Financial Accounting Basics: Assets, Liabilities, and Key Ratios

Assets

Everything a business owns that has value (cash, inventory, equipment, property).

Liabilities

What the business owes to others (loans, accounts payable, taxes).

Owner's Equity (Shareholder Equity)

The owner's stake in the business (investment + retained profits).

Accounts Receivable

Money owed to the business by customers who bought on credit.

Accounts Payable

Money the business owes to suppliers/vendors.

Working Capital

Shows if a business can cover short-term obligations.

Cash Flow

Tracks the money coming in and going out.

Income Statement

Shows revenues, expenses, and profits over a period of time.

Gross Profit

Profit from sales after subtracting only COGS.

Net Profit

Final profit after all expenses (operating, taxes, interest).

Balance Sheet

Snapshot of the business at a specific moment.

Return on Equity (ROE)

Shows how efficiently the business is using owner/investor money to generate profit.

Liquidity Ratios

Measures if a business can pay short-term debts.

Trade Credit

Short-term credit from suppliers (buy now, pay later).

Depreciation

Reduction in asset value over time (equipment, vehicles).

Fixed vs Variable Costs

Fixed Costs: Don't change with production (rent, insurance, salaries). Variable Costs: Change with production/sales (materials, commissions).

Overhead/Operating Costs

Expenses needed to run the business (utilities, rent, salaries).

Inventory

Goods held for sale.

Budgeting

Plan future income and expenses.

Auditing

Internal audits: Done by employees, checks processes, risk, and compliance. External audits: Done by independent accountants, checks financial accuracy.

Commission

Payment to employees based on sales percentage.

Business Objectives & Processes

Objectives: Goals the business wants to achieve (profit, growth, market share). Processes: Structured steps to accomplish tasks efficiently.