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Business Finance 101 – COS or COGS – Cost of Sales or Cost of Goods Sold – What it means

Business Finance 101 – COS or COGS – Cost of Sales or Cost of Goods Sold – What it means

COS or COGS – Cost of Sales or Cost of Goods Sold – What it means

Cost of Sales (COS) or Cost of goods sold (COGS) is the cost of the product that was sold to customers. It includes the cost of materials and direct labour used to produce the goods ready to sell. The cost of goods sold is reported on the profit and loss at the time/period the sales revenues of the goods sold are reported.

A retailer’s cost of goods sold includes the cost from its supplier plus any additional costs necessary to get the product into inventory and ready for sale. For example, a store purchases a book from a publisher. If the cost from the publisher is $60 plus $5 in delivery costs, the store reports $65 in its Inventory account until the book is sold. When the book is sold, the $65 is removed from inventory and is reported as cost of goods sold on the profit and loss.

COGS is usually the largest expense on the profit and loss of a company selling products or goods. Cost of Goods Sold are deducted from the sales/revenue.

Cost of goods sold is calculated in full, as follows:

Cost of beginning inventory + cost of goods purchased (net of any return stock) + freight-in – cost of ending inventory.

This account balance or this calculated amount will be deducted from the sales amount on the income statement, leaving a Gross Profit.

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Business Finance 101 – What is the difference between Current and Non-Current Liabilities?

Business Finance 101 – What is the difference between Current and Non-Current Liabilities?

What is the difference between Current and Non-Current Liabilities?

Businesses have liabilities – payments that are to be paid soon or later (long term) they are divided into Current and Non-Current.

Current Liabilities are obligations due to be paid within 12 months or less of the date of a company’s balance sheet and will require the use of a current asset (eg money in bank) or will create another current liability if paid by debt or loan.

Current liabilities are usually listed in the following order:

  1. Credit cards and overdraft accounts, loans less than 12 months;
  2. Accounts payable (trade creditors);
  3. The remaining current liabilities such as payroll taxes payable, superannuation, income taxes payable, interest payable and other accrued expenses.

Often, all the parties who are owed current liabilities are called creditors. In special situations, a legal arrangement may be created that gives preference and then those parties are called secured creditors. The majority of creditors are known as unsecured.

Non-Current Liabilities are liabilities that are to be paid over more than 12 months – typically business or vehicle loans and financing such a Chattel Mortgage. Others include Long Service Leave Accruals, and Directors Loans.

Is the business solvent? One overall method that is used to determine if a business is trading in a solvent manner, is to check if the Current Assets are more than Current Liabilities. The amount of current liabilities is used in financial ratios – such as:

  • Working capital (current assets minus current liabilities) and the company’s;
  • Current ratio (current assets divided by current liabilities).

These give an indication of the company health.

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Business Finance 101 – Liability vs debt – What is the difference?

Business Finance 101 – Liability vs debt – What is the difference?

Liability vs debt – What is the difference?

What is the difference between liability and debt? Often, people use liability and debt when they mean the same thing.

For an example, in the debt-to-equity ratio, debt usually means the total amount of liabilities. In this case, debt includes short-term such as overdrafts and credit cards and long-term loans and bonds payable, and normally also includes accrued wages and utilities, income taxes due, and other liabilities.

In other words, sometimes debt is means all obligations…all amounts owed…all liabilities.

However, other times, the word debt is used more narrowly to mean only the formal, written financing contracts such as short-term loans payable, long-term loans payable, and bonds payable – example, hire-purchase, equipment finance, etc.

So look further, to know WHAT is being used – be clear!

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Business Finance 101 – Do you know – What are the Accounting Principles?

Business Finance 101 – Do you know - What are The Accounting Principles?

Do you know – What are The Accounting Principles?

In accounting (recording the monetary values of financial transactions) there are general rules and concepts developed over many decades that apply. These are called basic accounting principles and guidelines and are the groundwork on which more detailed, complicated, and legalistic accounting rules are based. In Australia. The Australian Accounting Standards Board (AASB) uses the basic accounting principles and guidelines as a basis for their own detailed and comprehensive set of accounting rules and standards.

