Accounting explained for beginners

Why do you need to know the basics of accounting- bookkeeping, balance sheet, and the like? Because when you put up a business, you need to know the financial standing of your company- how much you gained or lost, where your money was spent, and how it was used, what changes that needs to be done.

For you to effectively run your business and for you to have information about your financial performance, you need to look at financial statements and know how to read these financial statements. Mind you, not all of us are good at numbers, but having the basics of accounting, is a good and fresh start in being a financial genius.

Here, we will tackle the basics of accounting- terminologies and how to make a sound balance sheet.

Definition of Accounting

Accounting is the art of analyzing, recording, summarizing, reporting, reviewing, and interpreting financial information necessary in making financial decisions.
Source: Bean Counter’s Dave Marshall. So, you want to learn Bookkeeping! (n.d.). Retrieved from: http://www.dwmbeancounter.com/tutorial/Tutorial.html

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In any business transactions, you should classify and record what kind of transaction in journals or ledgers before you can make the financial statement. This is where sound and logical bookkeeping comes into play.

Bookkeeping

The foundation of accounting is bookkeeping. This is the source of information for any kind of financial statements. Thus, it is important for you to know about bookkeeping.

Bookkeeping is the process of recording and classifying business financial transactions and activities. In simple language-maintaining the records of the financial activities of a business or an individual. Bookkeeping’s objective is simply to record and summarize financial transactions into a usable form that provides financial information about a business or an individual
Source: Bean Counter’s Dave Marshall. So, you want to learn Bookkeeping! (n.d.). Retrieved from: http://www.dwmbeancounter.com/tutorial/Tutorial.html

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Most businesses have a bookkeeping system that they follow whether manual through ledgers or computerized through bookkeeping softwares or both.

Bookkeeping software come in handy in daily bookkeeping.

Types of Bookkeeping Systems

There are two types of bookkeeping system- single- entry system and the double- entry system, which is explained below. Startups usually use the single entry system

Single Entry System

• Only one entry for a single business transaction
• Good example is a checkbook
• Records each transactions as either income, revenues, or expenses
• Summary of receipts, vouchers, disbursements
• Acceptable but does not provide sufficient financial information for business reporting

Next, we will tackle the Double- Entry System

#Double- Entry System

• Double- entry system is the standard system used by businesses to record financial transactions
• The most preferred system for creating a Balance Sheet and an Income Statement also called Profit and Loss Statement
• Each transaction is recorded in two accounts- debit or credit.
• Provide sufficient financial information for business reporting

General Ledger or Journal

“General Ledger or Journals are preliminary records where business transactions are first entered into the accounting system. The journal is commonly referred to as the book of original entry. ”

Type of information included in the Journal Record:

• • Entry Number
  • Date of each transaction
  • Names and/or the account numbers of the accounts to be debited or credited
  • Amounts of the debits and credits
  • Posting Reference-Account Number in the General Ledger
  • Explanation or description of the entry

Source: Bean Counter’s Dave Marshall. So, you want to learn Bookkeeping! (n.d.). Retrieved from: http://www.dwmbeancounter.com/tutorial/Tutorial.html

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Balance Sheet

The balance sheet is like a balanced weighing scale. It is derived from the basic accounting formula which is:

Basic accounting formula: Assets = Liability+Owner’s Equity

To prepare a balance sheet, the Total Assets should be equal to the Total liabilities and Equity.

From that formula, you will be able to see the big picture of your financial condition and standing from the start of your business to the current fiscal year.

A Balance Sheet is simply a picture of a business at a specific point in time, usually the end of the month or year. By analyzing and reviewing this financial statement the current financial “health” of a business can be determined.
Source: Bean Counter’s Dave Marshall. So, you want to learn Bookkeeping! (n.d.). Retrieved from: http://www.dwmbeancounter.com/tutorial/Tutorial.html

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Balance Sheet shows your total assets- current assets such as checking/ savings, other current assets which includes loan receivables.

It also shows the Total Liabilities & Equity. Liabilities are current liabilities and other liabilities including loans payable. Equity includes retained earnings from capital an investments; excess of revenues from expenses.

The categories and format of the Balance Sheet are based and in accordance to the Generally Accepted Accounting Principles or GAAP. It is the standard and rules to follow in preparing financial statements.

To make a Balance sheet, you should first get to know basic accounting terms so that you would be able to classify the information in your records.

Definition of Accounting Terms

• • Assets are things or money that makes money for the business. Examples of assets are accounts receivables where customers owes you money, checking or savings account, cash on-hand, sales or payments, office equipment, etc.
  • Liabilities are things or money that the business owes or takes away money from you. For ordinary people, a good example of a liability is the mortgage or bank loan for the housing. For businesses, liabilities are accounts payable, rent, etc.
  • Owner’s Equity or Capital is the money coming from capital and investments that business owners have put up. Equity is also the value or net worth of the business or property. IT also refers to excess of revenues over expenses that contributes to profits after the owner’s withdrawals and deposit.
    Owner’s equity would also show whether your business has profits or loss. It shows the amount of capital and investments for your business coming from internal and external sources.
  • Expenses are those that take money from you. Expenses includes loans for your business, monthly expenses such as salary, electricity and water bill, rent, and other expenses, and cash outflow.
    Expenses are also cashouts which includes payments for suppliers. Liabilities also form part of your expenses.
  • Revenues refers to the amount of increase in Owner’s Equity resulting from sales and other business activities and operations.
  • Draws are the opposite of revenues. It is the amount of decrease in Owner’s Equity.

Determining Financial Performance

To determine your annual financial performance, you should study your balance sheet and Income Statement also referred to as Profit and Loss Statement .

Your financial performance reflects your financial status and condition.

To complete your financial statement, you should put notes containing the nature of the business transactions and other relevant information that your stakeholders, accountants or auditors need to know.

Lastly, you should also be familiar with GAAP or Generally Accepted Accounting Principle. This is the standards of accounting that every business or entity has to abide by.

Now that you know the basics of accounting, it is time to apply. Have fun with numbers!

Sources:
Bean Counter’s Dave Marshall

http://www.accountingfoundation.org/gaap