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Accounting Asset Definition

See Also:
Generally Accepted Accounting Principles
Financial Accounting Standards Board
International Financial Reporting Standards
Financial Assets

Accounting Asset Definition

In accounting, an asset has two criteria: a company must own or control it, and it must be expected to generate future benefit for that company.

Assets on Balance Sheet

A company records the value of its assets on the balance sheet. Assets can be classified as current assets or as non-current assets.

Expect to use up or convert current assets, such as accounts receivable and inventory, to cash within one year or one operating cycle.

Non-current assets, also called fixed assets, such as plants and equipment, have useful lives longer than one year or one operating cycle.

Tangible – Intangible

Categorize assets as tangible or intangible. Report both types on the balance sheet.

Tangible assets are physical assets, such as land, machinery, and inventory. Depreciate the value of these assets over their useful lives.

Intangible assets are nonphysical assets, such as brand name, intellectual property, and goodwill. Certain intangible assets, such as goodwill, are amortized over their lifespan. Intangible assets can be either definite or indefinite. Definite intangible assets have a limited lifespan. Indefinite intangible assets exist as long as the company that owns them is a going concern.

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Periodic inventory System


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Account Manager

See Also:
Account Reconciliation
American Institute of Certified Public Accountants – AICPA
Thirteen Week Cash Flow Report
Accounting Income vs. Economic Income
Activity Based Management (ABM)

Account Manager Definition

The account manager definition is the manager of the customer relationship between a company and the client of one account. It is a very important job. The career path serves two roles in a company: liaison between the company and the customer, and sales person.

Account Manager Explanation

An account manager explanation is the first line of defense for customer relationship management, has many roles. First and foremost, their responsibilities involve making sure that a customer is pleased. In this way, they hear customer complaints and praises before anyone else.

Second, account manager skills involve making sure the client is up-to-date with payment. Software, these days, helps this process. Still, the account manager must make sure that the client has fully paid bills due. If not, it is their job to remind the customer. Collections, a different department from account management, is in charge of reminding the client of unpaid bills if this moves beyond the scope of the account manager.

Third, an account manager is a sales person. They are responsible for selling clients on additional services. Often, they are an expert in “upselling”; selling the client additional or more expensive products. In this way, an account manager qualifications create one of the most useful tools in a business.

Account Manager Example

Devin is an account manager for a major energy company. Client interactions fill his day. Devin loves his work because he can speak with people and practice his skills of persuasion. He is well versed in account manager best practices.

First, Devin begins his day by contacting clients who have not paid their bills. He simply calls them with a friendly reminder. If they continue this behavior, he passes their information off to collections. Devin is aided by software which reminds him who to contact and when. He very much appreciates CRM (customer relationship management) software because he can focus on processing rather than remembering customers.

Next, Devin deals with another client. In this situation, he needs to comfort the client while they are angry. Devin listens to the problem, restates it to the customer, and does what he can to fix it. Due to the fact that his company uses a horizontal management structure, Devin can solve problems himself. In this situation, he is able to turn an angry customer into one who purchases additional services.

When Devin leaves the office he is happy. His work involves pleasing customers as well as his employer. Devin is thankful that he has a job where he can make people happy every day. When he begins every day, he can rise with a smile knowing that his job is to help people get the results they want.

Hire the Right Account Manager

In order to determine which candidates are the right fit for your company, download and access your free white paper, 5 Guiding Principles For Recruiting a Star-Quality Team.


Account Manager Definition, Account Manager Explanation

Account Manager Definition, Account Manager Explanation

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Absorption vs Variable Costing Advantages and Disadvantages

See Also:
Absorption vs Variable Costing
Standard Costing System
Standard Costing Example
Process Costing
Activity Based Costing

Absorption vs Variable Costing Advantages and Disadvantages

The following includes absorption vs variable costing advantages and disadvantages.

Variable Costing Disadvantages and Advantages

Variable costing may provide a clearer picture of the actual incremental costs associated with a specific product. Essentially, the variable costing method can give those concerned with financial records an accurate representation of what actually goes into the costs of producing. Proponents of variable costing argue that fixed manufacturing overhead costs are incurred regardless of production volume. Therefore, they should not be considered in product-related decision-making. Therefore, variable costing method users can enjoy a reported cost that is representative of the actual inputs to the products. However, by ignoring fixed manufacturing overhead costs, variable costing may understate a product’s overall cost. The manufacturing overhead is important. This is because, though the costs included in overhead do not contribute directly to the creation of the product, there is still some residual effect on the production which drives up the cost to produce.

