Unit 3: Personal Saving and Borrowing; Business Finance and Accounting

People save for big purchases, emergencies and retirement. Uneven income, impulse buying and lifestyle inflation (spending more as you earn more) make saving hard, and inflation shrinks what saved money can buy. Savings accounts, money market accounts and certificates of deposit (CDs) at banks and credit unions are federally insured up to a limit. They trade higher interest against fees, minimum deposits and how easily you can reach your money; a CD locks it up for a set time. Checking accounts are insured too and handle everyday spending, while payment-app and crypto accounts usually aren't insured unless a bank or credit union offers them.

Borrowing lets you buy things that cost more than your income and savings, like a car or college, but it creates a debt you repay with interest. Secured loans are backed by collateral, such as the car or house itself, and usually charge less than unsecured loans. Lenders judge creditworthiness from your income, savings, existing debt and credit report, which includes a credit score. Borrowers manage debt by paying bills on time, paying off high-interest debt like credit cards quickly, comparing lenders and making a down payment.

Businesses record every transaction and turn those records into financial statements. These track the business's health, guide decisions and keep it within the law. Corporations that sell shares to the public must follow generally accepted accounting principles (GAAP) and report regularly, usually every quarter and every year. Managerial accountants serve people inside the business, financial accountants serve outsiders like investors and lenders, and the finance department turns the numbers into strategy. You can track your own money the same way with a budget.

Startup costs are one-time expenses, like legal and licensing fees, plus the first spending on rent, marketing and inventory. Ongoing costs are direct (tied to making the product, like the cost of goods sold, or COGS) or indirect (operating expenses for running the business, like office salaries and advertising). Costs are also fixed, staying the same at any output, or variable, rising as output grows. Businesses, like people, buy insurance against big losses, depending on how much risk they're willing to carry themselves.

Entrepreneurs often start by bootstrapping: using personal savings, loans or credit. They look for outside money if they can't cover costs until they break even, the point where sales cover all costs. Established firms raise money to develop products, replace equipment or grow. The money comes as loans (including bonds) repaid with interest, or as equity, selling ownership shares of stock. Lenders and investors weigh risk against expected return (interest, dividends or capital gains), often after a pitch backed by a business plan.

An income statement compares revenue with costs over a period. Revenue minus COGS is gross profit. Subtract operating expenses to get operating profit, subtract interest to get pretax income, and subtract taxes to get net profit, the bottom line. Each profit divided by revenue gives a margin (gross, operating or net profit margin), which is compared with past results, forecasts and competitors. Projected income statements, like personal budgets, plan for future income and costs.

A balance sheet is a snapshot, at one moment, of what a business owns (assets), what it owes (liabilities) and what it's worth to its owners (owners' equity). It always balances: assets = liabilities + owners' equity. Assets are grouped by liquidity, how easily they turn into cash, into current, long-term and intangible assets (like patents and brand names); liabilities are current (due within a year) or long-term. Current assets that cover current liabilities (working capital) mean the business can pay its near-term bills. A household's net worth works the same way: total assets minus total liabilities.

A cash flow statement tracks the cash coming in (customer payments, new loans, asset sales, investment income) and going out (wages, suppliers, interest, taxes, equipment, loan repayments, dividends) over a period. Owners, lenders and investors use it to see whether a business can pay its bills. Negative cash flow can push even a profitable business toward shutting down or bankruptcy. To fix it, the business may raise money, collect what customers owe (accounts receivable) faster or get better terms from suppliers and lenders.

Easy access to cash, and pressure to look good to investors, lenders or tax officials, can tempt people into embezzlement (stealing money they're trusted with), misuse of funds, bribery, tax evasion or falsified financial statements. U.S. law requires public companies to have their financial records audited each year by an independent accounting firm, and market rules aim to protect investors from fraud. Professional ethics codes and internal controls, like cash-handling rules, also help prevent wrongdoing.