Accounting ABCs

How the Profit & Loss connects to the Balance Sheet Credits to Josh Aharonoff, CPA, follow him for more practical finance content. Here's the original post ----- I'll reveal the secret sauce that links two important financial statements the Profit and Loss and The Balance Sheet. I'll also talk about other Accounts that have a relationship between P&L and the Balance Sheet if you work in Finance & Accounting, understanding this connection will unlock huge value in your career…allowing you to: ✅ Build a 3 statement model ✅ Book adjusting journal entries ✅ Understand how to read financial statements 1. Retained Earnings & Net Income This is the key connection. Your P&L condenses into Net Income, which then integrates into your Balance Sheet under Retained Earnings. • Balance Sheet → Retained Earnings • Profit & Loss → cumulative net income 2. Depreciation & Accumulated Depreciation Depreciation reflects the deterioration of your fixed assets…. and recorded as an expense on your income statement… followed by an accumulation to your balance sheet. • Balance Sheet → Accumulated Depreciation • Profit & Loss → Total past depreciation expense • Journal Entry: Debit Depreciation, Credit Accumulated Depreciation 3. Deferred Revenue & Revenue Revenue represents your earnings… Deferred Revenue is the income billed/collected but not yet fulfilled. • Balance Sheet → Deferred Revenue • Profit & Loss → Future Earnings • Journal Entry: Debit Deferred Revenue, Credit Revenue 4. Prepaid Expenses & Expenses Prepaid Expenses are costs paid in advance, which are yet to be utilized. Upon usage, it lowers your prepaid asset and is expensed on the P&L. • Balance Sheet → Prepaid Expenses • Profit & Loss → Upcoming Expenses (like software, marketing, travel) • Journal Entry: Debit Expense, Credit Prepaid Expense 5. Accruals & Expenses Accruals are estimated expenses incurred but not yet paid/settled. They appear as liabilities and reduce upon payment/settlement. • Balance Sheet → Accrued Liabilities • Profit & Loss → Recognized expenses • Journal Entry: Debit Expense, Credit Accrued Liability 6. Accounts Payable & Expenses Accounts Payable is what you owe to suppliers for goods/services. It's a liability that decreases with payments. • Balance Sheet → Accounts Payable • Profit & Loss → Recognized expenses • Journal Entry: Debit Expense, Credit Accounts Payable 7. Accounts Receivable and Revenue Accounts Receivable is what customers owe you for sales. The asset reduces upon receiving cash. • Balance Sheet → Accounts Receivable • Profit & Loss → Earned Revenue • Journal Entry: Debit Accounts Receivable, Credit Revenue === These are some of the ways the Balance Sheet & Profit & Loss interact... but there are countless others. What would you add? ---- Follow our page Accounting ABCs to learn more about the fundamentals of Accounting

Ten accountant types that work in Finance. Which accountant types have you worked as? Credits to Anders Liu-Lindberg, follow him for more useful content. The original post ---- Ten accountant types that work in Finance. Which accountant types have you worked as? Here are ten of the most common roles: Financial Accountant Focuses on preparing financial statements, ensuring that financial records are accurate and aligned with accounting standards. Responsible for monthly, quarterly, and annual reporting and often coordinates audits. Management Accountant Provides financial analysis for internal use, aiding in decision-making for budgeting, forecasting, and cost control. Focuses on analyzing operational costs and improving profitability by providing actionable insights to management. Tax Accountant Specializes in preparing tax returns, managing tax compliance, and developing strategies for tax optimization. Stays current with changing tax regulations to ensure the company meets its tax obligations efficiently. Project Accountant Manages accounting for specific projects, tracking project budgets, revenues, costs, and profitability. Works closely with project managers to monitor financial performance and provide real-time insights on project costs and margins. Cost Accountant Focuses on cost control