The knowledge database provides you information from complex structured and unstructured information in a simple way.
What is accounting?
Accounting is how you record, interpret, and summarize your financial profile to anyone interested in your business, including you. This can help everyone involved in your business to make informed decisions about investing or becoming a part of your business. Most organizations typically report their financial information on a monthly basis or, at the very least, annually using an accounting method.
What is the difference between the cash basis and the accrual basis of accounting?
Under the cash basis of accounting (cba):
- Revenues are reported on the income statement in the period in which the cash is received from customers.
- Expenses are reported on the income statement when the cash is paid out.
Under the accrual basis of accounting (aba):
- Revenues are reported on the income statement when they are earned—which often occurs before the cash is received from the customers.
- Expenses are reported on the income statement in the period when they occur or when they expire—which is often in a period different from when the payment is made.
The accrual basis of accounting provides a better picture of a company’s profits during an accounting period. The reason is that the income statement prepared under the accrual basis will report all of the revenues actually earned during the period and all of the expenses incurred in order to earn the revenues. The accrual basis of accounting also provides a better picture of a company’s financial position at a moment or point in time. The reason is that all assets that were earned are reported and all liabilities that were incurred will be reported. The accrual basis of accounting is required because of the matching principle.
What is Accounts Payable?
Accounts Payable (AP) are the vendors you need to pay for services or products you’ve received (ie, what you owe). We can divide AP to current or short term (less than one year old), long term (more than one years old), over due.
What is Accounts Receivable?
Accounts Receivable (AR) are those who need to pay you for your offering, or the services and products you provide (ie, what clients owe you). We can divide AR to current or short term (less than one year old), long term (more than one years old), over due.
What are Assets?
Assets are elements in Balance Sheet (listed on the left side) such as equipment, accounts receivable, cash, prepaid expenses, patents and other intangible assets, inventory, and other property you own that have quantifiable monetary value. In short everything from your business’ physical location to the products you sell can be considered assets. We differentiate Current Assets (or sometimes Short Term) and Long Term Assets.
What are Liabilities?
A company’s liabilities are the debts and obligations you owe. These are listed on the right side of your balance sheet including loans and mortgages, accounts payable, expenses, and any deferred revenue. These may sound like a bad thing, but liabilities are essential to financing your expansions and operational (production) costs. Without liabilities it would be impossible to gain assets (the left side of your balance sheet), which is part of the reason both sides of your balance sheet need to be equal at all times.
What is Working Capital?
A company’s working capital is the difference between the amount of Current Assets and Current Liabilities it currently has, and indicates the company’s immediate viability. You can also analyze your company’s Working Capital Ratio (Assets/Liabilities) to see if you have enough assets to cover your current debts at any given time. The higher this ratio is (further from 1, or any smaller integer) the better!