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what does the government accountability office gao do | the government accountability office gao is the audit agency of the u s government it evaluates the effectiveness of u s programs and proposed programs for example one of its ongoing reviews examined the effectiveness of 4 7 trillion in federal spending related to the covid 19 pandemic and made recommendations for changes to prevent misuse of funds fraud and errors in relief payments 15 | |
what is the difference between accountability and responsibility | a responsibility is an assigned or self assigned task or project accountability implies a willingness to be judged on the performance of the project accountability doesn t exist in a vacuum it requires transparency and effective communication of results with all parties that may be affected the bottom lineaccountability can be a management buzzword or it can be a real framework for evaluating the success or failure of an individual or an entity the concept of corporate accountability has always meant honest and transparent financial reporting in recent years that concept has expanded to encompass a corporation s performance and responsiveness to environmental social and community issues | |
what is an accountant | an accountant reviews and analyses financial records keeping track of a company s or individual s income expenditures and tax liabilities an accountant may also be involved in project planning cost analysis auditing and financial decision making some specialize in tax preparation and tax planning the accountant may work in a large company s accounting department or an external accounting firm accountants are required to meet state specific educational and testing requirements and are certified by national professional associations duties and skills of accountantsaccountants work with companies governments and non profits or set up private practices they may perform multiple duties depending on where they work they may perform account analysis review financial statements and other reports to ensure they are accurate conduct routine and annual audits review financial operations prepare tax returns advise on areas that require efficiencies and cost savings and provide risk analysis and forecasting an accountant s duties often depend on the type of educational background and designation they receive most professionals in the field possess bachelor s degrees and if employed by a corporation may require certification to move up within the firm certification requirements vary with some roles requiring additional educational requirements above the bachelor s degree and successful completion of rigorous examinations accountants can have more than one designation the most common are the certified internal auditor cia certified management accountant cma and certified public accountant cpa a certified internal auditor doesn t need a license to practice nor does a certified management accountant there are 672 587 certified public accountants in the u s according to the national association of state boards of accountancy 1many accountants choose to become cpas because the designation is considered the gold standard in the accounting profession in the united states certification requirements for accountants vary from state to state but one requirement is universal the passing of the uniform certified public accountant examination this exam is written and graded by the american institute of certified public accountants aicpa ethical standards and guiding principlesaccountants must abide by the ethical standards and guiding principles of the region where they practice such as the international financial reporting standards ifrs or generally accepted accounting principles gaap the ifrs is a set of rules issued by the international accounting standards board iasb these rules promote consistency and transparency in financial statements gaap is a set of standards that accountants must adhere to when they complete financial statements for publicly traded companies in the u s certified public accountants are legally and ethically responsible to be honest and trustworthy and to avoid negligence in their duties cpas have real influence over their clients which means their judgment and work can affect not just an individual but an entire company including its employees its board and its investors accountants may be held liable for paying uninsured losses to creditors and investors in the case of a misstatement negligence or fraud accountants can be held liable under two different types of law common law and statutory law common law liability includes negligence fraud and breach of contract while statutory law includes any state or federal securities laws history of accountantsthe first professional association for accountants the american association of public accountants was formed in 1887 and cpas were first licensed in 1896 23accounting grew as a profession during the industrial revolution this was largely due to the growing complexity of businesses and the demands of shareholders and bondholders for evidence of the financial well being of the companies they invested in after the great depression and the formation of the securities and exchange commission sec all publicly traded companies were required to issue reports written by accredited accountants this change further increased the need for corporate accountants today accountants remain a ubiquitous and crucial part of any business | |
how much money does an accountant make | the median annual pay for an accountant in the u s was 78 000 as of 2022 according to the bureau of labor statistics 4 | |
what is the difference between an accountant and a cpa | a certified public accountant cpa is an accountant who is licensed by the american institute of certified public accountants aicpa the accountant has passed a four part examination prepared by the aicpa prerequisites for taking the exam include a bachelor s degree in a related field and work experience in the field | |
how do i become a cpa | a certified public accountant cpa is a professional who has passed a four part examination known as the uniform cpa examination conducted by the american institute of certified public accounts aicpa with input from the national association of state boards of accountancy nasba and state boards of accountancy accountants need both a bachelor s degree in accounting or finance and experience in the field to take the exam the exam is tailored to each state s requirements and is administered by the state boards of accountancy 5the bottom lineaccountants are always in demand because every company of any size needs one or more of them they are the ones tracking analyzing and auditing the company s income and expenditures they also have a key role in planning decision making and forecasting based on their ability to accurately estimate the cost of future projects | |
what is an accountant | an accountant reviews and analyses financial records keeping track of a company s or individual s income expenditures and tax liabilities an accountant may also be involved in project planning cost analysis auditing and financial decision making some specialize in tax preparation and tax planning the accountant may work in a large company s accounting department or an external accounting firm accountants are required to meet state specific educational and testing requirements and are certified by national professional associations duties and skills of accountantsaccountants work with companies governments and non profits or set up private practices they may perform multiple duties depending on where they work they may perform account analysis review financial statements and other reports to ensure they are accurate conduct routine and annual audits review financial operations prepare tax returns advise on areas that require efficiencies and cost savings and provide risk analysis and forecasting an accountant s duties often depend on the type of educational background and designation they receive most professionals in the field possess bachelor s degrees and if employed by a corporation may require certification to move up within the firm certification requirements vary with some roles requiring additional educational requirements above the bachelor s degree and successful completion of rigorous examinations accountants can have more than one designation the most common are the certified internal auditor cia certified management accountant cma and certified public accountant cpa a certified internal auditor doesn t need a license to practice nor does a certified management accountant there are 672 587 certified public accountants in the u s according to the national association of state boards of accountancy 1many accountants choose to become cpas because the designation is considered the gold standard in the accounting profession in the united states certification requirements for accountants vary from state to state but one requirement is universal the passing of the uniform certified public accountant examination this exam is written and graded by the american institute of certified public accountants aicpa ethical standards and guiding principlesaccountants must abide by the ethical standards and guiding principles of the region where they practice such as the international financial reporting standards ifrs or generally accepted accounting principles gaap the ifrs is a set of rules issued by the international accounting standards board iasb these rules promote consistency and transparency in financial statements gaap is a set of standards that accountants must adhere to when they complete financial statements for publicly traded companies in the u s certified public accountants are legally and ethically responsible to be honest and trustworthy and to avoid negligence in their duties cpas have real influence over their clients which means their judgment and work can affect not just an individual but an entire company including its employees its board and its investors accountants may be held liable for paying uninsured losses to creditors and investors in the case of a misstatement negligence or fraud accountants can be held liable under two different types of law common law and statutory law common law liability includes negligence fraud and breach of contract while statutory law includes any state or federal securities laws history of accountantsthe first professional association for accountants the american association of public accountants was formed in 1887 and cpas were first licensed in 1896 23accounting grew as a profession during the industrial revolution this was largely due to the growing complexity of businesses and the demands of shareholders and bondholders for evidence of the financial well being of the companies they invested in after the great depression and the formation of the securities and exchange commission sec all publicly traded companies were required to issue reports written by accredited accountants this change further increased the need for corporate accountants today accountants remain a ubiquitous and crucial part of any business | |
how much money does an accountant make | the median annual pay for an accountant in the u s was 78 000 as of 2022 according to the bureau of labor statistics 4 | |
what is the difference between an accountant and a cpa | a certified public accountant cpa is an accountant who is licensed by the american institute of certified public accountants aicpa the accountant has passed a four part examination prepared by the aicpa prerequisites for taking the exam include a bachelor s degree in a related field and work experience in the field | |
how do i become a cpa | a certified public accountant cpa is a professional who has passed a four part examination known as the uniform cpa examination conducted by the american institute of certified public accounts aicpa with input from the national association of state boards of accountancy nasba and state boards of accountancy accountants need both a bachelor s degree in accounting or finance and experience in the field to take the exam the exam is tailored to each state s requirements and is administered by the state boards of accountancy 5the bottom lineaccountants are always in demand because every company of any size needs one or more of them they are the ones tracking analyzing and auditing the company s income and expenditures they also have a key role in planning decision making and forecasting based on their ability to accurately estimate the cost of future projects | |
what is accounting | accounting is the process of recording financial transactions pertaining to a business the accounting process includes summarizing analyzing and reporting these transactions to oversight agencies regulators and tax collection entities the financial statements used in accounting are a concise summary of financial transactions over an accounting period summarizing a company s operations financial position and cash flows investopedia jiaqi zhouunderstanding accountingaccounting is one of the key functions of almost any business a bookkeeper or an accountant may handle it at a small firm at larger companies there might be sizable finance departments guided by a unified accounting manual with dozens of employees the reports generated by various streams of accounting such as cost accounting and managerial accounting are invaluable in helping management make informed business decisions the financial statements that summarize a large company s operations financial position and cash flows over a particular period are concise and consolidated reports based on thousands of individual financial transactions as a result all professional accounting designations are the culmination of years of study and rigorous examinations combined with a minimum number of years of practical accounting experience history of accountingthe history of accounting has been around almost as long as money itself accounting history dates back to ancient civilizations in mesopotamia egypt and babylon for example during the roman empire the government had detailed records of its finances however modern accounting as a profession has only been around since the early 19th century 1luca pacioli is considered the father of accounting and bookkeeping due to his contributions to the development of accounting as a profession an italian mathematician and friend of leonardo da vinci pacioli published a book on the double entry system of bookkeeping in 1494 2by 1880 the modern profession of accounting was fully formed and recognized by the institute of chartered accountants in england and wales 3this institute created many of the systems by which accountants practice today the formation of the institute occurred in large part due to the industrial revolution merchants not only needed to track their records but sought to avoid bankruptcy as well the alliance for responsible professional licensing arpl was formed in august 2019 in response to a series of state deregulatory proposals making the requirements to become a cpa more lenient the arpl is a coalition of various advanced professional groups including engineers accountants and architects 4 | |
