(415) 418-0020 info@proteafinancial.com
The Accounting Equation

The Accounting Equation

The accounting equation is the most important piece of information any accountant can learn. Anyone starting out in the field of accounting or wants to just better understand the account equation should take time and learn the equation.

It really a very simple formula.

Assets = Liabilities + Equity

This straightforward equation on a company balance sheet is the foundation of the double-entry accounting system and the basics of accounting. Double entry accounting is the term used to simply summarize that each debit (left hand side) has an equal credit (right hand side), that keeps the books in balance. The accounting equation is the reason your balance sheet remains balanced.

It is all you need to handle the basics of accounting, and most of the not so basic items as well. Yes, there are a lot of overly complicated standards and yes, these do add extreme complexity, but at the core, if you know this equation, apply this equation and live by this equation you are bound to succeed.

Protea Financial Accounting Equation Graphic

In the expanded view, equity is broken down into capital and retained earnings.

Capital is the funds put into the business. Retained earnings is a little bit more complicated but in basic terms it is your revenue less your expense and further reduced by any funds owners have taken out of the business (can be in the format of dividends).

Understanding the Accounting Equation an Its Components

If you are trying to understand the financial position of a business the first place you want to go is to the balance sheet. Though each of the three main financial statements in accounting—the balance sheet, income statement, and cash flow statement—can stand on its own, there’s one piece of the puzzle that ties them all together: the accounting equation.

The equation makes it possible to figure out any one value using the other two values and vice versa, so you can use it to solve problems quickly and easily without needing to start from scratch every time.

As mentioned, the balance sheet is the accounting equation and will quickly show you all the key components of your business, namely your assets, your liabilities and if the company is profitable (though might be a bit hard to see as the equity section is a bit more complicated).

Assets are the items of worth that the business controls and liabilities show you what the business owes to others.

Protea Financial Balance Sheet 5.5.22B

Understanding the Balance Sheet

Every business keeps its assets and liabilities in check by tracking them on their balance sheet. The total value of all your assets is tracked at one side of a balance sheet, while your liabilities (the amount you owe to others) are listed at another column.

The third, and final, component of a company’s balance sheet is owner’s equity, which includes common stock and retained earnings. To be able to understand how a balance sheet works, you must know what each component means.

When looking at a balance sheet, you will see both current and noncurrent assets. this definition means they can be turned into cash within 12 months or less. On top of that, you will also see financial ratios like debt to equity ratio, working capital ratio, and asset turnover ratio.

These ratios help us to know whether or not a company has enough liquid capital to pay off debts with ease and has an excess of money left over for expansions. The only way that investors can see the information is by a spreadsheet or at a company’s webpage.

These numbers help them to decide whether or not they should invest in the company. to decide whether or not to invest, the company needs to take into account how much debt it has and how much the owner has.

Understanding the Cash Flow Statement

An investor needs to look at more than just a company’s income statement (aka profit and loss) and balance sheet (aka assets and liabilities). Cash flow statements are also important for understanding how a company is performing, since they provide insight on whether it can meet its short-term financial obligations.

While cash flow statements may not always be as straightforward as others, they have a very logical format. The first section of any cash flow statement will reveal where a company’s cash comes from and what types of assets generated that money. This is typically followed by an analysis of how much money was spent in each category, like dividends or capital expenditures.

Finally, investors should take note of items like net change in cash—this shows if a company has enough liquid assets to keep up with its current obligations. It’s best to view a cash flow statement over time so you can see trends in different areas and compare companies against one another.

Call Us Here at Protea Financial to Learn More About the Accounting Equation

The accounting equation is simply the most important accounting basic you will ever learn. It has several components that are all important. To find out more about the importance of the accounting equation, or any of its components, please call Protea Financial today!

Learn More About the Accounting Equation!

Reach out to the professionals here at Protea Financial to fully understand the accounting equation and its components!

Tasks Your Winery Bookkeeper Can Offer

Tasks Your Winery Bookkeeper Can Offer

Whether you are a new winery business owner, or you have been making wine for generations, when it comes to wine, you’re the expert. You know all about selecting the right barrel for aging and how to create a perfect label. When it comes to finances for your winery, you’re not quite as certain. This may be the perfect time to ask for help. Have you thought about hiring a bookkeeper? Here are some ways a bookkeeper can help you streamline your business, and allow you to focus on growing your business.

 

Keeping Track of Transactions

One of the most difficult items for business owners to keep up with are the daily transactions. Daily transactions represent the incoming and outgoing money for your business. Examples of daily transactions might include:

  • All of your sales for each day, both cash sales and credit sales.
  • Daily cash or charges from invoices you have sent to customers.
  • Purchases you have made for the business, whether they are small or large purchases.
  • An influx of cash into your business, such as a line of credit or a loan.
  • Paying off debts, such as a SBA loan.
  • Paying suppliers for supplies and equipment for your business.

If this sounds like a lot of details to keep up with, it is. While there may be times when you will not have many transactions at all, especially if your vineyard isn’t producing wine yet, there will be other times when you will be overwhelmed with daily transactions.

