Financial Planning Issues for Adoptive Parents

Financial Planning Issues for Adoptive Parents

Presented by Jared Daniel of Wealth Guardian Group

What is it?

Adoptive parents need to be concerned with special financial planning issues that arise when a child is added to their family. These issues include paying adoption costs, understanding the income tax implications, and reviewing their insurance coverage.

How much does adoption cost?

Adopting a child can be expensive, but the cost varies. According to the Child Welfare Information Gateway, www.childwelfare.gov, the total cost of adopting a child can range from $0 to $40,000 (or more), and depends on several factors, including the type of adoption arrangement, the child's age and circumstances, and whether the adoption is domestic or international. Adoption expenses may include:

·         Fees paid to an adoption agency or attorney that arranges or facilitates the adoption

·         Court costs

·         Home study fees

·         Travel expenses (domestic or international)

·         Expenses for the birth mother, including medical and counseling expenses (these costs are regulated by state law)

Some expenses, such as court costs, apply in every type of adoption, while other expenses, such as expenses for the birth mother, apply only in certain types of adoptions. Ask the adoption agency representative or attorney to give you an accurate breakdown of what you'll be expected to pay so that there are no surprises.

Paying adoption expenses

You may have to come up with thousands, or even tens of thousands of dollars to cover the cost of adoption, so it's important to plan ahead. Have you saved enough money to pay the entire cost out of pocket? If not, you may need to come up with alternative ways to cover adoption costs. Here are some ideas:

·         Take out a loan from a financial institution or a family member

·         Look into adoption grants or loans--some private foundations and public agencies offer them

·         Check with your employer to find out if adoption assistance is offered as an employee benefit

·         Claim the federal tax credit for adoption expenses (if you're eligible)

·         Explore subsidies available through your state government or through the federal government (subsidies are often offered for adoptions through the foster care system)

Adoption assistance from employer

Some employers offer adoption assistance. If you're lucky enough to work for an employer who offers this benefit, you may be able to recoup a portion of your adoption expenses tax free. Under federal rules, for 2014, up to $13,190 of qualifying adoption expenses paid or reimbursed by your employer (up to $12,970 for tax year 2013) are excludable from your income. However, income limits apply. For 2014, the exclusion amount is partially phased out for single and joint filers with modified adjusted gross income (MAGI) of $197,880 ($194,580 for 2013) and is phased out completely for single and joint filers once MAGI reaches $237,880 ($234,580 for 2013).

The adoption tax credit

When you file your federal income taxes, you may be able to claim a tax credit for expenses you paid to adopt a child. Because tax credits reduce your tax liability dollar for dollar, claiming the adoption tax credit is especially valuable. In 2014, you can claim an adoption tax credit of up to $13,190 ($12,970 in 2013) of qualified adoption expenses per eligible child, subject to the same income limits that apply to employer-provided adoption assistance.

Example(s):         Ken and Sue adopted their baby on January 2, 2014. They paid more than $15,000 to arrange the adoption. Their income tax liability for 2013 is $14,000. However, because they'll be eligible for a $13,190 adoption tax credit, they'll only have to send the IRS a check for $810.

Generally, you can only claim a tax credit equal to your qualified adoption expenses, including reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses while away from home, and other expenses directly related to the adoption. However, if you adopt a child with special needs, you can claim the entire tax credit, even if your actual adoption expenses are less.

Tip:           If you're eligible for both the federal adoption credit and tax-free adoption assistance from your employer, be aware that you can't claim both a credit and a tax exemption for the same expense. However, you can apply both to the same adoption, as long as you're applying them to different expenses. For example, if your adoption expenses total $10,000 and your employer reimburses you $9,000 through an adoption assistance program, you can claim an adoption tax credit of $1,000, assuming you meet other requirements.

Tip:           Because the adoption tax credit is nonrefundable (unless you adopt a child with special needs), if you owe less in income taxes than the adoption tax credit amount, you will not receive the difference as a refund. However, the unused portion of the credit may be carried forward for up to five additional years to reduce your tax liability until the credit is used up. For more information, consult a tax professional.