There is a phrase “generally accepted accounting principles” (or “GAAP“) which consist of three important sets of rules: (1) basic accounting principles and guidelines, (2) detailed rules and standards issued by AASB, and (3) the generally accepted industry practices.

When a company distributes its financial statements to the owners or the public, it is required to follow generally accepted accounting principles in the preparation of those statements. Further, if a company’s shares are publicly traded, federal law requires the company’s financial statements be audited by independent public accountants. Both the company’s management and the independent accountants must certify that the financial statements and the related notes to the financial statements have been prepared in accordance with GAAP.

GAAP is useful because it attempts to standardise and regulate accounting definitions, assumptions and methods. Because of generally accepted accounting principles we are able to assume that there is consistency from year to year in the methods used to prepare a company’s financial statements. And although variations may exist, we can make reasonably confident conclusions when comparing one company to another, or comparing one company’s financial statistics to the statistics for its industry. Over the years the generally accepted accounting principles have become more complex because financial transactions have become more complex.

The Accounting Standards are split into various categories eg “Statement of Cashflows”, “Construction Contracts” etc, and a list with the most recent updates/ pronouncements for Australia can be found HERE.

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Business Finance 101 – What does accounting equation mean?

Business Finance 101 – What does accounting equation mean?

What does accounting equation mean?

The Accounting Equation is used by small and large business, and gives a financial position of the business – ie its value (also known as equity), after debts/liabilities. The Accounting Equation or financial position is calculated from three items – assets (what it OWNS), liabilities (what is OWES) and equity (the difference between assets and liabilities, or owner’s equity).

The accounting equation is a simple way to understand how these three amounts relate to each other, and written –

Assets – Liabilities = Equity

It is also reported another way (eg USA)

Assets = Liabilities + Owner’s Equity for a small business sole proprietor

The accounting equation for a company/corporation is:

Assets = Liabilities + Stockholders’ Equity

Assets are the company’s resources —what the company owns of value – cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, and goodwill. From the accounting equation, we see that the amount of assets must equal the combined amount of liabilities plus owner’s (or stockholders’) equity.

Liabilities are the company’s obligations—what the company owes – notes or loans payable, accounts payable, salaries and wages payable, interest payable, superannuation, and income and payroll taxes payable.

Owner’s equity or stockholders’ equity is the amount left over after liabilities are deducted from assets:

Assets Liabilities = Owner’s (or Stockholders’) Equity. It also reports the amounts invested into the company by the owners plus the cumulative net profit/income of the company that has not been withdrawn or distributed to the owners.

With accurate records, the accounting equation will always be “in balance,” meaning the left side should always equal the right side. The balance is maintained because every business transaction affects at least two of the company’s accounts. As an example, if a company borrows money from a bank, the company’s assets will increase and its liabilities will increase by the same amount. When a company purchases inventory for cash, one asset will increase (inventory) and one asset will decrease (bank paid for the stock). Because there are two or more accounts affected by every transaction, the accounting system is referred to as double entry accounting.

A company keeps track of all of its transactions by recording them in accounts in the company’s general ledger. Each account in the general ledger is designated as to its type: asset, liability, owner’s equity, sales/revenue, expense, profit, or loss account.

Balance Sheet and Profit & Loss

The balance sheet is also known as the statement of financial position and it reflects the accounting equation. The balance sheet reports a company’s assets, liabilities, and owner’s (or stockholders’) equity at a specific point in time. Like the accounting equation, it shows that a company’s total amount of assets equals the total amount of liabilities plus owner’s (or stockholders’) equity.

The profit and loss or income statement is the financial statement that reports a company’s sales/revenues and expenses and the resulting net profit/income. While the balance sheet reports one point in time (the FINAL Balance at a date), the profit & loss covers the total amount over a time interval or period of time (eg a month). The profit and loss will explain part of the change in the owner’s or stockholders’ equity during the time interval between two balance sheets, as the profit or loss is reported on the balance sheet.

