A deficit, also called a loss, refers to the surplus of expenses over revenue for a certain time period. In other words, it’s when a company’s expenses exceed its revenues during a period. Sometimes this is also referred to as running in the red or having a loss for the year.
Explanation :
Deficits are common in the business world, especially in start-ups. It’s not uncommon for a company to lose money in the initial first years of existence. Tech companies are notorious for operating at a loss for the first few years. These companies stay a float through investors’ funds and increasing rounds of capital raising. Of course, an infamous non-business example is the United States government. Each year the US spends more money than it takes in from taxes and other collections. In financial terms, a deficit occurs when expenses exceed revenues, imports exceed exports, or liabilities exceed assets. A deficit is synonymous with a shortfall or loss and is the opposite of a surplus. A deficit can occur when a government, company, or person spends more than it receives in a given period, usually a year.
In a nutshell :
- A deficit occurs when expenses exceed revenues, imports exceed exports, or liabilities exceed assets in a particular year.
- Governments and businesses sometimes run deficits deliberately, to stimulate an economy during a recession or to foster future growth.
- The two major types of deficits incurred by nations are budget deficits and trade deficits.
A debit card is a bankcard that allows depositors to pay third parties directly from their bank account balances electronically. A debit card is a payment card that deducts money directly from a consumer’s checking account when it is used. Also called “check cards” or “bank cards,” they can be used to buy goods or services; or to get cash from an automated teller machine or a merchant who’ll let you add an extra amount onto a purchase.
Explanation:
Debit cards are normally issued by financial institutions and are extremely useful because they eliminate the need to carry cash. These cards are not the same as credit cards. When credit cards are used, the credit card company issues the payment for the purchase and grants a loan to the cardholder for the purchase that was made. Debit cards, on the other hand, fund the purchase immediately out of the cardholder’s bank account. This means that the account to which the debit card is linked must have available funds at the time of the purchase. Also, debit cards require a password to be used; this particular requirement also differs between a debit card vs a credit card. The latter doesn’t require a password to be used. In essence, a debit card is essentially like using cash to pay for things.
In a nutshell:
- Debit cards eliminate the need to carry cash or physical checks to make purchases, and they can also be used at ATMs to withdraw cash.
- Debit cards usually have daily purchase limits, meaning it may not be possible to make an especially large purchase with a debit card.
- Debit card purchases can usually be made with or without a personal identification number (PIN).
- You may be charged an ATM transaction fee if you use your debit card to withdraw cash from an ATM that’s not affiliated with the bank that issued your card.
- Some debit cards offer reward programs, similar to credit card reward programs, such as 1% back on all purchases.
Double Taxation is an occurrence where the income from the same source is taxed twice before translating into net income. This corporate phenomenon occurs because company income is taxed at the corporate level and taxed again when distributed to shareholders through dividends . In other words, this is a tax policy where the government taxes income when the corporation receives it and taxes the same income again when it is passed on to the owners of the corporation.
Explanation:
Double tax is the taxing of the same income twice. The most common example of this tax policy is with corporate dividends. As the corporation generates a profit, it pays income taxes at the corporate level. These profits sit in retained earnings until the corporation decides to distribute some of them to the shareholders in the form of a dividend. The dividends given to the shareholders are then taxed as personal income to the individuals. Thus, the profits from the corporation are taxed twice. Another common example is when the same income is taxed in two different countries during international trade. Double taxation is unique to C-corporations because of the entity structure. C-corporations are established as separate entities from their owners, the shareholders, and must pay their own income taxes on the profits they generate. When a C-corp passes these profits to its shareholders, the government recognizes that as income to the owners because they are a separate entity from the company. Thus, the shareholders are also required to declare this as income and pay income taxes on it as well.
In a nutshell :
- Double taxation refers to income tax being paid twice on the same source of income.
- Double taxation occurs when income is taxed at both the corporate level and personal level, as in the case of stock dividends.
- Double taxation also refers to the same income being taxed by two different countries.
- While critics argue that dividend double taxation is unfair, advocates say that without it, wealthy stockholders could virtually avoid paying any income tax.
Depreciation expense is the cost allocated to a fixed asset during a period. Many people think this is a way to “expense” assets over time, but that’s not really true. It is recorded as an expense on the income statement, but it isn’t an expense of the asset. Instead, it is allocating the cost of the asset over its useful life.
