Here is what every business owner should know about accounting
 

Definitions:

Bookkeeping

The activity of recording business transactions.

 

Double Entry Bookkeeping

An accounting technique which records each transaction as both a credit and a debit.  Since each credit has one or more corresponding debits (and vice versa), the system of double entry bookkeeping should always lead to a set of balanced accounts (total debits = total credits), and if the accounts are out of balance, errors are easier to find.

 

Debit

A entry on the debit side (left) of an account.

 

Credit

An entry on the credit side (right) of an account.

 

The Accounting Equation

Assets = Liabilities + Owners Equity

(Revenue and Expenses are totaled together and included in the Owners Equity section as Current Year Income)

 

Account Types

There are five basic account types, and debits and credits affect them differently.

 

Account Type Normal Balance Debit Credit
Assets Debit Increases Decreases
Liabilities Credit Decreases Increases
Owners Equity Credit Decreases Increases
Revenue Credit Decreases Increases
Expenses Debit Increases Decreases

 

 

Balance Sheet:
A statement listing the total assets and liabilities, indicating the net worth of the company for the given moment in time.  A balance sheet is cumulative over a period of years.

 

Income statement:
A statement that summarizes revenues and expenses for a period of time (Usually a Month or Year).

Trial Balance:
A work sheet showing the balances in each account - used to prove the equality of debits and credits.

Accrual basis:
A method of accounting where transactions are recorded as they occur regardless of when payment for that transaction is made or received

Cash basis:
An accounting method where transactions are recorded when the actual change of payment occurs, regardless of when the goods or services are delivered.

Chart of accounts:
A numerical listing of a businesses general ledger accounts.