Absorption Costing Disadvantages and Advantages

In contrast to the variable costing method, absorption costing may provide a fuller picture of a product’s cost by including fixed manufacturing overhead costs. A proponent of this method would argue that it is most effective. This is because, simply enough, all the possible costs are included. This method gives a company or organization a more accurate view of the products importance from an economic standpoint.

If the product is turning over a good amount of revenue in the absorption costing method, then it is turning over revenue in addition to the unrelated costs of production. However, absorption costing ignores the differential usage of indirect resources across products or product lines. Also, you can use absorption costing as an accounting trick to increase net income by moving fixed manufacturing overhead costs from the income statement to the balance sheet. Do this by simply increasing production volume disproportionately to sales volume.

Absorption Costing GAAP

GAAP requires absorption costing for external reporting.

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Absorption vs Variable Costing

Absorption vs Variable Costing Meaning

In the field of accounting, variable costing (direct costing) and absorption costing (full costing) are two different methods of applying production costs to products or services. The difference between the two methods is in the treatment of fixed manufacturing overhead costs. Under the direct costing method, fixed manufacturing overhead costs are expensed during the period in which they are incurred. Under the full costing method, fixed manufacturing overhead costs are expensed when the product is sold.

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Direct Costing System

The direct costing method applies all direct costs as well as variable manufacturing overhead costs to the end product. These costs move with the product through the inventory accounts until the product is sold, at which point they are expensed on the income statement as costs of goods sold. Fixed manufacturing overhead costs are expensed during the period in which they are incurred.

You can also call direct costing variable costing or marginal costing.

Full Costing Method

The full costing method applies all direct costs and both fixed and variable manufacturing overhead costs to the end product. All of these costs move with the product through the inventory accounts until the product is sold, at which point they are expensed on the income statement as costs of goods sold.

You can also call full costing absorption costing.

As a financial leader, it is your responsibility to add value. One way to add value is to reduce costs; start managing costs today. If you want to learn other ways to add value to your company, then download the free 7 Habits of Highly Effective CFOs. Find out how you can become a more valuable financial leader.

Absorption vs Variable Costing, Direct Costing, absorption vs variable costing advantages and disadvantages

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Absorption vs Variable Costing, Direct Costing, absorption vs variable costing advantages and disadvantages

See Also:
Absorption vs variable costing Advantages and Disadvantages
Variable vs Fixed Cost
Semi Variable Costs
Activity Based Costing vs Traditional Costing
Absorption Cost Accounting

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Absorption Cost Accounting

See Also:
Semi Variable Costs
Standard Costing System
Variable vs Fixed Cost

Absorption Cost Accounting

Absorption cost accounting (also known as the “Cost-Plus” approach), is a method that is centered upon the allocation of Manufacturing Cost to the product. This method is important for situations when a company needs to decide if it can be competitive in a market, or when the company has control over the pricing in general. This means that Direct Labor, Direct Materials, as well as fixed and variable Overhead Definition are all “absorbed” into product pricing as well as product costing.

(NOTE: Want to take your financial leadership to the next level? Download the 7 Habits of Highly Effective CFO’s. It walks you through steps to accelerate your career in becoming a leader in your company. Get it here!)

Absorption Cost Per Unit

Because absorption cost accounting is a “per-unit” method, it is necessary to understand how to determine the absorption cost per unit. So the fair question remains: What is the absorption cost approach? Ultimately, all of the calculations are done on a Per-Unit basis. For example, Wintax Company creates 5,000 products with Variable Cost per unit being $60 direct materials, $110 direct labor, and $40 variable overhead. In addition to the per-unit costs, the fixed overhead is $100,000. In order to obtain the product cost under absorption costing, first the per-unit costs are added together (direct labor, direct materials, variable overhead). After that, per-unit costs need to be obtained from the fixed overhead so that the per-unit overhead can be applied to the per-unit cost. Adding the overhead to the per-unit costs completes what is absorption costing per unit. See how to work out the problem below.