Explanation:
Fixed assets are capitalized when they are purchased. No expenses hit the income statement during the purchase. An asset account is debited and the cash or payables accounts are credited. This capitalization concept is based on the matching principle, which states that we need to match expenses with the revenues they help generate. If we expensed capital assets, we would be recording all of the expenses for an asset that will last five plus years in the year of the purchase. This doesn’t match the revenues or expenses. Depreciation is a way to fix this problem. It takes the depreciable cost of an asset and allocates it over the useful life. This way the expense actually reflects the income produced from the asset in that period.
In a Nutshell :
- Depreciation ties the cost of using a tangible asset with the benefit gained over its useful life.
- There are many types of depreciation, including straight-line and various forms of accelerated depreciation.
- Accumulated depreciation refers to the sum of all depreciation recorded on an asset to a specific date.
- The carrying value of an asset on the balance sheet is its historical cost minus all accumulated depreciation.
- The carrying value of an asset after all depreciation has been taken is referred to as its salvage value.
Double entry accounting is a system of recording business transactions where each transaction affects at least two accounts and requires an equal debit and credit. This system was created in the 13th century as a way to double check the accuracy of recorded numbers.
Explanation:
A double entry accounting system established the accounting equation where assets must always equal liabilities plus owner’s equity. Everything on the left side of the equation, the assets, has a debit balance. Everything on the right side of the equation, liabilities and equity, has a credit balance.
Formula:
Assets = Liabilities + Equity
Assets = debit balance, Liabilities = credit balance, Equity = credit balance
In a nutshell:
- Double-entry refers to an accounting concept whereby assets = liabilities + owners’ equity.
- In the double-entry system, transactions are recorded in terms of debits and credits.
- Double-entry bookkeeping was developed in the mercantile period of Europe to help rationalize commercial transactions and make trade more efficient.
- The emergence of double-entry has been linked to the birth of capitalism.
A dividend is a corporate payment of assets or earnings to shareholders. This payment can be made in two forms: cash or stock. Both distributions have similarities and are issued in the way.
Explanation:
These payments are both a distribution of profits to the corporation’s owners and an incentive for investors to keep investing in the company. The more stock and ownership they own in the company, the more dividends they will receive in the future. The corporate board of directors is in charge of declaring and issuing distributions to shareholders. This process takes several steps.A dividend is the distribution of some of a company’s earnings to a class of its shareholders, as determined by the company’s board of directors . Common shareholders of dividend-paying companies are typically eligible as long as they own the stock before the ex-dividend date.
In a nutshell:
- A dividend is the distribution of corporate profits to eligible shareholders.
- Dividend payments and amounts are determined by a company’s board of directors.
- Dividends are payments made by publicly listed companies as a reward to investors for putting their money into the venture.
- Announcements of dividend payouts are generally accompanied by a proportional increase or decrease in a company’s stock price.
- Many companies do not pay dividends and instead retain earnings to be invested back into the company.
Depletion expense is the cost allocated to natural resources when they are extracted.The concept of depletion of natural resources is similar to the depreciation of fixed assets. Since natural resources don’t have useful lives like fixed assets do, they can’t be depreciated over a certain period of time. Instead they are depleted as they are used or sold.
Explanation :
Natural resources like oil, natural gas, and coal are drilled or mined from the ground. It’s impossible to accurately know how much resources are below the earth’s surface before they are extracted. That is why GAAP requires that natural resources be capitalized at cost initially. The purchase price or cost of the resources, mineral rights, and anything needed to prep the area for extraction is then allocated over the period of time they are consumed. The depletion equation is somewhat different than a typical depreciation formula because you have to figure out an average price per unit first. To calculate the depletion per unit you take the total cost less salvage value and divide it by the total number of estimated units. The expense is calculated by multiplying the depletion per unit by the number of units consumed or sold during the current period.
Example:
Let’s take a look at an example. Big John Oil recently purchased an oil field in central Texas for $1 million. BJ estimates that there are 500,000 gallons of oil in the reserve on this property. Thus, the cost allocated to each gallon is two dollars. Over the course of the first year, BJ successfully drills and extracts 100,000 gallons of oil and sells it to his resellers and refineries. BJ would record $200,000 of depletion in the first year. Every year after this, BJ will record a depletion expense until the full $1 million of cost is allocated to the asset.
In a nutshell :
- Depletion is an accrual accounting method used to allocate the cost of extracting natural resources such as timber, minerals, and oil from the earth.
- When the costs associated with natural resource extraction have been capitalized, the expenses are systematically allocated across different time periods based upon the resources extracted.
