Tag Archives | amortization

Standard Chart of Accounts

See Also:
Chart of Accounts (COA)
Problems in Chart of Accounts Design
Complex Number for SGA Expenses

Standard Chart of Accounts

In accounting, a standard chart of accounts is a numbered list of the accounts that comprise a company’s general ledger. Furthermore, the company chart of accounts is basically a filing system for categorizing all of a company’s accounts as well as classifying all transactions according to the accounts they affect. The standard chart of accounts list of categories may include the following:

The standard chart of accounts is also called the uniform chart of accounts. Use a chart of accounts template to prepare the basic chart of accounts for any subsidiary companies or related entities. By doing so, you make consolidation easier.

Organize in Numerical System

Furthermore, a standard chart of accounts is organized according to a numerical system. Thus, each major category will begin with a certain number, and then the sub-categories within that major category will all begin with the same number. If assets are classified by numbers starting with the digit 1, then cash accounts might be labeled 101, accounts receivable might be labeled 102, inventory might be labeled 103, and so on. Whereas, if liabilities accounts are classified by numbers starting with the digit 2, then accounts payable might be labeled 201, short-term debt might be labeled 202, and so on.


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Number of Accounts Needed

Depending on the size of the company, the chart of accounts may include either few dozen accounts or a few thousand accounts. Whereas, if a company is more sophisticated, then the chart of accounts can be either paper-based or computer-based. In conclusion, the standard chart of account is useful for analyzing past transactions and using historical data to forecast future trends.

You can use the following example of chart of accounts to set up the general ledger of most companies. In addition, you may customize your COA to your industry by adding to the Inventory, Revenue and Cost of Goods Sold sections to the sample chart of accounts.

SAMPLE CHART OF ACCOUNTS

Refer to the following sample chart of accounts. Each company’s chart of accounts may look slightly different. But if you are starting from scratch, then the following is great place to start.

1000 ASSETS

1010 CASH Operating Account
1020 CASH Debitors
1030 CASH Petty Cash

1200 RECEIVABLES

1210 A/REC Trade
1220 A/REC Trade Notes Receivable
1230 A/REC Installment Receivables
1240 A/REC Retainage Withheld
1290 A/REC Allowance for Uncollectible Accounts

1300 INVENTORIES

1310 INV – Reserved
1320 INV – Work-in-Progress
1330 INV – Finished Goods
1340 INV – Reserved
1350 INV – Unbilled Cost & Fees
1390 INV – Reserve for Obsolescence

1400 PREPAID EXPENSES & OTHER CURRENT ASSETS

1410 PREPAID – Insurance
1420 PREPAID – Real Estate Taxes
1430 PREPAID – Repairs & Maintenance
1440 PREPAID – Rent
1450 PREPAID – Deposits

1500 PROPERTY PLANT & EQUIPMENT

1510 PPE – Buildings
1520 PPE – Machinery & Equipment
1530 PPE – Vehicles
1540 PPE – Computer Equipment
1550 PPE – Furniture & Fixtures
1560 PPE – Leasehold Improvements

1600 ACCUMULATED DEPRECIATION & AMORTIZATION

1610 ACCUM DEPR Buildings
1620 ACCUM DEPR Machinery & Equipment
1630 ACCUM DEPR Vehicles
1640 ACCUM DEPR Computer Equipment
1650 ACCUM DEPR Furniture & Fixtures
1660 ACCUM DEPR Leasehold Improvements

1700 NON – CURRENT RECEIVABLES

1710 NCA – Notes Receivable
1720 NCA – Installment Receivables
1730 NCA – Retainage Withheld

1800 INTERCOMPANY RECEIVABLES

 

1900 OTHER NON-CURRENT ASSETS

1910 Organization Costs
1920 Patents & Licenses
1930 Intangible Assets – Capitalized Software Costs

2000 LIABILITIES

 

2100 PAYABLES

2110 A/P Trade
2120 A/P Accrued Accounts Payable
2130 A/P Retainage Withheld
2150 Current Maturities of Long-Term Debt
2160 Bank Notes Payable
2170 Construction Loans Payable

2200 ACCRUED COMPENSATION & RELATED ITEMS

2210 Accrued – Payroll
2220 Accrued – Commissions
2230 Accrued – FICA
2240 Accrued – Unemployment Taxes
2250 Accrued – Workmen’s Comp
2260 Accrued – Medical Benefits
2270 Accrued – 401 K Company Match
2275 W/H – FICA
2280 W/H – Medical Benefits
2285 W/H – 401 K Employee Contribution

2300 OTHER ACCRUED EXPENSES

2310 Accrued – Rent
2320 Accrued – Interest
2330 Accrued – Property Taxes
2340 Accrued – Warranty Expense

2500 ACCRUED TAXES

2510 Accrued – Federal Income Taxes
2520 Accrued – State Income Taxes
2530 Accrued – Franchise Taxes
2540 Deferred – FIT Current
2550 Deferred – State Income Taxes