what are the different types of accounting | accountants may be tasked with recording specific transactions or working with specific sets of information for this reason there are several broad groups that most accountants can be grouped into financial accounting refers to the processes used to generate interim and annual financial statements the results of all financial transactions that occur during an accounting period are summarized in the balance sheet income statement and cash flow statement the financial statements of most companies are audited annually by an external cpa firm for some such as publicly traded companies audits are a legal requirement however lenders also typically require the results of an external audit annually as part of their debt covenants therefore most companies will have annual audits for one reason or another 5managerial accounting uses much of the same data as financial accounting but it organizes and utilizes information in different ways namely in managerial accounting an accountant generates monthly or quarterly reports that a business s management team can use to make decisions about how the business operates managerial accounting also encompasses many other facets of accounting including budgeting forecasting and various financial analysis tools essentially any information that may be useful to management falls under this umbrella just as managerial accounting helps businesses make management decisions cost accounting helps businesses make decisions about costing essentially cost accounting considers all of the costs related to producing a product analysts managers business owners and accountants use this information to determine what their products should cost in cost accounting money is cast as an economic factor in production whereas in financial accounting money is considered to be a measure of a company s economic performance while financial accountants often use one set of rules to report the financial position of a company tax accountants often use a different set of rules these rules are set at the federal state or local level based on what return is being filed tax accounts balance compliance with reporting rules while also attempting to minimize a company s tax liability through thoughtful strategic decision making a tax accountant often oversees the entire tax process of a company the strategic creation of the organization chart the operations the compliance the reporting and the remittance of tax liability | |
what types of careers are in the accounting field | while basic accounting functions can be handled by a bookkeeper advanced accounting is typically handled by qualified accountants who possess designations such as certified public accountant cpa or certified management accountant cma in the united states 67in canada the three legacy designations the chartered accountant ca certified general accountant cga and certified management accountant cma have been unified under the chartered professional accountant cpa designation 8a major component of the accounting profession is the big four these four largest accounting firms ernst young kpmg pricewaterhousecoopers deloitte conduct audit consulting tax advisory and other services these firms along with many other smaller firms comprise the public accounting realm that generally advises financial and tax accounting careers in accounting may vastly differ by industry department and niche some relevant job titles may include as of june 2024 the average certified public accountant in the united states made 199 000 per year 9 | |
what are accounting standards | in most cases accountants use generally accepted accounting principles gaap when preparing financial statements in the u s gaap is a set of standards and principles designed to improve the comparability and consistency of financial reporting across industries its standards are based on double entry accounting a method in which every accounting transaction is entered as both a debit and credit in two separate general ledger accounts that will roll up into the balance sheet and income statement 10in most other countries a set of standards governed by the international accounting standards board named the international financial reporting standards ifrs is used 11tax accountants overseeing returns in the united states rely on guidance from the internal revenue service federal tax returns must comply with tax guidance outlined by the internal revenue code irc 12tax accounts may also lean in on state or county taxes as outlined by the jurisdiction in which the business conducts business foreign companies must comply with tax guidance in the countries in which they must file a return | |
what are major accounting software platforms | accountants often leverage software to aid in their work some accounting software is considered better for small businesses such as quickbooks quicken freshbooks xero or sage 50 larger companies often have much more complex solutions to integrate with their specific reporting needs this includes add on modules or in home software solutions large accounting solutions include oracle netsuite or sage products | |
what is the accounting cycle | financial accountants typically operate in a cyclical environment with the same steps happening in order and repeating every reporting period these steps are often referred to as the accounting cycle the process of taking raw transaction information entering it into an accounting system and running relevant and accurate financial reports the steps of the accounting cycle are cash method vs accrual method of accountingfinancial accounts have two different sets of rules they can choose to follow the first the accrual basis method of accounting has been discussed above these rules are outlined by gaap and ifrs are required by public companies and are mainly used by larger companies the second set of rules follows the cash basis method of accounting instead of recording a transaction when it occurs the cash method stipulates a transaction should be recorded only when cash has been exchanged because of the simplified manner of accounting the cash method is often used by small businesses or entities that are not required to use the accrual method of accounting imagine a company buys 1 000 of inventory on credit payment is due for the inventory in 30 days the difference between these two accounting methods is the treatment of accruals naturally under the accrual method of accounting accruals are required under the cash method accruals are not required and not recorded the securities and exchange commission has an entire financial reporting manual outlining the reporting requirements of public companies 13 | |
why accounting is important | accounting is a back office function where employees may not directly interface with customers product developers or manufacturing however accounting plays a key role in the strategic planning growth and compliance requirements of a company example of accountingto illustrate double entry accounting imagine a business sending an invoice to one of its clients an accountant using the double entry method records a debit to accounts receivables which flows through to the balance sheet and a credit to sales revenue which flows through to the income statement | |
what are the responsibilities of an accountant | accountants help businesses maintain accurate and timely records of their finances accountants are responsible for maintaining records of a company s daily transactions and compiling those transactions into financial statements such as the balance sheet income statement and statement of cash flows accountants also provide other services such as performing periodic audits or preparing ad hoc management reports | |
what skills are required for accounting | accountants hail from a wide variety of backgrounds generally speaking however attention to detail is a key component in accountancy since accountants must be able to diagnose and correct subtle errors or discrepancies in a company s accounts the ability to think logically is also essential to help with problem solving mathematical skills are helpful but are less important than in previous generations due to the wide availability of computers and calculators | |
why is accounting important for investors | the work performed by accountants is at the heart of modern financial markets without accounting investors would be unable to rely on timely or accurate financial information and companies executives would lack the transparency needed to manage risks or plan projects regulators also rely on accountants for critical functions such as providing auditors opinions on companies annual 10 k filings in short although accounting is sometimes overlooked it is absolutely critical for the smooth functioning of modern finance the bottom lineaccounting is by far one of the most important and prevalent fields in the world today its use in organizing business transactions and meeting regulatory requirements makes it a field that requires extensive knowledge and study as such accountants make strong salaries and work in a variety of industries | |
what is accounting conservatism | accounting conservatism is a set of bookkeeping guidelines that call for a high degree of verification before a company can make a legal claim to any profit the general concept is to factor in the worst case scenario of a firm s financial future uncertain liabilities are to be recognized as soon as they are discovered in contrast revenues can only be recorded when they are assured of being received ryan oakley investopedia | |
how accounting conservatism works | generally accepted accounting principles gaap insist on a number of accounting conventions being followed to ensure that companies report their financials as accurately as possible one of these principles conservatism requires accountants to show caution opting for solutions that reflect least favorably on a company s bottom line in situations of uncertainty accounting conservatism is not intended to manipulate the dollar amount or timing of reporting financial figures it is a method of accounting that provides guidance when uncertainty and the need for estimation arise cases where the accountant has the potential for bias accounting conservatism establishes the rules when deciding between two financial reporting alternatives if an accountant has two solutions to choose from when facing an accounting challenge the one that yields inferior numbers should be selected a cautious approach generally presents financial statement in the least optimistic light there is a danger that assets and revenue would be overstated so where the accountant has two acceptable options the principle of conservatism would recommend presenting the lower of the two options there is a danger that liabilities and expenses on the other hand will be understated conservatism dictates that if it is more probable than not that the loss will be incurred accountants are encouraged to record it immediately regardless of whether it has actually been paid out yet in contrast if there is a possibility of a gain coming the company s way they are advised not to record it in the financial statements until virtually certain of receiving some benefit since there is a danger that companies will manipulate revenue numbers to record higher profits there are very stringent rules around revenue recognition there are many ways in which revenue could be manipulated that lie in an accounting gray area recording legitimate revenues before they are really true sales is one such risk for this reason before a sale can be recorded there are several criteria that must be met the fulfillment of the performance obligations is an example of conservatism in action no revenue should be recorded before these events take place even if business managers are very sure that a customer is going to want products or services advantages of accounting conservatismunderstating gains and overstating losses means that accounting conservatism will always report lower net income and lower financial future benefits painting a bleaker picture of a company s financials actually comes with several benefits most obviously it encourages management to exercise greater care in its decisions it also means there is more scope for positive surprises rather than disappointing upsets which are big drivers of share prices like all standardized methodologies these rules should also make it easier for investors to compare financial results across different industries and time periods disadvantages of accounting conservatismon the flip side gaap rules such as accounting conservatism can often be open to interpretation this means that some companies will always find ways to manipulate them to their advantage another issue with accounting conservatism is the potential for revenue shifting if a transaction does not meet the requirements to be reported it must be reported in the following period this will result in the current period being understated and future periods being overstated making it difficult for an organization to track business operations internally using accounting conservatismaccounting conservatism may be applied to inventory valuation when determining the reporting value for inventory conservatism dictates the lower of historical cost or net realizable value is the amount that should be included on the balance sheet as an asset estimations such as uncollectable accounts receivable ar and casualty losses also use this principle if a company expects to win a litigation claim it cannot report the gain until it meets all revenue recognition principles however if a litigation claim is expected to be lost an estimated economic impact is required in the notes to the financial statements contingent liabilities such as royalty payments or unearned revenue are to be disclosed too | |
what does accounting conservatism take into account | accounting conservatism records all probable losses when they are discovered and registers gains only when they are fully realized | |
what does accounting conservatism provide | accounting conservatism provides guidance when uncertainty and the need for estimation arise cases where the accountant has the potential for bias it establishes the rules when deciding between two financial reporting alternatives the one that yields inferior numbers should be selected | |
does accounting conservatism have a bright side | it does accounting conservatism encourages management to use greater care in decision making it also means more scope for positive surprises instead of disappointing upsets which drive share prices finally it also makes it easier for investors to compare financial results across different industries and time periods the bottom lineaccounting conservatism is a set of bookkeeping guidelines it requires company accounts to be prepared with caution and high degrees of verification the point is to factor in the worst case scenario for a company s financial future | |
what is the accounting cycle | the accounting cycle is a collective process of identifying analyzing and recording the accounting events of a company it is a standard 8 step process that begins when a transaction occurs and ends with its inclusion in the financial statements and the closing of the books the key steps in the eight step accounting cycle include recording journal entries posting to the general ledger calculating trial balances making adjusting entries and creating financial statements investopedia joules garcia | |
