Accounting

Equity vs Debt Financing: What You Should Know

If you’re in the early stages of launching a new business, you’ll need to raise capital to cover expenses like payroll, inventory, insurance, equipment and more. There’s an old saying that it takes money to make money. Regardless of what type of business you intend to run, you’ll need to purchase products and services to get it off the ground. With that said, there are different financing options available for new businesses, including equity and debt financing.

What Is Debt Financing?

Debt financing refers to borrowing money from a lender under the agreement that you’ll repay it according to the lender’s terms. It’s called “debt financing” because it requires businesses to take on debt. The lender loans you money to use for your business, but you’ll have to pay it back — along with interest in most cases — to comply with the terms and conditions created by the lender.

Not all debt financing is the same. Granted, your business will take on debt when using debt financing, but some forms are easier to obtain than others. Secured debt financing, for example, requires the use of assets with a monetary value as collateral. You essentially “secure” this form of financing using collateral. As a result, banks and lenders have more lenient requirements for secured debt financing as opposed to unsecured debt financing, the latter of which doesn’t use or otherwise require collateral.

What Is Equity Financing?

An alternative to debt financing is equity financing. Equity financing can provide you with money to launch your new business as well, but it’s a completely different form of funding. With equity financing, neither you nor your business will take on debt. Instead, it allows you to sell some of your business’s shares to a financial institution or investment firm.

It’s called “equity financing” because it involves the sale of a company’s equity. Therefore, you won’t own 100% of your business if you use this method to raise capital. But the good news is that you won’t take on debt from equity financing, either.

So, should you use debt financing or equity financing to raise capital for your new business? It really depends on the type of business you operate as well as your own goals and objectives. Some businesses prefer the simplicity of debt financing, whereas others prefer equity financing. Assess your business and goals and objectives to determine which financing vehicle is right for you.

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What Is a Fixed Asset in Accounting?

From retail stores and coffee shops to e-commerce stores and construction companies, all businesses have assets. In accounting, an asset any resource owned by a business that offers future value. In other words, it’s something that a business can convert into revenue. There are different types of assets used in business accounting, however, one of which is fixed. So, what are fixed assets exactly, and how do they compare to other types of assets?

Fixed Assets Explained

Also known as tangible assets, fixed assets are assets — resources of future value owned by your business — that cannot be converted into money within a short period of time, typically a year. An example of a fixed asset is heavy machinery owned by a construction company. Even if a piece of heavy machinery has monetary value, it may take a while for the construction company to sell. Therefore, it’s considered a fixed asset.

Another example of a fixed asset is a fleet of trucks owned and operated by a transportation company. Like heavy machinery, trucks cannot be easily sold or otherwise converted into cash, so they are considered a fixed asset. Regardless, all fixed assets are defined by their ability to be converted into cash within a short period of time.

Recording the Depreciation of Fixed Assets

Because they cannot be easily converted into cash within a short period of time, you should calculate the depreciation of your business’s fixed assets for tax purposes. The Internal Revenue Service (IRS) allows businesses to deduct depreciation of fixed assets from their taxes.

If you use Quickbooks Desktop to keep track of your business’s finances, you can easily calculate the depreciation of your fixed assets. The software contains a special feature known as Fixed Asset Manager (FAM) that uses up-to-date IRS standards to calculate how much your fixed assets have depreciated.

It’s important to note that FAM isn’t available in all versions of Quickbooks. You’ll only find this feature in Quickbooks Premier Accountant, Enterprise Accountant and Enterprise.

Fixed vs Current Assets

Current assets, on the other hand, are assets that can be converted into money within a short period of time. Inventory, for example, is typically considered a current asset. A retail apparel store may have a surplus of shirts and jeans. Because the store sells these items, they are considered a current asset.

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Guide to The Weighted Average Cost (WAC) Accounting Method

Weighted average cost (WAC) is an accounting practice used extensively by retailers, e-commerce companies and other businesses that sell physical products. Used by business business-to-consumer (B2C) and business-to-business (B2B) companies, it provides a better understanding of a business’s cost of goods available and its inventory. To learn more about the WAC accounting method and how it’s performed

Calculating WAC: What You Should Know

To calculate WAC for your business, you must take your cost of goods available and divide it by the number of units available. This number will reflect the WAC for each of those available units. Still confused? Here’s an example: If your cost of goods available is $50,000 and you have 5,000 units of that product available, the WAC per unit of that product is $10.

Benefits of Using the WAC Accounting Method

There are several benefits to using the WAC accounting method, one of which is simplicity. From an outsider’s perspective, calculating WAC may seem like a tedious and difficult process, but it’s actually quite easy. The only numbers required to calculate WAC are the cost of goods available and the number of units available. Once you’ve identified those two numbers, you can calculate the WAC for the product.

