Accounting 101: Basics for Small Business Owners and New Entrepreneurs (Part 1)

Congratulations on the launch of your small business if you just started one, and yes to the start of your entrepreneurship journey, this is a huge milestone and we celebrate you. Now, let’s talk about setting up an accounting system, without which your business is less likely to succeed.

An accounting system is a system used to manage the income, expenses, and other financial activities of a business. With an accounting system, you can keep track of what your business owns, who it owes money, and track outstanding debts from its customers. You can also manage your cash flow, track spending, meet deadlines, evaluate the performance of your business, and generally prevent your business from the risk of making errors in your finances.

Below are some top accounting terms every business owner should know:

Asset

An asset is defined as an item of value owned or controlled by a company. Assets can range from cash, raw materials, to office equipment, stock, buildings, and intellectual property. They can also be intangible, such as patents, copyrights, corporate intellectual property, trade secrets, permits, brands, etc.

Capital

The capital of a business is the financial assets and resources it needs for its everyday operations to produce the goods and services it sells and to also fund the future growth and revenue of the business. Examples are funds held in deposit accounts, brand names, production equipment, buildings, machinery, land, and other resources. There are three types of capital: working capital, equity capital, and debt capital.

Credit

A credit is an accounting entry that is made on the right side of any accounting transaction. A credit entry records an increase in liability and records a decrease in assets.

Debit

A debit is an accounting entry that is made on the left side of any accounting transaction. As opposed to credit, a debit entry will record an increase in assets and a decrease in a liability or equity account. 

Accounting period

An accounting period is a period that covers a set of financial statements. It is the time taken for a business to complete its accounting cycle of gathering and organising its financial activity, which is used to create financial statements at the close of the accounting period. The period can be one year, a quarter, a month, depending on the business. 

Account payable (AP)

Account payable is the money your business owes to its suppliers or vendors for goods and services purchased on credit. Utility bills, raw materials, assembling and subcontracting works, leases, licenses, equipment, and others. For each credit, you will receive a bill from the supplier for the goods and services purchased. The bill is usually due within 30 days.

Account receivable (AP)

Account receivable is the amount of money due to your business from customers who purchased goods or services on credit. This money is typically collected after a few weeks or within 30 days. Unlike account payable which is a liability, account receivable is an asset because they provide value to your business. An example is a bill the electricity company bills its client after the client has received the electricity. 

General ledger

A general ledger is a master document providing a record of all the financial transactions of your business. Your general ledger gives you an accurate record of all your financial transactions helping you spot unusual transactions like fraud immediately, and it helps you balance your books. Generally, it helps you look at the bigger picture.

Bank reconciliation

A bank reconciliation statement is a document that reconciles your general ledger with your ending bank balance at the end of a particular month. What it does is match the cash balances on the balance sheet to the corresponding amount on your bank statement. With this, you can resolve any discrepancies and identify fraudulent activities.

Cash accounting

Cash accounting is an accounting method that records payments when it is received and records expenses in the period in which they are paid. In other words, both revenues and expenses are recorded when they are received and paid. Cash accounting is one of the two methods of accounting and is a perfect choice for small businesses as it provides you with an immediate and up-to-date picture of your cash flow and balances.

***

Featured image: istockphoto