Per-Unit Costs Fixed-overhead per-unit
(direct labor + direct materials +variable overhead) + (fixed overhead / number of units)
($210) + ($20)
Absorption cost per unit: $230

Absorption Cost Unit Pricing

In addition to determining the overall cost of a singular product, absorption cost accounting gives one the ability to determine the appropriate selling price of a unit as well. As long as there is a target profit, the absorption costing method can calculate the appropriate price. For example, Bizzo Company desires a profit of $180,000 while producing 10,000 products. In addition, each product costs $150 to produce in total. In order to determine the appropriate selling price, first, divide profit by the number of products. Add that number to the original product cost in order to achieve the correct product price. Check out the solution worked out below.


((Desired Profit) / (Number of Units)) + (Product Cost Per-Unit)
( $180,000 / 10,000 ) + ( $150 )
Target Product Price= $168

Absorption Costing Formulas

(Absorption Cost per-unit) = (Per-Unit Variable Costs) + (Per-Unit Fixed Overhead)
Sales Price = (Manufacturing Cost Per-Unit) + (Sales and Administrative Cost Per-Unit) + (Profit Markup)

Deciding whether to be competitive in pricing or maintain status in the market is one of the many key decisions a financial leader has to make. Download the free 7 Habits of Highly Effective CFOs to find out how you can become a more valuable financial leader.

Absorption Cost Accounting

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5 Cs of Credit (5 Cs of Banking)

See Also:
What are the 7 Cs of banking
How to Manage Your Banking Relationship
Line of Credit
Trade Credit
Collateralized Debt Obligations

5 Cs of Credit (5 Cs of Banking)

The 5 Cs of credit or 5 Cs of banking are a common reference to the major elements of a banker’s analysis when considering a request for a loan. Namely, these are Cash Flow, Collateral, Capital, Character, and Conditions. Below is an in-depth description of each of the 5 Cs of credit or banking to help you understand what your banker needs to understand about your business in order to approve your loan. You will have insight as to where your banker is coming from and will therefore better prepare you to handle their questions and concerns.

Cash Flow

Cash Flow Importance

Cash Flow After Tax is the first “C” of the 5 Cs of credit (5 Cs of banking). Your banker needs to be certain that your business generates enough cash flow to repay the loan that you are requesting. Therefore, your banker will be looking at your company’s historical and projected cash flow and compare that to the company’s projected debt service requirements. There are a variety of credit analysis metrics used by bankers to evaluate this, but a commonly used methodology is the “Debt Service Coverage Ratio” generally defined as follows:

Debt Service Coverage Ratio = EBITDA – income taxes – unfinanced capital expenditures divided by projected principal and interest payments over the next 12 months

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Historical Ability to Service Debt

Typically, the bank will look at the company’s historical ability to service the debt. Your company’s past 3 years free cash flow will be compared to your projected debt service. In addition, they will compare free cash flow to the past twelve months to the extent your company is well into its fiscal year. While projected cash flow is important, the banker will generally want to see that the company’s historical cash flow is sufficient to support the requested debt. Usually projected cash flow figures are higher than historical figures due to expected growth at the company; however, your banker will view the projected cash flows with skepticism as they will generally entail some level of execution risk.

If your historical cash flow is insufficient, the banker must rely on your projections. Therefore, you must be prepared to defend your future cash flow projections with information that would give your banker visibility to future performance, such as backlog information.

Margin of Error

The banker will also want a comfortable margin of error in the company’s cash flow.

A typical minimum level of Debt Service Coverage is 1.2 times.

This means that the company is expected to generate at least $1.20 of free cash flow for each dollar of debt service. This margin of error is important. The banker wants to be comfortable. If there is a blip in the company’s performance, they want to know that the company will still meet its obligations.

Click here to Download the 25 Ways to Improve Cash Flow

Importance of Collateral

In most cases, the bank wants the loan amount to be exceeded by the amount of the company’s collateral. The reason the bank is interested in collateral is because it acts as a secondary source of repayment of the loan. If the company is unable to generate sufficient cash flow to repay the loan at some point in the future, the bank wants to be comfortable that it will be able to recover its loan by liquidating the collateral and using the proceeds to pay off the loan.

Assess Available Collateral

How doest the banker assess your company’s available collateral? It is common place for borrowers to think that the bank will lend a dollar for every asset that their company owns. This is not the case.