Using the WAC accounting method can also help you understand how much it costs to produce a product, per unit. When a business handles hundreds or thousands of orders per day, it may struggle to keep track of costs. This is where the WAC is helpful, however. This accounting method attaches a per-unit cost to the product, allowing businesses to see how much they spend to product or acquire a product that they sell.

Cost of Goods Available Isn’t the Same as COGS

It’s important to note that cost of goods available is not the same as cost of goods sold. The cost of goods sold (COGS) refers to the value of the product’s sales. In comparison, cost of goods available refers to the value of inventory in addition to the cost of goods purchased.

Hopefully, you have a better understanding of the WAC accounting method after reading this. To recap, this method is used to calculate the “weighted average cost” of a specific product. It’s performed by taking the cost of goods available and dividing it by the number of units available, resulting in the product’s WAC.

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What Is Debt Ratio in Accounting?

Debt ratio is a frequently overlooked financial metric. When running a business, you’ll probably focus on your net revenue simply because this reveals the total amount of profits your business earns in a given period. While important, however, there are other financial metrics you should track, including debt ratio. So, what is debt ratio in accounting, and how do you calculate your business’s debt ratio?

Debt Ratio Explained

Debt ratio refers to the difference between your business’s total liabilities and its total debt. To calculate debt ratio, take your business’s total liabilities and divide it by its total assets, at which point you’ll have your business’s debt ratio.

Here’s an example of how to calculate debt ratio: Let’s say your business has $500,000 in total assets and $250,000 in total liabilities. Take $250,000 and divide it by $500,000. This equals a debt ratio of 0.5. Any debt ratio below 1 is good because it means that your business’s total assets are greater than its total liabilities. If your business’s debt ratio is higher than 1, it means the cost of your liabilities is greater than the value of your assets.

Assets vs Liabilities:

To calculate debt ratio, you’ll need to add up all your business’s assets as well as its liabilities. Assets, of course, are something of value that provides economic benefit for your business. In comparison, liabilities include debt that your business is required to pay.

Assets may include your business’s cash, equipment, vehicles, office furniture and stock shares. Liabilities may include accounts payable, salaries payable, interest payable, income taxes payable and customer deposits. For effective debt ratio tracking, you must calculate all your business’s liabilities and divide it by all your business’s assets.

The Importance of Tracking Debt Ratio

Tracking your business’s debt ratio is important for several reasons. For starters, it provides a better understanding of your business’s cash flow. A high debt ratio will restrict your business’s cash flow, which could hinder your operations and prevent your business from growing and expanding into new markets. Your business’s debt ratio can also affect its a eligibility for funding. If you are seeking a loan to fund your business, lenders may scrutinize your debt ratio to determine if you are a suitable candidate. While private lenders are always an option, many banks will reject your application for a loan if your business has a high debt ratio.

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Accrual vs Cash Basis Accounting: What’s the Difference?

Accounting is an essential step to running a business. Regardless of industry, all businesses need to keep track of their expenses and revenue so that they can optimize their operations for higher profits and pay the correct amount of taxes. But there are different types of accounting from which business owners can choose, the two most common of which include accrual and cash basis.

How Cash Basis Accounting Works

With cash basis accounting, a business records revenue from the sale of a service or product when it receives payment from the customer. Whether the customer pays using cash, credit card, debit card or check, the business doesn’t record the payment as revenue until it has received the funds from the customer. Some basis exclusively use cash basis accounting. Retail stores, for example, typically use this method because they exchange products for money at the same time.

Cash basis accounting offers certain benefits, such as simplicity. It’s easy for businesses to record revenue when they receive payment from the customer. Furthermore, there’s no need to worry about accounts receivables affecting a business’s books. With cash basis accounting, accounts receivables — unpaid invoices — aren’t recorded as revenue.

How Accrual Accounting Works

Accrual accounting takes a different approach. Rather than recording revenue when a business receives payment from a customer, accrual accounting requires businesses to record revenue when a customer makes a purchase. This may sound confusing, but think of it like this: Purchasing and paying for a product or service are two separate things. You can purchase dinner at a restaurant, for example, and you won’t be required to pay for it until after your meal.

Many businesses allow customers to pay for their products or services after purchasing them. With accrual accounting, businesses record revenue when a customer makes a purchase. Customers may pay for their product or service when they initially purchase them. In other cases, customers may wait and pay at a later date, assuming it’s allowed by the business. Accrual accounting ignores the reception of payment from a customer. Instead, it revolves around recording revenue when a customer purchases or orders a product or service

Accrual accounting is the preferred method among business owners, primarily because it views accounts receivables as assets — which they are. On the other hand, however, it isn’t an effective accounting method for measuring a business’s cash flow.

