Here are the answers to the terminology quizz from the previous blog post.
| Accounting H |
| Asset L |
| Balance Sheet P |
| Cash Flow K |
| Cost of Sale N |
| Creditor B |
| Debtor I |
| Drawings E |
| Entity M |
| Equity D |
| Expenses A |
| Income F |
| Liability G |
| Profit & Loss C |
| Trading Account J |
| Trial Balance O |
A little added information about Cost of Sales to help explain:
Cost of Sales is an accounting method to measure the relationship of the Sales Margin.
This means that if the Cost Price is marked up by 3 times the G Profit is double the cost (300-100), or the margin (on Sales) is 66%.
Accountants measure the margin on Sales, and this, in theory, should always be constant. By separating from expenses the analysis is not confused by other issues. This measure has many advantages, one of the major advantages is that the Sales Breakeven level can be easily worked out, (to determine whether Expenses need cutting back, or sales need to be boosted)
Another way to put this:
If you mark-up an expense and sell it – it should be a cost of goods sold (COGS).
So take labour for example – If your labour is sold this should be COGS. Administration staff to run the general business is not sold so it’s an expense.
The same applies to freight so if you mark it up and sell it along with the goods then COGS or if this is just a treated as a fixed cost of doing business it’s an expense
The most important thing is to be consistent between the accounting periods so you can see if your gross profit (the profit made from trading) is trending up or down as a percentage. If down your margins are being squeezed or you have been inefficient servicing clients and if up the opposite you have been operating efficiently.
