This content will introduce the basic concepts of accounting. The following will explain some common accounting terms: Balance Sheet, Profit and Loss statement and Chart of Accounts.

Balance Sheet

Balance Sheet is also called Statement of Financial Position.

In simple terms, it is used to calculate the company's net worth.

The balance sheet can be used to analyze the financial health of a company, its cash flow ability, whether the debt level is too high, whether it is facing a bankruptcy crisis, and so on.

Especially when buying or selling a company, the net asset value of the balance sheet is an important factor in determining whether the company is worth buying.

It should be noted that the profit & loss statement reflects a period (eg: April 1, 2021 to March 31, 2022), while the balance sheet reflects a point in time (eg: March 31, 2021) .

For more in-depth understanding, you can refer to Wikipedia's explanation.

Profit & Loss Statement

Profit & Loss Statement is also called Income Statement. As the name suggests, it is a statement used to calculate the profit and loss of a company. Simply put, by reading the profit and loss statement, you can know how much the company's gross profit and net profit are. Many friends do not understand the difference between gross profit and net profit. Frankly speaking, it is very important.

Gross profit is revenue minus the direct cost of a product or service.

What are direct costs? Assuming your company sells popcorn, the direct cost of your product is popcorn oil. The gross profit of the product is the selling price per cup of popcorn minus the cost of popcorn oil per cup of popcorn.

Why is it so important? Because it is used to calculate the company's Break Even Point. How many cups of popcorn are sold before the company can offset all costs (including rent, wages, etc.).

Net profit is the net income of a company, and that is the money that can really be saved.

Chart of Accounts

It is a general catalog of all accounts, functioning like a catalog of books.

If you want to know the contents of a company, it is best to first look at the chart of accounts.

If you have a little understanding of business operations, then you can quickly get an initial idea of ​​company operations by reviewing the chart of accounts.

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