Personal Finance guide

Accounting is one of the most important internal aspects to any business that is to be financially successful in today’s market. It is the process of documenting all relevant economic information about a firm and communicating that information to key players. Managers and Executives need accounting information to make decisions and run their business to achieve maximum profitability. Shareholders need accounting information to make informed investments.

There are many types of accounting that all have different roles in the business world. Probably the best-known and most ‘classic’ type of accountant is a CPA, or Certified Public Accountant. A CPA has a very diverse client list. They can serve anyone including individuals, private firms, large publicly traded corporations, the government, or non-profit organizations. They can perform the role of an independent auditor, tax advisor, or financial consultant.

When performing an audit, a CPA will produce an independent auditor’s report that will tell the client four key pieces of information. First it identifies the documents that were audited and describes that the purpose of this report is to express an opinion about the documents in questions. Next it explains the standards used to analyze the data. Third is the actual opinion of the auditor in regards to the financial documents reviewed. Finally, the auditor elaborates on his opinion regarding the effectiveness of the financial reporting of the firm.

Another type of accountant is a CMA, or Certified Management Accountant. A CMA serves a smaller customer base, because they typically work for a single firm. The major role is to advise the company on their financial management, accounting processes, and budgetary issues. A CMA may work with individual employees of that company, but their main function is to advise the executives on the company’s complete financial structure. They are often involved in major decisions for the company.

A subset of managerial accounting is cost accounting. A cost accountant works closely with the budget structure of a company. They are typically involved with determining the internal costs of many functions and the profitability of the routine company operations. Cost accountants have a very future-oriented job in that they are primarily concerned with using historical data to forecast what the prospective financial strength of the company will be.

A third major type of accounting is a financial accounting. Financial accountants are primarily responsible for the preparations of the financial documents for review by the corporate decision makers. Managerial accountants, cost accountants, top management, and shareholders use these documents to make major business decisions. Financial accountants assemble an annual report including balance sheets, income statement, statement of cash flows, and statement of change in owners’ equity (or retained earnings). These documents are usually targeted to an external audience.

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Financial and Tax Accounting

It is a common misnomer that and organization needs to use the same method of accounting depreciation for financial reporting and tax purposes. An organization must decide if it is cost effective to use more than one depreciation method and furthermore which method or combination of methods to use. Each method carries with it a distinct list of benefits and draw backs and can be customized to fit a company’s unique situation.

There are three main types of depreciation techniques.

Straight-Line – Simplest deprecation technique. A company estimates the salvage value of the item and the usable life. It then subtracts the scrap value from the original cost and divides by the life span in years to get the annual depreciation expense. The largest benefit of this method is that it is very simple to understand and easy to use. A major drawback to this technique is that it does not acquire all the possible tax benefit early in the life cycle, effectively leaving those tax dollars on the table longer.

Double-Declining Balance – This technique factors in the fact that an item is more useful near the time of purchase as opposed to near the end of its life. The organization records a larger expense of depreciation in the first few years and it continues to decline until the scrap value is reached. A major benefit to this method being largely front loaded; where most of the depreciation is taken at the beginning of the life cycle is in reducing the taxable income quickly. This method is more complicated and requires involvement of the technical staff to accurately estimate an items life expectancy.

MACRS – The method approved by the IRS. Similar to the Double-Declining balance method it allows for most of the depreciation expense to be absorbed near the beginning of an items life to maximize the tax benefit of the additional expense. This allows a company to retain more income early in the depreciation cycle while reducing their overall tax exposure. This carries the same benefits and drawbacks as the double declining balance method.

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The Flaw of Accounts Receivable in Financial Accounting to Non-accountants

In my previous publication, The Unresolved Flaws in Financial Accounting I addressed some of the complex flaws in financial accounting that add to the confusion and frustration non-accountants face in trying to decipher financial reports. This time, I look at accounts receivable.

Accounts receivable is an asset account in a balance sheet. It allows a company to hold revenues and expenses within the period they occur which is a generally accepted accounting principle. This recognizes transactions irrespective of when actual payments take place. What this means is that when a firm sells on account, it considers future payments for its goods and/or services as assets thus increasing revenue.

To a non-accountant investor or stockholder, this recording appears easy to understand on a newly released balance sheet. The truth is that there are other entries that derive from the accounts receivable recording. The net realizable value of this account is the actually amount that the firm expects it will actually receive in payments. Off the back, that means that the amount recorded in accounts receivable though making assets look good will not be actualized. This amount is however an estimate based on previous experiences, trends, and ratios.

The net realizable value creates another account, the allowance for bad debt expense. This account holds the difference between what that actual accounts receivable and the net realizable value. Most firms use an aging method, usually in 30-day blocks to make adjustments to the value of their assets on the balance sheet. These uncollectible payments are described as “contra assets” because they reduce the vale of previously declared assets.

Most non-accountants do not understand the forward and backward entries and adjustments to pages and pages of detail reporting regardless of how many pages of accompanying notes there are. The question becomes, why not subtract the estimated bad debt from the account receivable entry? The problem is that though the firm knows or rightfully estimates that some payments will not be received, it cannot write-off an account unless it specifically knows which accounts will be in default.

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Congratulations, you just bought a new truck for your landscaping business. You will now be more efficient because you no longer have to travel back and forth to get your tools to the job site. This new asset will take your business to the next level and you can now compete for those large jobs the competition gets every day. The question is, “how do you account for this large expense in your financial statements to your investors and your tax returns?” Depreciation is the accounting tool that allows you to account for the cost of this new asset.

Depreciation is an application of the matching principle. The purchase or buildings and equipment are recorded at their original cost. In our example, the new landscaping truck costs $30K, but the financial benefit from this new vehicle will not be realized until future jobs are earned. Therefore it is necessary to come up with some correlation between this expensive asset and the future economic benefit it brings to the company. Depreciation is that correlation. At face value, some think depreciation is just a recalculation of the new market value of an asset. This is not the case; depreciation applies a portion of that initial expense to the revenue earned for a given period of time. We will explore this relationship and how they are applied through straight-line depreciation and accelerated depreciation.

Straight-line depreciation takes the total cost of an asset, in our case $30K for the new truck, and divides it by the years of life for that asset. The straight-line depreciation method is most often used for reporting to stockholders because in early years it accounts for lower depreciation expense and therefore maximizes the revenue for that period. In our example, the trucks useful life is 10 years so we would take $30K and divide by 10 years to come up with yearly depreciation of $3K. During every fiscal year $3K would be applied to the income statement as an expense and reduce net income by $3K.

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Being the best is the dream of every man, when life should be in his corner with a growing need, the brain sometimes become stunted and dead ends to make the ideas of brilliant, but this time we will try to peel a little knowledge of the business experts in making the best ideas of the business world, like what’s the best idea, the main thing is.

Viewing Market Trend
Let us not be too ambitious to follow the trend of business at the market but want to follow something to the idea of our goals, create ideas and products you can sell but differs from the others, do not you too follow the market trend, because the market trend, usually survive not so long, because it is not making your product will sell even make your business opponent products become increasingly popular in the eyes of costumer.

Capital
Maximize your capital, by making the target list you will need, do not waste something that is not necessary, but more careful in detailing the expenditure.

Practice Your Idea
Do not wait for the next day if you want to succeed and be successful with billions of income, because something delayed it will even make your ideas become more clogged and a lot of disturbing questions in mind, if indeed these days you can practice, practice ideas right now your brilliant.

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