2600 DEFERRED TAXES

2610 D/T – FIT – NON CURRENT
2620 D/T – SIT – NON CURRENT

2700 LONG-TERM DEBT

2710 LTD – Notes Payable
2720 LTD – Mortgages Payable
2730 LTD – Installment Notes Payable

2800 INTERCOMPANY PAYABLES

2900 OTHER NON CURRENT LIABILITIES

3000 OWNERS EQUITIES

3100 Common Stock
3200 Preferred Stock
3300 Paid in Capital
3400 Partners Capital
3500 Member Contributions
3900 Retained Earnings

4000 REVENUE

4010 REVENUE – PRODUCT 1
4020 REVENUE – PRODUCT 2
4030 REVENUE – PRODUCT 3
4040 REVENUE – PRODUCT 4
4600 Interest Income
4700 Other Income
4800 Finance Charge Income
4900 Sales Returns and Allowances
4950 Sales Discounts

5000 COST OF GOODS SOLD

5010 COGS – PRODUCT 1
5020 COGS – PRODUCT 2
5030 COGS – PRODUCT 3
5040 COGS – PRODUCT 4
5700 Freight
5800 Inventory Adjustments
5900 Purchase Returns and Allowances
5950 Reserved

6000 – 7000 OPERATING EXPENSES

6010 Advertising Expense
6050 Amortization Expense
6100 Auto Expense
6150 Bad Debt Expense
6200 Bank Charges
6250 Cash Over and Short
6300 Commission Expense
6350 Depreciation Expense
6400 Employee Benefit Program
6550 Freight Expense
6600 Gifts Expense
6650 Insurance – General
6700 Interest Expense
6750 Professional Fees
6800 License Expense
6850 Maintenance Expense
6900 Meals and Entertainment
6950 Office Expense
7000 Payroll Taxes
7050 Printing
7150 Postage
7200 Rent
7250 Repairs Expense
7300 Salaries Expense
7350 Supplies Expense
7400 Taxes – FIT Expense
7500 Utilities Expense
7900 Gain/Loss on Sale of Assets

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standard chart of accounts

Originally posted by Jim Wilkinson on July 24, 2013. 

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Term Loan

See Also:
What is a Term Sheet?
Term Deposit
Terms of Sale
Below the Line
Lease Term

Term Loan Definition

A term loan, defined as a loan which exist for a specific, predetermined amount of time before it is called and requires payment, is a staple in the loan industry. A term loan contract defines the period of time when the loan must be repaid. The agreement for this is negotiated and signed by both lender and receiver.

Term Loan Explanation

A term loan, explained as a loan that exists for only a certain period of time, is one of the many types of financing for a business. Most loans, regardless of type, have some sort of time when they are expected to be repaid. A term loan agreement, in comparison, establishes the period which the loan remains open as part of the agreement. There are both short term and long term loans. Short term means less than 1 year. Long term, on the other hand, means greater than 1 year. These loans maintain interest, principle payments, fees, and other requirements just as non-term loans do.

Example

For example, Kevin has started an A/C and heating company. He has worked to the bone to establish his company. He has gained accounts receivable, clients, some assets, and quality employees. Now Kevin must continue to grow his business. To do this, he needs financing.

Kevin has evaluated his options and now sees a term loan as his best financing opportunity. He makes sure to know what he wants and expects from the loan before he schedules a meeting with agents. Kevin will plan now rather than paying later.

When Kevin meets with the bank they negotiate an interest rate, principal payment schedule, and other details. With this he also negotiates a term loan amortization schedule. He decides on 5 years; ample time to repay. He also arranges for no penalty for early repayment to Kevin has flexibility in his loan. He leaves the meeting confident that he has made a good situation for his business.

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Negative Equity

Negative Equity Definition

Negative equity occurs when the the value of a loan is more than the value of the assets used to collateralize the loan. In addition, negative equity loans usually occurs because the value of the assets has diminished over time.

Negative Equity Explained

Negative equity usually occurs in the real estate market with mortgages. When the price of the house drops from a recession or some other reason, this causes negative equity. It often means that a home/land owner is actually paying more for the house/land than what the asset is actually worth. Also, if the borrower defaulted on the negative equity debt, then the lender would not recoup the amount given simply through repossession.

If the loan is a recourse, then repossession is not the only means of recouping costs. The bank or lender can go after recourse debtors after they sell the asset.

If the loan is non-recourse then it means the creditor will only be able to recoup some of its costs through the sell of the asset. This type of equity has also been known to occur if the value of the collateral asset stays fixed, and the value of the loan payments is less than the interest of the loan. Refer to this negative equity as a negative amortization.

Negative Equity

See Also:
Working Capital From Real Estate
Asset Based Financing
Loan Agreement
Pledged Collateral
Collateralized Debt Obligations

0

Free Cash Flow Analysis

Free Cash Flow Analysis Definition

Free cash flow analysis is the amount of cash that a company can put aside after it has paid all of its expenses at the end of an accounting period.

