A Basic Accounting Tutorial for New Small Business Owners
Imagine owning your own small business and doing something you’re completely passionate about. Imagine generating your own income being your own boss. Being an entrepreneur is the dream of many people, and having a successful business depends on several factors such as quality in goods or services, effective marketing strategy, and healthy customer relations. All of those factors influence what is perhaps the most important indicator of a business’s success: profitability. When you think about a business’s profitability, you have to think about the money your business brings in and the money your business spends. It’s important to keep track of your company’s finances because your business will never be sustainable financially if you’re not aware at any given moment of where your business is financially. If you’re not a business owner now, but you’re interested in starting your own business, this course will walk you through the process of starting and growing your own business.
Most business owners are aware that accounting is an important aspect of owning a business, but accounting is about more than just keeping track of how much money a business spends or brings in. Accounting is about keeping track of the health of a business, or being able to give an account at any given moment of how the business is doing. Of course, because businesses deal so heavily in financial matters and much of their success or health is measured by whether a business is making money, breaking even, or losing money, bookkeeping is undoubtedly a large part of an accountant’s job. An accountant keeps an accurate record of a company’s financial transactions, but they also serve to interpret the data they keep track of so that a business can not only get an accurate picture of their business’s current condition, but also build strategy for improvement based on the data. The American Accounting Association (AAA) defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information.” This course will help you to get a better grasp of business finance from the perspective of an entrepreneur.
Basic Accounting Tutorial
Accounting deals heavily in numbers when it comes to the bookkeeping portion of an accountant’s role, and this accounting tutorial will walk you through the basic concepts of accounting.
Understand the Concepts
Because it can be a little confusing when you first start looking into it, if you want to learn accounting, the first thing you need to do in an accounting tutorial is understand the terms that are used so that you’ll know how to use each of them correctly. Essentially, accounting from a bookkeeping perspective is about managing debits and credits. Keeping a careful tracking of debits and credits in a company is called double-entry bookkeeping. In double-entry bookkeeping, every business transaction that takes place is recorded in two accounts. An accountant will record a companies debits and credits on a ledger, and one account will receive a debit entry on the ledger, and another account will receive a credit entry. On the ledger, the debits are recorded on the left side of the ledger, and the credits are recorded in the right side.
The reason why every business transaction must be recorded twice in double-entry bookkeeping is because of one of the most foundational concepts in accounting: Debits = Credits. What this means is that after all transactions are recorded on a ledger, the totals at the bottom for both credits and debits must be equal. Otherwise, something isn’t being accounted for. This course goes more in depth into the details of bookkeeping.
There are several different types of accounts in which debits and credits are kept track of in accounting:
- Assets are the financially measurable resources that a company owns. Assets have an economic value that is measurable and can be expressed in dollars. Some examples of company assets include cash, investments, supplies, property, equipment, accounts receivable, and inventory. A company may have other assets, such as its reputation, that cannot be measured. Because these assets cannot be measured, they cannot be accounted for on a ledger sheet. Make sure to only record assets that have economic value that is measurable.
- Liabilities are the financial obligations of a company, or the things that they owe. These include dollar amounts that are owed to lenders and/or suppliers.
- Equity is the investment that stockholders make in the company and is essentially the dollar value of a company’s worth.
- Revenues are the dollar amounts of income that are earned whenever the business provides a service or sells a product to a customer or any way otherwise that a company earns an income. Some revenue accounts include sales revenues, service revenues, interest revenues, and fees.
- Expenses are the costs associated with running the business, including bills or operating expenses. There are also expenses that are equal to revenues. An example would be the cost associated with selling a product. Because the value of the product is accounted for in the balance sheet, whenever it is sold, the increase in revenue will be equal to the expense of no longer owning the product. This is important to keep in mind because selling a product is an example of where a business transaction must be accounted for in two accounts for the debits and credits to be equal when every transaction is finally accounted for on a balance sheet. In this example, the two accounts that would be affected would be Sales Revenue and Cost of Goods Sold. Check out this course to go deeper into the concepts of accounting.
Understand the Process
Remember that accounting is about managing the debits and credits of a company and that if every financial transaction is accounted for, then at the end of a balance sheet, debits will equal credits.
Now, it’s time to understand how debits and credits actually work within the different types of accounts you learned about in the previous section. Don’t forget that debits are recorded in the left column of a ledger, and credits are recorded in the right margin of a ledger. A ledger will list the business transaction and the account that the transaction is associated with before recording whether there is a debit or a credit to that account.
Debits and credits affect different types of accounts in different ways, so it’s important to pay close attention. Here are the guidelines to understand how debits and credits affect each type of account:
If there is a dollar amount increase to an asset account, the increase is recorded on the ledger as a debit
If there is a dollar amount increase to an expense account, the increase is recorded on the ledger as a debit
If there is a dollar amount decrease to a liability account, the decrease is recorded on the ledger as a debit
If there is a dollar amount decrease to a revenue account, the decrease is recorded on the ledger as a debit
If there is a dollar amount decrease to an equity account, the decrease is recorded on the ledger as a debit
If there is a dollar amount increase to a liability account, the increase is recorded on the ledger as a credit
If there is a dollar amount increase to a revenue account, the increase is recorded on the ledger as a credit
If there is a dollar amount increase to an equity account, the increase is recorded on the ledger as a credit
If there is a dollar amount decrease to an asset account, the decrease is recorded on the ledger as a credit
If there is a dollar amount decrease to an expense account, the decrease is recorded on the ledger as a credit
With these rules in mind, you’re now ready to actually do some accounting. If you remember that debits equals credits, then you should understand that keeping track of every financial transaction is about keeping the debit side of the ledger and the credit side of the ledger in balance. If you record a debit in an asset account, which means to increase the asset account, then you have to have a credit or decrease an expense account so that, in the end, your debits and credits will balance.
Anytime you record an increase in one account, you must record a decrease in another account. Put another way, every time you debit an account, you must credit another account. Otherwise, your accounts won’t balance after all the accounts are recorded. For example, if you were a film production company and your company purchased a new high-end video camera, this new piece of equipment would be recorded as an increase, or debit, to an asset account. Check out this course if you’re interested in film production. Whatever the dollar amount the camera was purchased for and recorded as a debit in an asset account must also be recorded as a credit in an equity account. Your company’s accounts keep track of all dollar values, so the purchasing of equipment means that a dollar amount increases in one type of account while at the same time decreases in another account.
This accounting tutorial has covered some of the basics of accounting. Obviously, there is much more to learn, but if you’re a small business owner, this will get you started keeping an accurate account of your company’s financial transactions. Furthermore, knowing the financial condition of your business puts you in a position to interpret the data you record and build strategies for growth and improvement based on those findings. If you’re interested in learning more about accounting, check out this introductory course on financial accounting.
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