4 Accounting Basics Everyone Should Know

If you own a business, then speaking accounting language is essential. Even when discussing personal assets, the proper terms help others know what you are talking about. Let’s look at some basic accounting terms and what they mean.

Financial Statements

Image via Flickr by Ken Teegardin

The balance sheet, statement of cash flow, and income statement are three types of financial statements everyone needs to understand. The balance sheet gives a picture of assets and liability whether for your business or you personally. Statements of cash flow point to the change in cash during a specific time period, be it a week, a month, or a year. Lastly, the income statement spells out your revenue accounts, such as services you offer or investment income, and your expense accounts, such as wages, rent, and depreciation. These three reports give a good picture of the financial state of your business.

Credits and Debits

When your company receives cash, it is recorded as a credit or income. When you pay out from your company, it is a debit. When looking at a ledger, debits go on the right and credits go on the left. Deposits to the bank show in the credit column. Paying your supplier goes in the debit column, which brings up another accounting concept: the double-entry. Every transaction gets recorded in at least two accounts. A simple example is that earning $500 increases your asset column and paying $500 worth of bills decreases your liabilities by the same amount.

Revenue and Expense Principles

You record revenue when making a sale involving a good or service you offer. You may not collect the cash yet but, you record the sale now. The cash might come in 30 days later when you invoice your customer. Record expenses the same way when you receive the goods or services. Even if you don’t pay for the product then, you record it on your financial statement at that time because, in effect, you spent the money. Then, when you look at the balance sheet, you will see accurate numbers.

Using Accounting Tools

To make keeping track of accounting easier, use the many types of tools that are available. Accounting software helps you put together every transaction and print out the financial statements. That way, you eliminate mathematical errors. Printing out deposit slips show which customer paid you on that particular day. It is important to make frequent deposits to keep track of income. If you have a large amount of cash or checks to deposit, use a disposable money bag. That way, you don’t worry about getting the lockbag returned.

Whether you own a business or just want your personal finances in good order, knowing the fundamentals of accounting is necessary. Even if you hire an accountant, talking the same language is vital to understanding financial reports. Terms such as revenue, expense, asset, liability, debits, and credits are universal. Know the different types of financial statements as well so you can see a current picture of your finances at all times.