Accounting

Table of Contents

Definitions

Book value

Book value is the value of an asset according to its balance sheet account balance.

For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset.

Traditionally, a company's book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variable include goodwill, intagible assets, or both.

Expense

An expense consists of the economic costs a business incurs through its operations to earn revenue.

Businesses are allowed to write off deductible expenses on their income tax returns to lower their taxable income and thus their tax liability.

Revenue

Revenue is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise.

It is the top line or gross income figure from which costs are subtracted to determine net income.

Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold.

Revenue is also known as sales on the income statement.

Balance sheet

A balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time.

The balance sheet adheres to the following formula:

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Tangability

An intangible asset is an asset that lacks physical substance (unlike physical assets e.g. machinery and buildings) and sually is very hard to evaluate.

E.g. patents, copyrights, franchises, goodwill, trademarks, trade names.

Depreciation & Ammortization

Suppose:

  • buy a truck at period 0 and we'er going to use it for 4 years => depreciate it across the 4 years we're going to use it
  • buy a license at period 0 which lasts 4 years => we ammortize it across the 4 years it's useful

Whether or not we call it depreciation or ammortization depends solely on the "tangebility" of the asset, e.g. a truck is "tangible" / "hard" asset, while a license is a "soft" asset.

Table 1: Deprectiation & Ammortization
Period 0 1 2 3 4
Truck Depreciation   20 20 20  
License fee   1 1 1 1
Table 2: Assets
Period 0 1 2 3 4
Truck Depreciation 60 40 20 0  
License fee 4 3 2 1 0