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Remember when you started your business? It was going to be a breeze! You
pictured doing just what you had been doing as an employee, but with no boss
and for more money.
 However, if you have been in business for any time, you now realize that
it can be a great life, but it requires a lot more hats, including that of
an accountant. Did you ever get a Basic Accounting Tutorial? Most of us probably should have.
Over 500 years ago, but still applicable today, a man by the name of Fra
Luca Pacioli wrote that three things are needed to be successful in business. In this accounting tutorial we would like to discuss them:
- You've got to have sufficient cash
- You must be comfortable with the numbers side of business
- You need to have a system of organizing your financial
information. Today, we call this accounting.
The need for accounting isn't anything new. In fact, as competition has increased,
it's even more important today than it was back then.
So what do you need to do to ensure it's working for you? You first need
to understand what all those accounting terms mean and how they fit together.
For that reason, you can find a complete list of accounting glossary terms here.
As you understand the different terms, you'll be much more able to see their
relevance to you, and talk to the bankers with greater confidence.
Secondly, you need to see how accounting fits into your daily business life.
Simply put, every transaction you make in your business will result in an
entry to your company books. This includes checks, deposits, sales invoices,
purchase orders, and cash receipts. Individually each of these transactions
may be unimportant, but when you systematically organize them, you get a picture
of your business.
Metaphorically, we can compare your accounting system to that of a puzzle.
Each individual piece is likely undecipherable and unimportant. But, when
placed in it's proper location and connected with the other information, it
gives you a bigger picture that is of value.
You need to also understand that there are two rules that we don't break
in double-entry accounting. One is "Debits" always equal "Credits".
For every transaction there will be at least two entries into the books (hence
"double-entry" accounting): one for a debit, the other for a credit.
The other rule is called the "Accounting Equation". It states that
Assets equal Liabilities plus Capital. Frankly this is just another way of
stating rule one, since Assets are Debit balance accounts and both Liabilities
and Capital are Credit balance accounts.
The accounting system is divided into "Categories", and each category
is divided into "Accounts". There are two types of categories: Balance
Sheet, and Profit and Loss.
A Debit entry will be an increase to some accounts while decreasing other
accounts. Conversely, a Credit entry will also increase or decrease accounts.
Here's a simple chart.
Balance Sheet Accounts
- Assets (Debits increase, Credits decrease)
- Liabilities (Credits increase, Debits decrease)
- Capital (Credits increase, Debits decrease)
Profit and Loss Classifications
- Sales (Credits increase, Debits decrease)
- Cost of Goods Sold (Debits increase, Credits decrease)
- Expenses (Debits increase, Credits decrease)
In assigning debits and credits, I like to consider what you got from the
transaction, and where it came from.
Let's look at a couple of examples:
Imagine that you perform accounting services and that you charge a client
$500 for doing his monthly books. You "got" cash, and it came from
a sell of a service. Your entry would be to Debit an Asset account (probably
the Bank Account), and Credit Sales. This would be an increase to both accounts.
Here's another example: You purchase office supplies for your accounting
service. You "got" office supplies, and it came from your Bank Account.
In this case you will decrease, or Credit your Asset account (again, probably
the Bank Account), and Debit your Expenses (probably Office Supply Expense
account).
Obviously to expect that you are an accountant now, even after reading through
the Glossary,
and this simple example of the fundamentals would be foolish. But, through
considering these important rules, you become ready to understand more about
the accounting model.
Request More Information and Tutorials here:
Accounting and Bookkeeping Tutorial |