Federal and state government subsidies

If you're adopting a child through the foster care system (public agencies often place children with special needs), you may be eligible for a special federal or state subsidy or reimbursement for a portion of your adoption expenses. In some cases, all of your adoption expenses will be covered.

Insurance issues

When you adopt a child, your insurance needs will change. One of your main concerns will be adding your child to your health insurance plan. Contact your health plan (or your company's benefit representative if you have coverage through your employer) as soon as possible to find out how to enroll your child.

Keep in mind that if you haven't yet joined your employer's health plan, but are eligible to do so, you can enroll yourself, your spouse, and your new child in the plan, even if it's not yet open enrollment season, because adoption is considered a special qualifying event. Generally, you'll have to do so within a certain time period (under federal law, 30 days from the date the adoption is finalized, but your employer's plan may give you more time). If you enroll your child within the applicable time period, your child's coverage will be effective retroactive to the date of adoption.

Adopting a child is also a reason to review--and possibly increase--your life insurance coverage to better protect your family's financial security. You'll also want to make sure you have adequate disability coverage to provide income should you become sick or are injured and unable to work. A financial professional or an insurance representative can help you review your insurance needs.

Jared Daniel may be reached at www.WealthGuardianGroup.com or our Facebook page.

IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.  The information in these materials may change at any time and without notice.

Teaching Your Teen About Money

Teaching Your Teen about Money

Presented by Jared Daniel of Wealth Guardian Group

Your teen is becoming more independent, but still needs plenty of advice from you. With more money to spend and more opportunities to spend it, your teen can easily get into financial trouble. So before money burns a hole in your child's pocket, teach him or her a few financial lessons. With your help, your teen will soon develop the self-confidence and skills he or she needs to successfully manage money in the real world.

Lesson 1: Handling earnings from a job

Teens often have more expenses than younger children, and your child may be coming to you for money more often. But with you holding the purse strings, your teen may have difficulty making independent financial decisions.

One solution? Encourage your teen to get a part-time job that will enable him or her to earn money for expenses. Here are some things you might want to discuss with your teen when he or she begins working:

·         Agree on what your child's pay should be used for. Now that your teen is working, will he or she need to help out with car insurance or clothing expenses, or do you want your teen to earmark a portion of each paycheck for college?

·         Talk to your teen about taxes. Show your child how FICA taxes and regular income taxes can take a bite out of his or her take-home pay.

·         Introduce your teen to the concept of paying yourself first. Encourage your teen to deposit a portion of every paycheck in a savings account before spending any of it.

A teen who is too young to get a job outside the home can make extra cash by babysitting or doing odd jobs for you, neighbors, or relatives. This money can supplement any allowance you choose to hand out, enabling your young teen to get a taste of financial independence.

Lesson 2: Developing a budget

Developing a written spending plan or budget can help your teen learn to be accountable for his or her finances. Your ultimate goal is to teach your teen how to achieve a balance between money coming in and money going out. To develop a spending plan, have your teen start by listing out all sources of regular income (e.g., an allowance or earnings from a part-time job). Next, have your teen brainstorm a list of regular expenses (don't include anything you normally pay for). Finally, subtract your teen's expenses from his or her income. If the result shows that your teen won't have enough income to meet his or her expenses, you'll need to help your teen come up with a plan for making up the shortfall.

Here are some ways you can help your teen learn about budgeting:

·         Consider giving out a monthly, rather than weekly, allowance. Tell your teen that the money must last for the whole month, and encourage him or her to keep track of what's been spent.

·         Encourage your teen to think spending decisions through rather than buying items right away. Show your teen how comparing prices or waiting for an item to go on sale can save him or her money.

·         Suggest ways your teen can earn more money or cut back on expenses (e.g., rent a DVD to watch with friends rather than go to the movies) to resolve a budget shortfall.

