Types of Legal Entity
Business (or Legal) Entity. The legal structure, or “type”, of a business. Common entities include Sole Proprietor, Partnership, Limited Liability Corp (LLC), S-Corp, and C-Corp. Each entity has a unique set of requirements, laws, and tax implications.
Corporation. A legal entity based upon State (not Federal) law that is separate and distinct from its owners. Under the law, corporations possess many of the same rights and responsibilities as individuals. They can enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.
Limited Liability Company. A legal entity based upon State law (not Federal) where members may not be personally liable for the company’s debts or liabilities.
Subchapter S corporation. A Corporation that has elected to be taxed in a way that avoids the double taxation of any dividend payments.
Types of Financial Statement
Balance sheet. A financial report that summarizes a company’s Assets (what it owns), Liabilities (what it owes), and Owner or Shareholder Equity (the Net Investment in the business by owners, plus any accumulated earnings, less any distributions to owners), at a specific time.
Cash Flow Statement. A financial report that summarizes how cash was generated and used by the company over a specific time period.
Income Statement. A financial report that shows the revenues, expenses, and profits over a specific time period.
Frequently Used Accounts or Totals
Accounts Payable. The amount of money a company owes but has not yet paid to creditors (vendors, suppliers, etc.) after goods and/or services have been purchased.
Accounts Receivable. The amount of money owed to the company by customers or clients after goods or services have been sold.
Accrued Expenses. If an invoice has not been received from a vendor, this is the estimated amount of money that a company owes creditors
Cash. Company money, most of which is typically in a bank checking or savings account that was opened by the company.
Cost of Goods Sold. Expenses incurred to produce or acquire, and store, the products sold by a business during this period.
Current Assets. Assets that can or will be converted to cash within one year or less. Typically, this could be cash, inventory or accounts receivable.
Current Liabilities. Liabilities that cash will be used to pay within one year or less.
Depreciation. A non-cash expense that shows an asset’s loss of value due to usage and/or time.
Equity. The difference between a company’s Assets and Liabilities. It shows how much money the owners have invested or re-invested in the company.
Expense. Any money spent by the business, most often for goods or services.
Fixed Assets. Assets that will provide benefits to a company for more than one year, such as real estate, land, or expensive machinery and equipment.
Gross Profit. Equals Revenues less Cost of Goods Sold. It describes the profit a company made after deducting Cost of Goods Sold, but before deducting sales, administrative, and other expenses.
Inventory. The cost of raw materials in stock plus cost of making items (products, parts, assemblies) in stock either for sale to customers or for use in other products.
Liabilities. Amounts a company owes to other people or organizations.
Long-Term Liabilities. Amounts a company owes which are payable a year or more from now.
Net Income. Equals all Revenues less all Expenses.
Other Assets. Assets that are neither Current nor Fixed.
Revenue. Revenue is any money earned by the business, often for providing goods or services, before deducting any expenses.
Useful Calculated Values
Cash Flow. Equals the Beginning Cash Balance less the Ending Cash Balance. This describes the net amount of money that a business consumed or generated over a period of time.
Fixed Cost. An expense that is not usually affected by changes in Revenue. For example, rent and admin salaries tend not to change with variations in revenue.
Gross Margin. A percentage equal to Gross Profit divided by Revenue in the same period. It describes how profitable the company is after deducting the Cost of Goods Sold, but before deducting other expenses.
Overhead. Expenses of running the business excluding Cost of Goods Sold. For example, Overhead often includes Rent, and admin Salaries.
Variable Cost. An expense that is affected significantly by changes in Revenue. They are expenses without which this level of Revenue could not have been earned (Cost of Goods Sold, sales commissions, etc.).
Additional Common Terms
Chart of Accounts. A list of account names arranged systematically and usually coded numerically or alphabetically or both to form the general framework of the accounting system of a specific business and to establish a scheme of account classification.
Credit. An accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is positioned on the right side of an accounting entry.
Debit. An accounting entry that either increases an asset or expense account, or decreases a liability or equity account. It is positioned on the left side of an accounting entry.
General Ledger. The record-keeping system for a company’s financial data. It categorizes transactions using the company’s Chart of Accounts, and provides a record of every financial transaction over the operating life of a company. It is used to prepare the company’s financial statements and income tax returns.
Journal Entry. The way updates and changes are made to a company’s books. Every Journal Entry must consist of a unique identifier (to record the entry), a date, and two or more debits/credits, amounts, and account codes (that determine which accounts are altered). The total of all Debit amounts must equal the total of all Credit amounts.
Receipt. A document that proves payment was made. A business provides a receipt when selling its product or service. A business receives a receipt when it pays for goods and services from other businesses.
Trial Balance. A business document, typically generated by an accountant, in which all General Ledger transactions are sorted into debit and credit columns to ensure they “balance”. If they do, the company’s bookkeeping system is mathematically correct.