Tag Archives | credit

Journal Entries (JEs)

See Also:
Double Entry Bookkeeping
Journal Entries For Factoring Receivables
Accounting Principles
Accounting Concepts
Adjusting Entries

Journal Entries Definition

A journal entry is a recording of a transaction into a journal like the general journal or another subsidiary journal. Journal entries for accounting require that there be a debit and a credit in equal amounts. Oftentimes, there is an explanation that will go along with this to explain the transaction.

Journal Entries Meaning

A journal entry means that a transaction has taken place whether it is a sale to a customer, buying goods from a supplier, or building a warehouse. These transactions affect both the balance sheet and income statement.

As said before, journal entry accounting requires that there be an equal debit and credit for every transaction. This is also known as double entry bookkeeping. Many journal accounts have a normal balance. For example, assets have a normal debit balance if the account is increased and it is a credit if it is decreased.


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Journal Entries Example

The following example will use both balance sheet and income statement accounts to show how they work.

Bill has been looking for a certain toy for his son. He walks into Toys Inc. to find it. After some searching, Bill finds a GI Joe for $14 and buys it to take home to his son. The toy cost Toys Inc. $9 to get the toy from its supplier. Thus, Toys inc. will record the following journal entries into the Sales Journal:

Cash………….$14

Sales Revenue…………..$14

COGS………….$9

Inventory…………………..$9

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Journal Entries

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Journal Entries

Originally posted by Jim Wilkinson on July 24, 2013. 

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General Ledger Reconciliation and Analysis

See also:
Account Reconciliation
Standard Chart of Accounts
Problems in Chart of Account Design
Cash Flow Statement
Income Statement
Subsidiary Ledger

General Ledger Reconciliation and Analysis Definition

Define a general ledger as the financial record of every transaction of a company. Commonly, it is referred to as the “books” of the company. In the general ledger, record each of the transactions twice as both a subtraction (debit) and addition (credit). The general ledger is the main accounting record of the company.

Consequently, general ledger reconciliation is the process of ensuring that accounts contained in the general ledger are correct. In short, reconciliation makes sure you place the appropriate credit and debit in the associated accounts. Seemingly simple, this process requires an experienced bookkeeper when applied to small companies. Complicated applications require the hand of a trained CFO or equivalent controller. In either situation, a general ledger reconciliation policy must by enacted to ensure consistency.


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General Ledger Reconciliation Explanation

Not every general ledger account has a detail subsidiary ledger to reconcile to. Monthly all balance sheet accounts should be analyzed for accuracy. In addition, periodically it may be necessary to reconcile revenue accounts, expense accounts and miscellaneous balance sheet accounts.

In these cases the procedures are similar to reconciling an account to a subsidiary ledger. Print a detail general ledger transaction report for the account. Then, eliminate reversing journal entries correcting errors. Finally, investigate any transactions that are unusual in nature. For example a debit entry or decrease to a revenue account would be unusual.

Finally, prepare a detailed schedule of transactions remaining in the final balance.

General Ledger Reconciliation Process

Some wonder “what is general ledger reconciliation?”. Others wonder how to do general ledger reconciliation. For bookkeepers, adhere to the following process:

First, study the accounting policy of the company. Ignorance to this is missing the essential foundation of the process; knowing the rules is key.

Then, gather information. These include receipts, invoices, account statements, invoices, and related financial reports. This data is the information the accounting staff puts into accounts.

Third, ask questions about the accounts. What items did the company purchase? Do they relate to company policy? Why are they included in the given account? When were they spent/made?

Finally, document your work. Proper documentation ensures properly reconciled accounts as much as it ensures effective bookkeeping in the first place.

General Ledger Reconciliation Template

A general ledger reconciliations template can be found at: Microsoft Templates.

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Periodic inventory System

 

General Ledger Reconciliation and analysis

Originally posted by Jim Wilkinson on July 23, 2013. 

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5 Cs of Credit – How to Be More Credit Worthy

Are you credit worthy? Right now, is your credit good enough for a lender to give you a loan or line of credit today? If your answer is no or if your not sure of your answer, take a look at the 5 Cs of Credit. This 5-point checklist allows loan officers to easily determine if you are going to be good for their banking business. Although, banks don’t strictly rely on only the 5 Cs of Credit, it’s good to know where they start.

