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Let's talk about inventory and expenses in your business. Inventory is usually the largest current asset of the business that sells products. If the inventory count is greater at the end of the period than at the start of the reporting period, the amount the business actually paid in cash for that inventory is more than what the business recorded as its cost of goods sold expense. When that occurs, the accountant deducts the inventory increase from net income for determining cash flow from profit.

CPA accountants Irvine shows the prepaid expenses asset account works in much the same way as a change in inventory in accounts receivable account. However, changes in prepaid expenses are usually much smaller than changes in those other two asset accounts.

The beginning balance of prepaid expenses is charged to expenses in the current year, but the cash was actually paid out last year. This period, the business pays cash for next periods pre-paid expense,s which affects this period's cash flow but doesn't affect net income until the next period.

Now let's talk about growth. As a business grows, it needs to increase its prepaid expenses for such things as fire insurance premiums which have to be paid in advance of the insurance coverage and its stocks of office supplies. Increases in accounts receivable inventory and prepaid expenses are the cash flow price a business has to pay for growth.

Rarely do you find a business that can increase its sales revenue without increasing these assets. The lagging behind effect of cash flow is the price of businesses' growth. Managers and investors need to understand that increasing sales without increasing accounts receivable, isn't a realistic scenario for growth. In the real business world, you generally cannot enjoy growth in revenue, without incurring additional expenses.

Now let's talk a little bit about the depreciation. Depreciation is a term we hear about frequently but don't really understand. It's an essential component of accounting; however depreciation is an expense that's recorded at the same time and in the same period as other accounts. Long-term operating assets that are not held for sale in the course of business are called fixed assets. Fixed assets, include buildings, machinery, office equipment, vehicles, computers and other equipment. It can also include items such as shelves and cabinets. Depreciation refers to spreading out the cost of a fixed asset over the years of its useful life tool a business instead of charging the entire cost to the expense in the year that the asset was purchased, that way each year that equipment or asset is used is sharing the total cost.

For example, cars and trucks are typically depreciated over five years. CPA Accountants Irvine knows this idea to charge a fraction of the total cost of depreciation expense during each of the five years, rather than just the first year. Depreciation applies only to a fixed asset that you can actually buy, not those you rent or lease. Depreciation is a real expense but not necessarily a cash outlay expense in the year it's recorded.

The cash outlay actually occurs when the fixed asset was acquired, but is recorded over a period of time. Depreciation is different from other expenses; it is deducted from the sales revenue to determine profit. DF

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