More Info on Accounting
Assets = Liabilities + Equity
Assets represent the company's wealth and the goods it owns. Fixed assets include buildings and offices, while current assets include bank accounts and cash.The money owed by a client is an asset. An employee is not an asset.
Liabilities are obligations from past events that the company will have to pay in the future (utility bills, debts, unpaid suppliers). Liabilities could also be defined as a source of financing which is provided to the company, also called *leverage*.
Equity is the amount of the funds contributed by the owners of the company (founders or shareholders) plus previously retained earnings (or losses). Each year, net profits (or losses) may be reported as retained earnings or distributed to the shareholders (as a dividend).
A difference is made between assets and expenses:
- An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet. They are bought or created to increase a firm's value or benefit its operations.
- An expense is the costs of operations a company bears to generate revenues.
The revenue refers to the money earned by the company by selling goods and/or services.
The cost of goods sold (COGS, or also known as "Cost of Sale") refers to the sale of goods' costs (e.g., the cost of the materials and labor used to create the goods).
The Gross profit equals the revenues from sales minus the cost of goods sold.
Operating expenses (OPEX) include administration, sales and R&D salaries, rent and utilities, miscellaneous costs, insurances, and anything beyond the costs of products sold or the cost of sale.
Chart of Accounts¶
The chart of accounts lists all the company's accounts: both Balance sheet accounts and P&L
accounts. Every transaction is recorded by debiting and crediting multiple accounts in a journal
entry. In a way, a chart of accounts is like a company's DNA!
Every account listed in the chart of accounts belongs to a specific category. In PerfectWORK, each account
has a unique code and belongs to one of these categories:
- Equity and subordinated debts
- Equity is the amount of money invested by a company's shareholders to finance the company's activities.
- Subordinated debts are the amount of money lent by a third party to a company to finance its activities. In the event of the dissolution of a company, these third parties are reimbursed before the shareholders.
- Fixed assets are tangible (i.e., physical) items or properties that a company purchases and uses to produce its goods and services. Fixed assets are long-term assets. This means the assets have a useful life of more than one year. They also include properties, plants, and equipments (also known as "PP&E") and are recorded on the balance sheet with that classification.
- Current assets and liabilities
- The current assets account is a balance sheet line item listed under the Assets section, which accounts for all company-owned assets that can be converted to cash within one year. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, prepaid liabilities, and other liquid assets.
- Current liabilities are a company's short-term financial obligations due within one year. An example of a current liability is money owed to suppliers in the form of accounts payable.
- Bank and cash accounts
- A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a customer are recorded.
- A cash account, or cash book, may refer to a ledger in which all cash transactions are recorded. The cash account includes both the cash receipts and the cash payment journals.
- Expenses and income
- An expense is the costs of operations a company bears to generate revenues. It is simply defined as the cost one is required to spend on obtaining something. Common expenses include supplier payments, employee wages, factory leases, and equipment depreciation.
- The term "income" generally refers to the amount of money, property, and other transfers of value received over a set period of time in exchange for services or products.