An asset is defined as something of current or future value owned by the company. Assets are shown on the balance sheet, which gives a snapshot of a company’s financial position at one point in time. Any time a business spends money, they are creating an expense or an asset in the financial statements.
Three characteristics of assets:
In order to be considered a true asset, the following must all be true:

There is probable future benefit that the asset contribute directly or indirectly to future net cash flows, that is it generates revenue for the company. (Or in the case of a non-profit, the …read more

A lot of the confusion in formal accounting comes from the difference between accrual basis accounting, and cash basis accounting.
Under the accrual basis accounting, revenues are reported on the income statement when they are earned. Under the cash basis accounting, revenues are reported on the income statement when cash is received.
As for expenses, accrual basis accounting matches expenses with the related revenues when the expense occurs. And in cash accouting? You guessed it – expenses are booked when the cash is paid.
The reasoning behind accrual accounting is that it creates an a more realistic income statement (in terms of profitability) …read more

The downward spiral in a recession (downsizing & cutbacks > unemployment > loss-of-purchasing power > cuts-in-production > more unemployment > more loss-of-purchasing-power > and on and on) can be mitigated if the Fortune 500 & Blue Chip corporations (which remain profitable, recession or not) played Big Brother to Small Business Kid Brother by doubling their accounts receivable days (encouraging buyers to purchase) and decreasing by half their accounts payable days (thereby giving much needed relief to their suppliers). In effect, this will increase the velocity of funds in …read more

One of the greatest problems of a prolonged recession is the downward spiral that corporations (large & small) cause by their survival strategies. As companies downsize & cutback, unemployment causes loss of purchasing power in the market place which make companies bring down production levels which causes more unemployment which causes more loss of purchasing power . . . etc etc.
One survival strategy which contributes to downsizing and cutbacks is the knee-jerk reaction of finance managers. In a recession, they almost automatically shorten accounts receivable and lengthen accounts payable. This has the double whammy effect of slowing …read more

The Pareto Priniciple (also called the 80% – 20% Rule) has been applied in a variety of fields & disciplines; e.g., business management, time management, management of sales people, project management, development economics, etc. Basically, the Pareto Principle states: in any endeavor, a 20% segment can explain the status of almost anything and can influence what can or will happen to the undertaking. The Pareto Principle has also been called the Rule of the Vital Few and the Trivial Many.
For small businesses, it is best if you consider the 20% as critical and the 80% as …read more

Accounts receivable and accounts payable are reciprocal accounts. Your business’ accounts receivable are the accounts payable of the community you serve and your accounts payable are the accounts receivable of the community (e.g., suppliers).
Specially for small businesses, it is best if the relationships are not just cold impersonal exchanges of goods and dollars. Beyond the trust that underlies business transactions, there should be some concern and consideration flowing into / from both ends of the transaction. Even huge multinationals see this and spend a lot of public relations dollars in creating an image of concern and consideration …read more

AccountingSolver received an insightful comment from Mary Schaeffer, Author Controller & CFO’s Guide to Accounts Payable (John Wiley & Sons 2007) & 12 other business books, Editorial Director Accounts Payable Now & Tomorrow (http://ap-now.com/blog/):
“I just read a post on another blog recommending payment stretching as a way of improving cash flow. And, to be honest, it will do just that – at least temporarily.
But the pundits that recommend this tactic overlook a few things. First, it will annoy the you know what out of your suppliers. They have no interest in becoming your banker – they are worried enough about …read more

In order to avoid undue pressure on your cash (as the increase in Sales pushes up your Cost of Goods), you have to make sure that your accounts receivable & accounts payable are synchronized. You have to make sure that the number of days in which you collect your accounts receivable (i.e., credit sales) is always less than the number of days in which you have to pay your suppliers (i.e., cost of goods).
In a small business with not so many transactions, it is easy to track days receivable and days payable. If / when your credit program …read more

One of the most effective ways of stimulating sales is by injecting a credit program into your sales program (i.e., set up an accounts receivable).  If / when your credit program / accounts receivable results in a growth in Revenues as expected, your Cost of Goods will also grow in step with your Revenues.
In most businesses (specially where goods are produced), the greater portion of Working Capital goes into Cost of Goods Sold.  One of the most effective ways of reducing the need for Working Capital is through suppliers’ credit or your accounts payable.  It would be a great advantage …read more

One of the most effective ways of stimulating sales is by injecting a credit program into your sales program (i.e., set up an accounts receivable). If / when your credit program / accounts receivable results in a growth in Revenues as expected, your Cost of Goods will also grow in step with your Revenues. Make sure that your Cost of Goods per unit stays the same (of course, the absolute / total amount will grow). With your Cost of Goods per unit kept at the same level (and with your accounts receivable not exceeding 25% of your …read more