within manufacturing or service industries. Analyzes production costs and inventory valuation and monitors cost variances to support efficiency and profitability. Fund Accountant Manages accounting for investment funds, trusts, or non-profit funds. Tracks contributions, allocations, and fund performance and provides regular reporting to stakeholders or investors. Payroll Accountant Manages all aspects of employee compensation, including salaries, benefits, taxes, and deductions. Ensures timely and accurate payroll processing while complying with labor laws and regulations. Fixed Asset Accountant Manages the financial aspects of a company’s fixed assets, such as property, plant, and equipment. Responsibilities include tracking asset purchases, depreciation, and disposals and ensuring proper recording in the financial system. Revenue Accountant Monitors and records revenue transactions, ensuring revenue is recognized in compliance with accounting standards. Also handles billing, contracts, and customer payments. General Ledger Accountant Oversees the company’s general ledger, which is the core of the financial record-keeping system. Responsible for recording transactions, reconciling accounts, and ensuring accurate trial balances. Are there any accountant roles missing? --- Follow our page Accounting ABCs to learn more about the fundamentals of Accounting

See how the COGS and Inventory Relationship impacts your Financial Model 👇 Credits to Chris Reilly, follow him for more useful content. The original post ---- See how the COGS and Inventory Relationship impacts your Financial Model 👇 𝟭. 𝗥𝗲𝗰𝗼𝗿𝗱 𝗣𝘂𝗿𝗰𝗵𝗮𝘀𝗲 (𝗶𝗻 𝗜𝗻𝘃𝗲𝗻𝘁𝗼𝗿𝘆) The company records a purchase of inventory when the goods are received. 𝗡𝗼𝘁𝗲: a company typically records an inventory purchase when the inventory is received and a legal obligation to pay is established, following the accrual basis of accounting, which records transactions when earned or incurred, not when cash changes hands. 2. 𝗥𝗲𝗰𝗼𝗿𝗱 𝗣𝘂𝗿𝗰𝗵𝗮𝘀𝗲 (𝗶𝗻 𝗔𝗣) The company records that same inventory purchase as a liability in Accounts Payable. This is because the company still owes payment to its supplier. 𝟯. 𝗣𝗮𝘆 𝗦𝘂𝗽𝗽𝗹𝗶𝗲𝗿 When the bill for the inventory is due, the company pays the supplier in cash. This reduces the Accounts Payable balance and $1,000 of cash leaves the business (in this example). 𝟰. 𝗥𝗲𝗱𝘂𝗰𝗲 𝗜𝗻𝘃𝗲𝗻𝘁𝗼𝗿𝘆 Once the product is sold to a customer, then the company removes the purchase from the Inventory account and records it as COGS. They are removing the Cost of something they have now Sold (COGS). Revenue does not impact either of these schedules, rather, it is reflected in Accounts Receivable. 𝗖𝗼𝗺𝗺𝗼𝗻 𝗠𝗶𝘀𝘁𝗮𝗸𝗲𝘀 𝘁𝗼 𝗔𝘃𝗼𝗶𝗱 𝗢𝘃𝗲𝗿𝗹𝗼𝗼𝗸𝗶𝗻𝗴 𝗖𝗼𝘀𝘁𝘀: Don’t forget to include all costs (like shipping) in your Inventory. 𝗠𝗶𝘀𝗮𝗹𝗶𝗴𝗻𝗶𝗻𝗴 𝗣𝗮𝘆𝗺𝗲𝗻𝘁𝘀: Make sure you manage your cash flow based on when payments are due. 𝗜𝗴𝗻𝗼𝗿𝗶𝗻𝗴 𝗧𝘂𝗿𝗻𝗼𝘃𝗲𝗿: Keep an eye on how quickly your inventory is sold and replaced. 𝗜𝗻 𝗦𝘂𝗺𝗺𝗮𝗿𝘆 The relationship between Accounts Payable and Inventory is established through the purchase and payment process. As the company acquires Inventory, it records the corresponding liability in Accounts Payable. The balance is settled when the company pays its supplier, demonstrating the interconnected nature of these two accounts. 𝗡𝗼𝘁𝗲 𝗮𝗯𝗼𝘂𝘁 𝗖𝗢𝗚𝗠 While the above steps outline the basic process for non-manufacturing businesses, in a manufacturing business, there's an additional step: the Cost of Goods Manufactured (COGM). COGM includes not only the cost of raw materials but also direct labor and manufacturing overhead costs. These costs are added to the inventory value as they contribute to the process of bringing the inventory to a sellable state, even though they are not part of the physical inventory itself. --- Follow our page Accounting ABCs to learn more about the fundamentals of Accounting

