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Category: Home Business

Home Business refers to doing business from one’s home. Similar to “work at home”, home business entails doing a job in your home in a satisfactory manner. but unlike work at home, your home business may be registered with the local municipality.

  • The Important Task of Measuring Costs


    Measuring profits or net income is the most important thing accountants do. The second most important task is measuring costs. Costs are extremely important to running a business and managing them effectively can make a substantial difference in a company’s bottom line.

    Any business that sells products needs to know its product costs and, depending on what is being manufactured and/or sold, it can get somewhat complicated. Every step in indirect costsmanufacturing costs, has to be tracked carefully from start to finish. Many manufacturing costs cannot be directly matched with particular products; these are called indirect costs.

    To calculate the full cost of each product manufactured, accountants devise methods for allocating indirect production costs to specific products. Generally accepted accounting principles (GAAP) provide few guidelines for measuring product cost.

    Accountants need to determine many other costs, in addition to product costs, such as costs of the departments and other organizational units of the business, the cost of a retirement plan for the company’s employees; the cost of marketing and advertising; the cost of restructuring the business or the cost of a major recall of products sold by the company, should that ever become necessary.

    Cost accounting serves two broad purposes: Measuring profit and furnishing relevant information to managers. What makes it confusing is that there is no one set method for measuring and reporting costs, although accuracy is paramount. Cost accounting can fall anywhere on a continuum between conservative or expansive.

    The phrase ‘actual cost’ depends entirely on the particular methods used to measure cost. These can often be as subjective and nebulous as some systems for judging sports. Again, accuracy is extremely important. The total cost of goods or products sold is the first and usually largest expense deducted from sales revenue in measuring profit.

  • Some Operating And Accounting Costs A Business Incurs


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    Direct & indirect costs

    Direct costs are those costs that can be directly attributed to a product or product line, or to one source of sales revenue, or one business unit or operation of the business. An example of a direct cost would be the cost of tires on a new automobile.

    Indirect Costs are very different and can’t be attached to any specific product, unit or activity. The cost of labor or benefits for an auto manufacturer is certainly a cost, but it can’t be attached to any one vehicle. Each business has to devise a method of allocating indirect costs to different products, sources of sales revenue, business units, etc.

    Most allocation methods are less than perfect, and generally end up being arbitrary to one degree or another. Business managers and accounts should always keep an eye on the allocation methods used for indirect costs and take the cost figures produced by these methods with a grain of salt.

    Fixed & variable costs

    Fixed Costs are those costs that stay the same over a relatively broad range of sales volume or production output. They’re like an albatross around the neck of business and a company must sell its product at a high enough profit to at least break even.

    Variable Costs can increase and decrease in proportion to changes in sales or production level. Variable costs vary proportionately with changes in production

    Relevant & irrelevant costs

    Relevant Costs are essentially future costs that could be incurred, depending on what strategic course a business takes. If an auto manufacturer decides to increase production, but the cost of tires goes up, than that cost needs to be taken into consideration.

    Irrelevant Costs are those that should be disregarded when deciding on a future course of action. They’re costs that could cause you to make a wrong decision. Whereas relevant costs are future costs, irrelevant costs are those costs that were incurred in the past. The money’s gone.

  • A Brief Insight Into GAAP

    While many businesses assume that accountants are bound by generally accepted accounting practices and that these are inviolate, nothing could be further from the truth. Everything is subject to interpretation, and GAAP (Generally Accepted Accounting Principles) is no different. For one thing, GAAP permit alternative accounting methods to be used for certain expenses and for revenue in certain specialized types of businesses.

    For another, GAAP methods require that decisions be made about the timing for recording revenue and expenses, or they require that key factors be quantified. Deciding on the timing of revenue and expenses and putting definite values on these factors require judgments, estimates and interpretations which, when arrived at in a forthright and responsible manner are acceptable to GAAP, despite the method used.

    The mission of GAAP over the years has been to standardize accounting methods in order to bring about uniformity across all businesses. But alternative methods are still permitted for certain basic business expenses. No tests are required to determine whether one method is more preferable than another. A business is free to select whichever method it wants.

    However, if a business is to use an alternative accounting method, it must choose which cost of goods sold expense method to use and which depreciation expense method to use. For other expenses and for sales revenue, one general accounting method has been established, which is GAAP, a set of accounting rules used to standardize the reporting of financial statements in the United States; there are no alternative methods.

    Notwithstanding, a business has a fair amount of latitude in actually implementing the methods. One business applies the accounting methods in a conservative manner, and another business may apply the methods in a more liberal manner. The end result is more diversity between businesses in their profit measure and financial statements than one might expect, considering that GAAP have been evolving since 1930.

    The pronouncement on GAAP prepared by the Financial Accounting Standards Board (FASB) is now more than 1000 pages long. And that doesn’t even include the rules and regulations issued by the federal regulatory agency that has jurisdiction over the financial reporting and accounting methods of publicly owned businesses – the Securities and Exchange Commission (SEC).




     

  • Budgeting – Uninspiring But Critically Needed Work


    Budgeting is one of those topics you would rather avoid, but in business, it’s an absolute necessity. To prepare a reasoned and thoughtful budget, an accountant must start with a broad-based critical analysis of the most recent actual performance and position of a given business by the managers who are responsible for getting results.

    Then the managers decide on specific and concrete goals for the coming year. It demands a fair amount of management time and energy. A budget should be worth this time and effort because it’s one of the key components of a manager’s job. To construct budget financial statements, a manager needs good models of the profit, cash flow and financial condition of your business.

