Budget & Accounting Basics
Budgeting activities help companies and individuals save money, expand their businesses and run financially healthy operations. As a business owner, understanding the basic concepts of accounting and budgeting can help you steer your company to profitability in the short and long terms. You can also rely on accounting procedures to lift the veil on your company's liquidity levels.
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Asset
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Assets represent resources that you own. Examples include accounts receivable, equipment and cash, including money in your bank account and other liquid resources, such as stocks. Other resources that are considered assets include real estate and machinery.
Liability
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A liability is a debt you must repay. You also may be liable if you provide a guarantee in a financial transaction for someone else. For example, if you co-sign a loan for an underage relative, you are liable if the family member defaults.
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Expense
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An expense is a cost that you incur through your company's operations. Individuals also incur living expenses, such as rent, insurance, groceries and interest. Other corporate expenses include depreciation, which allocates the cost of a long-term asset over several years.
Revenue
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Revenue is income that a firm generates through its operating activities. As a business owner, your revenues may come from sales, vendor discounts and interest income on savings accounts.
Accounts Receivable
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Accounts receivable represent money that customers owe a company. Customer receivables represent an important barometer that business partners keep a close eye on. Lenders and suppliers may view a company with high receivable amounts as healthy and financially viable.
Vendors Payable
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Vendors payable, also known as accounts payable, constitute amounts that a company owes its suppliers, contractors, tax authorities and service providers (utilities companies, for example).
Financial Statement
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A financial statement is otherwise called an accounting report or financial summary. Examples include balance sheets, statements of profit and loss, statement of cash flows and statements of equity. Accounting reports provide insight into a company's profitability and solvency.
Annual Budget
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A budget is a financial document in which a company's leadership sets spending limits to which employees must conform when performing tasks. A personal budget may also help you control your expenses and save enough money to reach your long-term investment goals.
Cost Control
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In the corporate setting, cost control is a constant, pressing priority. Top management sets cost-control procedures integrally to corporate budgets, enabling department heads to monitor spending in their business units.
Variance
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To calculate cost variances, subtract actual expenses from budget amounts. A positive result is the preferred outcome, as it indicates that actual spending was below budget targets. Constantly generating positive variances is important for manufacturing supervisors who want to run efficient production processes.
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