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Elementary accounting concepts

Amount of money saved. Keep a running record of your income (the money coming in) and of your expenses (outgo). Your total income in a year minus your expenses for the year is the money you have saved. An analogy is water flowing into a barrel where you dip some out for various uses.

A family has a certain amount of after-tax income that comes in in a year. And they have money going out in the form of house or rent payments, food costs, clothing costs, interest costs for loans, etc.

Total saved = total income - total outgo

Cashbook. A book in which a record is kept of money taken in and money paid out.

Assets. All goods or property owned which have a money value.

Net worth. At the end of the year, sum up the values of all your assets and all of your debts. The sum of the values of your assets minus the sum of your debts is your net worth at that point in time.

Many people borrow money to buy things. They borrow money to buy a house, borrow money to buy a car, borrow money when paying with credit cards, etc. All money borrowed is money held at a cost. One must pay for the privilege of holding and using someone else’s money. The money you pay to hold someone else’s money is called interest. All interest that you pay is an expense to you.

Interest. Payment for the use of money, usually expressed as a percentage of the amount owed.

Balance sheet. A statement in tabular form that shows assets, liabilities (i.e. debts), and net worth at a specified date.

Net income. In a business, profit given by revenues minus the costs of doing business such as depreciation, interest, taxes and other expenses.

Income statement. In business, a statement showing 1) all income, 2) all expenses, and 3) net income.

Cash Flow. In business, for some period such as a month, the ending balance minus the beginning balance of an account. Cash flow is increased by 1) selling more goods or services, 2) selling an asset, 3) reducing costs 4) increasing the selling price, 5) collecting faster, 6) paying slower, 7) bringing in more equity, or 8) taking a loan.

Mar 2017