Hungry for financial knowledge? Credits to Josh Aharonoff, CPA, follow him for more practical finance content. Here's the original post ----- Hungry for financial knowledge? Today's special: The Financial Statements Menu! 🍽️ If you've been following my content, you know that I am committed to spreading financial literacy... and today, I've been cooking up something special for you - a simple (yet tasty) way to understand financial statements 😙👌. Grab your napkin (and maybe a calculator), because this is one meal you won't want to miss! Here's what's on the menu... 👇 🍕 THE PROFIT & LOSS Start off with a delicious appetizer that brings you the taste of profitability! Like any great dish, it's all about balancing the ingredients ⚖️ 😋 Revenue: Fresh ingredients bringing income from customers 😋 Cost of Goods Sold: The raw ingredients that go into every sale 😋 Operating Expenses: All the kitchen costs to keep cooking 😋 Other Income & Expenses: Special ingredients that spice up your profits (but aren't part of the core recipe!) But don't fill up on appetizers... our main course is about to be served! 🔥 🍝 THE BALANCE SHEET Now for our main course - the chef's masterpiece that shows what your business is made of! 🤤 Assets: A rich collection of everything your business has in the kitchen - from cash in the register to those fancy ovens and secret recipes 🤤 Liabilities: The tab you're running with suppliers and lenders (don't worry, they take credit! 😉) 🤤 Owner's Equity: The chef's special! This shows your slice of the business pie - and trust me, you'll want seconds of this one! Now save room... because dessert is coming up! 🍰 🍰 THE STATEMENT OF CASH FLOWS For dessert, we're serving up the sweetest part - where your cash is flowing! (And yes, we're cash only at this station 😂) 🧑🍳 Operating Activities: Your daily special - all the cash from running the restaurant 🧑🍳 Investing Activities: Saving up for new kitchen equipment? Here's where that money goes! 🧑🍳 Financing Activities: When you need extra dough - from taking out loans to paying back your investors === Thanks for dining with us today! 🍽️ Here's a little secret from the kitchen: many of these dishes share the same ingredients! Just like a great chef uses the same fresh tomatoes in multiple courses, you'll find things like net income showing up: 🥘 As an appetizer in the P&L 🥘 Mixed into the Balance Sheet's Retained Earnings 🥘 And even sprinkled into our Cash from Operating Activities dessert! What's your favorite dish on our financial menu? Are you a P&L appetizer person, or more of a Balance Sheet enthusiast? Let me know in the comments! 👇 Bon appétit! 🧑🍳 ---- Follow our page Accounting ABCs to learn more about the fundamentals of Accounting

Here’s how to build a 3-Statement Model Credits to Josh Aharonoff, CPA, follow him for more practical finance content. Here's the original post ----- Here’s how to build a 3-Statement Model 👇 Learning how to create a 3 statement model has been one of the most valuable things I’ve learned how to do in my career… and there’s really not much to it once you understand a few core concepts on how the financial statements are connected. Simply follow these 5 steps… 1️⃣ Export your Profit & Loss and Balance Sheet ⬇️ Start with an export of these 2 financial statements from your accounting software…or build them from scratch. Decide on whether you want to showcase your information monthly (most common) Or instead quarterly, or annually 🗓️ 2️⃣ Connect your Profit & Loss to the Balance Sheet 🔗 Did you know that your P&L connects to the Balance Sheet? It’s all via an account called Retained Earnings… Which represents all of your prior EARNINGS…that have been RETAINED. You’ll often times see an account called “Net Income” or “Profit for the year” on your Balance Sheet. Start by linking this account to the Net Income amount on your Profit & Loss. Then take your Retained Earnings, and make it equal to the prior periods retained earnings + net income 3️⃣ Create a Cash Flow Statement 💵 OK…this is where most people get tripped up. But it’s actually REALLY easy See…a cash flows statement is really just showing the movements in your balance sheet accounts EXCEPT for cash. Since Assets = Liabilities + Owners Equity…the NET CHANGE in these values must equal each other as well. So just duplicate your balance sheet to a new tab, and label it cash flows… then remove all of your values, and for assets: Take Last periods value - this periods value Do the opposite for