Account Keeping Plus – Administration, Bookkeeping, Compliance News & Tips MYOB Reckon Quickbooks Xero Software TrainingSmall Business

Making Business Books and Accounting Come Alive! MYOB Reckon Xero


Leave a comment

Business Finance 101 – What is Working capital – and how it can be used

Business Finance 101 – What is Working capital – and how it can be used

What is Working capital – and how it can be used

Working capital is defined as the difference between current assets (CA) and current liabilities (CL) at a specific date. The CA and CL amounts are found on your company’s balance sheet. For example, if your company’s balance sheet has current assets of $150,000 and current liabilities of $120,000 then your company’s working capital is $30,000.

Working Capital = Current Assets – Current Liabilities
Normally we want cash and assets that can be turned into cash within 12 months, such as Inventory, debtors who owe the company etc (ie “Current” means within 12 months) to be GREATER than Current (12 months) Liabilities.

But with a significant amount of working capital, a company can still have a period of cash shortage if its current assets are not turning to cash. As an example, a company with most of its current assets locked up in inventory. Or if a company has a large accounts receivables that are not being collected, but even still, this large working capital situation isn’t much immediate help when you can’t meet the payroll run!

There are also other financial ratios use the working capital components such as the current ratio, quick ratio, accounts receivable turnover ratio, and inventory turnover ratio.

Good management means keeping watch on current assets (receivables and inventory) to keep the cash coming into the bank.

Get a FREE 30 min answer to your query, and FREE ongoing email or phone support – No-one offers as much! Call and you also get FREEAvoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

Email info@accountkeepingplus.com.au or call 0407 361 596 Australia

Advertisements


Leave a comment

Business Finance 101 – Current Ratio – What is it and what does it show?

Current Ratio – What is it and what does it show?

Business Finance 101 – Current Ratio – What is it and what does it show?

There are several financial ratios including the current ratio which shows the proportion of current assets to current liabilities. The current ratio is known an indicator of a company’s liquidity. Put in another way, it shows when there is a large amount of current assets in relationship to a small amount of current liabilities there is some assurance that the obligations coming due will be paid.
As an example if a company’s current assets are $500,000 and its current liabilities are $250,000 the current ratio is 2:1. If the current assets are $600,000 and the current liabilities are $500,000 the current ratio is 1.2 : 1. Clearly a larger current ratio is better than a smaller ratio in comparison to current liability. Generally, a current ratio that is less than 1:1 indicates insolvency, and the preference is at least 2:1, or over 2.
When benchmarking a company, or comparing your own, it is wise to compare a company’s current ratio to those in the same industry. It is also worth keeping a close look at the trend of the current ratio for a given company over time. Is the current ratio improving over time, or is it deteriorating?
The composition of the current assets is also an important factor. If the current assets are predominantly in cash, marketable securities, and accounts receivable, that is more valuable than having the majority of the current assets in slow-moving inventory.

Need help? Not sure? Call for FREE 30min advice / strategy session today!

Call 0407 361 596 Aust and also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!


2 Comments

Business Finance 101 – What is Equity?

Business Finance 101 – What is Equity?

Business Finance 101 – What is Equity?

I am asked at times – what is equity? If we deduct Liabilities from the Assets of the Business (at cost value), we are left with Equity. These are listed in the Balance Sheet financial statement. Another way is –

ASSETS – LIABILITIES = EQUITY

Equity is also sometimes used to refer to as ownership of shares in a company.

In a company Balance Sheet it is the amount of money contributed by the owners/share/stock-holders PLUS the Retained Earnings (Profit/Loss of past years).

Also note – because assets like plant and equipment are entered at their COST amount (less GST) the MARKET value of the asset is not represented, unless an adjustment is made (by journal) to reflect change of value (and increase or decrease of asset value are then balanced in a special sale or cost of sale asset account). Hence the Company Market Value may not be the true Market Value, unless the adjustment has been made.

Equity can be called Owner’s Equity – for Sole Proprietors, or Shareholder/Stockholder Equity for a company (usually with more than one director).

Owner’s Equity may consist of several accounts –

1.     Capital

2.     Drawings and

3.     Current Year Net Income/Earnings

Shareholder Equity may consist of accounts such as –

1.   Paid-In Capital

  • Preferred Stock
  • Common Stock
  • Paid-In Capital in Excess of Par Value
  • Treasury Stock (stock re-purchased from shareholders)

2.   Retained Earnings/Net Income 

3.   Less Treasury Stock

Equity is also used in several important ratios that help determine financial health of the business, such as Debt to Equity and Return on Equity.

Need help? Not sure?

Call for FREE 30min advice / strategy session today! 0407 361 596

Call 0407 361 596 Aust and also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!


Leave a comment

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.

Get a FREE 30 min answer to your query, and FREE ongoing email or phone support – No-one offers as much! Call and you also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

Email info@accountkeepingplus.com.au or call 0407 361 596 Australia


Leave a comment

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.

Get a FREE 30 min answer to your query, and FREE ongoing email or phone support – No-one offers as much! Call and you also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

Email info@accountkeepingplus.com.au or call 0407 361 596 Australia


Leave a comment

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!

Get a FREE 30 min answer to your query, and FREE ongoing email or phone support – No-one offers as much! Call and you also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

Email info@accountkeepingplus.com.au or call 0407 361 596 Australia


Leave a comment

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.

Get a FREE 30 min answer to your query, and FREE ongoing email or phone support – No-one offers as much! Call and you also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right!

Email info@accountkeepingplus.com.au or call 0407 361 596 Australia