Franchise accounting can be a daunting task for a franchise owner, requiring specific knowledge of accounting to prepare and/or interpret the necessary financial statements and reports. While many franchisees rely on franchise accountants to handle all their bookkeeping and financial reporting, cloud-based franchise accounting software has made it easier for franchise owners and accountants to collaborate and share in managing the company’s finances. Having knowledge of basic franchise accounting terms will help franchise owners to become more self-sufficient, have better control over their business, and communicate effectively with their accountant.
This list of important franchise accounting terminology covers basic terms that franchisees need to know. Each term has the corresponding definition, and is placed in a structure designed to show how the concepts relate to one another.
This is a general franchise accounting term, representing all the statements of financial activity within the business. There are four types of financial statements important to franchises – the balance sheet, income statement, statement of owner’s equity, and statement of cash flows.
A balance sheet is a snapshot of the company’s financial position at a specific time, including assets, liabilities and owner’s equity. It is called a balance sheet because these items must balance out: a company’s total assets should be equal to its liabilities plus the owner’s equity.
- Assets – Includes the things that a business owns and which give it value. Financial accountants further break assets into two categories: (1) current assets – including cash, inventory, supplies, and other things of immediate value – and (2) long-term or fixed assets – things such as real estate, machinery and investments.
- Liabilities – Includes the company’s financial obligations – money that is owed to creditors. Liabilities are related to assets because they are often incurred to obtain assets. For example, the loan you get to buy inventory is a liability, which produces an asset (the inventory itself).
- Owner’s Equity – Owner’s equity is also a source of funds for acquiring assets, and in general, it means the money that an owner puts into a business. This includes the initial investment and retained earnings – which is the money an owner earns and then can reinvest into the business.
Franchise accounting software typically produce income statements – a summary of all financial activity over a given period of time. Common reporting periods for income statements are monthly, quarterly, and yearly. The equation financial accountants use to calculate income is: Net Income = Revenues + Gains – Expenses – Losses
- Net Income – As seen in the formula above, net income is the money left over (in terms of revenues and gains) after subtracting all expenses and losses.
- Revenues – Refers to the money collected within the given period. For franchises, this refers to the money made from selling goods or services plus money earned from other sources, such as interest or rent.
- Gains – Gains include money that is made from the sale of long term assets. For example, a gain may occur when long term assets, like property or a piece of equipment, are sold
- Expenses – This is a franchise accounting term that most people easily understand. Expenses refer to the money spent on the business, for normal operation. Some examples include the cost of goods, electricity, advertising, rent, and salaries.
- Losses – Losses are the opposite of gains. Losses happen when a long-term asset is sold for less than its original value. Money lost via lawsuits is also considered a loss.
Statement of Owner’s Equity
Franchise accountants may also call this the Statement of Retained Earnings. Owner’s equity can be calculated by rearranging the balance sheet formula. In that formula, assets = liabilities + owner’s equity. Therefore, owner’s equity is equal to assets minus liabilities.
- Retained Earnings – Another name for owner’s equity. It refers to the money that is earned and retained from business operations. This money could be withdrawn by the franchise owner or reinvested in the company.
Statement of Cash Flows
This financial report, which is typically generated by franchise accounting software, shows where a company’s cash is coming from and how it is being spent for a specific time period. A cash flow statement is divided into three sections: cash from operations, cash from investing, and cash from financing. In each case, the statement records how and when money comes into a business, and where it goes.
- Cash from Operations – Cash that comes from daily business operations.
- Cash from Investing – Cash used to invest in assets and the cash that comes in from selling long-term assets
- Cash from Financing – Cash that comes and goes as money is borrowed or past financing / loans are repayed.
So, even if a franchise owner has a franchise accountant handling all of their accounting and financial reporting, it is still important for them to have a basic understanding of these standard financial reports and calculations. An as a reminder, our industry-leading cloud-based franchise accounting software tool makes financial consolidation and reporting easier and more efficient for franchisees and/or their franchise accountant(s).