Liabilities + Owners equity by taking this periods value - last periods value Learn more about how to do this right here: https://lnkd.in/exi9fksF 4️⃣ Connect your Cash Flows back to your Balance Sheet 🔗 Now that you have your cash flows statement created, simply link your ending cash balance back to your Balance Sheet from your Statement of Cash Flows Way to go! You now have a basic 3 statement model 5️⃣ Refine & Built Out the Rest 📊 Now that you have your basic 3 statement model, take it to the next level by focusing on these areas: ➡️ Forecast your Revenue ➡️ Forecast your Headcount ➡️ Forecast your Profit & Loss ➡️ Forecast your Balance Sheet ➡️ Create Stunning Dashboards === Building a 3 statement model can do wonders for your Finance & Accounting function… and if you master this concept, you’ll become more comfortable with predicting the future, and drawing key insights. What has your experience been with creating a 3 statement model? ---- Follow our page Accounting ABCs to learn more about the fundamentals of Accounting

What Are Intangible Assets? Credits to Nathan Liao, CMA, follow him for more useful content. The original post ---- What Are Intangible Assets? A Deep Dive 👇 Intangible assets are non-physical assets That grant rights or privileges to an entity 🏢 They’re often linked to future economic benefits List of Intangible Assets: 1️⃣ Trademarks: Definition: Symbols, names, or slogans used to identify goods or services. Example: The Apple logo or Nike's "Just Do It" slogan. 2️⃣ Patents: Definition: Exclusive rights to make, use, or sell an invention. Example: A pharmaceutical company's exclusive right to produce a new drug. 3️⃣ Copyrights: Definition: Protection of artistic or literary works. Example: The rights to a bestselling novel or a popular music album. 4️⃣ Franchises: Definition: Authorization granted to carry out specified commercial activities. Example: Owning a McDonald's outlet in a city. 5️⃣ Goodwill: Definition: Excess of purchase price over the fair value of net identifiable assets of a business in an acquisition. Example: If Company A acquires Company B for $2M and the net assets of Company B are valued at $1.5M, the goodwill recognized is $500K. 6️⃣ Licenses: Definition: Permission to perform activities or produce items, typically granted by a government. Example: A radio broadcasting license. 7️⃣ Customer Lists: Definition: Information about customers, crucial for sales and marketing activities. Example: A detailed list of clients for a CRM software company. —--------------- These assets can hold immense value 💰 👉 What would you add? Comment below --- Follow our page Accounting ABCs to learn more about the fundamentals of Accounting

How to Protect Your Job Against AI Credits to Nicolas Boucher, follow him for more practical finance content. Here's the original post ----- How to Protect Your Job Against AI AI power is doubling every 6 months It can now write and speak like us It can produce images It can write code Soon it will have access to your productive environment through APIs and will perform the mundane tasks at a large scale What can you do to continue keeping your edge? - Short term practical and efficient solution: Go through my 5-day free course on AI for Finance (comment below 5-day course to get the link and I will send it to you in the comments) -Long term solution: Follow these 10 advices below Here's how you can safeguard your role and thrive in this new era of finance: 1️⃣ Embrace Continuous Learning Stay updated on AI trends and corporate finance by setting up Google Alerts for keywords like "AI in finance" or "Fintech innovations." Follow top influencers in AI and finance for daily insights. 2️⃣ Develop Technical Skills Dedicate 1-2 hours a week to learning tools like data analytics, machine learning, or automation. Consider courses like “Advanced ChatGPT for Finance” https://lnkd.in/ePf_a5aE to enhance your skills. 3️⃣ Enhance Soft Skills Focus on improving communication, leadership, and adaptability. Join a Toastmasters club to sharpen these abilities and apply them at work by leading teams or presenting data-driven insights. 