A budget is a monetary plan for an upcoming period. It can also help forecast financial performance and position. Usually, companies prepare a budget for every financial period. Once created, companies can use it as a tool to control performance. Companies can use various types of budgets for different areas …

Companies can choose between various forms of finance. The two most common ones include equity and debt. However, each source comes with its costs. While equity is more expensive, it is easier to obtain. The primary expense associated with equity finance is dividends paid to shareholders. In contrast, debt finance …

Companies that offer credit sales accumulate accounts receivable. These are balances that they expect their debtors to pay before a set credit term. Usually, debtors repay their debts before the defined period. However, some may also go beyond that or not settle those debts at all. Companies must analyze their …

A company records transactions in its accounting systems throughout the year. These transactions come from various sources. At the end of each financial year, it summarizes these transactions in a general ledger and then a trial balance. The next step within this process is preparing financial statements. However, companies must …

A loan is a form of debt to finance various needs and operations. Companies often obtain these from financial institutions. In exchange, the lender receives interest income. Accounting standards do not allow companies to account for loans in the same accounting period. Since this finance spreads over several periods, the …

Companies use equity as a method of raising funds. Most people associate equity finance with ordinary or common stock. However, companies may also use preference shares as an alternative to obtaining funds from investors. The accounting treatment of these shares differs from that used for ordinary stock. Before discussing that, …

A swap is a derivative instrument that allows two parties to “swap” the cash flows from financial instruments. However, it does not involve exchanging the underlying liabilities in most cases. It is a part of a hedging strategy followed by entities to mitigate their risks. Two common examples of these …

Financial statements provide crucial information about a company’s finances to its stakeholders. Most users prefer the balance sheet and income statement. However, they do not provide essential information about cash transactions during the year. Therefore, companies also prepare a cash flow statement that satisfies this requirement. Accounting standards require companies …

Accounting profit is the net income companies receive after deducting expenses from revenues. It provides a base to measure financial performance during a financial period. However, companies may also use other metrics internally to gauge it. One includes contribution margin, which companies can translate into contribution per unit. The base …

When a financial transaction occurs, companies record it in the books of prime entry. Some companies also record it as a journal entry. As these transactions occur, companies accumulate them and post the cumulative amount in the general ledger. It happens through a process known as posting in accounting. It …