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It's Easy to Account for an Asset Buy and Its Loan
Borrowing to acquire fixed assets is a widespread practice among small businesses, but it gets confusing when the business doesn't account for the entire cost when it makes the purchase, but instead accounts for much of it when paying back the loan used to buy the assets.

In fact, companies are considered to have paid the full cost for an asset even if they take on debt to buy it. When a fixed asset is acquired, the bookkeeping process requires a journal entry.

An asset account on one side of the balance sheet is increased for the entire cost. On the other side is the addition of a note payable for the funds borrowed to buy the asset. A down payment made with company funds is the difference between asset cost and loan amount. This reduction in the cash asset balances the journal entry.

How it works

For example, consider a $10,000 equipment purchase that's paid by $2,000 of company cash and $8,000 of borrowed money. A journal entry increases equipment assets (a $10,000 debit) while decreasing cash asset (a $2,000 credit) as well as increasing notes payable (an $8,000 credit).

Sometimes, owners are confused about where to account for their expenditures on loan payments. However, after accounting for the portion that is interest expense, each loan payment is simply applied to the note payable liability.

The takeaway: Loan principal is neither an expense nor an addition to the asset. Rather, the full cost of the asset was already recorded upon purchase. Easy!

The Changing Face of Biz Collaboration Solutions
Long ago, people went to a place called "work." But then technology came along and changed the workplace forever. Individuals could work in different locations and communicate as if they were in the same room. What's more, this technology saved money, streamlined service, and advanced communications. It was called desktop virtualization. Which, as Technopedia notes, "... provides a way for users to maintain their individual desktops on a single, central server ... through a LAN, WAN or over the Internet."

Then, according to a 2014 article in ZDNet, desktop visualization went cold, frozen out by mobile devices: "What appears to be happening instead is individuals have chosen a different approach. They've asked their companies to encapsulate workloads and offer them as IOS or Android apps or make those applications accessible through internal Web sites."

A lot can happen in three years. Now products such as Slack and Yammer are providing popular business collaboration options via social networks. So it only makes sense for the social network phenomenon Facebook to provide its interpretation. And Facebook's Workplace, says Jack Madden of, just may be a "game changer."

Why? Says Madden: "Everybody already knows how to use it. ..." And, most important, "Workplace isn't just for corporate employees in the office, rather it's for all sorts of extended enterprise users, like field workers, contractors, technicians, and other employees that may not have a desktop or even a corporate email address."

Will Workplace replace e-mail, messaging, and other collaboration options? Time will tell. But it's a serious challenger. As Madden says, don't discount it.

Are Bosses and Employees at Odds over Corporate Culture?
Office Gossips
Most business leaders believe they head organizations that value and encourage innovation, resourcefulness, initiative, and teamwork. However, their employees see it differently, believing that conformity, predictability, and deference to authority are traits that are rewarded.

Why the disconnect? Are senior execs that out of touch with their rank-and-file workers?

A recent study by Joseph Grenny and David Maxfield, of the corporate trainer VitalSmarts, found there is often a significant chasm between how managers and workers perceive their company's culture.

Grenny and Maxfield's survey of more than twelve hundred employees, managers, and executives revealed that employees tend to view their company culture far more negatively than do their bosses - the higher up in the organization, the more positive the view of the corporate culture.

Not surprisingly, this gap in perception has an impact on performance, execution, talent retention, and general morale. According to the VitalSmarts researchers, when employees have a negative view of their company's culture, they are less likely to be engaged, motivated, and committed to the organization. And that affects everything: When employees believed the culture promoted values such as predictability, "(t)hey were 26% less likely to rate their organization as successful at innovating and executing."

The way to deal with company culture issues is with honest, open dialogue, Grenny and Maxfield advise. They urge leaders to adopt internal communication strategies and hold frank discussions about company culture. Among the tactics they recommend:
  • Clearly articulate the desired company culture and be open about the business case underpinning it.
  • Focus on vital behaviors that will make a measurable difference in performance.
  • Engage with employees at all levels and listen actively to their feedback.
  • Take action to address concerns and respond to issues quickly.

How to Account for Products Bought for Resale
Whether your business is driven by product resale or selling components with accompanying services, it's necessary to account for inventory. Special rules apply to inventory accounting, even for a smaller operation maintaining cash basis books that record expenditures as they are paid.