Understand the Balance Sheet HERE

Understand the Profit & Loss HERE

Learn why Profit does not equal Cash HERE

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Business Finance 101 – RESC – Reportable Employer Superannuation Contributions – a Summary

Business Finance 101 – RESC – Reportable Employer Superannuation Contributions – a Summary

Business Finance 101 – RESC – Reportable Employer Superannuation Contributions – a Summary

To ensure fairness in the application of income tests and to ensure that the government assistance is consistent and fair based on gross incomes, the Federal Government requires employers to record the reportable employer superannuation contributions figures on payment summaries from the financial year 2009-10 onwards.

Reportable Employer Superannuation Contributions (RESC) are the portion of the employer contribution that the employee has influenced, for example superannuation contributions made by the employer under the terms of a salary sacrifice agreement, made in a financial year (1 July to 30 June) to a superannuation fund for an employee.

Reportable employer superannuation contributions do not include – super guarantee contributions (SG), contributions mandated by industrial agreements that the employee does not influence, or post tax member contributions.

Which types of super payments are RESC?

Legislative Employer Contributions (Super Guarantee (SG))                                 No

Refers to the federal legislation based employer contribution of 9.50% in 2015-2017 tax years currently. Known as Concessional Contributions – the employer gets a tax concession (deduction) at year end.

Group Contract Employer Contributions such as a Collective Agreement          No

Refers to agreement such as those found in awards and enterprise bargaining documents that result in all affected employees being entitled to a greater employer contribution.

Employee Personal Deductions – treated as an AFTER tax deduction                 No

The Gross Payment amount on the employee’s payment summary is not reduced by this deduction. It is also known as Non-Concessional contribution.

Additional Employer Contributions BEFORE tax                                                         Yes

These are contributions which exceed what the employer needs to contribute.  The effect is for the gross payment to the employee is lower than what it would otherwise had been. Also known as Concessional Contribution.

Employee Personal Deductions – treated as a BEFORE tax deduction                 Yes

This is known as a salary sacrifice deduction and results in the Gross Payments figure on the employee’s payment summary being reduced. Also known as Concessional Contribution.

NOTE –

Superannuation Guarantee Act exempt employees  YES – If employee negotiated or influenced

If the employer choose to pay superannuation for SGA exempt employees, those contributions will be reportable as RESC only if the employee has negotiated and influenced the decision of the employer.

If the employer has made the decision themselves to go ahead and pay super in the above scenarios even though they may not be required to (by award or collective agreement), then that super will not be reportable as long as the employer can substantiate that this was done for example for Administrative Simplicity and it has not been influenced by the employee.

For more information refer to ATO for Reportable Superannuation ContributionsInstructions for employers (NAT 72916)

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Business Finance 101 – The Accumulated Depreciation asset account

Business Finance 101 – The Accumulated Depreciation asset account

The Accumulated Depreciation asset account

The Accumulated Depreciation account is an asset account  on a company’s balance sheet that reports the amount of an asset’s cost that has been depreciated (written off) up to the date of the balance sheet. The asset’s original cost is recorded another asset account eg Motor Vehicle at Cost, Office Equipment at Cost, Plant and Equipment at Cost.

They are shown together with the Assets at Cost account debited when assets are posted there and the Accumulated Depreciation is credited each time that Depreciation Expense is debited (usually for small business depreciation is calculated at year end by the accountant). Since Accumulated Depreciation will have a continually increasing credit balance it is referred to as a contra asset account.

As an example let’s say that at the beginning of the current year a company’s asset account Plant & Equipment has a balance of $50,000 which will be the at-cost amount (net GST) from the previous year. From the time of purchase until the beginning of the current year the related Accumulated Depreciation account has accumulated a credit balance of $25,000 over the past 3 years. The Balance Sheet will also report the net of $50,000 less $25,000 leaving a Plant & Equip balance of $25,000 which will be used to calculate the next depreciation allowable. So at the end of the current year the company debits Depreciation Expense for $7,500 (if that is the calculation at 30%) and credits Accumulated Depreciation Asset for $7,500. At the end of the current year the credit balance in Accumulated Depreciation will be $32,500.

Start of Year       

Plant & Equip                 $50,000 is constant unless more equip purchased

Accum Deprec               -$25,000

Total Plant & Equip     $25,000

 

End of year

Plant & Equip                  $50,000

Accum Deprec                -$32,500                has $25,000 plus $7,500 (if that is the depreciation calculated)

Total Plant & Equip      $17,500

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