how the accounting cycle works | the accounting cycle is a methodical set of rules that can help ensure the accuracy and conformity of financial statements computerized accounting systems and the uniform process of the accounting cycle have helped to reduce mathematical errors today most software fully automates the accounting cycle which results in less human effort and errors associated with manual processing there are eight steps to the accounting cycle an accounting cycle is used by most but not all businesses sole proprietorships other small businesses and entrepreneurs may not follow it timing of the accounting cyclethe accounting cycle is started and completed within an accounting period the time in which financial statements are prepared accounting periods vary and depend on different factors however the most common type of accounting period is the annual period during the accounting cycle many transactions occur and are recorded at the end of the fiscal year financial statements are prepared and are often required by government regulation for example public entities are required to submit financial statements by certain dates all public companies that do business in the u s are required to file registration statements periodic reports and other forms to the u s securities and exchange commission 1 therefore their accounting cycles are tied to reporting requirement dates accounting cycle vs budget cyclethe accounting cycle is different from the budget cycle the accounting cycle focuses on historical events and ensures that incurred financial transactions are reported correctly alternatively the budget cycle relates to future operating performance and planning for future transactions the accounting cycle assists in producing information for external users while the budget cycle is mainly used for internal management purposes | |
why is the accounting cycle important | it s important because it can help ensure that the financial transactions that occur throughout an accounting period are accurately and properly recorded and reported this can provide businesses with a clear understanding of their financial health and ensure compliance with federal regulations | |
what are benefits of the accounting cycle | the accounting cycle can aid a company in keeping accurate books and not losing important financial information analyzing financial events preparing required financial statements and overall managing a business successfully who is responsible for performing the accounting cycle usually accountants are employed to manage and conduct the accounting tasks required by the accounting cycle if a small business or one person shop is involved the owner may handle the tasks or outsource the work to an accounting firm the bottom linethe accounting cycle is a comprehensive accounting process that begins and ends in an accounting period it involves eight steps that ensure the proper recording and reporting of financial transactions once a company s books are closed and the accounting cycle for a period ends it begins anew with the next accounting period and financial transactions | |
what is the accounting equation | the accounting equation states that a company s total assets are equal to the sum of its liabilities and its shareholders equity this straightforward relationship between assets liabilities and equity is considered to be the foundation of the double entry accounting system the accounting equation ensures that the balance sheet remains balanced that is each entry made on the debit side has a corresponding entry or coverage on the credit side the accounting equation is also called the basic accounting equation or the balance sheet equation daniel fishel investopedia | |
what are the key components in the accounting equation | the financial position of any business large or small is based on two key components of the balance sheet assets and liabilities owners equity or shareholders equity is the third section of the balance sheet the accounting equation is a representation of how these three important components are associated with each other assets represent the valuable resources controlled by a company while liabilities represent its obligations both liabilities and shareholders equity represent how the assets of a company are financed if it s financed through debt it ll show as a liability but if it s financed through issuing equity shares to investors it ll show in shareholders equity the accounting equation helps to assess whether the business transactions carried out by the company are being accurately reflected in its books and accounts below are examples of items listed on the balance sheet assets include cash and cash equivalents or liquid assets which may include treasury bills and certificates of deposit cds accounts receivable list the amounts of money owed to the company by its customers for the sale of its products inventory is also considered an asset the major and often largest value assets of most companies are that company s machinery buildings and property these are fixed assets that are usually held for many years liabilities are debts that a company owes and costs that it needs to pay in order to keep the company running debt is a liability whether it is a long term loan or a bill that is due to be paid costs include rent taxes utilities salaries wages and dividends payable the shareholders equity number is a company s total assets minus its total liabilities it can be defined as the total number of dollars that a company would have left if it liquidated all of its assets and paid off all of its liabilities this would then be distributed to the shareholders retained earnings are part of shareholders equity this number is the sum of total earnings that were not paid to shareholders as dividends think of retained earnings as savings since it represents the total profits that have been saved and put aside or retained for future use accounting equation formula and calculationassets liabilities owner s equity text assets text liabilities text owner s equity assets liabilities owner s equity the balance sheet holds the elements that contribute to the accounting equation as an example say leading retailer xyz corp reported the following on its balance sheet for its latest full fiscal year if we calculate the right hand side of the accounting equation equity liabilities we arrive at 50 billion 120 billion 170 billion which matches the value of the assets reported by the company | |
what is the purpose of the double entry system | the accounting equation is a concise expression of the complex expanded and multi item display of a balance sheet essentially the representation equates all uses of capital assets to all sources of capital where debt capital leads to liabilities and equity capital leads to shareholders equity for a company keeping accurate accounts every business transaction will be represented in at least two of its accounts for instance if a business takes a loan from a bank the borrowed money will be reflected in its balance sheet as both an increase in the company s assets and an increase in its loan liability if a business buys raw materials and pays in cash it will result in an increase in the company s inventory an asset while reducing cash capital another asset because there are two or more accounts affected by every transaction carried out by a company the accounting system is referred to as double entry accounting the double entry practice ensures that the accounting equation always remains balanced meaning that the left side value of the equation will always match the right side value in other words the total amount of all assets will always equal the sum of liabilities and shareholders equity the global adherence to the double entry accounting system makes the account keeping and tallying processes more standardized and foolproof the accounting equation ensures that all entries in the books and records are vetted and a verifiable relationship exists between each liability or expense and its corresponding source or between each item of income or asset and its source limits of the accounting equationalthough the balance sheet always balances out the accounting equation can t tell investors how well a company is performing investors must interpret the numbers and decide for themselves whether the company has too many or too few liabilities not enough assets or perhaps too many assets or whether its financing is sufficient to ensure its long term growth real world example of the accounting equationbelow is a portion of exxon mobil corp s xom balance sheet in millions as of march 31 2024 the accounting equation is calculated as follows 164 866 total liabilities 213 052 equity 377 918 which equals the total assets for the period | |
why is the accounting equation important | the accounting equation captures the relationship between the three components of a balance sheet assets liabilities and equity all else being equal a company s equity will increase when its assets increase and vice versa adding liabilities will decrease equity while reducing liabilities such as by paying off debt will increase equity these basic concepts are essential to modern accounting methods | |
what are the 3 elements of the accounting equation | the three elements of the accounting equation are assets liabilities and shareholders equity the formula is straightforward a company s total assets are equal to its liabilities plus its shareholders equity the double entry bookkeeping system which has been adopted globally is designed to accurately reflect a company s total assets | |
what is an asset in the accounting equation | an asset is anything with economic value that a company controls that can be used to benefit the business now or in the future they include fixed assets such as machinery and buildings they may include financial assets such as investments in stocks and bonds they also may be intangible assets like patents trademarks and goodwill | |
what is a liability in the accounting equation | a company s liabilities include every debt it has incurred these may include loans accounts payable mortgages deferred revenues bond issues warranties and accrued expenses | |
what is shareholders equity in the accounting equation | shareholders equity is the total value of the company expressed in dollars put another way it is the amount that would remain if the company liquidated all of its assets and paid off all of its debts the remainder is the shareholders equity which would be returned to them the bottom linethe accounting equation is based on the premise that the sum of a company s assets is equal to its total liabilities and shareholders equity as a core concept in modern accounting this provides the basis for keeping a company s books balanced across a given accounting cycle | |
what is an accounting information system ais | an accounting information system ais involves the collection storage and processing of financial and accounting data used by internal users to report information to investors creditors and tax authorities it is generally a computer based method for tracking accounting activity in conjunction with information technology resources an ais combines traditional accounting practices such as the use of generally accepted accounting principles gaap with modern information technology it resources | |
how an accounting information system ais is used | an accounting information system contains various elements that are important in the accounting cycle although the information contained in a system varies among industries and business sizes a typical ais includes data relating to revenue expenses customer information employee information and tax information specific data includes sales orders and analysis reports purchase requisitions invoices check registers inventory payroll ledger trial balance and financial statement information an accounting information system must have a database structure to store information this database structure is typically programmed with query language that allows for table and data manipulation an ais has numerous fields to input data and edit previously stored data in addition accounting information systems are often highly secured platforms with preventative measures taken against viruses hackers and other external sources attempting to collect information the various outputs of an accounting information system exemplify the versatility of its data manipulation capabilities an ais produces reports including accounts receivable aging reports based on customer information depreciation schedules for fixed assets and trial balances for financial reporting customer lists taxation calculations and inventory levels may also be reproduced however correspondences memos or presentations are not included in the ais because these items are not directly related to a company s financial reporting or bookkeeping benefits of an aisan accounting information system strives to interface across multiple departments within the system the sales department can upload the sales budget for example this information is used by the inventory management team to conduct inventory counts and purchase materials upon the purchase of inventory the system can notify the accounts payable department of the new invoice an ais can also share information about a new order so that the manufacturing shipping and customer service departments are aware of the sale an integral part of accounting information systems relates to internal controls policies and procedures can be placed within the system to ensure that sensitive customer vendor and business information is maintained within a company through the use of physical access approvals login requirements access logs authorizations and segregation of duties users can be limited to only the relevant information necessary to perform their business function | |
how does an accounting information system ais incorporate technology | an ais combines modern information technology it resources with traditional accounting practices such as the use of generally accepted accounting principles gaap | |
why is it important that accounting information systems are highly secured | cybersecurity is increasingly important as more and more companies store their data electronically because of this accounting information systems are often highly secured against viruses hackers and other external sources attempting to collect information | |
what does an accounting information system ais produce | ais reports include the bottom linean accounting information system ais involves collecting storing and processing financial and accounting data used by internal users to report information to investors creditors and tax authorities in general it is a computer based method to track accounting activity in conjunction with information technology it resources | |