But first, what are the 5 Cs of Credit?

5 Cs of Credit

The 5 Cs of Credit include cash flow, collateral, capital, character, and conditions.

5 cs of creditCash Flow

The bank need to know that your company can generate (and has generated) enough cash flow to pay off the debt. To increase your chances of getting approved for a loan, display how you have paid off debt before, had consistent cash flow, and plan to pay off debt in the future. Remember, cash is king. Because of that, this is one of the most important Cs.

If you need to improve your cash flow, download our free 25 Ways to Improve Cash flow whitepaper. Get approved for that loan!

Collateral

Unfortunately, some companies fail. Regardless of whether the company fails or not, the bank wants to make sure that it can be paid. The bank looks for sufficient collateral to cover the amount of the loan as the secondary source of repayment. This C allows the bank to cover all their bases because at the end of the day, they just want to be paid.

The bank wants to make sure it is protected if you cannot repay the loan. As a result, the bank will look into your savings, investments, and/or property.

5 cs of credit

Capital

Capital is a huge sign of commitment. One of the reasons why the bank looks at capital to approve a loan is to confirm that the company can weather any storm and ensure that the owner will not just walk out any day. The bank needs to know that there is a significant commitment, that being an investment, from the owners of the company.

Character

One of the suggestions we give to clients when developing a banking relationship is to take their banker out to lunch. This provides an opportunity for the banker to assess your character. What are they looking for? Integrity, honesty, respect, and other virtues reflect a good business person who will stick with their commitments in the good times and the bad. Sound character is critical in business. The banks want to feel safe when doing business with you.

Indicators of character include credit history and stability. The biggest question asked is, “will you be able to repay the debt?”

Conditions

With any business, there are external factors that could impact the company’s success. Therefore, the bank looks for conditions surrounding your business that may or may not pose a significant risk to your ability to succeed (and pay off your loan). If there is high risk, the banks will be more cautious when approaching you. But if the risks are small and do not impact any of the 5 Cs of Credit, then the bank is more willing to offer a loan.

Ask yourself: can you repay the debt?

Why do banks follow the 5 Cs of Credit?

In short, banks follow the 5 Cs of Credit to mitigate any risk related to loaning to a company. The risk a bank incurs from lending money to companies can be managed by assessing different areas of credit. Although not every bank uses this list, it’s safe to assume that when approaching a bank, you need to address each of these factors.

Relationships

Business deals with people; therefore, it is critical for the management (especially the owner/CEO/CFO) to have a good relationship with their banker. Imagine a random person coming into your office to ask for a $350,000 loan. Because you have no relationship with them, you don’t know how honest they are, if they have integrity, how willing they are to pay back the loan, how they do business, etc. Because there are a lot of unknowns, the risk increases dramatically.

Trust between a bank and a company is developed when you have proven that you are able to pay off your loans, have long-lasting relationships with customers, vendors, suppliers, etc., and alert the bank if your projections are a little off.

5 cs of creditWhat Lenders Look For

Lenders look to reduce their risk. They are willing to provide loans that may not have the highest return over risky loans with high returns. Areas of risk include the amount of credit used, the number of recent applications for loans, how much the company makes, and available collateral.

To start the process of applying for a loan, address areas that need to be fixed before the application, explain any red flags that your banker might raise, and prove you are credit worthy.

How to be More Credit Worthy

Creditworthiness is a valuation method banks use to measure their customers, your company. Although there may be slight differences between personal and business credit scores, it is a good start to improve your personal credit score. If you follow the same guidelines in your business, the company’s creditworthiness will increase.

Be more credit worthy by:

  • Paying bills on time
  • Pay more than just the minimum amount required
  • Manage credit card balances
  • Limit or manage the usage of debt

In addition to addressing the factors that directly impact your credit score, take a look at the 5 Cs of Credit. If you find yourself lacking in any one of those areas, make it a goal to increase your creditworthiness in that area over the next quarter. If you have decided to start tackling the first “C” – cash flow – download the free 25 Ways to Improve Cash Flow whitepaper. Make a big impact today with this checklist.

