Accounting for Entrepreneurs
Accounting Terminology for Entrepreneurs: M-O
Written by Bobby Jan for Gaebler Ventures
This article, as part of the Accounting Terminology for Entrepreneurs series, introduces some important accounting terminologies. We cover accounting terms starting with the letters M-O.
Understanding accounting is essential for every entrepreneur.
To help you understand accounting a little better, we've created our Accounting Terminology for Entrepreneurs series, which provides simple easy to understand explanations of important accounting terms.
In this article, we look at accounting terms starting with the letter M-O.
Net book value
Net book value = original cost of asset - (depreciation + amortization). For example, if you purchased a crane for $100,000 and it depreciates by $10,000 a year, after two years, the net book value of the crane will be $100,000 - 2 * ($10,000) = $80,000. When you are valuing a business, be careful not to take net book value for granted since the numbers you see might reflect accounting conventions rather than the fair market value of assets.
Net profit = revenue - total expense. Net profit is often referred to as "the bottom line" because it appears at the bottom of the income statement. Net profit could be either pre-tax or post-tax.
Net worth = total assets - total liabilities. Net worth is the same as net book value and owner's equity.
Non Recurrent Items
Non recurrent items are financially meaningful events that are unlikely to reoccur in the normal course of a company's business cycle and therefore not ordinarily a factor in financial estimations. Examples of non recurrent items are results from discontinued operations, natural disasters,
Original cost is the total cost to the owner of acquiring an asset. Original cost includes the cost of the asset plus any expenses that were incurred as a direct result of acquiring the asset. For example, the original cost of purchasing securities may include the market value of the securities purchased plus commission. Be careful not to confuse original cost with the cost of purchasing the asset brand new.
Overhead, also referred to as indirect costs, is a broad category of business expenses arising from activities that do not contribute directly to the production of goods and services sold by the business. Overhead is an ongoing administrative expense that does not directly generate profits but is essential for operating a business. Examples of overhead are depreciation, insurance, taxes, legal fees, advertisement expenses, etc.
Owner's equity = assets - liabilities. Owner's equity is the same as net book value and net worth. Owner's equity is the residual, or last, claim against a business's assets. As a business owner, it is important to make sure that liabilities do not exceed assets and that the business is able to pay all of its current liabilities.
Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.
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