Financial trail

Inventory is defined as merchandise your business obtains for the purpose of selling to customers. Accounting for expenditures for these items is not considered a business expense until the merchandise is sold. Rather, the cost for resale merchandise is recorded on the company balance sheet as inventory. The business merely exchanges a cash asset for inventory assets.

Inventory appears on the balance sheet at its cost, not its retail value. When inventory is sold, the cost for these items is transferred from the balance sheet to the income statement as "cost of goods sold."

The cost of inventory includes delivery. So purchasing 1,000 units of item "X" for $3,000 plus $50 in shipping expenses results in a cost of $3.05 per item. When one hundred items are sold, inventory is reduced by $305.00 and cost of goods sold is increased by the same amount.

The circumstances clearly become complex if cost for the same item changes. Acquiring another one hundred units of item "X" for $320 plus $15 for shipping results in $3.35 per unit added to inventory. When two hundred more items are sold, confusion reigns.

The default accounting method for variable inventory unit costs is called FICO-an acronym for First In, First Out. Accordingly, the cost for the two hundred sold items is $3.05 each. You're still selling from your original 1,000-item batch. But if you're selling 1,000 items, the first nine hundred are the remaining units from the original batch and the next one hundred are from the second batch, and have a cost of $3.35 each.

Simplifying inventory

All small businesses should consider an inventory tracking system. The "periodic" system places all inventory purchases in a "cost of goods sold" account, a temporary holding station. At the end of an accounting period - at least annually - a physical inventory count is taken, and the known inventory cost is recorded on the balance sheet. The difference between inventory figures from one period and those of the next offsets the cost of goods sold, so the purchases no longer belong in a temporary holding station. The difficulty in this method is assigning differential costs for units acquired at various prices; however, it's satisfactory for smaller companies with few types of inventory items and little fluctuation in cost.

By contrast, "perpetual" systems continuously update the costs for all units on hand in the inventory account. Most accounting software will automate these systems, which are superior for tracking inventory in stock, as they constantly update the income statement for true FICO cost as items are sold.

Learning the data entry steps for these programs is challenging, but for larger organizations with multiple components of inventory, the output is certainly worth the effort.
Michele Ball
Perfect Additions
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Worth Reading
Make Sure Your Employees Have Good Things to Say about You behind Your Back
By Nathan T. Washburn and Benjamin Galvin
Harvard Business Review
Leaders try to foster employee engagement through memos, e-mails, speeches, and meetings. But there's a better way to create a positive leader-driven culture. Reach beyond your inner circle and cultivate admirers, who will spontaneously share their positive opinions of you with their peers. But be admirable. And most important, be authentic.

Limit How Much Information You Have to Process to Avoid "Mental Fog"
By Eric Ravenscraft

Information overload comes at a cognitive cost. When we force ourselves to process too much information, we often slip into a "mental fog." Although we may think we're multitasking, we're really just switching from one to-do item to the other, making poor decisions and mistakes, and responding emotionally, rather than rationally, along the way.

The Top Idea in Your Mind
By Paul Graham

An oldie, but a goodie, this post will have you solving problems in the shower. Left alone, our thoughts tend to drift inevitably toward the top idea/problem in our minds. According to Graham, this is why the solution to a vexing problem often comes when you are in the shower. Be sure your top-of-mind issue is important. Or keep refocusing until it is.

This Month: Know Your Employees
How well do you know your employees? Not just their names or favorite lunch spots - their potential.

Even the best bosses don't always get it. Use these links to gain insight into your number one asset: your employees.

How open is communication at your company? You may be surprised at the things your employees aren't telling you. Discover them here:
5 Things Your Employees Will Never Tell You

You want to give these seven things a miss - they make your employees mad:
7 Guaranteed Ways to Enrage Your Employees

Are your motivational techniques relevant for today's worker? Find out here:
Leaders Get Wrong About Motivating Employees

Companies are getting creative with ways of rewarding their employees. Get ideas here:
Top 20 Employee Benefits & Perks

Discerning employers are always looking for talent. Check out these high-potential employee traits you may not recognize:
Four Things You Probably Didn't Know About High Potential Employees
This newsletter and any information contained herein are intended for general informational purposes only and should not be construed as legal, financial or medical advice. The publisher takes great efforts to ensure the accuracy of information contained in this newsletter. However, we will not be responsible at any time for any errors or omissions or any damages, howsoever caused, that result from its use. Seek competent professional advice and/or legal counsel with respect to any matter discussed or published in this newsletter.
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