15 Mar The accounting cheat sheet for business owners
Wouldn’t it be great if there was some kind of accounting cheat sheet for business owners that made accounting basics simple? Well, look no further.
Since we get lots of bookkeeping questions from self-employed individuals at Rochon & Associates, we wanted to provide you with some of the basic accounting principles in an easy-to-understand manner – no accounting degree required.
We are guessing if you are reading this that you aren’t “in the know” when it comes to accounting, but we promise we will make this post as painless as possible. Plus, the good news is that if you forget what something means, you can always come back to our cheat sheet and look it up later on.
Every business has different “accounts” that your business’s finances are categorized into—categories like assets, liabilities, equity, revenue, and expenses. You might only look at your income, but you have to consider all these “accounts” to get a FULL financial picture. Most software will have what is called a chart of accounts that shows this information. You can track different types of spending in these accounts, but they are also used to show anyway your money is used or stored.
Essentially, whenever you do something financially with your business, there is a money trail that needs to be recorded. The easiest way to explain this is with an expense. If you buy something, where does that money come from, and where does it end up? All of this is recorded in your “accounts.”
Accrual VS. Cash
Perhaps you have noticed in your accounting software that there are multiple ways to look at your overall sales. These are known as Accrual VS. Cash accounting methods. So what does this mean exactly:
Accrual VS. Cash: An accrual accounting method is counting your income when the work is performed.
Cash: a cash accounting method is counting your income when the money is received.
Generally, larger companies will use an accrual method and have accounts receivable and accounts payable departments, but as a self-employed individual, cash may be more straightforward.
Debits and Credits
Debits and credits are records of the financial accounts you have in your business. These can be assets, expense accounts, liability, revenue, and equity accounts, as mentioned in the first section of this post.
The wording of debits and credits sometimes confuses people. Often we think debit means subtract, and credit means add, but depending on the type of account, those can be completely opposite.. The important thing to remember is that debits and credits have to balance out.
For example, if you debit 20 dollars and you have 60 dollars in your bank account, you would now have a credit of 40 dollars. Make sense? If you only had 35 dollars in your bank account for some reason, we are left wondering what happened to the other 5 dollars? So it’s important to reconcile (balance) your debits and credits at the end of every month. Most software has an option to run a report to reconcile your accounts.
There are several financial statements/reports that you can use to get an idea of your financial picture. Here are some of the most common.
Profit VS. Loss – This shows your financial picture over some time (monthly, quarterly, yearly).
Balance sheet – Records a specific period of your finances.
These are handy to see where you are overall in your business and where you can improve. It would help if you were looking at these statements at a minimum every quarter (three months).
Double-entry accounting is the principle that there are two sides to every transaction. Money in vs. money out is one of the most basic ways to explain this.
However, it goes far beyond that. When money comes from something, it has to go to something. Most software does this automatically by only imputing one transaction, but another transaction gets updated when you update that one transaction. Think of it as a chain reaction; whenever you do anything in your business’s books, something else is affected and needs to be balanced out.
We could tell you more, but we don’t want to frighten you completely. If you have more questions, you can always let us know. Don’t be afraid of feeling foolish, only to have to pay us or someone else a lot of money down the road to fix things. Get in touch with us today!