Reconciliation (Term Tuesday)

Reconciliation aka Balancing the Check Book

Definition

Investopedia defines Reconciliation as “An accounting process used to compare two sets of records to ensure the figures are in agreement and are accurate. Reconciliation is the key process used to determine whether the money leaving an account matches the amount spent, ensuring the two values are balanced at the end of the recording period.” http://www.investopedia.com/terms/r/reconciliation.asp

If you use a Bookkeeping software you most likely enter the transactions that go through your bank account or credit cards into the software but just “Entering” those transactions does NOT mean you have reconciled your account most bookkeeping software’s have another area in which you compare your accounts in two different forms to make sure everything has been entered at the end of each month! If you have not been completing this second area of reconciliation you might want to contact a bookkeeper to help you to actually complete your Reconciliation’s.

 

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Cash Flow (Term Tuesday)

Cash Flow

Definition

  1. Investopedia defines Cash Flow as “A revenue or expense stream that changes a cash account over a given period. Cash inflows usually arise from one of three activities – financing, operations or investing – although this also occurs as a result of donations or gifts in the case of personal finance. Cash outflows result from expenses or investments. This holds true for both business and personal finance.” Or “An accounting statement called the “statement of cash flows”, which shows the amount of cash generated and used by a company in a given period. It is calculated by adding noncash charges (such as depreciation) to net income after taxes. Cash flow can be attributed to a specific project, or to a business as a whole. Cash flow can be used as an indication of a company’s financial strength.” http://www.investopedia.com/terms/c/cashflow.asp
  2. Another great definition or explanation of Cash Flow from Wikipedia “Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, limited period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company’s value and situation. Cash flow can be used, for example, for calculating parameters: it discloses cash movements over the period.”
  • “to determine a project’s rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return and net present value.”
  • “to determine problems with a business’s liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable.”
  • “as an alternative measure of a business’s profits when it is believed that accrual accounting concepts do not represent economic realities. For instance, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares or raising additional debt finance.”
  • “cash flow can be used to evaluate the ‘quality’ of income generated by accrual accounting. When net income is composed of large non-cash items it is considered low quality.”
  • “to evaluate the risks within a financial product, e.g., matching cash requirements, evaluating default risk, re-investment requirements, etc.” http://en.wikipedia.org/wiki/Cash_flow

Here is a link to brief informational video on “Understanding Cash Flow” from Investopedia:

http://www.investopedia.com/video/play/what-is-cash-flow/

 

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Cost of Goods Sold (Term Tuesday)

Cost of Goods Sold aka COGS or Cost of Revenue

1st of all please remember Cost of Goods Sold does not apply to just product based companies if you provide a Service you will have cost of services provided as well!

Definition

  1. Investopedia defines Costs of Goods Sold as “The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. COGS appears on the income statement and can be deducted from revenue to calculate a company’s gross margin. Also referred to as cost of sales.” http://www.investopedia.com/terms/c/cogs.asp
  2. QuickBooks Help defines Cost of Goods Sold as “The Cost of Goods Sold account is added to your chart of accounts the first time you add an inventory item. QuickBooks uses this account to track how much you paid for goods and materials that were held in inventory and then sold. While an item is held in inventory, its value is tracked in the Inventory Asset account, which is also added to your chart of accounts when you create your first inventory item. As soon as that item is sold using an invoice or sales receipt, its value is taken out of the Inventory Asset account and put into the Cost of Goods Sold account.”

For a service based company a few items that might be included but not limited to in your COGS account could include materials used to provide service, direct labor, subcontracted labor and commissions.

http://www.as-bookkeeping.com

Here is a link to brief informational video on Cost of Goods Sold by Investopdedia:

http://www.investopedia.com/video/play/what-are-cogs/

COGS

 

Accounts Payable aka A/P & Bills (Term Tuesday)

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Accounts Payable aka A/P & Bills

Definition

  • “Any amount owed as the result of a purchase of goods or services on a credit basis. Although a firm making a purchase issues no written promise of payment, it enters the amount owed as a current liability in its accounts. Companies often incur this type of short-term debt in order to finance their inventories, especially in industries where inventory turnover is rapid.” http://www.merriam-webster.com/dictionary/account%20payable
  • QuickBooks help center defines this account “The record of the outstanding bills of a business. Accounts Payable is called A/P for short. (Even though the word accounts is plural, QuickBooks uses a single account on the chart of accounts to track all outstanding bills.)”

“An account that QuickBooks automatically adds to your chart of accounts the first time you enter a bill. QuickBooks uses this account to track the money your business owes to others. When you enter a new bill, or pay off outstanding bills, QuickBooks records the transaction in the register for your Accounts Payable account.”

“Your chart of accounts lists the type of this account as “Accounts Payable.” If you need to use more than one of this type of account in your business, you can add additional “accounts payable” accounts to the chart. When you have more than one accounts payable account, QuickBooks lets you choose the account you want to use when you enter and pay bills.”

Negative Amount Showing in your Accounts Receivable’s

If you are showing a negative balance for a customer in your customer center or in your Balance Sheet this is a result of 2 things.

1)      You received money from a Customer but did not create an Invoice for products or services provided.

2)      You owe a customer money due to a refund, overpayment, or if you have given them a gift certificate of some kind.

Quickbooks Accounts Receivable

QuickBooks help center defines accounts receivable as “The record of money owed to your business for goods or services; that is, invoices for which your business hasn’t received payment yet. Accounts Receivable is called A/R for short. (Even though the word “accounts” is plural, QuickBooks uses a single account on the chart of accounts to track all outstanding invoices.)”

The accounts receivable account is “An account that QuickBooks automatically adds to your chart of accounts the first time you write an invoice. QuickBooks uses this account to track the money owed to your business. When you write an invoice or receive a payment from a customer, QuickBooks records the transaction in the register for your Accounts Receivable account.”

“Your chart of accounts lists the type of this account as “Accounts Receivable.” If you need to use more than one of this type of account in your business, you can add additional “accounts receivable” accounts to the chart. When you have more than one accounts receivable account, QuickBooks lets you choose the account you want to use when you write an invoice or enter a customer payment.”

Definition of Accounts Receivable

Accounts Receivable (aka A/R)

“Any amount owed to a business as the result of a purchase of goods or services from it on a credit basis. Although the firm making the sale receives no written promise of payment, it enters the amount due as a current asset in its books. Accounts receivable constitute a major portion of the assets of many companies, and they may even be sold or pledged as collateral to obtain loans.”  http://www.merriam-webster.com/dictionary/accounts%20receivable

Tip When Entering Transactions

DATE!!!  QuickBooks is date driven so it is very important that when you are entering transactions you use the correct date of the transaction!

Always use the date of when the transaction occurred such as the receipt date, date you wrote the check, or the day you deposited an item to your account.

Tip When Entering Visa / Debit Card transactions

When entering transactions for your Visa / Debit Card you will use the “Write Check” (Quick Shortcut on Keyboard Ctrl W) option within Quickbooks.  Choose what you like to refer to these transactions as either Debit or Visa.  In the “No.” field enter your preferred term for these transactions such as Visa.

Why Business & Personal Funds Should Be Separate?

Check out this video of the importance of keeping your business & personal funds seperate!.

http://www.entrepreneur.com/video/224658