Bookkeepers can record all of your winery’s transactions. This may not sound like a big deal, but think about all of the incoming expenses, and outgoing inventory. It can be extremely difficult to run a business and keep up with your winery daily transactions. A bookkeeper streamlines the entire process for you.

 

Continuous Updates on Expenses

As a business owner, it can be extremely difficult to stay on top of your spending. Bookkeepers can give you daily, weekly, and monthly updates on incoming and outgoing expenses, which helps you to stay on track and focus on your business goals.

Over half of all small business owners don’t have a formal budget, and also own up to not keeping track of their expenses. For winery and vineyard owners, it become even more difficult to track expenses, as there are immediate, short-term expenses—such as bottles, fertilizer and insect control—and long-term expenses, such as payroll. Also, you may have expenses that are services, such as an accountant or a bookkeeping service, that are harder to categorize, which makes them tougher to track. This is precisely why a bookkeeper can keep you updated on your expenses, so you can stay within your budget.

In addition, an accountant could use the daily expenses information to make predictions for your business moving forward. This allows you to stay within your business goals and continue to grow.

Protea Financial Winery Bookkeeper 4.21.22B

Accounts Receivable And Payable

Accounts receivable can be hard to handle in a winery. When you originally began your winery, you may have begun (or inherited) a way of invoicing long-term customers. For example, many wineries charge their long-term customers by the month, with a net 30 days from date of invoice. However, if you also have a store on the premises, you will have short-term payments via cash or credit. Because invoicing can be in the short term or the long term, your clients may pay immediately, or upon receipt of products.

If your winery is like many wineries, you may have different invoicing periods, but a bookkeeper can keep your accounts receivable humming smoothly. A bookkeeper can also help you with delinquent accounts as well. This is an important part of the accounts receivable process, because delinquent accounts cost you money each month.

In addition to mastering accounts receivable, bookkeepers can also smooth and streamline your accounts payable process. The accounts payable process can also be tough for wineries to negotiate. Wineries often operate at a net loss, especially at the beginning, and you will need someone who can keep up with money going out and coming in.

Your bookkeeper can work with your accountant to ensure that your accounts receivable and payable reports can account for the money moving out and coming in to your business.

 

Inventory Help

One of the most important jobs a winery bookkeeper has is to keep track of inventory. Wineries have liquid inventory, the wine itself. Wineries also have supplies needed to make wine on  hand daily. In addition, some wine inventory is sold by the bottle, some by the barrel, and some inventory is “used” for wine tastings. This means that keeping track of inventory is critical. If a bookkeeper can ensure your inventory is accurate, it helps you order supplies and track your wine quickly.

In addition, because your bookkeeper is working daily with your inventory, their inventory reports will be vital to your accountant at tax time. Because your accountant will have all of the inventory paperwork, your business accounting for taxes shouldn’t be such a headache.

Although you may have tried to streamline your process for winemaking, as any winery owner does, you may not be as up to date in your bookkeeping. In fact, you may be using outmoded bookkeeping and inventory methods. A bookkeeper can suggest ways to make your winery business run smoothly and adjust to rapid growth. This is great information for a new business owner who may not be used to rapid growth and money coming in daily.

 

Bank Reconciliations 

If you hate reconciling the bank accounts for your business, you aren’t the only business owner who feels that way. Just as expenses for the winery can be tricky, reconciling bank accounts can be difficult for winery owners as well, because they have short and long-term expenses coming out at one time. If you have both a vineyard and a winery, the accounts get even more difficult. If you hire a bookkeeper, you can leave the bank worries to them.

This is more than just a load off your mind. Reconciling bank accounts means no more overdraft fees, because your bookkeeper can help keep all of your business balances up to date. Also, in conjunction with an accountant, a bookkeeper can manage the flow of money in and out of your accounts. If you know how much money is entering and leaving your accounts, you will be better able to make your money work for your business.

A bookkeeper can also work with your accountant to make sure your software and bank balances match, which will also help keep your business growing in the right direction.

 

Fraud Prevention

Hiring a bookkeeper to keep track of your daily transactions helps prevent fraud in your business. Researchers estimate that small businesses lose an average of $200,000 yearly to fraud. In over 40% of fraud cases, having a bookkeeper to look at daily transactions would have prevented the fraud from occurring. Only 15% of businesses who were victims of fraud recovered any of the money they lost. While Fortune 500 Companies may be able to lose that amount to fraud, small businesses don’t usually have that kind of money lying around.

Protea Financial Winery Bookkeeper 4.21.22B

For Help Delegating Your Winery Bookkeeping Tasks, Contact Protea Financial Today!

Bookkeepers are one of the most important parts of your accounting and finances team. You need a great bookkeeper to help you continue to maximize your business potential. With an accomplished bookkeeper, you’ll be able to concentrate on marketing and advertising for your winery. You can focus on finding and keeping your customers, and creating reasons for customers to buy more of your wine. Maybe you can begin to move into other avenues for your winery, such as hosting groups for weddings, bridal showers, or business meetings. If you aren’t sure how to look for a bookkeeper who has winery experience, we can help. Contact Protea Financial today. 

We Can Help with Winery Bookkeeping Tasks!

No matter what winery bookkeeping tasks you need help with, the experienced people here at Protea Financial can help!