what is an accounting method | an accounting method refers to the rules that a company follows in reporting revenues and expenses the two primary methods of accounting are accrual accounting generally used by companies and cash accounting generally used by individuals cash accounting reports revenues and expenses as they are received and paid through cash inflows and outflows accrual accounting reports them as they are earned and incurred through sales and purchases on credit and by using accounts receivable and accounts payable generally accepted accounting principles gaap require accrual accounting understanding an accounting methodall businesses need to keep accounting records public companies are required to do so accounting allows a business to monitor every aspect of its finances from revenues to costs to taxes and more without accurate accounting a business would not know where it stands financially most likely resulting in its demise accounting is also needed to pay accurate taxes to the internal revenue service irs if the irs ever conducts an audit on a company it looks at a company s accounting records and methods furthermore the irs requires taxpayers to choose an accounting method that accurately reflects their income and to be consistent in their choice of accounting method from year to year this is because switching between methods would potentially allow a company to manipulate revenue to minimize its tax burdens as such irs approval is required to change methods companies may use a hybrid of the two methods which is allowable under irs rules if specified requirements are met types of accounting methodscash accounting is an accounting method that is relatively simple and is commonly used by small businesses in cash accounting transactions are only recorded when cash is spent or received in cash accounting a sale is recorded when the payment is received and an expense is recorded only when a bill is paid the cash accounting method is of course the method that most people use in managing their personal finances and is appropriate for businesses up to a certain size if a business generates more than 25 million in average annual gross receipts for the preceding three years however it must use the accrual method according to irs rules 1accrual accounting is based on the matching principle which is intended to match the timing of revenue and expense recognition by matching revenues with expenses the accrual method gives a more accurate picture of a company s true financial condition under the accrual method transactions are recorded when they are incurred rather than awaiting payment this means a purchase order is recorded as revenue even though the funds are not received immediately the same goes for expenses in that they are recorded even though no payment has been made example of an accounting methodthe value of accrual accounting becomes more evident for large complex businesses for example a construction company may undertake a long term project and may not receive complete cash payments until the project is complete under cash accounting rules the company would incur many expenses but would not recognize revenue until cash was received from the customer so the accounting book of the company would look weak until the revenue actually came in if this company was looking for debt financing from a bank for example the cash accounting method makes it look like a poor bet because it is incurring expenses but no revenue under accrual accounting the construction company would recognize a percentage of revenue and expenses corresponding to the portion of the project that was completed this is known as the percentage of completion method how much actual cash is coming into the company however would be evident in the cash flow statement this method would show a prospective lender a much more complete and accurate picture of the company s revenue pipeline | |
what do the 2 primary accounting methods report | accrual accounting reports revenues and expenses as they are earned and incurred through sales and purchases on credit and by using accounts receivable and accounts payable cash accounting reports revenues and expenses as they are received and paid through cash inflows and outflows | |
what does the irs require for accounting methods | the irs requires businesses making an average of 25 million or more in sales for the preceding three years to use accrual accounting as for individual taxpayers the irs mandates that they choose an accounting method that accurately reflects their income and be consistent in their choice of accounting method from year to year can a hybrid of the 2 primary accounting methods be used yes by companies but not individuals companies may use a hybrid of accrual accounting and cash accounting under irs rules if specified requirements are met switching between methods is not allowed because it would potentially allow a business to manipulate revenue to minimize its tax burdens the bottom linean accounting method is the rules that a company must follow in reporting revenues and expenses accrual accounting used mostly by companies and cash accounting used mostly by individuals are the two primary accounting methods | |
what are accounting policies | accounting policies are the specific procedures implemented by a company s management team that are used to prepare its financial statements these include any accounting methods measurement systems and procedures for presenting disclosures accounting policies differ from accounting principles in that the principles are the accounting rules and the policies are a company s way of adhering to those rules | |
how accounting policies are used | accounting policies are a set of standards that govern how a company prepares its financial statements these policies are used to deal specifically with complicated accounting practices such as depreciation methods recognition of goodwill preparation of research and development r d costs inventory valuation and the consolidation of financial accounts these policies may differ from company to company but all accounting policies are required to conform to generally accepted accounting principles gaap and or international financial reporting standards ifrs 12accounting principles can be thought of as a framework in which a company is expected to operate however the framework is somewhat flexible and a company s management team can choose specific accounting policies that are advantageous to the financial reporting of the company because accounting principles are lenient at times the specific policies of a company are very important looking into a company s accounting policies can signal whether management is conservative or aggressive when reporting earnings this should be taken into account by investors when reviewing earnings reports to assess the quality of earnings also external auditors who are hired to review a company s financial statements should review the company s policies to ensure they conform to gaap company management can select accounting policies that are advantageous to their own financial reporting such as selecting a particular inventory valuation method example of an accounting policyaccounting policies can be used to legally manipulate earnings for example in the united states companies are allowed to value inventory using the average cost first in first out fifo or last in first out lifo methods of accounting under the average cost method when a company sells a product the weighted average cost of all inventory produced or acquired in the accounting period is used to determine the cost of goods sold cogs under the fifo inventory cost method when a company sells a product the cost of the inventory produced or acquired first is considered to be sold first under the lifo method when a product is sold the cost of the inventory produced last is considered to be sold first in periods of rising inventory prices a company can use these accounting policies to increase or decrease its earnings for example a company in the manufacturing industry buys inventory at 10 per unit for the first half of the month and 12 per unit for the second half of the month the company ends up purchasing a total of 10 units at 10 and 10 units at 12 and sells a total of 15 units for the entire month if the company uses fifo its cost of goods sold is 10 x 10 5 x 12 160 if it uses average cost its cost of goods sold is 15 x 11 165 if it uses lifo its cost of goods sold is 10 x 12 5 x 10 170 in the us where companies are able to choose between fifo and lifo a company wishing to maximize profits will use the fifo method in periods of rising prices in order to minimize the cost of goods sold and increase earnings a company wishing to lower taxable income will use the lifo method if prices are rising to increase the cost of goods sold and decrease earnings | |
what is the difference between accounting policies and principles | while an accounting principle is the standardized rule set forth by a governing body an accounting policy is the method or guideline used by management to adhere to the rule and generate financial statements in the united states generally accepted accounting principles gaap are the accounting standards accepted by the securities and exchange commission sec certain accounting principles allow for management discretion and that is where accounting policies come into play | |
what are some examples of accounting policies | accounting policies appear in a business when accounting principles allow leeway in how the rules are applied to a situation situations that involve management discretion include | |
what is the difference between conservative and aggressive accounting | conservative accounting uses accounting policies that result in a lower revenue and or a higher expense on the other hand aggressive accounting uses policies that tend to increase revenue and or reduce expenses a company using conservative accounting policies will have lower earnings in the current year while a company using aggressive accounting policies will show better financial performance in the current year conservative accounting policies will tend toward better financial performance in the long run while aggressive accounting policies tend to lead to a decline in financial performance over the long run the bottom lineaccounting policies are different from accounting principles which are the accounting rules to which all accounting policies must conform a company s management team can choose specific accounting policies that are advantageous to the firm s financial reporting the team might use either conservative or aggressive accounting policies which will determine how a company s financial performance appears in a given year | |
what are accounting principles | accounting principles are the rules and guidelines that companies and other bodies must follow when reporting financial data these rules make it easier to examine financial data by standardizing the terms and methods that accountants must use the international financial reporting standards ifrs is the most widely used set of accounting principles with adoption in 168 jurisdictions the united states uses a separate set of accounting principles known as generally accepted accounting principles gaap 1ryan oakley investopediaunderstanding accounting principlesthe ultimate goal of any set of accounting principles is to ensure that a company s financial statements are complete consistent and comparable this makes it easier for investors to analyze and extract useful information from the company s financial statements including trend data over a period of time it also facilitates the comparison of financial information across different companies accounting principles also help mitigate accounting fraud by increasing transparency and allowing red flags to be identified the ultimate goal of standardized accounting principles is to allow financial statement users to view a company s financials with certainty that the information disclosed in the report is complete consistent and comparable comparability is the ability for financial statement users to review multiple companies financials side by side with the guarantee that accounting principles have been followed to the same set of standards accounting information is not absolute or concrete and standards are developed to minimize the negative effects of inconsistent data without these rules comparing financial statements among companies would be extremely difficult even within the same industry inconsistencies and errors also would be harder to spot | |
what are the basic accounting principles | some of the most fundamental accounting principles include the following the most notable principles include the revenue recognition principle matching principle materiality principle and consistency principle completeness is ensured by the materiality principle as all material transactions should be accounted for in the financial statements consistency refers to a company s use of accounting principles over time | |
when accounting principles allow a choice among multiple methods a company should apply the same accounting method over time or disclose the change in its accounting method in the footnotes of the financial statements | generally accepted accounting principles gaap generally accepted accounting principles gaap are uniform accounting principles for private companies and nonprofits in the u s these principles are largely set by the financial accounting standards board fasb an independent nonprofit organization whose members are chosen by the financial accounting foundation 2a similar organization the governmental accounting standards board gasb is responsible for setting the gaap standards for local and state governments a third body the federal accounting standards advisory board fasab publishes the accounting principles for federal agencies 34although privately held companies are not required to abide by gaap publicly traded companies must file gaap compliant financial statements to be listed on a stock exchange chief officers of publicly traded companies and their independent auditors must certify that the financial statements and related notes were prepared in accordance with gaap 5privately held companies and nonprofit organizations also may be required by lenders or investors to file gaap compliant financial statements for example annual audited gaap financial statements are a common loan covenant required by most banking institutions therefore most companies and organizations in the u s comply with gaap even though it is not a legal requirement accounting principles differ around the world meaning that it s not always easy to compare the financial statements of companies from different countries international financial reporting standards ifrs the international accounting standards board iasb issues international financial reporting standards ifrs these standards are used in approximately 168 jurisdictions including those in the european union eu 1the securities and exchange commission sec the u s government agency responsible for protecting investors and maintaining order in the securities markets has expressed interest in transitioning to ifrs however because of the differences between the two standards the u s is unlikely to switch in the foreseeable future 5however the fasb and the iasb continue to work together to issue similar regulations on certain topics as accounting issues arise 6since accounting principles differ around the world investors should take caution when comparing the financial statements of companies from different countries the issue of differing accounting principles is less of a concern in more mature markets still caution should be used as there is still leeway for number distortion under many sets of accounting principles who sets accounting principles and standards various bodies are responsible for setting accounting standards in the united states generally accepted accounting principles gaap are regulated by the financial accounting standards board fasb in europe and elsewhere international financial reporting standards ifrs are established by the international accounting standards board iasb | |
