Finance February 21, 2011 41 Reads share

Accounting for Dummies: Part 3

In a previous blog post I introduced the

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Fixed Assets

…are always the first item in the Balance sheet. These are as the name suggests semi-permanent assets which are necessarily used by the business in its trading activity. These usually include Land and buildings, Plant and equipment, Fixtures and fittings and Motor Vehicles. Depreciation will be charged on these (written off to P&L) over the useful lives of the assets.

Current Assets

…are the short term assets used in the business and are usually made up of cash, debtors and stocks.

Current Liabilities

…are the opposite i.e. short term liabilities of running the business and are made up of overdrafts, creditors and accruals. The difference between Current assets and liabilities is known as Working Capital and a 2 to 1 ratio was always seen as healthy when I went to school.

Ratio analysis on your working capital figures is one of the best ways of measuring and monitoring the financial health of your business. Debtor days, stock days, creditor days define your business and careful cash-flow management is essential for business survival

The larger a business gets, other measures become more important like Return on Investment (ROI), Gearing ratios, Earnings per share (EPS) and Price Earnings ratio (P/E). These all measure the attractiveness of a business as it looks to investors rather than management.

Aonghus Sammin

Aonghus Sammin

Accountant with 17 years business experience. Principal of Bradán Consulting based in Galway. The firm provides accounting, business planning and governance services. Member of Fáilte Ireland Business Mentors panel. Chairman of Board member at COPE Galway.

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