5 cs of credit

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5 cs of credit

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Debit vs Credit

Debit vs Credit

Since the late 13th century, people have discussed debit vs credit. Double entry accounting was conceived centuries ago. Now, it is an international standard to record all business transactions with a debit and a credit. This double entry keeps the accounting equation balanced. It also ensures that one account is not left out of a transaction. If you make a mistake, an unbalanced ledger occurs.

Should You Learn It?

Even though accounting software guides you along the double entry process, it is still important to understand the debit and credit rules. This gives you the ability to correct mistakes and edit your company’s books. Without knowing the fundamentals of double entry accounting, you run the risk of keeping inaccurate records that may be beyond repair.

Entrepreneurs are often guilty of not truly understanding accounting and their company’s financial statements. Understanding these begins with grasping the debit and credit rules. These rules are part of a bigger concept: keeping the assets equal to the liabilities plus shareholders’ equity.

What are the rules?

The basic rules state whether an account increase or decreases with a debit or credit. Asset accounts and expense accounts increase with debits and decrease with credits. This means you debit cash to increase the cash account. It also means you debit your COGS to increase your cost of goods account. On the other hand, liabilities, revenues, and shareholders’ equity increase with credits and decrease with debits.

While these rules are not instinctual, they helped businesses keep accurate records for centuries. The extra work to record a debit and credit for each transaction helps prevent errors as well as making mistakes easier to identify.

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

Debit vs Credit

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Debit vs Credit

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Debit vs Credit

See Also:
Debits and Credits
Double Entry Bookkeeping

Debits and Credits in Accounting

When people discuss debit vs credit, they are usually referring to double entry accounting. More specifically, a debit and credit are recorded for each transaction. These two are required for each transaction in order to keep the accounting equation in balance. There is more information about this in the next section.

Today’s accounting software is also based off of the debit and credit account ledgers. In fact, these programs also offer mobile applications to manage your business’s finances on the go. Even if new software reduces the need to understand debits and credits, it is still essential for business owners and managers to be comfortable with. For example, if one has to record an unusual transaction or correct a mistake, it is often necessary that he or she understands double entry bookkeeping.

What is Double Entry Bookkeeping?

Double entry bookkeeping is a method of recording business transactions using at least two accounts for each transaction. Each account receives a debit on the left side or a credit on the right side. Together, the debits and credits keep assets equal to liabilities plus shareholders’ equity. For example, imagine Business A purchases equipment using cash from Business B. Business A would record a debit to equipment, to increase this asset account, and a credit to cash, to decrease this asset account. Business B would record two transactions: a debit to cash and a credit to revenues, as well as a debit to COGS and a credit to Inventory.

The rules are not quite intuitive. They say to increase assets and expenses with debits and decrease with credits. On the other hand, increase liabilities and revenue with credits and decrease with debits. It takes memorization and commitment to learn these rules, but it pays off by having a better grasp of a company’s books.

Debits and Credits for a Bank

One reason people have such a difficult time learning the difference of debit vs credit is their experience with bank accounts. When a business deposits money into a bank, it credits its account. Conversely, if you have a recurring charge, debit the account to decrease its amount. This is the opposite of the rules stated above for double entry accounting. Why are the bank’s debits and credits confusing? Banks are in the business of lending money. This means that a client’s deposit is a liability on their books; thus, it increases with a credit.

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

Debit vs Credit

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Debit vs Credit

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What Lenders Look At?

See Also:
Relationship With Your Lender
What Does a Lender Want to Know
Don’t Tell Your Lender Everything
Due Diligence on Lenders
Finding the Right Lender

What Lenders Look At?

I recently spoke to students at the University of Houston in the Wolff Center for Entrepreneurship on the topic of Dealing with Lenders. During the question and answer portion of the program, I was asked by a student, what lenders look at when they are deciding whether or not to approve a loan.

I answered the question by saying all lenders start with looking at the C’s of credit. There are normally five Cs of credit which I will define in a minute. But, the really important issue in getting your transaction approved rests upon your ability to present your case in satisfying each of the C’s.


