Whether you are a manager, an executive, or a small business owner, you need to know a few things about bookkeeping and accounting. There is a difference. To understand accounting, you first must understand something about bookkeeping.
Firms use either a cash system of bookkeeping or an accrual method. Only a cash system will be discussed because most basics are included in both systems. Small business owners interested in purchasing financial software should check out QuickBooks or QuickBooks Pro by Intuit or Peachtree by Sage. A good teaching site is Basic Accounting Help. Non-finance managers or executives may want to consider taking a course from Learning Tree International.
A Cash Single Entry Bookkeeping System
This is a system where no balance sheet is required. It works much like a personal bank account. A business account is set up with the first deposit representing the owner’s equity. Deposits are added and checks are subtracted. At the end of the month, the balance represents the owner’s equity.
Double Entry Accounts and How They Are Used
A simple listing of balance sheet accounts:
- Current Assets
- Accounts Receivable
- Long Term Assets
- Current Liabilities
- Accounts Payable
- Long Term Liabilities
- Mortgage on Property
- Loan on Van
- Owner’s Equity (Assets – Other Liabilities)
A simple listing of profit and loss accounts:
- Daily Income
- Business List
- Daily Expenses
- Business List
In double entry accounting, every entry must have a debit and an offsetting credit. For example, when inventory is purchased, the amount is added (debited) to the inventory account and the bill for the inventory is either paid and subtracted from current assets (cash) or credited in accounts payable. Accounts payable is a current liability and any balance is a credit. Sales add to cash and subtract from inventory.
Balance Sheet and Profit and Loss Summary
The left side or top of the balance sheet shows the Assets, both current and long-term. The right side or bottom of the balance sheet shows the Liabilities and Owner’s Equity. The Assets must equal the Liabilities + Owner’s Equity. The Profit and Loss Summary has entries for all the income gathered and all the expenses incurred during an accounting period, which is usually one month. After the Profit and Loss Summary is produced, the bottom line is transferred to the Owner’s Equity account. This may increase or decrease the Owner’s Equity.