how does ifrs differ from gaap | ifrs is a standards based approach that is used internationally while gaap is a rules based system used primarily in the u s ifrs is seen as a more dynamic platform that is regularly being revised in response to an ever changing financial environment while gaap is more static several methodological differences exist between the two systems for instance gaap allows companies to use either first in first out fifo or last in first out lifo as an inventory cost method lifo however is banned under ifrs 78 | |
when were accounting principles first set forth | standardized accounting principles date back to the advent of double entry bookkeeping in the 15th and 16th centuries which introduced a t ledger with matched entries for assets and liabilities 9some scholars have argued that the advent of double entry accounting practices during that time provided a springboard for the rise of commerce and capitalism what would become the american institute of certified public accountants aicpa and the new york stock exchange nyse attempted to launch the first accounting standards to be used by firms in the united states in the 1930s 10 | |
what are some critiques of accounting principles | critics of principles based accounting systems say they can give companies far too much freedom and do not prescribe transparency they believe because companies do not have to follow specific rules that have been set out their reporting may provide an inaccurate picture of their financial health in the case of rules based methods like gaap complex rules can cause unnecessary complications in the preparation of financial statements these critics claim having strict rules means that companies must spend an unfair amount of their resources to comply with industry standards the bottom lineaccounting principles are rules and guidelines that companies must abide by when reporting financial data which method a company chooses at the outset or changes to at a later date must make sound financial sense whether it s gaap in the u s or ifrs elsewhere the overarching goal of these principles is to boost transparency and make it easier for investors to compare the financial statements of different companies without these rules and standards publicly traded companies would likely present their financial information in a way that inflates their numbers and makes their trading performance look better than it actually was if companies were able to pick and choose what information to disclose it would be extremely unhelpful for investors | |
what is accounting profit | accounting profit is a company s total earnings calculated according to generally accepted accounting principles gaap it includes the explicit costs of doing business such as operating expenses depreciation interest and taxes investopedia ellen lindner | |
how accounting profit works | profit is a widely monitored financial metric that is regularly used to evaluate the health of a company firms often publish various versions of profit in their financial statements some of these figures take into account all revenue and expense items laid out in the income statement others are creative interpretations put together by management and their accountants accounting profit also referred to as bookkeeping profit or financial profit is net income earned after subtracting all dollar costs from total revenue in effect it shows the amount of money a firm has left over after deducting the explicit costs of running the business the costs that need to be considered include the following accounting profit vs economic profitlike accounting profit economic profit deducts explicit costs from revenue where they differ is that economic profit also uses implicit costs the various opportunity costs a company incurs when allocating resources elsewhere examples of implicit costs include for example if a person invested 100 000 to start a business and earned 120 000 in profit their accounting profit would be 20 000 economic profit however would add implicit costs such as the opportunity cost of 50 000 which represents the salary they would have earned if they kept their day job as such the business owner would have an economic loss of 30 000 120 000 100 000 50 000 economic profit is more of a theoretical calculation based on alternative actions that could have been taken while accounting profit calculates what actually occurred and the measurable results for the period accounting profit has many uses including for tax declarations economic profit on the other hand is mainly just calculated to help management make a decision accounting profit vs underlying profitcompanies often choose to supplement accounting profit with their own subjective take on their profit position one such example is underlying profit this popular widely used metric often excludes one time charges or infrequent occurrences and is regularly flagged by management as a key number for investors to pay attention to the goal of underlying profit is to eliminate the impact that random events such as a natural disaster have on earnings losses or gains that do not regularly crop up such as restructuring charges or the buying or selling of land or property are usually not taken into account because they do not occur often and as a result are not deemed to reflect the everyday costs of running the business example of accounting profitcompany a operates in the manufacturing industry and sells widgets for 5 in january it sold 2 000 widgets for a total monthly revenue of 10 000 this is the first number entered into its income statement the cost of goods sold cogs is then subtracted from revenue to arrive at gross revenue if it costs 1 to produce a widget the company s cogs would be 2 000 and its gross revenue would be 8 000 or 10 000 2 000 after calculating the company s gross revenue all operating costs are subtracted to arrive at the company s operating profit or earnings before interest taxes depreciation and amortization ebitda if the company s only overhead was a monthly employee expense of 5 000 its operating profit would be 3 000 or 8 000 5 000 once a company derives its operating profit it then assesses all non operating expenses such as interest depreciation amortization and taxes in this example the company has no debt but has depreciating assets at a straight line depreciation of 1 000 a month it also has a corporate tax rate of 35 the depreciation amount is first subtracted to arrive at the company s earnings before taxes ebt of 1 000 or 2 000 1 000 corporate taxes are then assessed at 350 to give the company an accounting profit of 650 calculated as 1 000 1 000 0 35 | |
what is accounting rate of return arr | the accounting rate of return is a capital budgeting metric to calculate an investment s profitability businesses use arr to compare multiple projects to determine each endeavor s expected rate of return or to help decide on an investment or an acquisition 1the accounting rate of return arr formula divides an asset s average revenue by the company s initial investment to derive the ratio or return generated from the net income of the proposed capital investment investopedia dennis madambacalculating arra r r a v e r a g e a n n u a l p r o f i t i n i t i a l i n v e s t m e n t arr frac average annual profit initial investment arr initialinvestmentaverageannualprofit examplea business is considering a project with an initial investment of 250 000 and forecasts it will generate revenue for the next five years arr is calculated as advantages and disadvantages of arrthe accounting rate of return is a simple calculation that does not require complex math and allows managers to compare arr to the desired minimum required return for example if the minimum required return of a project is 12 and arr is 9 a manager will know not to proceed with the project however arr does not consider the time value of money or cash flows the time value of money is the concept that money available at present is worth more than an identical sum in the future because of its potential earning capacity arr does not assign a higher value to a project that returns profits sooner the accounting rate of return does not consider the increased risk of long term projects and the increased uncertainty associated with long periods determines a project s annual rate of returnsimple comparison to minimum rate of returnease of use | |
does not account for cash flow timing | the time value of money is the main concept of the discounted cash flow model which better determines the value of an investment as it seeks to determine the present value of future cash flows accounting rate of return vs required rate of returnthe arr is the annual percentage return from an investment based on its initial outlay the required rate of return rrr or the hurdle rate is the minimum return an investor would accept for an investment or project that compensates them for a given level of risk it is calculated using the dividend discount model which accounts for stock price changes or the capital asset pricing model which compares returns to the market the rrr can vary between investors as they each have a different tolerance for risk for example a risk averse investor requires a higher rate of return to compensate for any risk from the investment investors and businesses may use multiple financial metrics like arr and rrr to determine if an investment would be worthwhile based on risk tolerance | |
how does depreciation affect the accounting rate of return | depreciation will reduce the accounting rate of return depreciation is a direct cost that reduces the value of an asset or profit of a company as such it will reduce the return on an investment or project like any other cost | |
what is the difference between arr and internal rate of return irr | the main difference between arr and irr is that irr is a discounted cash flow formula while arr is a non discounted cash flow formula arr does not include the present value of future cash flows generated by a project in this regard arr does not include the time value of money where the value of a dollar is worth more today than tomorrow the bottom linethe accounting rate of return arr is a simple formula that allows investors and managers to determine the profitability of an asset or project because of its ease of use and determination of profitability it is a handy tool to compare the profitability of various projects however the formula does not consider the cash flows of an investment or project or the overall timeline of return which determines the entire value of an investment or project | |
what is an accounting ratio | accounting ratios an important subset of financial ratios are a group of metrics used to measure the management aptitude efficiency and profitability of a company based on its financial reports they provide a way of expressing the relationship between one accounting data point to another and are the basis of ratio analysis they also serve as a comparison toolbox to compare the firms performance to that of its peer in the same industry understanding an accounting ratioan accounting ratio compares two line items in a company s financial statements these consist of its income statement balance sheet and cash flow statement the ratios can be used to evaluate a company s fundamentals and provide information about the performance of the company over the last quarter or fiscal year analyzing accounting ratios is an important step in determining the financial health of a company it can often point out areas that are dragging the profitability of a company down and therefore need improvement the effectiveness of new management plans new products and changes in operational procedures can all be determined by analyzing accounting ratios accounting ratios also work as an important tool in company comparison within an industry the company can see how it stacks up against its peers and investors can use accounting ratios to determine which company is their better option a thorough accounting analysis can be a complex task but calculating accounting ratios is a simple process of dividing two line items found on a financial statement that provide a quick form of clear analysis to a business owner or investor types of accounting ratiosseveral types of accounting ratios can determine various types of information the income statement contains information about company sales expenses and net income it also provides an overview of earnings and the number of shares outstanding used to calculate earnings per share eps these are some of the most popular data points that analysts use to assess a company s profitability gross profit as a percent of sales is referred to as gross margin it s calculated by dividing gross profit by sales the gross profit margin would be 80 if gross profit is 80 000 and sales are 100 000 the higher the gross profit margin the better it indicates that a company is keeping a higher proportion of revenues as profit rather than using it to meet expenses operating profit as a percentage of sales is referred to as operating margin it s calculated by dividing operating profit by sales the operating profit margin would be 60 if the operating profit is 60 000 and sales are 100 000 the balance sheet provides accountants with a snapshot of a company s capital structure one of the most important measures of capital structure is the debt to equity d e ratio it s calculated by dividing debt by equity the debt to equity ratio would be two to one if a company has debt equal to 100 000 and equity equal to 50 000 the debt to equity ratio shows how much a business is leveraged how much debt it s using to finance operations rather than its internal funds the quick ratio is also known as the acid test ratio it s an indicator of a company s short term liquidity and measures a company s ability to meet its short term obligations with its most liquid assets the ratio excludes inventories from current assets because we re only concerned with the most liquid assets in this case the cash flow statement provides data for ratios dealing with cash the dividend payout ratio is the percentage of net income paid out to investors through dividends both dividends and share repurchases are considered outlays of cash and can be found on the cash flow statement the dividend payout ratio is calculated by dividing 100 000 by 400 000 which works out to 25 if dividends are 100 000 and income is 400 000 the higher the dividend payout ratio the higher the percentage of income a company pays out as dividends rather than reinvesting back into the company | |
