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In order to manage its cash flow a business needs to understand the working capital calculation. Working capital is the amount of cash needed to fund the normal day to day trading operations of the business. In a simple business it would be calculated as Inventory + Accounts receivable – Accounts payable representing the funding needed to buy inventory and provide credit to customers reduced by the amount of credit obtained from suppliers.
When a business has a disposal of fixed assets, the original cost and the accumulated depreciation to the date of disposal relating to those fixed assets must be removed from the accounting records. A disposal of fixed assets can occur when the asset is scrapped and written off, sold for a profit to give a gain on disposal, or sold for a loss to give a loss on disposal.
Drawings accounting is used when an owner of a business wants to withdraw cash for private use. The bookkeeping entries are recorded on the drawings account.
If for example an owner takes 200 cash from the business for their own use, then the drawings accounting would be as follows:
A customer has been invoiced 100 for goods and takes a 5% cash settle discount for early payment.
The original invoice would have been posted to the debtors control, so the balance before settlement on the customers account is 100. A 5% discount on 100 is 5, and the amount of cash the customer pays is 95.
The LIFO method is a way of determining which items of inventory have been sold during a period and which items remain in inventory at the end of the period. This will allow a business to determine the cost of goods sold and the value of the ending inventory. A method is needed because all items are not purchased at the same price.
The FIFO method (First In First Out) is a way of determining which items of inventory have been sold during a period and which items remain in inventory at the end of the period. This will allow a business to determine the cost of goods sold and the value of the ending inventory. A method is needed because all items are not purchased at the same price.