Knowhow-Now Article

Accounting Basics: Inventory And Expenses

Inventory is usually the largest current asset of a business that sells products. If the inventory account is greater at the end of the period than at the start of the reporting period, the amount the business actually paid in cash for that inventory is more than what the business recorded as its cost of good sold expense. When that occurs, the accountant deducts the inventory increase from net income for determining cash flow from profit.

the prepaid expenses asset account works in much the same way as the change in inventory and accounts receivable accounts. However, changes in prepaid expenses are usually much smaller than changes in those other two asset accounts.

The beginning balance of prepaid expenses is charged to expense in the current year, but the cash was actually paid out last year. this period, the business pays cash for next period's prepaid expenses, which affects this period's cash flow, but doesn't affect net income until the next period. Simple, right?

As a business grows, it needs to increase its prepaid expenses for such things as fire insurance premiums, which have to be paid in advance of the insurance coverage, and its stocks of office supplies. Increases in accounts receivable, inventory and prepaid expenses are the cash flow price a business has to pay for growth. Rarely do you find a business that can increase its sales revenue without increasing these assets.

The lagging behind effect of cash flow is the price of business growth. Managers and investors need to understand that increasing sales without increasing accounts receivable isn't a realistic scenario for growth. In the real business world, you generally can't enjoy growth in revenue without incurring additional expenses.

Comments
Order by: 
Per page:
 
  • There are no comments yet
   Comment Record a video comment
 
 
 
     
Related Articles
Accounting is not just for people who own businesses or corporations. Accounting is a practical set of methodologies that any person can find sensible use for. This is called home accounting or personal accounting, as other people may call it. (...)
07.12.2014 · From TheAuthor
Have you ever been employed by a company or a corporation? If so, then you must be very familiar with a payroll or a piece of paper stating the salary or wages, the bonuses and the deductions for each employee. (...)
26.11.2014 · From TheAuthor
What is medical accounting? What does a medical accountant do and what are the job descriptions of a medical accountant? Is it a medical term or is it an accounting term. At first glance, it looks confusing and is somehow perplexing. (...)
21.11.2014 · From TheAuthor
There is a famous saying that says, “If you want it to be done right do it yourself.” That is not the case when it comes to accounting or accounting outsourcing. In these two fields, you can get as much professional help as you want. (...)
18.11.2014 · From TheAuthor
We all have to start somewhere; this is what most people would say when they hear about small businesses. However, there is a great debate if small businesses need the same things as big businesses. (...)
18.11.2014 · From TheAuthor
Ads
Article Info
64 Views
0 Subscribers
All Articles by TheAuthor
Sharing Is Good!
Rate
0 votes