Accounting is the language of business
But, it’s FILLED with incoherent jargon
Here are 8 of the most confusing terms explained in plain English: ⤵️
But, it’s FILLED with incoherent jargon
Here are 8 of the most confusing terms explained in plain English: ⤵️
Amortization & Depreciation
Found on: Income Statement & Cash Flow Statement
Definition: The accounting process of writing down the value of an asset over time
Found on: Income Statement & Cash Flow Statement
Definition: The accounting process of writing down the value of an asset over time
Plain English: You buy a car for $33,000. 10 years later, you sell it for $3,000.
The value of the car depreciated by $3,000/per year
Amortization is the same thing, but the term applies to intangible assets that you can’t physically touch (trademarks, patents, goodwill)
The value of the car depreciated by $3,000/per year
Amortization is the same thing, but the term applies to intangible assets that you can’t physically touch (trademarks, patents, goodwill)
Accountants deduct depreciation & amortization on the income statement to provide a "better" view of profitability
⚫️Depreciation occurs to tangible (physical) assets like buildings & machines
⚫️Amortization occurs to intangible (non-physical) assets like patents & trademarks
⚫️Depreciation occurs to tangible (physical) assets like buildings & machines
⚫️Amortization occurs to intangible (non-physical) assets like patents & trademarks
Capital Expenditure (Capex):
Found on: Cash Flow Statement
Definition: Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment
Found on: Cash Flow Statement
Definition: Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment
Plain English: Tesla just built Gigatexas, a massive new car factory
All of Tesla’s costs to buy the property, construct the building, and fill it with car-building equipment are capital expenditures
All of Tesla’s costs to buy the property, construct the building, and fill it with car-building equipment are capital expenditures
Deferred Revenue (Unearned Revenue)
Found on: Balance sheet | Liabilities, Current & Long-term
Definition: A prepayment for a good or service by a customer that has yet to be delivered
Found on: Balance sheet | Liabilities, Current & Long-term
Definition: A prepayment for a good or service by a customer that has yet to be delivered
Plain English: A company sells a 1-year magazine subscription in Jan for $100
They collect the $100 upfront, but they can’t count it all as revenue until the magazines are delivered
Deferred revenue is a liability that is gradually reduced as the magazines are delivered:
They collect the $100 upfront, but they can’t count it all as revenue until the magazines are delivered
Deferred revenue is a liability that is gradually reduced as the magazines are delivered:
Goodwill
Found on: Balance Sheet
Definition: The premium paid over the fair market value for an acquisition
Found on: Balance Sheet
Definition: The premium paid over the fair market value for an acquisition
Plain English: Company A buys Company B for $1 million
The fair market value for Company B’s assets & liabilities at the acquisition is $600,000.
That extra $400,000 has to be accounted for. It is stored as “Goodwill” on the balance sheet
The fair market value for Company B’s assets & liabilities at the acquisition is $600,000.
That extra $400,000 has to be accounted for. It is stored as “Goodwill” on the balance sheet
Note: Goodwill has an indefinite life. Most other intangible assets have a finite life
Companies are required to review goodwill value regularly
If they conclude that it no longer has the same level of value, they have to record an impairment charge (like $TDOC this year)
Companies are required to review goodwill value regularly
If they conclude that it no longer has the same level of value, they have to record an impairment charge (like $TDOC this year)
Marketable Securities
Found on: Balance Sheet
Definition: any unrestricted financial instrument that can be bought or sold on a public stock exchange or a public bond exchange
Found on: Balance Sheet
Definition: any unrestricted financial instrument that can be bought or sold on a public stock exchange or a public bond exchange
Plain English: Bank accounts pay little interest
Some companies invest a portion of their cash in stocks, bonds, or money market funds to earn a higher return
Marketable Securities are the value of all of those securities that can be quickly converted into cash
Some companies invest a portion of their cash in stocks, bonds, or money market funds to earn a higher return
Marketable Securities are the value of all of those securities that can be quickly converted into cash
Operating Lease Right-of-Use / Operating Lease Liability
Found on: Balance Sheet
Definition: a lease agreement in which the lessor provides the lessee with the right to use an asset for an agreed upon period of time
Found on: Balance Sheet
Definition: a lease agreement in which the lessor provides the lessee with the right to use an asset for an agreed upon period of time
Plain English: A company signs a building lease for 10 years at $1 million per year
A recent account change made it so they report $10 million as an asset (Operating Lease Right-of-Use) and $10 million as a liability (Operating Lease Liability)
They cancel each other out
A recent account change made it so they report $10 million as an asset (Operating Lease Right-of-Use) and $10 million as a liability (Operating Lease Liability)
They cancel each other out
Note: Some financial websites count Operating Lease Liability as debt
Ex: Yahoo finance says $ULTA has $1.6 billion in debt
In reality, it’s not debt. It’s an Operating Lease Liability
Ex: Yahoo finance says $ULTA has $1.6 billion in debt
In reality, it’s not debt. It’s an Operating Lease Liability
Retained Earnings
Found on: Balance Sheet
Definition: the cumulative net earnings a business has generated after it has paid out dividends to its shareholders
Found on: Balance Sheet
Definition: the cumulative net earnings a business has generated after it has paid out dividends to its shareholders
Plain English:
⚫️The grand total of all of the profits that a company business has generated over its lifetime
⚫️But you have to subtract dividend payments & share buybacks that have been made to shareholders along the way
⚫️The grand total of all of the profits that a company business has generated over its lifetime
⚫️But you have to subtract dividend payments & share buybacks that have been made to shareholders along the way
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Review
Amort./Deprec.: Spread costs over time
Capex: Paying for physical infrastructure
Deferred Rev: Money collected up front
Goodwill: Acquisition premium
Marketable Securities: Stocks & Bonds
Operate Lease Liability: Rental agreement
Retained earnings: All cash earned & kept
Amort./Deprec.: Spread costs over time
Capex: Paying for physical infrastructure
Deferred Rev: Money collected up front
Goodwill: Acquisition premium
Marketable Securities: Stocks & Bonds
Operate Lease Liability: Rental agreement
Retained earnings: All cash earned & kept
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