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What Is Current Ratio in Accounting?

Financial accounting is an important task associated with running a business. If you don’t know how much money you spend and how much you generate, you won’t be able to optimize your business’s operations, resulting in lower profits. But there are a number of metrics used to measure a business’s financial health, one of which is current ratio. As a business owner, you should familiarize yourself with current ratio so that you can effectively use this metric in your financial accounting efforts.

Current Ratio Explained

Current ratio is a financial metric used to determine if a business has the adequate amount of money and resources needed to cover its short-term expenses. It’s calculated by taking a business’s current assets and dividing it by the business’s current liabilities. If your business has $500,000 in current assets and $300,000 in current liabilities, its current ratio would be 1.66.

A current ratio above 1.0 indicates that your business’s assets are worth more than the cost of its liabilities. Of course, that’s a good thing. If your business’s liabilities are higher than its assets, your business may spend more money than what it earns. In this regard, current ratio is primarily used to measure a business’s liquidity.

Current Ratio Vs Quick Ratio

Current ratio is often confused with quick ratio. Both of these financial metrics reveal a business’s liquidity by comparing its assets with its liabilities. However, that doesn’t necessarily mean they are the same. The difference between current ratio and quick ratio is that the former takes into account all assets, whereas the latter only takes into account highly liquid assets that can be easily converted to cash in a short period of time. Examples of assets used in the quick ratio formula include cash and accounts receivables.

How to Improve Your Business’s Current Ratio

There are several steps you can take to improve your business’s current ratio. First, try to keep your liabilities to a minimum. In other words, avoid taking out loans or using credit cards to fund your business. Second, work to increase your business’s current assets. With more assets, you’ll achieve a higher current ratio. There are countless ways to increase assets, such as exploring new markets or releasing new products or services. With a little work, you can improve your business’s current ratio, allowing for greater liquidity.

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The 5 Primary Types of Adjusting Journal Entries in Accounting

Creating adjusting journal entries is an important step in accrual accounting. They are called “adjusting” journal entries because they are made before you generate your actual financial reports, thereby giving you a better understanding of your business’s true financial health. In this blog post, we’re going to cover the five most common types of adjusting journal entries and what they mean.

#1) Deferred Expenses

Deferred expenses are business-related expenses that you’ve already paid for but haven’t received. Whether it’s a product or service, if you pay for something related to your business’s operations and haven’t received it yet, it’s classified as a deferred expense, in which case it should be added as an adjusting journal entry.

#2) Accrued Expenses

Another common type of adjusting journal entry is accrued expenses. While deferred expenses refer to products and services that you’ve already paid for and haven’t received, accrued expenses are the opposite: they are expenses that you haven’t paid for but plan to. If you have a business loan, for example, an upcoming interest payment on the loan is an accrued expense.

#3) Deferred Revenue

There’s also deferred revenue, which is income generated by your business that you haven’t yet fulfilled. If a customer pays for a product or service in advance, you may record this payment as deferred revenue until you deliver the product or complete the service. Once you’ve fulfilled your obligation — either by delivering the product or completing the service — it’s no longer considered deferred revenue.

#4) Non-Cash Transactions

Non-cash transactions are financial transactions made by your business that don’t have any impact on your business’s cash. Some business owners non-cash transactions are simply transactions made using credit cards, debit cards or checks, but this isn’t true. They are actually financial transactions, such as equipment depreciation, that don’t affect your business’s cash.

#5) Accrued Revenue

Finally, accrued revenue is any income that your business has earned but haven’t received payment for. It’s not uncommon for businesses to allow their customers to pay after the product has been delivered or service has been completed. The business sends the customer an invoice, indicating how much he or she must pay and by when. Until the customer pays this invoice, however, the transaction should be recorded as an accrued revenue adjusting journal entry.

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What Is Bad Debt in Business Accounting?

In business accounting, bad debt refers to unpaid customer or client invoices that you don’t expect to collect. It’s not uncommon for businesses to allow customers or clients to pay after their product or service has been delivered. This is particularly true when speaking about business-to-business (B2B) companies. If you sell a B2B product or service, you may send customers an invoice after delivering the product or service. Most customers will pay this invoice in a timely manner. There are times, however, when a customer may fail to pay his or her invoice.

When a customer doesn’t pay his or her invoice, you should continue to pursue them in an attempt to collect the debt. Maybe the customer forgot about the invoice, or perhaps he or she is experiencing financial hardship. With a little persistence, you can often collect these outstanding invoices and earn the revenue to which you are entitled.

Unfortunately, though, some customers will never pay their outstanding invoices. If an invoice is several months past due and the customer has expressed no desire to pay it, you should consider writing off the invoice as bad debt. Doing so ensures that the invoice isn’t counted as income, which would otherwise increase your tax liabilities and, subsequently, hurt your business’s profits.