what are shares outstanding | shares outstanding are those that are available to investors they include shares held by company employees and institutional investors the number can fluctuate when employees exercise stock options or if the company issues more shares | |
what are some examples of liquid assets | liquid assets include cash and anything that can be easily converted to cash they include marketable securities government bonds foreign currencies and treasury bills cash can be on hand or held in various bank accounts and savings vehicles | |
how can an investor use accounting ratios | accounting ratios provide a view of a company s financial health but they re only one viable tool when you re assessing investments they can measure a company s liquidity and profitability but this information should be taken in light of other factors to get a complete picture of its sustainability and potential earnings the bottom lineaccounting ratios can provide an accurate assessment of the profitability of a company over the last quarter or fiscal year they include the debt to equity ratio the quick ratio the dividend payout ratio the gross margin and the operating margin these are just a few examples of the many accounting tools that corporations and analysts use to evaluate a company however many other tools highlight different aspects of a company so you ll want to explore and potentially use them as well | |
what is an accounting standard | an accounting standard is a common set of principles standards and procedures that define the basis of financial accounting policies and practices understanding accounting standardsaccounting standards improve the transparency of financial reporting in all countries in the united states the generally accepted accounting principles gaap form the set of accounting standards widely accepted for preparing financial statements 1 international companies follow the international financial reporting standards ifrs which are set by the international accounting standards board and serve as the guideline for non u s gaap companies reporting financial statements 23the generally accepted accounting principles are used widely among public and private entities in the united states the rest of the world primarily uses ifrs multinational entities are required to use these standards the international accounting standards board iasb establishes and interprets the international communities accounting standards when preparing financial statements 2accounting standards relate to all aspects of an entity s finances including assets liabilities revenue expenses and shareholders equity specific examples of accounting standards include revenue recognition asset classification allowable methods for depreciation what is considered depreciable lease classifications and outstanding share measurement the american institute of accountants which is now known as the american institute of certified public accountants and the new york stock exchange attempted to launch the first accounting standards in the 1930s 4 following this attempt came the securities act of 1933 and the securities exchange act of 1934 which created the securities and exchange commission 5 accounting standards have also been established by the governmental accounting standards board for accounting principles for all state and local governments 1accounting standards specify when and how economic events are to be recognized measured and displayed external entities such as banks investors and regulatory agencies rely on accounting standards to ensure relevant and accurate information is provided about the entity these technical pronouncements have ensured transparency in reporting and set the boundaries for financial reporting measures u s gaap accounting standardsthe american institute of certified public accountants developed managed and enacted the first set of accounting standards in 1973 these responsibilities were given to the newly created financial accounting standards board 6 the securities and exchange commission requires all listed companies to adhere to u s gaap accounting standards in the preparation of their financial statements to be listed on a u s securities exchange 7accounting standards ensure the financial statements from multiple companies are comparable because all entities follow the same rules accounting standards make the financial statements credible and allow for more economic decisions based on accurate and consistent information financial accounting standards board fasb an independent nonprofit organization the financial accounting standards board fasb has the authority to establish and interpret generally accepted accounting principles gaap in the united states for public and private companies and nonprofit organizations 8 gaap refers to a set of standards for how companies nonprofits and governments should and present their financial statements 1 | |
why are accounting standards useful | accounting standards improve the transparency of financial reporting in all countries they specify when and how economic events are to be recognized measured and displayed external entities such as banks investors and regulatory agencies rely on accounting standards to ensure relevant and accurate information is provided about the entity these technical pronouncements have ensured transparency in reporting and set the boundaries for financial reporting measures | |
what are generally accepted accounting principles gaap | in the united states the generally accepted accounting principles gaap form the set of accounting standards widely accepted for preparing financial statements its aim is to improve the clarity consistency and comparability of the communication of financial information basically it is a common set of accounting principles standards and procedures issued by the financial accounting standards board fasb 1 public companies in the united states must follow gaap when their accountants compile their financial statements 7 | |
what are international financial reporting standards ifrs | international companies follow the international financial reporting standards ifrs which are set by the international accounting standards board and serve as the guideline for non u s gaap companies reporting financial statements they were established to bring consistency to accounting standards and practices regardless of the company or the country ifrs is thought to be more dynamic than gaap in that it is regularly being revised in response to an ever changing financial environment 2 | |
what is accounting theory | accounting theory is a set of assumptions frameworks and methodologies used in the study and application of financial reporting principles the study of accounting theory involves a review of both the historical foundations of accounting practices as well as the way in which accounting practices are changed and added to the regulatory framework that governs financial statements and financial reporting understanding accounting theoryall theories of accounting are bound by the conceptual framework of accounting this framework is provided by the financial accounting standards board fasb an independent entity that works to outline and establish the key objectives of financial reporting by businesses both public and private 1 further accounting theory can be thought of as the logical reasoning that helps evaluate and guide accounting practices accounting theory as regulatory standards evolve also helps develop new accounting practices and procedures accounting theory is more qualitative than quantitative in that it is a guide for effective accounting and financial reporting the most important aspect of accounting theory is usefulness in the corporate finance world this means that all financial statements should provide important information that can be used by financial statement readers to make informed business decisions this also means that accounting theory is intentionally flexible so that it can produce effective financial information even when the legal environment changes in addition to usefulness accounting theory states that all accounting information should be relevant reliable comparable and consistent what this essentially means is that all financial statements need to be accurate and adhere to u s generally accepted accounting principles gaap adherence to gaap allows the preparation of financial statements to be both consistent to a company s past financials and comparable to the financials of other companies finally accounting theory requires that all accounting and financial professionals operate under four assumptions the first assumption states that a business is a separate entity from its owners or creditors the second affirms the belief that a company will continue to exist and not go bankrupt the third assumes that all financial statements are prepared with dollar amounts and not with other numbers like units of production finally all financial statements must be prepared on a monthly or annual basis special considerationsaccounting as a discipline has existed since the 15th century since then both businesses and economies have greatly evolved accounting theory is a continuously evolving subject and it must adapt to new ways of doing business new technological standards and gaps that are discovered in reporting mechanisms for example organizations such as the international accounting standards board help create and revise practical applications of accounting theory through modifications to their international financial reporting standards ifrs 2 professionals such as certified public accountants cpas help companies navigate new and established accounting standards | |
what is accounts payable ap | accounts payable ap or payables refers to a company s short term obligations owed to its creditors or suppliers which have not yet been paid payables appear on a company s balance sheet as a current liability another less common usage of ap refers to the business department or division that is responsible for making payments owed by the company to suppliers and other creditors accounts payable can be compared with accounts receivable investopedia alison czinkotaunderstanding accounts payable ap a company s total accounts payable balance at a specific point in time will appear on its balance sheet under the current liabilities section accounts payable are obligations that must be paid off within a given period to avoid default at the corporate level ap refers to short term payments due to suppliers the payable is essentially a short term iou from one business to another business or entity the other party would record the transaction as an increase to its accounts receivable in the same amount ap is an important figure in a company s balance sheet if ap increases over a prior period that means the company is buying more goods or services on credit rather than paying cash if a company s ap decreases it means the company is paying its prior period obligations at a faster rate than it is purchasing new items on credit accounts payable management is critical in managing a business s cash flow | |
when using the indirect method to prepare the cash flow statement the net increase or decrease in ap from the prior period appears in the top section the cash flow from operating activities | management can use ap to manipulate the company s cash flow to a certain extent for example if management wants to increase cash reserves for a certain period they can extend the time the business takes to pay all outstanding accounts in ap however this flexibility to pay later must be weighed against the ongoing relationships the company has with its vendors it s always good business practice to pay bills by their due dates recording accounts payableproper double entry bookkeeping requires that there must always be an offsetting debit and credit for all entries made into the general ledger to record accounts payable the accountant credits accounts payable when the bill or invoice is received the debit offset for this entry generally goes to an expense account for the good or service that was purchased on credit the debit could also be to an asset account if the item purchased was a capitalizable asset when the bill is paid the accountant debits accounts payable to decrease the liability balance the offsetting credit is made to the cash account which also decreases the cash balance for example imagine a business gets a 500 invoice for office supplies when the ap department receives the invoice it records a 500 credit in accounts payable and a 500 debit to office supply expense the 500 debit to office supply expense flows through to the income statement at this point so the company has recorded the purchase transaction even though cash has not been paid out this is in line with accrual accounting where expenses are recognized when incurred rather than when cash changes hands the company then pays the bill and the accountant enters a 500 credit to the cash account and a debit for 500 to accounts payable a company may have many open payments due to vendors at any one time all outstanding payments due to vendors are recorded in accounts payable as a result if anyone looks at the balance in accounts payable they will see the total amount the business owes all of its vendors and short term lenders this total amount appears on the balance sheet for example if the business above also received an invoice for lawn care services in the amount of 50 the total of both entries in accounts payable would equal 550 prior to the company paying off those obligations accounts payable vs trade payablesalthough some people use the phrases accounts payable and trade payables interchangeably the phrases refer to similar but slightly different situations trade payables constitute the money a company owes its vendors for inventory related goods such as business supplies or materials that are part of the inventory accounts payable include all of the company s short term obligations for example if a restaurant owes money to a food or beverage company those items are part of the inventory and thus part of its trade payables meanwhile obligations to other companies such as the company that cleans the restaurant s staff uniforms fall into the accounts payable category both of these categories fall under the broader accounts payable category and many companies combine both under the term accounts payable accounts payable vs accounts receivableaccounts receivable ar and accounts payable are essentially opposites accounts payable is the money a company owes its vendors while accounts receivable is the money that is owed to the company typically by customers when one company transacts with another on credit one will record an entry to accounts payable on their books while the other records an entry to accounts receivable | |
what are some examples of payables | a payable is created any time money is owed by a firm for services rendered or products provided that have not yet been paid for by the firm this can be from a purchase from a vendor on credit or a subscription or installment payment that is due after goods or services have been received | |
