​HAVING A BUDGET AND KEEPING TRACK OF INCOME AND EXPENSE TO REACH FINANCIAL GOALS.

4/30/2017

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Creating a budget for yourself or business to give you a projection of how much money you’re making and spending throughout the year can give your insight on how to maximum your cash flow and keep cost low.
Why having a budget is useful:
  • Have control over your money
  • Keeps you focused on your money goals
  • Keep you aware of what is going on with your money
  • Helps you organize your spending and savings
  • Enables you to save for expected and unexpected costs
  • Provides you with an early warning for potential problems
I have created a template you can download to create your own budget for your personal or business use. 
 
budget.xlsx
File Size: 13 kb
File Type: xlsx
Download File


​To make sure that you have stay within the numbers of you budget you have created. I created a template to keep track of your income and expense. I made it simple to put in income and expense for each week to produce the report for each month and end of year.
You can also use it without the budget just to keep track of your income and expense. Some of the benefits of keeping track of your income and expense is:
  • It forces you to prioritize
  • It shines the light on spending habits
  • You’ll be aware of questionable charges
  • Gives you an idea on how to generate more revenue
p_l_template.xlsx
File Size: 40 kb
File Type: xlsx
Download File

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