If you use the Quickbooks accounting software, you can easily write off bad debt such as this. To begin, log in to your Quickbooks account and create a new account by clicking Lists > Chart of Accounts > New > Expense > Continue. From here, you can assign the customer’s account number to to the new account and enter a name (e.g. Bad Debt). When finished, click “Save & Close.”

After creating the account, you must record the customer’s bad debt. This is done by accessing Customers > Receive Payments > select the customer’s name. Next, click the line item, followed by “Discounts & Credits.” You should then click the “Discount Account” drop-down menu and choose “Discounts,” after which you can select the bad debt account that you recently created. Once this account opens, enter the amount of the bad debt (the amount that the customer hasn’t paid and still owes), followed by “Done” and “Save & Close.”

It’s frustrating when a customer doesn’t pay his or her invoice. And while writing it off as bad debt won’t change this fact, it will prevent the unpaid invoice from hurting your business’s books.

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What Is a Trial Balance in Business Accounting?

Still trying to understand the concept of trial balances in business accounting? This report provides insight into the accuracy of your busines’s financial records. Therefore, it’s important for business owners and professional accounts to create a trial balance report on a regular basis.

Trial Balance: The Basics

The primary purpose of a trial balance is to show that the value of all debit balances equals the value of all credit balances. If the debit column in your business’s trial balance reports shows a higher or lower value than the credit column, it indicates an error in the ledger accounts, in which case you must identify and correct it before creating a profit and loss statement. Trial balances are most commonly used for double-entry accounting, which involves giving every transaction two or more accounts.

Basically, a trial balance is a worksheet or report that contains the value of all ledgers, which are separated into debit and credit columns. Most businesses create trial balances at the end of a reporting period. However, there’s no specific rule stating that you must create a trial balance report at a certain time. Some businesses ignore them altogether. In doing so, however, they place their business at risk for accounting errors.

How to Generate Trial Balance Report in Quickbooks

You can easily create a trial balance report using the Quickbooks accounting software in just a few simple steps. Assuming you use Quickbooks Desktop, log in to your account and access Reports > Accounts & Taxes > Trial Balance. Quickbooks will then show you a report containing two columns: a debit and credit column. At the bottom of these columns are the totals for the respective transactions. These two columns should be exactly the same. If one column contains a different amount than the other, you should go back over the transactions to identify and correct the erroneous entry.

You can also run a trial balance report using Quickbooks Online — the cloud-based version of Intuit’s popular accounting software. From the dashboard, click the “Tax” column, hover over the client for whom you wish to run the report and click “Start Review.” Next, click the pencil-shaped icon next to “Tax Year.” This will bring up a new screen with information pertaining to your chart of accounts. If you need help running a trial balance report, contact your Quickbooks vendor for assistance.

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What is a Worksheet in Accounting?

In accounting, a worksheet is a document containing a myriad of financial information about a business for a specific period or cycle. Typically created in spreadsheet format, it provides a detailed analysis of the business’s financial transactions. Normally, an accounting worksheet will contain the following information.

Income Statement

The income statement is a part of the accounting worksheet that features revenue and expense balances. Also known as a profit and loss account, it shows the business’s expenses for the period.

Trial Balance

Another component of an accounting worksheet is trial balance. This component reveals the business’s assets, liabilities, revenue and expenses for the period. Normally, the trial balance section will list all accounts with a debit under the same column and all accounts with a credit under a different column.

Balance Sheet

Of course, you’ll also find a balance sheet section in an accounting worksheet. As you  may already know, the balance sheet contains information about the business’s assets, liabilities and capital account balances. When creating a balance sheet, you should check to make sure the total of the debit and credit columns equals the balance.

Chart of Accounts

The chart of accounts section of an accounting worksheet features a list of all accounts the business has. More specifically, it breaks down this information into several subsections, including assets, liabilities, equity, revenue and expenses.

Adjusting Entries

The adjusting entries section, as the name suggests, reveals all adjustments the business had made to its financial entries. Adjusting entries are made at the end of a fiscal period. Keep in mind, however, that these are not traditional adjustments; adjusting entries are made specifically at the end of a fiscal period.

Retained Earnings Statement

Finally, you’ll also find a section for retained earnings in an accounting worksheet. This statement is intended to show the changes in a retained earnings account. Normally, it shows a credit for the beginning balance and debits for money to paid to owners and shareholders.

These are just a few of the main components in an accounting worksheet. It’s important to note that some companies may structure their worksheet differently. The key thing to remember is that this document contains detailed information about a business’s finances for a specific period. It usually features the sections listed above, though they may contain other sections as well.

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