·         Show your teen how to modify a budget by categorizing expenses as needs (expenses that are unavoidable) and wants (expenses that could be cut if necessary).

·         Resist the temptation to bail your teen out. If your teen can depend on you to come up with extra cash, he or she will never learn to manage money wisely. But don't be judgmental--your teen will inevitably make some spending mistakes along the way. Your child should know that he or she can always come to you for information, support, and advice.

Lesson 3: Saving for the future

As a youngster, your child saved up for a short-term goal such as buying a favorite toy. But now that your child is a teen, he or she is ready to focus on saving for larger goals such as a new computer or a car and longer-term goals such as college. Here are some ways you can encourage your teen to save for the future:

·         Have your teen put savings goals in writing to make them more concrete.

·         Encourage your child to set goals that are based on his or her values, not on keeping up with what other teens have or want.

·         Motivate your child by offering to match what he or she saves towards a long-term goal. For instance, for every dollar your child sets aside for college, you might contribute 50 cents or 1 dollar.

·         Consider increasing your teen's allowance if he or she is too young to get a part-time job.

·         Praise your teen for showing responsibility when he or she reaches a financial goal. Teens still look for, and count on, their parent's approval.

·         Open up a savings account for your child if you haven't already done so.

·         Introduce your teen to the basics of investing by opening an investment account for your teen (if your teen is a minor, this will be a custodial account). Look for an account that can be opened with only a low initial contribution at an institution that supplies educational materials introducing teens to basic investment terms and concepts.

Lesson 4: Using credit wisely

You can take some comfort in the fact that credit card companies require an adult to cosign a credit card agreement before they will issue a card to someone under the age of 21 (unless that person can prove that he or she has the financial resources to repay the credit card debt), but you can't ignore the credit card issue altogether. Many teens today use credit cards, and it probably won't be long until your teen asks for one too.

If you decide to cosign a credit card application for your teen, ask the credit card company to assign a low credit limit (e.g., $300). This can help your child learn to manage credit without getting into serious debt.

Here are some things to discuss with your teen before he or she uses a credit card:

·         Set limits on what the card can be used for (e.g., emergencies, clothing).

·         Review the credit card agreement, and make sure your child understands how much interest will accrue on the unpaid balance, what grace period applies, and what fees will be charged.

·         Agree on how the bill will be paid, and what will happen if your child can't pay the bill.

·         Make sure your child understands how long it will take to pay off a credit card balance if he or she only makes minimum payments. You can demonstrate this using an online calculator or by reviewing the estimate provided on each month's credit card statement.

If putting a credit card in your teen's hands is a scary thought, you may want to start off with a prepaid spending card. A prepaid spending card looks like a credit card, but works more like a prepaid phone card. You load the card with the dollar amount you choose and your teen can generally use it anywhere a credit card is accepted. Your teen's purchases are deducted from the card balance, and you can transfer more money to the card if necessary. Although there may be some fees associated with the card, no interest or debt accrues.

One thing you may especially like about prepaid spending cards is that they allow your teen to gradually get the hang of using credit responsibly. Because you can access account information online or over the phone, you can monitor your teen's spending habits, then sit down and talk with your teen about money management issues.

Jared Daniel may be reached at www.WealthGuardianGroup.com or our Facebook page.

IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.  The information in these materials may change at any time and without notice.

Estimating Your Retirement Income Needs

Estimating Your Retirement Income Needs

Presented by Jared Daniel of Wealth Guardian Group

You know how important it is to plan for your retirement, but where do you begin? One of your first steps should be to estimate how much income you'll need to fund your retirement. That's not as easy as it sounds, because retirement planning is not an exact science. Your specific needs depend on your goals and many other factors.

Use your current income as a starting point

It's common to discuss desired annual retirement income as a percentage of your current income. Depending on who you're talking to, that percentage could be

anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity, and the fact that there's a fairly common-sense

analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you'll no longer be liable for (e.g., payroll taxes) will, theoretically, allow you to sustain your current lifestyle.

