The third the cash flow brings the other two forward

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Unformatted text preview: becomes cost of goods sold or cost of sales, does it reduce income. W hy You do not Want to Capitalize Expenses Sometimes people want to treat expenses as assets. Ironically, that is usually a bad idea, for several reasons: • Money spent buying assets is not tax deductible. Money spent on expenses is deductible. • Capitalizing expenses creates the danger of overstating assets. • If you capitalize the expense, it appears on your books as an asset. Having useless assets on the accounting books is not a good thing. Debits and Credits You don’t have to know debits and credits to do a business plan. As I say elsewhere, planning is not accounting. You don’t need to be an MBA or CPA to develop business plan financials. You need to be able to make reasonable assumptions and follow the financials, preferably using Business Plan Pro® software. Still, some simple understanding is useful, and easy. Debits and credits originally appeared as part of the double-entry bookkeeping system that supports the entire world of financial accounting, planning, and analysis. It starts out with a simple accounting sheet, as you see here. You write the item in one column, the debit in another, and the credit in a third. HURDLE: THE BOOK 14.4 Item Debit Sales Cash ON BUSINESS PLANNING Credit $635.32 $635.32 You’ll notice that the single transaction has two entries, one of $635.32 for the sale and the other for the related $635.32 for the cash. Here’s another: Item Debit Rent $975.00 Cash Credit $975.00 It can get a lot more complicated than that, but with these examples you can see the foundations of the system. Here are some built-in standards that might help. • Every transaction has to have equal amounts for debits and credits. Accounting must always balance debits and credits. That’s where the word “balance” comes from. • The amount of a sale is normally a credit. A debit to sales is the same as a refund. It reduces sales. • Costs and expenses are normally debits. You debit the expense account a...
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