4️⃣ Specialize in Niche Areas Finance requires human judgment in areas like strategic decisions and ethics. Choose a niche, such as ESG analysis or financial compliance, and work on projects that demand specialized skills. 5️⃣ Leverage AI Tools Use AI platforms like Microsoft’s AI Builder or UiPath (with NLP functions) to automate routine financial tasks, boosting productivity and decision-making efficiency. 6️⃣ Focus on Data Interpretation Sharpen your ability to interpret and present data. Take a course on Power BI and apply your skills by creating dashboards for your projects. 7️⃣ Enhance Problem-Solving Abilities Practice solving complex business problems, such as optimizing financial processes, by applying newly learned cost-control techniques. 8️⃣ Adapt to New Technologies Stay flexible and open to evolving financial technologies by attending industry expos or virtual conferences. Stay informed about the latest tools. 9️⃣ Network and Collaborate Build a strong professional network by joining LinkedIn groups or finance-focused Slack communities. Stay connected to maintain relevance in the industry. 🔟 Focus on Ethical AI Use Understand the ethical implications of AI in finance by completing courses from institutions like Stanford or MIT. Apply ethical guidelines to ensure compliance and fairness in your work. With the right approach, you can future-proof your career! ---- Follow our page Accounting ABCs to learn more about the fundamentals of Accounting

Setting up your books wrong destroys businesses faster than any market crash. Credits to Josh Aharonoff, CPA, follow him for more practical finance content. Here's the original post ----- Setting up your books wrong destroys businesses faster than any market crash. I’ve seen these mistakes so often - founders mixing personal and business accounts, messy charts of accounts, and pure chaos in their statements. 📌 How to do Bookkeeping like a PRO (step-by-step guide) Watch the full video: https://lnkd.in/eEbv4-yD Most businesses fail because they ignore their foundation. Not anymore. Here's the breakdown 👇 First, let's talk about what makes a solid foundation in 2024: - Automated transaction management - Clean separation of business and personal finances - Strategic software selection - Clear understanding of cash vs accrual implications Let's fix that! Here's my proven 10-step system: 1️⃣ BUSINESS SETUP Personal card for business expenses? BIG mistake. Not only will the government hate it... Your bookkeeper will too! (Plus you're risking that corporate veil protection) Creating a dedicated bank account for your business is a no-minder and will save you so many headaches. 2️⃣ GET YOUR SOFTWARE RIGHT Excel is great (trust me, I'm obsessed) BUT Your core accounting needs real software QuickBooks Online is the cheapest and most popular tool before you need an ERP 3️⃣ CASH VS ACCRUAL Quick example: Sell an iPhone for $1,000, deliver in 30 days Cash basis? Record now Accrual? that's deferred revenue 4️⃣ DESIGN YOUR CHART OF ACCOUNTS Think of this as your financial filing system. Strike the balance between: - Too detailed = overwhelming - Too broad = uninformative 5️⃣ IMPORT TRANSACTIONS Automation is your friend here. Direct bank feeds save hours of manual entry. Sort by description for bulk categorization. Set rules for recurring transactions. 6️⃣ CLASSIFY TRANSACTIONS Every transaction needs a home. Include: - Category - Vendor/customer - Department - Supporting documents Remember: Garbage in = Garbage out 7️⃣ PERFORM BANK RECONCILIATIONS Match every transaction to your statements. Investigate every discrepancy, no matter how small. 8️⃣ ADJUSTMENTS Key adjustments to consider: - Prepaid expenses spreading - Accrued expense recognition - Depreciation calculations - Revenue recognition - Inventory adjustments Remember the BASE formula: Beginning + Additions - Subtractions = Ending 9️⃣ FINANCIAL STATEMENTS This is where your hard work pays off. Review for: - Unusual fluctuations - Missing expenses - Revenue recognition timing - Margin changes - Budget variances Your statements should tell a story about your business. 🔟 MAKE DECISIONS Great bookkeeping is about insights. Use your clean books to: - Forecast cash flow - Plan hiring - Time major purchases - Identify cost savings - Drive growth strategies Follow our page Accounting ABCs to learn more about the fundamentals of Accounting

