When you run a business, your focus should be on operations and not on spending extensive time managing your business accounts. However, there are still some basic concepts of corporate accounting that you should be aware of. Knowing the following corporate accounting terms can help you better understand your business expenses, incomes, and financial position at any given point.
Accrual Based Accounting and Cash-Based Accounting
Accrual and cash are the two methods of accounting and only differ by the time when the expenses and incomes are recorded or recognized. In the accrual-based accounting, the income and expenses are recorded when the transaction takes place. Even if the payments aren’t received, or expenses are not paid, they are recorded in the books of account.
On the other hand, in the cash method, the incomes and expenses are recorded when the actual movement of cash takes place.
Cash flow is a term that explains the flow or movement of cash and cash equivalents, basically real and virtual money, to and from your organization. The movement of funds includes various incomes from customers and clients or direct sales and expenses such as operating costs, production costs, and daily cash payments. There are two situations of cash flow that every organization faces. Positive cash flow is when there is an increase in liquid assets that enable you to make investments, settle debts, pay loans, and clear tax liabilities. Negative cash flow occurs when there is a decrease in liquid assets, which prevents you from clearing your liabilities.
A balance sheet is a type of financial statement that summarizes the assets and liabilities along with the shareholder’s equity in your business at a specific point in time. Balance sheets with these three sections help you understand the business assets and liabilities owed at specific points in time, generally at the end of every month, quarter, or year. Balance sheets are also described as the “snapshots of an organization’s financial condition.”
Gross Profit v/s Net Profit
The gross and net profits are ratios for you to assess your company’s financial stability and overall health.
- Gross profit is calculated using the following equation:
Gross Profit = Sales – Cost of Good Sold
Here, the sales is the total revenue generated by selling the goods
Net profit is calculated using the following equation:
Net Profit = Total Income – Total Expenses
Here, the income is the total revenue generated, and expenses include the total costs or expenses associated with selling the goods (operating expenses, transport and other expenses, interest, taxes, etc.)
Tax liability is the amount of taxation or money that your company has to pay in compliance with the current Canadian taxation laws. Taxes are imposed on various incomes, direct or indirect. The direct incomes include revenues generated from the sale of goods and payments from customers and clients. The indirect income includes revenues that you earn from a secondary source such as dividends and bank interests. If you do not report and pay the taxes owing in accordance with current Canadian taxation laws, you may become subject to additional interest and penalties.
Every business owner should be aware of the basic business and corporate accounting concepts. However, you don’t have to be an expert. To handle these as well as other, complex accounting and financial management tasks, you can hire expert chartered accountants. Our professionals focus on providing accurate business numbers with the help of best corporate accounting software and methods.