    Models are blueprints or schematics of how things work. A business budget is, at its core, a financial blueprint of the business. Budgeting relies on financial models that are the foundation for preparing budgeted financial statements. Those statements include:

    –Budgeted income statement (or profit report): This statement highlights the critical information that managers need for making decisions and exercising control. Much of the information in an internal profit report is confidential and should not be divulged outside the business.

    –Budgeted balance sheet: The connections and ratios between sales revenue and expenses and their corresponding assets and liabilities are the elements of the basic model for the budgeted balance sheet.

    –Budgeted statement of cash flows: The changes in assets and liabilities from their balances at the end of the year just concluded to the projected balances at the end of the coming year determine cash flow from profit for the coming year.

    Budgeting requires good working models of profit performance, financial condition, and cash flow from profit. Constructing good budgets is a strong incentive for businesses to develop financial models that not only help in the budgeting process but also help managers in making strategic decisions.

  • A Brief Description Of The Sole Proprietorship


    A sole proprietorship is the business or an individual who has decided not to carry his business as a separate legal entity, such as a corporation, partnership or limited liability company. The proprietorship business type is not a separate entity. Any time a person regularly provides services for a fee, sells things at a flea market or engage in any business activity whose primary purpose is to make a profit, that person is a sole proprietor.

    If they carry on business activity to make profit or income, the IRS requires that you file a separate Schedule C “Profit or Loss From a Business” with your annual individual income tax return. Schedule C summarizes your income and expenses from your sole proprietorship business activity.

    As the sole proprietor of a business, you have unlimited liability, meaning that if your business can’t pay all it is liable for, the creditors to whom your business owes money can come after your personal assets. Many part-time entrepreneurs may not know this, but it’s an enormous financial risk. If they are sued or can’t pay their bills, they are personally liable for the business incurred expenses and liabilities.

    A sole proprietorship has no other owners to prepare financial statements for, but the proprietor should still prepare these statements in order to keep abreast of how his business is doing. Banks usually require financial statements from sole proprietors who apply for loans. And a partnership needs to maintain a separate capital or ownership account for each of the partners.

    The total profit of the firm is allocated into these capital accounts, as spelled out in the partnership agreement. Although sole proprietors don’t have separate invested capital from retained earnings like corporations do, they still need to keep these two separate accounts for owners’ equity – not only to track the business, but for the benefit of any future buyers of the business.

    The question you should ask yourself when planning to start a business of your own is, which business type affords me the most protection under the law? And the answer to this question is most assuredly the general corporation; but along with the protection it provides to you, the business person (or CEO), comes the added responsibility of adherence to the law as well as your obligation to stock holders, if any. The decision could be an interesting one that may take some time to come to terms with.

  • A Look at Partnerships and Limited Liability Companies


    Some business owners choose to create partnerships or limited liability companies instead of a corporation. A partnership can also be called a firm, and refers to an association of a group of individuals working together in a business or professional practice.

    While corporations have rigid rules about how they are structured, partnerships and limited liability companies allow the division of management authority, profit sharing and ownership rights among the owners to be very flexible.

    Partnerships fall into two categories. General partners are subject to unlimited liability. If a business can’t pay its debts, its creditors can demand payment from the general partners’ personal assets. General partners have the authority and responsibility to manage the business. They’re analogous to the president and other officers of a corporation.

    Limited partners escape the unlimited liability that the general partners have. They are not responsible as individuals, for the liabilities of the partnership. These are junior partners who have ownership rights to the profits of the business, but they don’t generally participate in the high-level management of the business. A partnership must have one or more general partners.

    A limited liability company (LLC) is becoming more prevalent among smaller businesses. A LLC is like a corporation regarding limited liability and it’s like a partnership regarding the flexibility of dividing profit among the owners. Its advantage over other types of ownership is its flexibility in how profit and management authority are determined.

    limited liability company can have a downside, however. The owners must enter into very detailed agreements about how the profits and management responsibilities are divided. It can get very complicated and generally requires the services of a lawyer to draw up the agreement.

    A partnership or LLC agreement specifies how profits will be divided among the owners. While stockholders of a corporation receive a share of profit that is directly related to how many shares they own, a partnership or LLC does not have to divide profit according to how much each partner invested. Invested capital is only of the factors that are used in allocating and distributing profits.

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  • You’ve Heard Of a Corporation What Exactly is it?


    Most businesses start out as a small company, owned by one person or by a partnership. The most common type of business when there are multiple owners is a corporation. The law sees a corporation as a real, live person. Like an adult, a corporation is treated as a distinct and independent individual who has rights and responsibilities.

    A corporation’s “birth certificate” is the legal form (filing certificate) that is filed with the Secretary of State of the state in which the corporation is created, or incorporated. It must have a legal name, just like a person. A corporation is separate from its owners and it is responsible for its own debts. The bank can’t come after the stockholders if a corporation goes bankrupt.

    A corporation issues ownership shares to persons who invest money in the business. These ownership shares are documented by stock certificates, which state the name of the owner and how many shares are owned. The corporation has to keep a register, or list, of how many shares each share holder owns. Owners of a corporation are called stockholders because they own shares of stock issued by the corporation.

    One share of stock is one unit of ownership; how much one share is worth depends on the total number of shares that the business issues. The more shares a business issues, the smaller the percentage of total owners’ equity each share represents.

    Stock shares come in different classes of stock. Preferred stockholders are promised a certain amount of cash dividends each year. Common stockholders have the most risk. If a corporation ends up in financial trouble, it’s required to pay off its liabilities first. If any money is left over, then that money goes first to the preferred stockholders. If anything is left over after that, then that money is distributed to the common stockholders.