Accounting Basic Terms and Accounting 101 Tips
As a small business owner you just need to know the accounting basic principles.As your business grows...you can jump into the deep end of the accounting pool with ratios and monetary unit assumptions later. Let’s just get our feet wet first...because accounting is one of the most important components of your small business. Without it you are just setting yourself up for failure. So let’s wade in and learn some accounting basic terms and start your lesson in accounting 101. Paying your website fee affects your small business’s financial condition because it would then have less cash on hand. Such an economic event or condition that directly changes your business’s financial condition is a financial (business) transaction. All business transactions can be stated in terms of changes in the three elements of this accounting basic equation which is to the base of all accounting: Assets = Liabilities + Owner’s Equity Learn more about the
accounting equation and debits and credits on this page.
However, this format is difficult to use when multiple transactions must be recorded daily.
Therefore, accounting basic systems are designed to show the increases and decreases in each financial statement item in a separate record. This record is called an account.
For example, since cash appears on the all balance sheets, a separate record is kept of the increases and decreases in cash. Likewise, a separate record is kept of the increases and decreases for supplies, equipment, notes payable and other balance sheet items. Similar records would be kept for income statement items, such as revenue, wage expenses, rent expenses, etc. A group of accounts which contains all of the balance sheet and income statement accounts is called a ledger. A list of the accounts in the ledger is called a chart of accounts. The accounts are usually listed in the order in which they appear in the financial statements. The balance sheet accounts are usually listed first, in the order of assets, liabilities, and fund equity. The income statement accounts are then listed in the order of revenues and expenses. Each of these major classifications is briefly described below: Assets are resources you own. Examples of assets include cash, account receivables(money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for), supplies, prepaid expenses (such as insurance) buildings, equipment, and land. Liabilities are debts owed. Liabilities are often identified on the balance sheet by titles that include the word payable. Examples of liabilities include: accounts payable (money owed to vendors for products and services purchased on credit), notes payable and wages payable. Equity is the owner’s right to the assets of their business. Revenues are increases in the owner’s equity. Examples of revenue include sales and commissions. Expenses are assets used up or services consumed in the process of operating your business. Examples of typical expenses include wage expense, rent expense, utilities expense, supplies expense, and miscellaneous expense. A chart of accounts is designed to meet the information needs of an owner’s financial administrators and other users of its financial statements. Within the chart of accounts, the accounts are numbered for use as references. A flexible numbering system is normally used, so that new accounts can be added without affecting other account numbers. Each account number has at least two digits. The first digit indicates the major classification of the ledger in which the account is located. Accounts beginning with:
Usually all businesses use 1 for assets and 2 for liabilities; however, many businesses then use 3 for revenue, 4 for expenses, and 5 for equity. The second digit indicates the location of the account within its class. For example, if you didn’t have a lot of accounts and were only using two digits, miscellaneous expense would have the number 59 because it is always the expense listed last and cash would have the number 11 because it is always the current asset listed first. Another example of setting up your chart of accounts numbers is while setting up your expenses you may assign the number 54 for your rent expense and 56 for your electric expense – a year later you lease a copier and now you can set up your copier rent as number 55 and keep similar items together. Notice: most organizations will have a three or more digits unless you have a very small budget.
This accounting package of high quality printable PDF files includes everything you will ever need to learn a good accounting foundation for your small business. It covers over 30 accounting topics and gives clear explanations and examples on various topics such as activity based costing, balance sheet, evaluating business investments, improving profits and accounting basics. It also has accounting drills, cheat sheets, exams, crossword puzzles, word scrambles, and a wonderful accounting dictionary. One of my favorite sections in the package is the Special Q and A section. It has over 500 questions and answers complied into a 200+ page document that you can use as a resource anytime you get confused on an area of accounting. This accounting package is valued at $200, but you can purchase the entire package for only $30 by clicking on the link below. *Comes with a 90-day "no questions asked" money-back guarantee
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