Calculation of Free Cash Flow

Free cash flow = Net cash flow from operating activities – capital expendituresdividends

Or

= Net income + amortization + depreciation + deferred taxes – capital expenditures – dividends


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Applications

Free cash flow is an important measurement of the unconstrained cash flow of the company. It measures a company’s ability to generate internal growth and to return profits to shareholders.

Positive free cash flow means that a company has done a good job of managing its cash. If free cash flow is negative then the company may have to look for other sources of funding such as issuing additional shares or debt financing.

Negative free cash flow is not necessarily an indication of a bad company, however, since many young companies put a lot of their cash into investments, which diminishes their free cash flow. But if a company is spending so much cash, it should have a good reason for doing so and it should be earning a sufficiently high rate of return on its investments.

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See Also:
Cash Flow Projections
Discounted Cash Flow Analysis
Cash Cycle
Steps to Track Money In and Out of a Company

0

EBITDA Formula

EBITDA Formula

In order to completely understand the concept of EBITDA, an intelligent idea is to visualize the formula concept. Express the EBITDA calculation formula as follows:

EBITDA = Revenues – Costs (excluding interest expenses, taxes, depreciation, and amortization)

or, if a person wants to view EBITDA in terms of the excluded expenses listed above, another way to calculate EBITDA is: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

EBITDA Ratio Analysis

Use EBITDA in accounting ratios that compare the profitability of different companies in the same industry. It is important to have a preferable EBITDA so that you can make positive estimates about your company for the future. At the same time, it is just as important, if not more so, to have a positive EBITDA for outside observers. For example, a ratio used to compare profitability is the EBITDA margin ratio. Calculate it using the following equation:

EBITDA Margin Ratio = EBITDA/Sales

The idea is that excluding interest, taxes, depreciation, and amortization gives a clearer picture of a company’s operating performance. More specifically, a company can be viewed with no stings attached using the calculation of EBITDA. Essentially, EBITDA is the skeleton and necessary structure functions and costs of the company. Also use EBITDA to measure the ability of a company to service its interest bearing debt, through the use of the EBITDA coverage ratio. Calculate EBITDA coverage ratio using the following equation:

EBITDA Coverage Ratio = EBITDA/Debt Service

EBITDA Valuation

Value companies using a EBITDA valuation multiple. Calculate the enterprise value of a company using a multiple of its annualized EBITDA. Express this as:

Enterprise Value (EV) = Multiple * EBITDA

where the multiple is derived from an average of comparable transactions in the company’s industry. To use this method to value a company’s equity, subtract the company’s total debt less cash (known as net debt) from its enterprise value:

Equity Value = Enterprise Value – Total Debt – Cash

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See Also:

EBITDA Definition
EBITDA Valuation

2

Current Expenditures

Current Expenditures Definition

Current expenditures refer to short-term spending that is fully expensed in the fiscal period in which it is incurred. They are in contrast to capital expenditures, which refer to spending on long-term assets that are capitalized and amortized over their useful life. Examples of this type of expenditure include wages, salaries, raw material costs, and administrative expenses.

Accounting Treatment

In accounting, treat current expenditures like other short-term expenses. They are fully expensed during the fiscal period they incur. Unlike capital expenditures, which are first recorded on the balance sheet as assets before hitting the income statement as amortization expenses, current expenditures are recorded directly on the income statement as expenses in the current fiscal period. Basically, if the capital outlay is invested in an asset that will last longer than one year, it is considered a capital expenditure and treated accordingly. On the other hand, if the capital outlay is invested in an asset that will last less than one year, it is considered a current expenditure.


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current expenditures

 

current expenditures

See Also:
Double Entry Bookkeeping
Indirect Labor
Indirect Materials
Lease Agreements
Net Operating Loss Carryback and Carryforward

0

Calculate EBITDA

See Also:
EBITDA Definition
EBITDA Valuation
Operating Income (EBIT)
Operating Profit Margin Ratio Analysis
Net Income
Adjusted EBITDA

Calculate EBITDA

Calculate EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization) in three easy steps. For an EBITDA meaning and use in valuation, click the above links for a better description.

EBITDA Formula

Step 1) The EBITDA calculation formula is quite simple; in fact, all of the information needed is contained within the income statement. The first step to calculate EBITDA from the income statement is to pull the operating profit or Earnings before Interest and Tax (EBIT). This can be found within the income statement after all Selling, General, and Administrative (SG&A) expenses as well as depreciation and amortization.

Step 2) Because the EBIT has already had the depreciation and amortization expense taken out within the income statement, it is necessary to add these expenses back to see what sort of cash flow the company really has contained within EBITDA. Once you add non-cash expenses to EBIT it is then considered the EBITDA and true amount of cash contained within the company. Many investors and users of financial statements use this number because the non-cash expenses do little to say about the actual cash flows of the company. Thus, the EBITDA reveals the true position of the company.

Use the following EBITDA calculation formula:

Operating Profit(Income) or EBIT
+ Depreciation Expense
+ Amortization Expense
EBITDA

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