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5 Cs of Credit

Depending upon your lender, the weight assigned to each “C” may vary, so you must understand the order of importance to the specific lender you are dealing with.

Character

The first C is Character. Normally borrowers don’t consider this but, lenders do. Lenders look at such things as your willingness to pay obligations, morality, and integrity. Lenders determine the borrower’s business character based on the historical information. To form an opinion on character, lenders will review the borrowers past success, payment history, and intangibles such as personal credit, family background and employment records.

Capacity

Another C is the borrower’s Capacity to pay. The lender normally looks to the business and determines if the business has a history of successful operations. The lender will determine if the business has paid their debts when they were due and shown a proven ability to generate cash flow. If you are trying to fund a start up, you must show prior business experience relating to the operation of the business you are trying to start. You must provide evidence of the capability of operating successfully and paying your bills.

Capital

Next, lenders look at another C Capital. Capital is the equity or net worth of a company. Capital signifies the company’s financial strength as a credit risk. The more capital a company has, the smaller the credit risk. Your company needs a history showing increasing sales, profits and net worth. Additionally, your company needs favorable trends in your operations, such as, constant or increasing gross profit margins.

Conditions

Another of the C’s is Conditions. Lenders will analyze how current and expected economic situations may affect your business. Such items might include past and current political history, and business cycles for you and who you sell to. Normally, the lenders like industries that are in periods of dynamic growth.

Collateral

The final C is Collateral. Lenders will determine the company’s ability to access and provide additional resources such as, equity or other assets, to use for repayment if the company’s capacity or character fails.

By addressing these C’s in your business plan and on your loan application you make the lender’s job faster and easier. Therefore, understanding and selling your C’s will improve your chances of getting the lender to approve your request.

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what lenders look at
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7 C’s of Banking

See Also:
5 Cs of Credit
Line of Credit
Credit Rating Agencies
How Important is Personal Credit in Negotiating a Commercial Loan?
Improve Your Credit Score

7 C’s of Banking

Every knows the 5 C’s of Banking. But what are the 7 C’s of Banking? Recently, I spoke to students at the University of Houston in the Wolff Center for Entrepreneurship on the topic of Dealing with Lenders. During the question and answer portion of the program, a student asked me “What do lenders really look at when they are deciding whether or not to approve a loan?”

7 C’s of Credit: Condition

Is there a logical need for the funds? Does it make business sense? Are the funds to be used to grow an existing and proven business product or service business or to be used for an unproven one?

7 C’s of Credit: Collateral

Is the proposed collateral sufficient? What type of value does it have? Is there a secondary market for it? The lender wants to know, in the event of a default, that it will be likely to recoup a significant portion of the amount lent.

7 C’s of Credit: Credit

For smaller enterprises, the personal credit score of the individual owner(s) will be reviewed. As with personal loans, such as an auto or mortgage loan, the bank is looking for evidence of a history of you paying your lenders on time. For larger companies, the bank will consult Dun & Bradstreet reports for evidence of the timely payment of vendors and other creditors.

7 C’s of Credit: Character

What do those who have done business with the prospective borrower have to say about its business practices? A bank will typically ask the applicant for a list of references, such as three customers and three vendors to contact.

7 C’s of Credit: Capacity

Does the borrower have the wherewithal to pay the debt service? Is it generating enough free cash flow to reasonably assure timely interest payments and ultimately the repayment of the principal balance?

Due to the expanding levels of transnational business and cross-border lending over the last few decades, you need to discuss the two new C’s.

7 C’s of Credit: Currency

What is the recent history and outlook of the primary currency in which the company will conduct its operations? Does the currency exhibit a history or likelihood of losing its value? The more stable the currency, the more attractive the loan request will be to a lender.

7 C’s of Credit: Country

Does the borrower conduct a significant portion of its operations in a country with a history of political instability? Is there the possibility of an expropriation of the borrower’s assets due to a change in the country’s government? Is the country’s current political and legal system hostile to the interests of foreign countries? There are two factors that would make the bank more likely to be willing to make the loan, including the following:

  • The more established the country’s government is
  • The more a legal system has demonstrated a reverence for bother property rights and the rights of creditors

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7 C's of banking

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