The problem with this approach is that it doesn't account for your specific situation. If you intend to travel extensively in retirement, for example, you might easily need 100 percent (or more) of your current income to get by. It's fine to use a percentage of your current income as a benchmark, but it's worth going through all of your current expenses in detail, and really thinking about how those expenses will change over time as you transition into retirement.

Project your retirement expenses

Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That's why estimating those expenses is a big piece of the retirement planning puzzle. But you may have a hard time identifying all of your expenses and projecting how much you'll be spending in each area, especially if retirement is still far off. To help you get started, here are some common retirement expenses:

·         Food and clothing

·         Housing: Rent or mortgage payments, property taxes, homeowners insurance, property upkeep and repairs

·         Utilities: Gas, electric, water, telephone, cable TV

·         Transportation: Car payments, auto insurance, gas, maintenance and repairs, public transportation

·         Insurance: Medical, dental, life, disability, long-term care

·         Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs

·         Taxes: Federal and state income tax, capital gains tax

·         Debts: Personal loans, business loans, credit card payments

·         Education: Children's or grandchildren's college expenses

·         Gifts: Charitable and personal

·         Savings and investments: Contributions to IRAs, annuities, and other investment accounts

·         Recreation: Travel, dining out, hobbies, leisure activities

·         Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living

·         Miscellaneous: Personal grooming, pets, club memberships

Don't forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 2.5 percent. (Source: Consumer price index (CPI-U) data published by the U.S. Department of Labor, 2013.) And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children's education early in retirement. Other expenses, such as health care and insurance, may increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it's always best to be conservative). Finally, have a financial professional help you with your estimates to make sure they're as accurate and realistic as possible.

Decide when you'll retire

To determine your total retirement needs, you can't just estimate how much annual income you need. You also have to estimate how long you'll be retired. Why? The longer your retirement, the more years of income you'll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it's great to have the flexibility to choose when you'll retire, it's important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.

Estimate your life expectancy

The age at which you retire isn't the only factor that determines how long you'll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you'll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you'll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you'll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There's no way to predict how long you'll actually live, but with life expectancies on the rise, it's probably best to assume you'll live longer than you expect.

Identify your sources of retirement income

Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov). Additional sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

Make up any income shortfall

If you're lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you'll come up short? Don't panic--there are probably steps that you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:

·         Try to cut current expenses so you'll have more money to save for retirement

·         Shift your assets to investments that have the potential to substantially outpace inflation (but keep in mind that investments that offer higher potential returns may involve greater risk of loss)

·         Lower your expectations for retirement so you won't need as much money (no beach house on the Riviera, for example)

·         Work part-time during retirement for extra income

·         Consider delaying your retirement for a few years (or longer)

Jared Daniel may be reached at www.WealthGuardianGroup.com or our Facebook page.

IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.  The information in these materials may change at any time and without notice.

Family and Life Situations

Family and Life Situations

Presented by Jared Daniel of Wealth Guardian Group

What is it?

Throughout your life, you will face certain life-changing events. Some of these situations are unexpected and demand immediate action. For instance, you may have to plan the funeral of a loved one or decide how to care for an aging parent who suddenly needs a lot of help. Other situations arise less dramatically, with more time to plan. If you are engaged, for instance, you may have several months to deal with the financial implications of marriage. Whether the situation is expected or unexpected, you'll need to consider how your needs have changed now that your life is changing. You'll need to deal with money, legal, insurance, and estate planning issues and/or find quality care and support for your family members.

Family and life situations you may confront

Marriage

Because married couples frequently argue about money, it's important for all couples who are marrying to discuss money issues. In particular, couples should talk about how they handle money, whether they should keep their finances separate, whether they should own property together, and how they will budget their money once they're married. In addition, if you are getting married, you and your future spouse should determine whether you will need more or less insurance after marriage and figure out how you can best combine benefits you receive from your employers. You'll also need to plan for the transfer of your assets, decide whether you need a prenuptial agreement, and plan for retirement together.

