Solvency explained

Solvency is a company’s ability to pay its debts. You can quickly measure solvency by comparing a company’s assets with its liabilities.  If liabilities exceed assets, then the company is probably insolvent. Regrettably, the balance sheet does reliably measure the value of assets. Many assets are measured at historical cost.  If you paid $200,000 for a piece […]
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Goodwill explained

In business parlance, goodwill is friendly, helpful or cooperative feelings or attitude.  The accounting definition is quite different, and the source of much confusion. Goodwill, an asset on the balance sheet, is additional value recorded when one company acquires another.  It is measured as the difference between the purchase price of the acquisition, and the […]
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When will you break even?

It is critically important for you to properly use quality cost information when making basic decisions about your business, such as pricing your goods and planning your sales volume.  Over the past few posts, I’ve explained how to determine fixed costs, variable costs, and contribution margin.  If you haven’t already done so, I encourage you to […]
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The Accounting Equation: Assets = Liabilities + Owners’ Equity

Your business is built on the accounting equation: Assets = Liabilities + Owners’ Equity Assets are what your business owns.  Liabilities are what your business owes.  The difference between these what you – the owner – actually own: owner’s equity. Suppose your business has $100,000 in assets and $30,000 in liabilities.  Then $70,000 of your […]
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Accrual accounting explained

People generally think of accounting in terms of cash flows.  Money comes in and money goes out.  However, this is not how accountants measure revenues, expenses or net income.  They use a system called accrual accounting. Accrual accounting records revenues when they are earned and expenses when they are incurred. Revenues are earned when the […]
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