What is Accounting?
Accounting is more than simple bookkeeping as most of you know, it’s a system of organizing, recording, maintaining & analyzing financial business activities that ensures accuracy in a timely manner to various audiences. The key terms in accounting and the basics of small business accounting procedures include the following: asset, capital, expenses, liabilities and revenue. An asset is something you own that has value to it. For example, a vehicle or a computer is an asset.
Capital is the business ownership of assets contributed by a proprietor(s). Expenses are simply the costs of running your business day to day. For example, a retail business has the cost of rent in order to run their business.
Forms of assets include current assets, investments, property-plant-equipment, and intangible assets. Current assets include cash and other assets that can be converted to cash, used or sold in a year or less. Investments are usually long term assets and aren’t used in the regular operations of the company day to day.
Property-plant-equipment are assets that are long term and expected to be used in the business for more than 1 year. Examples would be equipment, land, buildings, and operating machinery. Intangible assets aren’t physical and are long term and examples include goodwill, trademarks, and copyrights you may have.
The Accounting Equation
The basic accounting equation is the following:
Assets = Liabilities + Capital
Ex 1: $14,000 (asset)= $0 (Liabilities) + $14,000 (Capital)
This is the most important equation you need to understand in accounting, as everything in business accounting is built around this in order to master the basics of small business accounting procedures. Liabilities come in many different shapes, such as accounts payable and note payable and include many more. Liabilities can defined as money owed to creditors and other parties. For example, if your business owns a truck but has a loan on it, the loan is the note payable.
If you are setting up an accounting/bookkeeping system you may want to look at one of the automated bookkeeping systems like QuickBooks online that will calculate all of these items, such as Assets for you and record the asset depreciation as well.
Accounting Equation Video:
Recording Business Revenue & Profit
Revenue is the profit earned by your business, resulting from a sale or service you provided. Profits are income earned by your business after subtracting your total expenses.
The business accounting equation leads to double entry accounting bookkeeping which can get complex but is simplified by many accounting/bookkeeping programs out there.
QuickBooks online offers a free small business bookkeeping trial period you may want to check out for your small business.