Understanding the basics of accounting for small businesses is vital for any business owner or new entrepreneur – thankfully, they’re fairly straightforward and simple to master.
The Basics
Accounting, at its most basic level, refers to recording financial transactions and the processes around this. By recording, reporting, and summarizing their transactions, business owners can better understand their company’s financial health. Basic accounting records details and reveals operations and cashflow, dividing all transactions into credits and debits. Somewhat confusingly, for accounting beginners, credits increase equity accounts or liabilities and decrease expense or asset accounts, while debits increase expense accounts or assets and decrease equity accounts or liabilities.
What Is a Balance Sheet?
A balance sheet (also known as a statement of financial position) provides information about a business’s current financial state, detailing its liabilities, assets, and owners’ equity. Balance sheets can have different formats, such as common size, comparative, classified, and vertical, with each format presenting information as line items that combine to provide an overview of a company’s financial position.
What Are Accounts Receivable and Accounts Payable?
Accounts receivable refers to money others owe a business for services and goods and is considered an asset on the balance sheet. If a customer pays their invoice, the business’s accounts receivable total is reduced as less money is owed. Accounts payable is money that a business owes others and is represented as a liability on the balance sheet.
What Does Accruals Refer To?
Accruals are debts and credits that a business has recorded but not yet fulfilled, such as sales that have been completed but that have not yet been paid for. Professional accountants such as Paul Simonson, who has been a member of the Florida Institute of Certified Public Accountants since 1998, know that accruals can also refer to expenses that have been made but not yet paid for.
How Does Cash Basis Accounting Work?
This type of accounting involves recording expenses and revenues when the money involved in transactions actually changes hands. In this it differs from accrual-based accounting, which recognizes expenses and revenues at the point they occur regardless of the actual exchange of funds.
What Is Depreciation?
Depreciation is an expense that applies to fixed assets – the latter are owned, long-term resources of economic value that businesses use to generate wealth or income. These assets can decline in value over time, and these decreases are recorded by accountants as depreciation.
