Fixed costs are the overhead costs of a business.
Amortization (charging to expense of the cost of an intangible asset). …
Depreciation. …
Insurance. …
Interest expense. …
Property taxes. …
Rent. …
Salaries. …
Utilities. …
The greater quantity produced, the lower fixed cost per unit. Fixed cost will include an expense debit each month. Fixed costs may, or may not, include a cash credit each month. Fixed costs are added to the General Journal by monthly adjustments.
Short term assets are day to day purchases for your business. These purchases are commonly made by cash, check, debit card, credit card, or line of credit. The significant thing to know is these purchases are not necessarily an expense. Many of these purchases are for item that will not be consumed until later that year. Short term assets are held less than one year. Long term assets are items held longer than one year. Remember, an asset is an item used in your business to generate revenue.
Variable costs vary directly with quantity produced. Raw materials, labor, fuel, consumables are variable cost. Variable cost are short term assets.
Variable costs are added to the General Journal as purchased. However, note these variable costs are not expenses, they are assets. Some of these assets are Raw Materials and others are Prepaid Supplies.
Raw Materials are assets that will go into inventory for future sale. Prepaid Supplies are assets that will eventually be consumed and expensed by the business.
Variable costs will include a debit to Raw Materials or Prepaid Supplies and a payment credit.
So the take away here is, just because your write a check or make a credit card purchase, does not mean that your asset account has decreased. Refer to my article, “Exchanging Assets for Assets”.
This people, is why we have accountants. The overall process is simple, but as the assets increase, so does the amount of paper work. The business managers should focus their time managing their employees and bringing in cash. Let the accountants manage the record keeping.
A quick plug for my business, Rule Accounting. If your business is starting to takeoff, but you may not be able to justify a full time accountant, let us help you. With the internet, we are able to assist you from anywhere. We can install an app on your smart phone that will allow us to get data from you, either daily, weekly, or monthly. If you prefer to collect the data yourself with Excel, Quicken, or QuickBooks, we may exchange files. Collecting the data is easy. Knowing what to do with the data is a matter of knowledge and experience. That is where Rule Accounting can help.
Brett Bickham, Clifton, TX
July 30, 2019
Owner, Rule Accounting