Amortization is similar to depreciation but focuses on the costs of intangible assets. It allows businesses to account for the cost of intangible assets over time. Intangible assets are non-physical assets that are expected to provide value to a business for more than a year. The most common way to amortize is to divide the cost of an intangible asset over the number of years you expect it to provide value to your business.
Accrual accounting records a monetary transaction when the good or service is delivered—so when you send an invoice or receive a bill. Cash accounting records monetary transactions when the money actually moves—so when bills or invoices are paid. Cash accounting can be preferable for tax purposes since you’re only taxed on the money you’ve actually received. Accrual accounting can make your revenue look more steady since it doesn’t represent time lag in payments.
Dividend payments do not count as an expense! In order to account for dividend payments, you must use a Statement of Retained Earnings. The statement of retained earnings is a bridge between the income statement and the balance sheet, subtracting your dividend payments from the net income in order to calculate the retained earnings.
Cost of goods sold is the direct costs associated with producing and delivering a good or service. Only expenses that you have to make every time you produce a new product (like raw materials) count as cost of goods sold. Any expenses that would remain the same regardless of how many products you produce (like software purchases) go in business expenses. Because of this, cost of goods sold typically applies to product businesses more than service businesses.
Nothing strikes fear in the heart of small business owners more than looking at your income for the quarter or year and realizing that it’s lower than you projected—or worse, lower than the quarter or year before. You probably immediately…
Over the years I’ve had the pleasure of working with many different types of service-based creative businesses, from pattern designers to dog walkers. No matter what service they are providing, each creative entrepreneur seems to have one big question. How…