where do i find a company s accounts payable | accounts payable are found on a firm s balance sheet and since they represent funds owed to others they are booked as a current liability | |
how is accounts payable different from accounts receivable | receivables represent funds owed to the firm for services rendered and are booked as an asset accounts payable on the other hand represent funds that the firm owes to others and are considered a type of accrual for example payments due to suppliers or creditors payables are booked as liabilities | |
are accounts payable business expenses | no some people mistakenly believe that accounts payable refer to the routine expenses of a company s core operations however that is an incorrect interpretation of the term expenses are found on the firm s income statement while payables are booked as a liability on the balance sheet the bottom lineaccounts payable ap refers to the obligations incurred by a company during its operations that remain due and must be paid in the short term as such ap is listed on the balance sheet as a current liability typical payables items include supplier invoices legal fees contractor payments and so on | |
what is the accounts payable turnover ratio | the accounts payable turnover ratio is a short term liquidity measure used to quantify the rate at which a company pays off its suppliers it shows how many times a company pays off its accounts payable during a particular period accounts payable is short term debt that a company owes to its suppliers and creditors the accounts payable turnover ratio can reveal how efficient a company is at paying what it owes in the course of a year investopedia michela buttignolformula and calculation of the ap turnover ratioap turnover tsp bap eap 2 where ap accounts payable tsp total supply purchases bap beginning accounts payable eap ending accounts payable begin aligned text ap turnover frac text tsp text bap eap 2 textbf where text ap accounts payable text tsp total supply purchases text bap beginning accounts payable text eap ending accounts payable end aligned ap turnover bap eap 2tsp where ap accounts payabletsp total supply purchasesbap beginning accounts payableeap ending accounts payable calculate the average accounts payable for the period by adding the accounts payable balance at the beginning of the period to the balance at the end of the period divide the result by two then divide the total supplier purchases for the period by the average accounts payable for the period | |
what the ap turnover ratio can tell you | the accounts payable turnover ratio shows investors how many times per period a company pays its accounts payable in other words the ratio measures the speed at which a company pays its suppliers investors can use the accounts payable turnover ratio to determine if a company has enough cash or revenue to meet its short term obligations creditors can use the ratio to measure whether to extend a line of credit to the company measured over time a decreasing figure for the ap turnover ratio indicates that a company is taking longer to pay off its suppliers than in previous periods this could signal that a company is in financial distress alternatively a decreasing ratio could also mean the company has negotiated different payment arrangements with its suppliers | |
when the figure for the ap turnover ratio increases the company is paying off suppliers at a faster rate than in previous periods it means the company has plenty of cash available to pay off its short term debts in a timely manner this can indicate that the company is managing its debts and cash flow effectively | however an increasing ratio over a long period of time could also indicate that the company is not reinvesting money back into its business this could result in a lower growth rate and lower earnings for the company in the long term ideally a company wants to generate enough revenue to pay off its accounts payable quickly but not so quickly that the company lacks the cash needed to take advantage of opportunities to invest in its growth the accounts payable is listed on the balance sheet under current liabilities example of how to use the ap turnover ratiohere s an example of how an investor might consider an ap turnover ratio comparison when investigating companies in which they might invest company a purchased its materials and inventory from one supplier and calculated an ap turnover ratio for the past year with the following numbers during the same year company b a competitor of company a calculated its ap turnover ratio as shown below the investor can see that company b paid off its suppliers at a faster rate than company a that could mean that company b is a better candidate for an investment however the investor may want to look at a succession of ap turnover ratios for company b to determine in which direction they ve been moving that in turn may motivate them to look more closely at whether company b has been managing its cash flow as effectively as possible in addition before making an investment decision the investor should review other financial ratios as well to get a more comprehensive picture of the company s financial health ap turnover ratio vs ar turnover ratiothe accounts receivable turnover ratio is an accounting measure used to quantify a company s effectiveness in collecting its receivables or the money owed to it by its customers the ratio demonstrates how well a company uses and manages the credit it extends to customers and how quickly that short term debt is collected or paid so while the accounts receivable turnover ratio shows how quickly a company gets paid by its customers the accounts payable turnover ratio shows how quickly the company pays its suppliers an industry could have a standard ap turnover ratio that is unique to it limitation of the ap turnover ratioas with all financial ratios it s useful to compare a company s ap turnover ratio with companies in the same industry that can help investors determine how capable one company is at paying its bills compared to others on the other hand a consistently high or increasing ratio especially when compared to the industry standard could alert creditors and investors to a situation in which a company isn t managing its cash properly and failing to reinvest in its growth consequently a high or low ratio shouldn t be taken at face value instead investors who note the ap turnover ratio may wish to do additional research to determine the reason for it | |
what is a good accounts payable turnover ratio | an ap ratio between six and 10 is considered ideal a ratio below six indicates that a business is not generating enough revenue to pay its suppliers in an appropriate time frame bear in mind that industries operate differently and therefore they ll have different overall ap turnover ratios | |
is a higher accounts payable turnover ratio better | yes a higher ap turnover ratio is better than a lower one because it shows that a business is bringing in enough revenue to be able to pay off its short term obligations this is an indicator of a healthy business and it gives a business leverage to negotiate with suppliers and creditors for better rates | |
how can you improve your accounts payable turnover ratio | to improve your accounts payable turnover ratio you can improve your cash flow renegotiate terms with your supplier pay bills before they re due and use automated payment solutions the bottom linethe accounts payable turnover ratio is a measurement of how efficiently a company pays its short term debts normally the higher the ratio the better the company is at paying its bills the ideal ap turnover ratio should allow it to pay off its debts quickly and reinvest money in itself to grow its business a higher ratio also means the potential for better rates on purchases and loans | |
what are accounts receivable ar | accounts receivable ar is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers accounts receivable is listed on the balance sheet as a current asset any amount of money owed by customers for purchases made on credit is ar joules garcia investopediaunderstanding accounts receivable ar accounts receivable refer to the outstanding invoices that a company has or the money that clients owe the company the phrase refers to accounts that a business has the right to receive because it has delivered a product or service accounts receivable or receivables represent a line of credit extended by a company and normally have terms that require payments due within a relatively short period it typically ranges from a few days to a fiscal or calendar year companies record accounts receivable as assets on their balance sheets because there is a legal obligation for the customer to pay the debt they are considered liquid assets because they can be used as collateral to secure a loan to help meet short term obligations receivables are part of a company s working capital furthermore accounts receivable are current assets meaning that the account balance is due from the debtor in one year or less if a company has receivables this means that it has made a sale on credit but has yet to collect the money from the purchaser essentially the company has accepted a short term iou from its client accounts receivable vs accounts payable | |
when a company owes debts to its suppliers or other parties these are accounts payable accounts payable are the opposite of accounts receivable to illustrate company a cleans company b s carpets and sends a bill for the services | company b owes them money so it records the invoice in its accounts payable column company a is waiting to receive the money so it records the bill in its accounts receivable column | |
what accounts receivable can tell you | accounts receivable are an important aspect of a business s fundamental analysis accounts receivable is a current asset so it measures a company s liquidity or ability to cover short term obligations without additional cash flows fundamental analysts often evaluate accounts receivable in the context of turnover also known as the accounts receivable turnover ratio which measures the number of times a company has collected its accounts receivable balance during an accounting period further analysis would include assessing days sales outstanding dso the average number of days that it takes to collect payment after a sale has been made example of accounts receivablean example of accounts receivable includes an electric company that bills its clients after the clients receive the electricity the electric company records an account receivable for unpaid invoices as it waits for its customers to pay their bills most companies operate by allowing a portion of their sales to be on credit sometimes businesses offer this credit to frequent or special customers who receive periodic invoices the practice allows customers to avoid the hassle of physically making payments as each transaction occurs in other cases businesses routinely offer all of their clients the ability to pay after receiving the service | |
what are examples of receivables | a receivable is created any time money is owed to a firm for services rendered or products provided that have not yet been paid this can be from a sale to a customer on store credit or a subscription or installment payment that is due after goods or services have been received | |
where do i find a company s accounts receivable | accounts receivable are found on a firm s balance sheet because they represent funds owed to the company they are booked as an asset investors need to dig into the numbers shown under accounts receivable to determine if the company follows sound practices | |
how are accounts receivable different from accounts payable | accounts receivable represent funds owed to the firm for services rendered and they are booked as an asset accounts payable on the other hand represent funds that the firm owes to others for example payments due to suppliers or creditors payables are booked as liabilities the bottom lineaccounts receivable is one of the most important line items on a company s balance sheet it is money owed to a company from the sale of its goods or services to customers that has not yet been paid the shorter the time a company has accounts receivable balances the better as it means the company is being paid fast and it can use that money for other business aspects | |
what is accounts receivable aging | accounts receivable aging is a periodic report that categorizes a company s accounts receivable according to the length of time an invoice has been outstanding it is used as a gauge to determine the financial health and reliability of a company s customers if the accounts receivable aging shows a company s receivables are being collected much more slowly than normal this is a warning sign that business may be slowing down or that the company is taking on greater credit risk in its sales practices investopedia michela buttignol | |
how accounts receivable aging works | accounts receivable aging as a management tool can indicate that certain customers are becoming credit risks it can be used to help determine whether the company should keep doing business with customers who are chronically late payers accounts receivable aging has columns that are typically broken into date ranges of 30 days each and shows the total receivables that are currently due as well as those that are past due for each 30 day time period 1accounts receivable aging is useful in determining the allowance for doubtful accounts when estimating the amount of bad debt to report on a company s financial statements the accounts receivable aging report is used to estimate the total amount to be written off the primary useful feature is the aggregation of receivables based on the length of time the invoice has been past due accounts that are more than six months old are unlikely to be collected except through collections or a court judgment companies apply a fixed percentage of default to each date range invoices that have been past due for longer periods of time are given a higher percentage due to increasing default risk and decreasing collectibility the sum of the products from each outstanding date range provides an estimate regarding the total of uncollectible receivables 2the irs allows companies to write off aged receivables but only if the company has given up on collecting the debt 3the aged receivables report is a table that provides details of specific receivables based on age the specific receivables are aggregated at the bottom of the table to display the total receivables of a company based on the number of days the invoice is past due the typical column headers include 30 day windows of time and the rows represent the receivables of each customer here s an example of an accounts receivable aging report 1benefits of accounts receivable agingthe findings from accounts receivable aging reports may be improved in various ways first accounts receivable are derivations of the extension of credit if a company experiences difficulty collecting accounts as evidenced by the accounts receivable aging report problem customers may be required to do business on a cash only basis therefore the aging report is helpful in laying out credit and selling practices accounts receivable aging reports are also required for writing off bad debts tracking delinquent accounts allows the business to estimate the number of accounts that they will not be able to collect it also helps to identify potential credit risks and cash flow issues companies will use the information on an accounts receivable aging report to create collection letters to send to customers with overdue balances accounts receivable aging reports may be mailed to customers along with the month end statement or a collection letter that provides a detailed account of outstanding items therefore an accounts receivable aging report may be utilized by internal as well as external individuals | |
