Lesson 7 - Basic Financials, Cash & Taxes.pptx

Lesson 7 - Basic Financials, Cash & Taxes.pptx - Basic...

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Start, Run & Grow Your Business Basic Financials, Cash & Taxes Lesson 7
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Start, Run & Grow Your Business Accounting Terms: Why Bother? The reason is this: financial terms commonly used in business discussions have quite specific meanings. People who don’t understand those meanings tend to misuse financial terms. And this makes for confusion when someone who’s guessing on meaning tries to converse with someone who understands the specific definition. My favorite example of this is the word “goodwill.” In financial analysis, it means something very specific: when a company buys another company, goodwill is an asset that accounts for the difference between what the company paid to purchase that company, and the value of the assets it absorbs. It’s a matter of double-entry bookkeeping. 2
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Start, Run & Grow Your Business Accounting Terms: Why Bother? EXAMPLE: Suppose your company writes me a $100,000 check to buy my company, but my company has only $55,000 of book value for assets on the books. In that case, in your posting for that transaction, you debit $55,000 to specific assets (probably listing them in detail), and you debit $45,000 to goodwill, so that the total debits, $100,000, are exactly equal to the $100,000 amount that gets credited to your checking account. This has to be; it’s fundamental to the double entry, which is fundamental to having the balance remain in balance. Why does this matter? Because you’ll find in business discussions some people decide that goodwill means something like “good will,” as in good vibes and happiness, or good karma. Or whatever. If you’re talking to somebody who knows finance and accounting, however, that will confuse them no end. You don’t get to decide what accounting terms mean. 3
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Start, Run & Grow Your Business Accounting Tersm: Why Bother? The same happens with the word “assets.” For example, if you pay a programmer $1,000 to create a website, you’d like to think that the website is an asset to your business. And in the general sense of the word, it is. But it isn’t an asset in the accounting sense; it’s an expense. And that specific vs. general definition makes a huge difference. 4
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Start, Run & Grow Your Business Planning is not Accounting Image: publicdomainpictures.net 5
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Start, Run & Grow Your Business Planning is not Accounting This is a common misconception, but there is a difference. Accounting looks backward at what happened in a given time period. The deep details of depreciation, assets, loan payments and interest are important, because they determine what amount of taxes must be paid by the business. Business planning looks forward and projects estimated totals for a given time period. The objective of business planning is decision-making. Because they are estimates, planning numbers don’t require the same level of detail. Instead, they are guidelines for where you want your business to reach. You want to simplify your assumptions for depreciation, assets and taxes.
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