When to hard code bank reconciliations Credits to Chris Reilly, follow him for more useful content. The original post ---- Actually, yes, it's totally fine to hard code. Here's where 👇 ~~~ 📌𝗙𝗿𝗲𝗲 𝗥𝗲𝘀𝗼𝘂𝗿𝗰𝗲: building a model but not sure where to start? Grab a free checklist here 👉 https://lnkd.in/eVTU67fY ~~~ 𝗕𝗮𝗻𝗸 𝗥𝗲𝗰𝗼𝗻𝗰𝗶𝗹𝗶𝗮𝘁𝗶𝗼𝗻... 𝗯𝘂𝘁 𝗱𝗼𝗲𝘀 𝗶𝘁 𝘁𝗶𝗲? To the extent possible, each month I like to manually (yes, 𝘮𝘢𝘯𝘶𝘢𝘭𝘭𝘺) punch in the ending bank account balance from the company operating account and compare it to the model calculation. It's a great double-check to ensure I've captured everything correctly in my file, and is good practice for if/when the company undergoes a Quality of Earnings Report. 𝗪𝗵𝗲𝗿𝗲 𝗶𝘁 𝗺𝗶𝗴𝗵𝘁 𝗯𝗲 𝗼𝗳𝗳... There could still be outstanding transactions that have not yet cleared the bank, which could affect the accuracy of the ending balance in the accounting software. But in the grand scheme of things, manually checking and comparing the ending bank account balance with the model provides an additional level of validation to ensure the model is actually working properly. In the image, I like to call it "Proof of Cash" (from my PE days) but it's really a bank reconciliation. 𝗠𝗼𝗱𝗲𝗹𝗶𝗻𝗴 𝗕𝗲𝘀𝘁 𝗣𝗿𝗮𝗰𝘁𝗶𝗰𝗲 Everyone screams "automation, automation, automation!" but to be honest I love good old fashioned "typing in numbers" into my spreadsheet in a handful of places. This is one of them. It forces your brain to take a step back and say to yourself, "is this right?" (and for the truly reckless, you might even print it out on paper) A great update process I like is ~90/10 in terms of automation/manual. Just enough manual information in key places to make sure the automation is correct. --- Follow our page Accounting ABCs to learn more about the fundamentals of Accounting

Margin vs Markup: What's the Difference? 🤔 Credits to Josh Aharonoff, CPA, follow him for more practical finance content. Here's the original post ---- Margin vs Markup: What's the Difference? 🤔 Let’s find out! After 10+ years in finance and accounting, I've seen countless professionals mix up these two crucial metrics. Let's break them down once and for all! Whether you're pricing products, analyzing profitability, or making strategic decisions, understanding the distinction between margin and markup is ESSENTIAL. Let's dive in 👇 ➡️ Margin Margin shows the percentage of your selling price that's PROFIT. Formula: (Selling Price - Cost) / Selling Price For example, if a pair of sneakers sells for $200 and costs $150 to buy, the margin is (200 - 150) / 200 = 25% ➡️ Markup Markup is the percentage ADDED TO THE COST price to get the selling price. Formula: (Selling Price - Cost) / Cost Using the same example, if a pair of sneakers costs $150 and is sold for $200, the markup is (200 - 150) / 150 = 33.33% ➡️ Why Should You Care in Accounting? A few reasons... 1️⃣ Pricing Strategy: Markup helps you ensure all costs are covered and desired profit margins are achieved. You don't want to sell shoes at a loss! 2️⃣ Profit Analysis: Understanding margin helps in analyzing profitability and making informed decisions on which product lines to expand or discontinue. 3️⃣ Competitive Analysis: Both metrics help you understand how your pricing compares to competitors. Are you leaving money on the table, or pricing yourself out of the market? ➡️ Pro Tip: Consistency is Key When sharing financial information with your team or stakeholders, be clear about which metric you're using. Mixing them up can lead to confusion and poor decision-making. Always specify whether you're talking about margin or markup to keep everyone on the same page. === That's my breakdown on the crucial difference between margin and markup, with a little help from our local shoe store. How do you use these metrics in your business? Have you ever encountered confusion between the two? Step into the discussion in the comments below 👇 ---- Follow our page Accounting ABCs to learn more about the fundamentals of Accounting