Schedule C Income, COGS, and Deductible Expenses

The learning points, or topics covered in this portion of the video, include:

• Other Types of Accounts

• In addition to the five major accounts, other types of accounts include gains and losses.

• A gain is the difference when an asset, such as a computer bought for $100, is sold for a higher amount, like $150, resulting in a $50 gain. This is considered another type of income, but it is not normal sales revenue because it is not from everyday business.

• Other comprehensive income is applicable to C-Corporations, which is not covered because the speaker assumes the audience is not at that point.

• COGS stands for Cost of Goods Sold.

• COGS applies mostly to retail spaces and manufacturers.

• COGS is the direct cost of selling an item and is netted against sales revenue.

• Chart of Accounts

• The assets, revenues, liabilities, expenses, and equities are used to create the chart of accounts, which are the ledger accounts.

• In accounting foundations, ledger accounts are used to summarize transactions into a single account. For example, instead of seeing every single supply item purchased in a month, the ledger accounts will summarize the total expenditure by type.

• Asset accounts usually start with 1,000s or ones. For example, cash could be the 1,000 account, and accounts receivable could be the 1,100 account.

• Liability accounts normally start with twos, equity accounts start with threes, revenue accounts start with fours, and expense accounts start with fives.

• This structuring allows for easy summarizing of individual transactions so that one can easily grasp the total amount spent on an item.

• Most accounting software uses this structure, starting with ones, twos, threes, fours, or fives.

• The speaker notes that many clients' accounts are not structured this way, which leads to costly cleanup work, emphasizing the importance of setting up finances and structure correctly from the start.

• Trial Balance

• Once the ledger accounts (chart of accounts) are recorded, a one-page document called the trial balance is created.

• The trial balance lists all assets, liabilities, and revenues on one page, and they will equal.

• The equality is due to the double-entry system in accounting, where if you debit something, the opposing side must be a credit, and if you credit something, the opposing side must be a debit.

• Understanding the "normal side" (debit or credit) of each account type (asset, liability, equity, revenues) is important for looking at the correct data in the financials.

• Financial Statements

• After the trial balance is created, the financial statements are generated. The entire accounting process is focused on creating these financial statements.

• The key financial statements are the balance sheet, income statement, and statement of cash flow.

• The statement of cash flow is often not relevant to small businesses because they typically use the cash-in and cash-out, or cash accounting, method.

• The statement of cash flow becomes important if accrual accounting is used.

• Accrual accounting is more complex, and the speaker suggests using an accountant to convert cash-basis accounts to accrual-basis accounts if it is required.

• Accrual accounting requires recording revenue even if the cash has not been received, provided the service has been performed or the sale has occurred.

• It also requires recording a liability if an item or service has been used, even if it has not yet been paid for.

• The purpose of accrual accounting is to show an investor or bank what the business is actually doing currently, indicating what will come in as revenue and what will go out as liabilities/expenses, regardless of the current cash position.