Today’s business landscape is dotted with small businesses and startups. For businesses with small teams, and in some cases also in large companies, it makes good sense for everyone to understand the basics of accounting. As bookkeeping software becomes more prevalent in its use, more employees can view the company’s accounts and evaluate how their own area of functioning can be more cost-effective as long as they have a working understanding of such bookkeeping software.
Here are 6 basic bookkeeping concepts that everyone should have down pat.
- Assets and Liabilities
Assets refer to everything that the company owns, including cash in hand and capital held in bank accounts, any investments held by the company, payments receivable from clients, product inventory that is in the pipeline for sale. As you can imagine, a sales executive should understand why the office accountant keeps breathing down his neck asking if he has followed up on a client’s payment. Liabilities include everything that the business owes – all its debts. Payments due to suppliers and loans if any, show up here.
Assets and liabilities appear on a company’s balance sheet. As you can imagine, a profitable business will have assets that far exceed its liabilities.
- Income statement
Aside from what the company owns and what it owes, bookkeeping must also record what a company has earned and spent. That’s precisely what goes into an income statement. All the revenue raked in by the company is included in the income statement across earnings from the sale of the company’s product or service, interest earned, income from any other source, tax reimbursements if any, and so on.
The income statement also records all the amounts spent on everything from minor expenses office stationery to coffee, to big expenses like office printers and monthly rent and even spends on raw materials required for the product or services like courier and internet.
- Retained earnings and Equity
Equity is mentioned in the balance sheet along with assets and liabilities. It includes several components like the claim that investors have over the company as well as their investment in the company, equity investments made by the company.
Retained earnings are an account of profits clocked by the company that is not paid out to investors. This amount keeps piling up over time and it may be pumped back into the business for expansion or acquisition or to fund a larger team.
The three bookkeeping concepts that we talked about above are linked to accounting terminology. The next three are about bookkeeping methodologies.
- Single-entry bookkeeping
If you are the sole owner and founder of your business this method of accounting might work for you. Single entry bookkeeping is handy when your business is still small and when transactions are straightforward. When an expense is incurred or a sale is made, it is entered into the books of accounts which include a Disbursements Record and a Revenue Record. The accountant also uses a bank statement to verify his entries.
- Double-entry bookkeeping
When there are multiple investors involved and the business is slightly more complex, each transaction will usually include both a debit entry and a credit entry. Debits and credits are entered side by side to offer a true picture of the actual state of a company’s finances. Most bookkeeping software uses this method.
- Cash basis accounting technique
As the name suggests, cash basis booking makes a record whenever there is an exchange of cash. Just paid a supplier – data entry time. Just received a payment from a client – data entry time. Interest received on cash in the bank – data entry time.
It is important for business owners, key company decision-makers, sales, and procurement staff to understand these bookkeeping basics, besides the accountants of course. Are you looking to acquire industry-leading bookkeeping software to keep things streamlined? Check out the Dext software for bookkeeping!