- There are two basic forms of depletion allowance: percentage depletion and cost depletion.
Demand is an economic term that refers to the amount of products or services that consumers wish to purchase at any given price level. The mere desire of a consumer for a product is not demand. Demand includes the purchasing power of the consumer to acquire a given product at a given period. In other words, it’s the amount of products or services that consumers are willing and able to purchase.
The factors of demand for given products or services is related to:
- The price of the good or service
- The income level
- The prices of complementary products
- The prices of substitute products
- Consumer preferences
- Consumption patterns
Explanation:
It is also related to the quantity supplied, which is expected to meet demand so that demand and supply are in equilibrium. Consumers seek utility maximization, which is the satisfaction they derive from using a given product or service for a given period while paying the lowest price. Therefore, the demand for a given product or service is determined by consumer purchasing behavior, which involves consumer preferences, intentions, and decisions. Consumer purchasing behavior is related to consumer income and the prices of goods and services. Different income levels determine diverse quantities demanded of the same product or service, reflecting the purchasing power of consumers and the apprehended utility. Remember that just because a consumer wants a product, it doesn’t mean they are increasing the economic demand. If more low income people want to purchase a Lamborghini, it doesn’t increase the D because they don’t have the ability to purchase one.
In a nutshell:
- Demand theory describes the way that changes in the quantity of a good or service demanded by consumers affects its price in the market,
- The theory states that the higher the price of a product is, all else equal, the less of it will be demanded, inferring a downward sloping demand curve.
- Likewise, the more demand that occurs, the greater the price will be for a given supply.
- Demand theory places primacy on the demand side of the supply-demand relationship.
Deflation is a decrease in the prices of goods and services, thereby increasing the purchasing power of consumers and domestic currency. However, deflation can cause lower profits for firms, thereby increasing unemployment.
Explanation:
The government aims to maintain price level stability, by infusing money in the market to counterbalance the impact of deflation. However, low consumer spending due to lower money supply decreases demand; therefore, the supply of goods outpaces demand, causing depression in the economy. Furthermore, due to lower demand, unemployment tends to rise, as firms have to lay off workers. Other causes of deflation are the innovation that causes a sharp increase in productivity, thereby leading to lower prices and a change in the capital structure of markets that facilitates firms to raise capital to fund innovative production processes.
Example:
An example of deflation is the Great Depression in the United States that followed the US stock market crash in 1929. During the Great Depression, unemployment reached 25%, and although the output of high production industries such as mining and farming was high, workers were not compensated according to their labor. Therefore, consumer spending was extremely low, and people could not afford basic goods, no matter how low the prices were.
In a nutshell:
- Deflation is the general decline of the price level of goods and services.
- Deflation is usually associated with a contraction in the supply of money and credit, but prices can also fall due to increased productivity and technological improvements.
- Whether the economy, price level, and money supply are deflating or inflating changes the appeal of different investment options.
The debt ratio is a financial, liquidity ratio that compares a company’s total liabilities to its total assets. The debt ratio is one of the simplest and most common liquidity ratios. The debt ratio measures how many assets a company must sell in order to pay off all of its liabilities. Companies with high debt ratios are known as highly leveraged companies.
Explanation :
The debt ratio is calculated by dividing total liabilities by total assets. A lower debt ratio usually implies a more stable business with the potential of longevity. Every industry has different debt ratio standards and benchmarks. Some industries, like the real estate industry, tend to borrow more money than companies in the industrial machinery industry. A debt ratio of .7 could be considered high in one industry and standard in another. In general, companies should strive for a low debt ratio.
Example:
Like all liquidity ratios, the debt ratio is important to both creditors and investors. Creditors are concerned with companies’ financing strategies. Companies can either finance their asset growth with debt financing (bank loans and personal loans) or equity financing (payments from owners and stock issuances).If a company finances too much of its assets with debt, its debt ratio will be high. Creditors view companies with higher debt ratios as riskier borrowers because the company must sell more of its assets to pay for its liabilities in liquidation. Remember creditors are only concerned about having their money repaid.
In a nutshell:
- A debt ratio measures the amount of leverage used by a company in terms of total debt to total assets.
- This ratio varies widely across industries, such that capital-intensive businesses tend to have much higher debt ratios than others.
- A company’s debt ratio can be calculated by dividing total debt by total assets.
- A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.
- Some sources consider the debt ratio to be total liabilities divided by total assets.