Certain Asset Classes

First, the banker is interested in only certain asset classes as collateral – specifically accounts receivable, inventory, equipment and real estate – since in a liquidation scenario, these asset classes can be collected or sold to generate funds to repay the loan. The banker will not consider other asset classes as collateral. Since in a liquidation scenario, they would not fetch any meaningful amounts. These asset classes include goodwill, prepaid amounts, investments, etc.

In the case of accounts receivable, the debtor (your company’s customer to whom a good was sold or service rendered) is legally required to pay their bill with the company, and in a liquidation scenario the bank will collect the accounts receivable and use those amounts to pay down the loan. In the case of inventory, equipment and real estate, the bank can sell these assets to someone else and use the proceeds to pay down the loan.

Historical Liquidation Values

Secondly, the bank will discount or “margin” the value of the collateral based on historical liquidation values. For example, bank’s will generally apply margin rates of…

  • 80% against accounts receivable
  • 50% against inventory
  • 80% against equipment
  • 75% against real estate

These advance rates are not arbitrary. These are the amounts that in the bank’s historical experience they have realized in a liquidation scenario against the respective asset class. While you might think that your accounts receivable would collect 100% on the dollar, the amounts have actually been historically closer to 80%. In liquidation scenarios, account debtors will come up with reasons why they don’t owe the entire amount. Or worse, they won’t pay at all and force the bank to sue them for collection.

The amount of the receivable would be exceeded by the legal costs of collection in some cases, and thus the bank simply won’t pursue collection. In the case of inventory, 50 cents on the dollar is usual since the buyers of this inventory know that it is a distressed sale and are in a position of leverage to buy the goods for less than what it cost you to buy them.

Third Party Appraisals

In the case of equipment and real estate collateral, the bank needs a completed third party appraisal on these assets. The bank will margin the appraised value of these asset classes to determine the amount of the loan… As opposed to using the company’s carrying value of these assets on its balance sheet. You will be responsible for the cost of third party appraisals. So, be sure to factor in the time needed to complete the appraisals.

Due Diligence

Also, the bank will in many cases want to complete due diligence on your accounts receivable and inventory to confirm asset values as well as the reliability of the reports you provide to the bank. This due diligence is called a “collateral exam” or “field audit”, and involves the bank sending an auditor to the company’s offices to review books and records to:

(1) Ensure that the company-generated reports for accounts receivable (your accounts receivable aging) and inventory are accurate and reliable

(2) Determine and confirm the amounts of any “ineligibles” within these asset classes.

In general, ineligibles are amounts that the bank will not lend against. This includes the following:

  • A/R over 90 days past due
  • Accounts that are due from foreign counter-parties
  • Accounts that are due from counter-parties that are related by common ownership to your company

In the case of inventory, ineligibles will generally include any work-in-process inventory, any consignment inventory, and inventory that is in-transit or otherwise not on your company’s premises.

Importance of Capital to Banks

When it comes to capital, the bank is essentially looking for the owner of the company to have sufficient equity in the company. Capital is important to the bank for two reasons…

First, having sufficient equity in the company provides a cushion to withstand a blip in the company’s ability to generate cash flow. For example, if the company were to become unprofitable, then it would burn through cash to fund operations. The bank is never interested in lending money to fund a company’s losses, so they want to be sure that there is enough equity in the company to weather a storm and to rehabilitate itself. Without sufficient capital, the company could run out of cash. Then they would be forced to file for bankruptcy protection.

Secondly, when it comes to capital, the bank is looking for the owner to have sufficient “skin in the game”. The bank wants the owner to be sufficiently invested in the company such that if things were to go wrong, the owner would be motivated to stick by the company and work with the bank during a turnaround. If the owner simply handed over the keys to the business, then the bank would have fewer, less viable options to obtain repayment of the loan.

Debt to Equity Ratios

There is no precise measure or amount of “enough capital”, but rather it is specific to the situation and the owner’s financial profile. Commonly, the bank will look at the owner’s investment in the company relative to their total net worth, and they will compare the amount of the loan to the amount of equity in the company – the company’s Debt to Equity Ratio. This is a measure of the company’s total liabilities to shareholder’s equity.

Remember, banks typically like to see Debt to Equity Ratios no higher than 2 to 3 times.


