The Basics of Business Accounting
Every business owner has a knowledge of accounting– maybe not all but its basics. Running a business involves buying, selling, banking and taxes and to be able to perform this, one must know even just the basic principles of accounting. Below are the common and important terms and definitions you need to learn in business accounting.
Important Terms in Business Accounting
1. Credit and Debit
In business accounting, credits and debits are considered the backbone- and it’s easy to know why. Credit and debits are present in every aspect of accounting because every entry in the general ledger contains a credit and a debit. It is also important to note that all credits and debits must be equal, or else an entry will be out of balance. Credits and debits increases and decrease the balance of the account, while with assets, the credits decrease and the debts increase. In income, the credit increases it while the debt decreases it. For expenses, the credits decrease expenses and debts increase it.
2. Income and expenses
The income and expenses section in a balance sheet is considered important because it shows where the money is coming from and where it is going. The income accounts include sales revenue, interest income, asset sale income, and consulting income. Expense accounts, on the other hand, shows where the money is going such as rent, interest, amortization, depreciation of assets, repairs, salaries, compensations, maintenance, and utilities. Take note that income and expenses should be updated each time the business money comes in or goes out- this is to know how your business financials is doing.
3. Assets and liabilities
There are separate sections for assets and liabilities depending on the type of your business. Assets and liabilities make up the accounts on the balance sheet. In debits, the assets increase while in credits, the assets decrease. Assets include anything that has a value such as cash, vehicles, objects, claims, and inventory that belongs to your business. Liabilities, on the other hand, are obligations that your business has to another business. Examples are your credit card and loans.
Types of Financial Statements
Financial statements are very important in your business- it provides the overall information of your business performance, financial state and cash flow. Financial Statements represent a formal record of the financial activities of an entity. These are written reports that quantify the financial strength, performance, and liquidity of a company. There are four types of financial statements:
1. Income statement
It reveals the financial performance of your business for the entire period. It begins with sales and then subtracts out all expenses incurred during the period to arrive at a net profit or loss. This type is considered the most important since it describes how your business is doing.
2. Balance sheet
It shows the financial position of your business as of the report date. It includes the general classifications of assets, liabilities, and equity
3. Cash flow statements
This report states the inflows and outflows of your cash which has experienced by your business during the reporting period. It is divided into 3 parts, namely operating activities, investing activities and financing activities.
4. Statement of changes in equity
Last but not the least, this report includes all changes in equity during the reporting period. It includes issuance of purchase of shares, dividends issued, and the profits or losses.
“Knowing even just the basics of business accounting can mean a lot in growing your business. Remember, accounting is the language of business and this is very vital in making effective business strategies for the success of your business.”