how do you calculate accounts receivable aging | accounts receivable aging sorts the list of open accounts in order of their payment status there are separate buckets for accounts that are current those that are past due less than 30 days 60 days and so on based on the percentage of accounts that are more than 180 days old a company can estimate the expected amount of unpaid accounts receivables for future write offs | |
why is accounts receivable aging important | there are two main reasons to track accounts receivable aging first to track overdue or delinquent accounts so that the company can continue to decide what to do with old debts these may be sold to collections pursued in court or simply written off the second reason is so that the company can calculate the number of accounts for which it does not expect to receive payment using the allowance method the company uses these estimates to include expected losses in its financial statement | |
what is the typical method for aging accounts | the aging method is used to estimate the number of accounts receivable that cannot be collected this is usually based on the aged receivables report which divides past due accounts into 30 day buckets each bucket is assigned a percentage based on the likelihood of payment by multiplying the total receivables in each bucket by the assigned percentage the company can estimate the expected amount of uncollectable receivables 1the bottom lineaccounts receivable aging is a type of financial report used by businesses it distinguishes open accounts receivables or customers with outstanding balances based on how long an invoice has been unpaid it usually tabulates invoices owed in 30 day segments this report can be used in a variety of ways businesses can use accounts receivable aging to decide whether to continue doing business with a certain customer or whether to require them to pay in advance or in cash it can be used to decide whether to pursue an invoice in court or through a collections agency if the company cannot collect the amount owed the accounts receivable aging report is used to write off the debt | |
what is accounts receivable financing | accounts receivable ar financing is a type of financing arrangement in which a company receives financing capital related to a portion of its accounts receivable accounts receivable financing agreements can be structured in multiple ways usually with the basis as either an asset sale or a loan understanding accounts receivable financingaccounts receivable financing is an agreement that involves capital principal in relation to a company s accounts receivables accounts receivable are assets equal to the outstanding balances of invoices billed to customers but not yet paid accounts receivables are reported on a company s balance sheet as an asset usually a current asset with invoice payment required within one year accounts receivable are one type of liquid asset considered when identifying and calculating a company s quick ratio which analyzes its most liquid assets quick ratio cash equivalents marketable securities accounts receivable due within one year current liabilitiesas such both internally and externally accounts receivable are considered highly liquid assets which translate to theoretical value for lenders and financiers many companies may see accounts receivable as a burden since the assets are expected to be paid but require collections and can t be converted to cash immediately as such the business of accounts receivable financing is rapidly evolving because of these liquidity and business issues moreover external financiers have stepped in to meet this need the process of accounts receivable financing is often known as factoring and the companies that focus on it may be called factoring companies the best factoring companies will usually focus substantially on the business of accounts receivable financing but factoring in general may be a product of any financier financiers may be willing to structure accounts receivable financing agreements in different ways with a variety of different potential provisions structuringaccounts receivable financing is becoming more common with the development and integrations of new technologies that help to link business accounts receivable records to accounts receivable financing platforms in general accounts receivable financing may be slightly easier for a business to obtain than other types of capital financing this can be especially true for small businesses that easily meet accounts receivable financing criteria or for large businesses that can easily integrate technology solutions overall there are a few broad types of accounts receivable financing structures asset salesaccounts receivable financing is typically structured as an asset sale in this type of agreement a company sells accounts receivable to a financier this method can be similar to selling off portions of loans often done by banks a business receives capital as a cash asset replacing the value of the accounts receivable on the balance sheet a business may also need to take a write off for any unfinanced balances which would vary depending on the principal to value ratio agreed on in the deal depending on the terms a financier may pay up to 90 of the value of outstanding invoices this type of financing may also be done by linking accounts receivable records with an accounts receivable financier most factoring company platforms are compatible with popular small business bookkeeping systems such as quickbooks linking through technology helps to create convenience for a business allowing them to potentially sell individual invoices as they are booked receiving immediate capital from a factoring platform with asset sales the financier takes over the accounts receivable invoices and takes responsibility for collections in some cases the financier may also provide cash debits retroactively if invoices are fully collected most factoring companies will not be looking to buy defaulted receivables rather focusing on short term receivables overall buying the assets from a company transfers the default risk associated with the accounts receivables to the financing company which factoring companies seek to minimize in asset sale structuring factoring companies make money on the principal to value spread factoring companies also charge fees which make factoring more profitable to the financier bluevine is one of the leading factoring companies in the accounts receivable financing business they offer several financing options related to accounts receivable including asset sales the company can connect to multiple accounting software programs including quickbooks xero and freshbooks for asset sales they pay approximately 90 of a receivables value and will pay the rest minus fees once an invoice has been paid in full loansaccounts receivable financing can also be structured as a loan agreement loans can be structured in various ways based on the financier one of the biggest advantages of a loan is that accounts receivable are not sold a company just gets an advance based on accounts receivable balances loans may be unsecured or secured with invoices as collateral with an accounts receivable loan a business must repay companies like fundbox offer accounts receivable loans and lines of credit based on accounts receivable balances if approved fundbox can advance 100 of an accounts receivable balance a business must then repay the balance over time usually with some interest and fees accounts receivable lending companies also benefit from the advantage of system linking linking to a companies accounts receivable records through systems such as quickbooks xero and freshbooks can allow for immediate advances against individual invoices or management of line of credit limits overall underwritingfactoring companies take several elements into consideration when determining whether to onboard a company onto its factoring platform furthermore the terms of each deal and how much is offered in relation to accounts receivable balances will vary accounts receivables owed by large companies or corporations may be more valuable than invoices owed by small companies or individuals similarly newer invoices are usually preferred over older invoices typically the age of receivables will heavily influence the terms of a financing agreement with shorter term receivables leading to better terms and longer term or delinquent receivables potentially leading to lower financing amounts and lower principal to value ratios advantages and disadvantagesaccounts receivable financing allows companies to get instant access to cash without jumping through hoops or dealing with long waits associated with getting a business loan when a company uses its accounts receivables for asset sales it does not have to worry about repayment schedules when a company sells its accounts receivables it also does not have to worry about accounts receivable collections when a company receives a factoring loan it may be able to obtain 100 of the value immediately although accounts receivable financing offers a number of diverse advantages it also can carry a negative connotation in particular accounts receivable financing can cost more than financing through traditional lenders especially for companies perceived to have poor credit businesses may lose money from the spread paid for accounts receivables in an asset sale with a loan structure the interest expense may be high or may be much more than discounts or default write offs would amount to | |
what is an accredited asset management specialist aams | the accredited asset management specialist aams is a professional designation awarded by the college for financial planning to financial professionals who complete a self study program pass an exam and agree to comply with a code of ethics successful applicants earn the right to use the aams designation with their names for two years which can improve job opportunities professional reputation and pay understanding the aams designationthe aams program began in 1994 and is taught exclusively online using the cfp s platform the college for financial planning owned by kaplan is a financial education provider for working adults in the financial services industry the aams program consists of 10 modules starting with a review of the asset management process and then covers a broad range of topics such as investments insurance taxation retirement and estate planning issues to keep the privileges associated with the designation aams professionals must complete 16 hours of continuing education every two years and pay a fee the aams continuing education program is developed alongside some of the nation s top investment firms applicants explore case studies based on real life scenarios designed to prepare them for effectiveness in the real world and help them build lasting relationships with clients | |
what does an aams do | the aams certification is designed to equip new advisors with the information they need to help clients plan for and accomplish their personal financial goals the specialists help people plan college savings taxes and retirement savings an aams focuses on personal finances over and above checking and savings account management asset management investments and much more individuals with the aams designation may work as financial advisors registered investment advisors registered representatives client relationship managers financial consultants or investment advisors | |
how to attain aams certification | the aams certification is granted by the college of financial planning the college that created the certified financial planner certification to achieve certification you ll need to enroll at the college of financial planning this process is not similar to traditionally enrolling in a college you select the program from the college s website choose your options and pay for the materials you re given an opportunity to choose printed study materials when you re checking out once you receive your materials you have 120 days from the day you re granted access to the online material to complete testing and pass the final exam you follow the course online using prerecorded videos self study and printed study materials if you buy them the final exam for the aams program contains 80 questions a passing score on the aams final examination is 70 or better the time limit for the final exam is three hours and you re allowed two attempts to pass 1the self study program covers several topics once you receive your aams certification you must complete 16 hours of continuing education credits per year and pay a renewal fee of 95 once every two years to maintain your certification 1aams vs cfpaams certification focuses on personal finance asset management and investments it is intended for newer financial planners or planners transitioning from other financial work certified financial planners cfp are finance professionals certified by the college of financial planning to help people plan and achieve their financial goals a cfp can assist someone throughout their lifetime helping them adjust their finances to meet changing life events and updated financial goals the cfp certification is the highest accreditation available for financial planners requiring 6 000 hours of professional planning experience within the ten years preceding the certification exam special considerationsthe financial industry regulatory authority finra specifies that it does not approve or endorse any professional credential or designation still it does list the aams as one of the available designations in the financial services industry according to the college for financial planning cfp some organizations recognize the aams designation as representing 28 hours of continuing education credit the cfp maintains an accessible database of the names of all certificate holders and their status when aams students pass their final exam they receive credit for completing module fp511 from the cfp course | |
what does aams stand for | an accredited asset management specialist is certified by the college of financial planning to advise clients about personal finance matters asset management and investments | |
which is better aams or cfp | the aams is more for entry level advisors or those that enjoy advising clients about personal finances investments and asset management a cfp professional helps clients plan their finances throughout their lifetimes advising them on everything from savings to retirement funds to investment portfolios |
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