Another key factor in the 5 Cs of credit is the overall environment that the company is operating in. The banker assesses the conditions surrounding your company and its industry. They determine the key risks facing your company. They also determine whether these risks are sufficiently mitigated. Even if the company’s historical financial performance is strong, the bank wants to be sure of the future viability of the company. The bank won’t make a loan if your company is threatened by some unmitigated risk not sufficiently addressed. In this assessment, the banker is going to look to things such as the following:

The Competitive Landscape of Your Company

Who is your competition? How do you differentiate yourself from the competition? How does the access to capital of your company compare to the competition and how are any risks posed by this mitigated? Are there technological risks posed by your competition? Are you in a commodity business? If so, what mitigates the risk of your customers going to your competition?

The Nature of Your Customer Relationships

Are there any significant customer concentrations (do any of your customers represent more than 10% of the company’s revenues?) If so, how does the company protect these customer relationships? What is the company doing to diversify its revenue base? What is the longevity of customer relationships? Are any major customers subject to financial duress? Is the company sufficiently capitalized to withstand a sizable write-down if they can’t collect their receivable to a bankrupt customer?

Supply Risks

Is the company subject to supply disruptions from a key supplier? How do they mitigate any risk? What is the nature of relationships with key suppliers?

Industry Issues

Are there any macro-economic or political factors affecting, or potentially affecting the company? Could the passage of pending legislation impair the industry or company’s economics? Are there any trends emerging among customers or suppliers that in the future will negatively impact operations?

Drivers of Business

The banker will need your help to identify and understand these key risks and mitigants, so be prepared to articulate what you see as the primary threats to your business, and how and why you are comfortable with the presence of these risks, and what you are doing to protect the company. The banker will need to understand the drivers of your business, which is equally as important to the banker as understanding the company’s financial profile.


While we have left “Character” for last, it is not the least important of the 5 Cs of credit. Arguably it is the most important. Character gets to the issue of people – are the owner and management of the company honorable people when it comes to meeting their obligations? Without scoring high marks for character, the banker will not approve your loan.

How does a banker assess character?

Character is an intangible. It is partly fact-based and partly “gut feeling”. The fact-based assessment involves a review of credit reports on the company, and in the case of smaller companies, the personal credit report of the owner as well. The bank will also communicate with your current and former bankers. They want to determine how you have handled your banking arrangements in the past. The bank may also communicate with your customers and vendors. This is to assess how you have dealt with these business partners in the past. They will determine the soft side of character assessment by how you deal with the banker during the application process. Thus, their resultant “gut feeling” will be a determining factor.

Bankers Want to Deal With Trustworthy People

In the end, bankers want to deal only with people that they can trust to act in good faith at all times – in good times and in bad. Banks want to know that if things go wrong, that you will be there. They want to know that you will do your best. In addition, they want to ensure that the company honors its commitments to the bank. Even if the company’s financial profile is strong and scored well in all of the other 5 Cs of credit, the banker will reject the loan if they fail the character test. To be clear – it is not necessarily an issue if your company has gone through troubled times in the past. What is more important is how you dealt with the situation.

Were you forthright and proactive with the bank in communicating problems?

Or did you wait until a default situation was already in effect before reaching out to the bank?

Were you cooperative with the bank while getting through the distressed period?

We cannot stress enough the importance of character.

Five Cs of Credit Management

To summarize, the 5 Cs of credit forms the basis of your banker’s analysis as they are considering your request for a loan. The banker needs to be sure that (1) your company generates enough CASH FLOW to service the requested debt, (2) there is sufficient COLLATERAL to cover the amount of the loan as a secondary source of repayment should the company fail, (3) there is enough CAPITAL in the company to weather a storm and to ensure the owner’s commitment to the company, (4) the CONDITIONS surrounding your business do not pose any significant unmitigated risks, and (5) the owners and management of the company are of sound CHARACTER, people that can be trusted to honor their commitments in good times and bad.

Hopefully, this article has succeeded in helping you understand where your banker is coming from. With a better understanding of how your banker is going to view and assess your company’s creditworthiness, you will be better prepared to deliver information and position your company to obtain the loan that it needs to grow and thrive. You should use these 5 Cs as a credit management tool to run your company. To improve your cash flow, download the free 25 Ways to Improve Cash Flow whitepaper.

5 Cs of credit, 5 Cs of Banking

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5 Cs of credit, 5 Cs of Banking


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