Living together as an unmarried couple

If you are planning on living together with another person as an unmarried couple, you'll face most of the planning concerns that married couples face. However, unmarried couples also have special needs and concerns, particularly money and property ownership issues, that married couples don't have to face. Since laws that affect couples are usually written with married couples in mind, they may not adequately protect the interests of unmarried couples.

Divorce

If you and your spouse are divorcing, you'll need to alleviate some of the inevitable financial trauma that accompanies divorce. In particular, you'll need advice about many issues, including child custody and child support, alimony, property settlements, tax planning and other financial and legal issues.

Birth or adoption of child with or without special needs

Families who have a child born to them or who adopt a child find quickly that the arrival of a child is a life-changing event. Life becomes more joyful and more complex as parents adjust their daily schedules, finances, and future plans to ensure that their child is well taken care of. If you are anticipating the arrival of a child, you'll need to review your finances and budget, update your will, name a guardian for your child, and make sure that you have adequate health, life, and disability insurance.

If you want to adopt a child, you'll need information on these topics and more. In particular, prospective adoptive parents need to know the ins and outs of the adoption process, and they need to consider the legal and financial issues surrounding adoption. If your child has special needs, you'll need to find quality medical care or child care for your son or daughter; find resources and support groups throughout the community; and consider certain family and social issues that arise when a child with special needs is adopted or born.

Finding child care

If you decide to work or go back to work after your child is born, you must determine what kind of child care would be best for your child, find quality child care, and figure out how you will pay for child care. These issues are time-consuming for most parents, but parents of children with special needs may spend even more time researching child care due to more limited child-care options.

Caring for your aging parents

Because many adults today are becoming first-time parents in their thirties and others are remarrying and rearing second families, increasing numbers of adults are finding themselves in the "sandwich generation." You may face having to pay expenses of growing children (including college expenses), plan for your own retirement, and support your aging parents financially. Even if your parents don't need financial help, they will likely need help in other areas.

One of the first concerns that you will face when caring for your aging parents is getting the information you need to help your parents plan for the future. It means locating important documents and records and evaluating your parents' need for housing, legal assistance, financial assistance, and medical assistance. You may need to rely heavily on resources and support available in their community, particularly when you live far away from your parents.

Planning a funeral

You may need to plan the funeral of a loved one or a family member or you may decide to plan your own funeral to lessen the burden on your family when you die. Although planning a funeral isn't difficult, it's often stressful, particularly when you must plan a funeral when you're grieving. There's no right or wrong way to plan a funeral but you or your family members will have to consider your own preferences, tastes, and traditions. In addition, funerals can be expensive, and for many people, figuring out how to pay for a funeral is important. If you're planning your own funeral, you'll have time to put your wishes in writing and investigate options, with or without the help of a funeral director.

Jared Daniel may be reached at www.WealthGuardianGroup.com or our Facebook page.

IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.  The information in these materials may change at any time and without notice.

Monthly Financial Statement Monitoring

Monthly Financial Statement Monitoring

Presented by Jared Daniel of Wealth Guardian Group

What is a financial statement?

A financial statement is a report containing financial information about a company. The financial statement depicts the condition and performance of the company. Generally, the financial statement consists of the balance sheet, income statement, statement of cash flows, and statement of changes in owner's or stockholder's equity.

A balance sheet is a statement of the company's assets, liabilities, and equity at a specific point in time (sometimes referred to as a "snapshot"). The balance sheet shows, in dollars, what the business owns (assets), what it owes (liabilities), and its owners' ownership interest (equity or net worth) at a given point in time. The income statement reflects the performance of the company over a specified period of time in terms of revenue, expenses, and net income or loss. The statement of cash flows provides relevant information about cash receipts and cash payments of the company during a specified period. The statement of changes in owner's or stockholder's equity discloses the changes in these separate accounts and is meant to make the other financial statements as informative as possible.

