If the thought of financial statements, trial balances, or audits is enough to make your head spin, you’re not alone – most entrepreneurs admit that accounting is either too complicated to understand or too boring to pay attention to.
Whether you’re confused by accounts or just don’t have time to spend on keeping track of payments and purchases, it’s still vitally important to keep an eye on your company’s books. Even the most dynamic entrepreneur may run into trouble if a cash flow problem develops in their business, or if a dishonest employee is doing financial damage to the business without the owner’s knowledge.
A basic understanding of accounting is important for all business owners, and the good news is that it’s not difficult to understand your accounts – here is a quick accounting guide for entrepreneurs.
Debits and Credits
Debits and Credits are the most basic accounting concept that every business owner should understand. In any set of accounts, debits must equal credits – if this isn’t the case, something is either wrong with the bookkeeping system or there is a problem with the running of the business that should come under the owner’s attention.
For every type of account – income, expenses, assets, and liabilities, the balance of debits and credits should be maintained. If you’re wondering what these accounts are all about, here are some easy explanations that will make things clearer.
These are things of value that your business owns. Assets may include:
- Business premises
- Company vehicles
- All other property belonging to the business
- Payments owed to your business by clients
- Cash in the company bank account
These are payments your business owes to customers, banks, or other businesses. They are basically the opposite of assets, and include the following:
- Repayments on vehicles and leased items
- Money owed to suppliers
- Deposits owed to customers
- Bank loans
The difference between assets and liabilities is owners’ equity. The more assets and fewer liabilities your business has, the more owners’ equity you will have – this is what every business owner should be aiming for.
Money that your business earns through the sale of products and services, consulting fees, and interest on cash deposits in the bank all count as income.
You may track your income from different products by having different income accounts from each one, or split your income accounts more broadly to include revenue from sales, consulting fees, and interest – these categories will vary from business to business.
These are the costs that your business experiences on a regular basis, from salaries to office supplies and many others. Tracking your expenses through various expense accounts is an effective way of keeping an eye on your company’s cash each month.