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The accounting term working capital is essential knowledge for all business owners. Basically, it is the ability of a business to meet its ongoing obligations. Learning about some of the different aspects of working capital is vital for any successful business owner. Net operating working capital (NOWC) is the gap between a business’ current assets (accounts receivable, inventories, cash, though excluding marketable securities) and its non-interest-bearing liabilities (which are financial obligations a business must meet, except those not subject to interest payments). This calculation looks at a business’ cash flow availability and determines available current assets able to be liquidated inside a calendar year. TheRead More →

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A trial balance is an accounting tool that helps businesses determine if the double entry accounting system has any mathematical errors. Once the trial balance is worked through, and the total debits and total credits equal each other, we know there are no mathematical errors – but that doesn’t mean it is error free. It is important to determine how it is constructed and the considerations for each step in the process. Raw Trial Balance The first is the unadjusted trial balance. This looks at all the double entry bookkeeping journal entries, which records the business’ day-to-day transactions. When beginning to prepare for the adjustedRead More →

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As the name implies, a contingent liability for a business does not always happen and depends on how the future unfolds. When it comes to a business analyzing a contingent liability, it focuses on the probability of the business realizing it, the time frame within which the liability might occur, and the accuracy of the contingent liability’s estimated amount.   When to Record and Notify of Contingent Liabilities Projected contingent liabilities are typically recorded if the contingent liability will materialize and can be reasonably projected with a high level of accuracy. Examples include a company making good on a large-scale product warranty, a business facingRead More →

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When it comes to business operations and measuring performance, the optimal production scale a company can sustain is an important metric to measure. If a business’ capacity can’t be realized and sustained – or the bottlenecks can’t be identified and addressed in a timely manner – a business will likely stagnate and fail. Understanding more about capacity management can help businesses reduce the chances of dealing with sub-optimal performance. Capacity Defined A business’ capacity is defined as its highest level of production on a consistent basis. By measuring the capacity of a business, we can calculate its ongoing revenue projections. This type of evaluation alsoRead More →

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In the world of accounting and auditing, there is a concept called materiality. The term materiality essentially means an amount that, if erroneously omitted or included, impacts the financials of a company to the point where they don’t tell the truth. One very basic example would be if a $1 million revenue small business made a mistake recording their accounts payable, and as a result, the business has $100,000 of expenses missing from their results. This would be material. If the same exact mistake happened in a multi-billion multinational company, it would not. When it comes to materiality in accounting, there are many nuances that need to be considered whenRead More →