Monitoring your company's financial statements can provide you with information that is useful in making credit and investment decisions; assessing future cash flows; and understanding the company's resources, claims to those resources, and any changes in them. For optimum benefit, financial statements should be monitored on a monthly basis. Most likely, you will have an accounting professional prepare the financial statements for you. However, in order to make your company's financial statements work for you, you need some basic knowledge. What follows are a few simple accounting principles to give you at least a conceptual framework.

Tip:           Financial statements are not just internal company tools. Creditors, investors, and potential purchasers are often quite interested in seeing your financial statements. Additionally, all corporations and certain partnerships are required to attach these reports to income tax returns (Forms 1065, 1120, and 1120S).

Tip:           You may want to have your financial statement audited regularly by a reputable certified public accountant. If you own a small business, you may need to do this only every few years. However, if you own a larger organization, or one with complex operations or several locations, an annual audit is recommended.

What are the elements of financial statements?

There are 10 basic elements of financial statements. They are:

Assets

An asset is something the company owns. Specifically, assets are probable future economic benefits obtained or controlled by your company as a result of past transactions or events.

Liabilities

A liability is something the company owes. Specifically, liabilities are future sacrifices of economic benefits arising from present obligations of your company to transfer assets or provide services to other entities (companies or persons) in the future as a result of past transactions or events.

Equity

Equity is an ownership interest. Specifically, equity is the residual interest in the assets that remains after deducting your company's liabilities.

Investments by owners

An increase in net assets resulting from transfers of value made by others in order to obtain or increase ownership interests (i.e., equity) in the company is an investment by owners. Usually, assets are received, but services, satisfaction or conversion of company liabilities may also be used.

Distributions to owners

A decrease in net assets resulting from transferring assets, providing services, or incurring liabilities to owners is a distribution. Distributions to owners decrease their ownership interest in the company.

Comprehensive income

Broadly speaking, comprehensive income refers to net operating profit. Specifically, comprehensive income is the change in equity during a period of transactions with nonowners.

Revenues

Broadly speaking, revenues refer to gross operating profit. Specifically, revenues are inflows or other enhancements of assets, (or reductions of liabilities) during a period of delivering or producing goods, providing services, or otherwise carrying out the business of the company.

Expenses

The flip side of revenues--expenses--are the company's operating outflows (i.e., the using up of assets), or incidence of liabilities, during a period of delivering or producing goods, providing services, or otherwise carrying out the business of the company.

Gains

A gain is an increase in equity from all transactions other than operations.

Losses

The flip side of gains--losses--are decreases in equity from all transactions other than operations.

What is the historical cost principle?

Most assets and liabilities are recorded on the company's books at historical cost. That is, they are recorded on the basis of acquisition price. It is done this way because historical cost is reliable and verifiable. What this means, however, is that assets and liabilities do not reflect current value. Therefore, you must keep in mind that the asset or liability may be undervalued or overvalued in terms of current market value.

What is the revenue recognition principle?

Revenue is generally recognized when it is realized (or realizable) or when it is earned. Revenue is realized when products or services are exchanged for cash. Revenues are realizable when assets received for products and services are readily turned into cash. Revenues are considered earned when the company has substantially accomplished what it must do to receive the cash. In other words, revenue is not put on the books until the sale is actually made. It is a uniform and reasonable method of accounting. This rule is followed to give meaning to revenue numbers on the financial statement. You can be sure the revenue is real and not dependent on an anticipated sale that may not actually take place.

What is the matching principle?

The matching principle means that expenses follow the revenues. Expenses incurred in the performance of the work are recognized only when the product actually makes a contribution to revenue. For example, wages paid and inventory and supplies used to build a widget are not recognized until the widget is sold. Wages paid and inventory and supplies used (and other such expenses) are classified as product costs. They relate directly to the making of the product. However, period costs, such as officers' salaries and selling expenses, are charged off immediately because no direct relationship between cost and revenue can be determined. Thus, be aware that some expenses may not be reflected in the financial statement.

Jared Daniel may be reached at www.wealthguardiangroup.com or our Facebook page.

IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials.  The information in these materials may change at any time and without notice.