Basic Bookkeeping Principles: A Simple Glossary For Small Business Owners

basic bookkeeping principlesBasic Bookkeeping Principles

Sometimes bookkeeping, accounting, payroll and tax preparation services are all offered under the same roof. In some cases, one area depends on the other.

Basic Bookkeeping Principles – Did you know the revenue from the accounting, tax preparation and payroll services industry in the United States is forecasted to generate around 160 billion U.S. dollars by 2018? Bookkeeping involves the recording of financial transactions, while accounting leverages that information to produce financial models for a company. With good accounting, a company can better understand their profitability and cashflow.

Since mainstream conversations tend to interchange accounting and bookkeeping terminology, Your Miami Beach Bookkeeping Department is here to share some basic accounting and basic bookkeeping principles and comprehensive glossary.

Cash Accounting:

When it comes to dealing with cash, things are very simple. You’re paid and income is recorded. When expenses are paid, they’re recorded. Payments from clients are received cash in hand and expenses are cleared from your bank account. For example, if you invoice a client for $500 on April 10th but receive payment only on May 10th, the income would be recorded in May’s bookkeeping. Cash accounting simplifies bookkeeping for many small business owners, because it makes tracking the money easier. It also means there’s no income tax paid on any of the revenue until it’s deposited in the bank.

Accrual Accounting:

Unlike cash accounting, income is recorded as its earned and expenses are recorded when they’re billed. Accrual accounting considers accounts payable and accounts receivable. For example, if you invoice someone for $300 on March 5th, that’s when it’s recorded. This type of accounting doesn’t account for cash flow or funds available in the bank, but does give you a more realistic view of income and expenses for a certain period of time.

journal entries bookkeeping principlesJournal Entries: One of the most basic bookkeeping principles, journal entries are used for tracking business expenses and income that’s received. Proper journal entries can help you keep your books balanced and also makes financial reports easier to create. A journal entry consists of the date, amounts debited or credited, short description and a reference such as a check number. Journal entries can also include depreciation or accrued interest.

Accounts Payable: This is the money you owe to your vendors and creditors. For example, if you bought a new printer for your small business marketing firm, that payment is recorded in your accounts payable. These are marked as liabilities. Other examples include advertising, travel and utilities.

Accounts Receivable: This is the money you expect your clients or customers to pay you for the products you sold to them or services you offered. For example, if you sold photography sessions to a newlywed couple, their payment is recorded in your accounts receivable. There’s usually a time frame, also called credit terms and payment terms, associated with payment due.

Bookkeeping Systems

There are two types of bookkeeping methods; single- and double- entry bookkeeping. A personal check book uses the single entry method, with debits and credits recorded as balance increases and decreases. This bookkeeping system doesn’t reveal where the money is going in the future. A double entry bookkeeping system, records expenses in particular categories, showing you how much you spend in each one. It also tracks future spending.

Capital: Debt and Equity

Capital included cash in all of your accounts, assets and investments. Debt involves borrowed funds business owners need to repay while equity relates to selling off interest in the company. Equity is seen as an investment in the business.

Debits and Credits

With a double-entry bookkeeping system, debits and credits cancel each other out. When deposit funds in your bank account, you debit the cash account and credit the income or deposit category.

Depreciation

From computers, to furniture, machinery and other tangible assets, loss of value takes place over time. You can account for that loss with a simple formula: depreciation=asset purchase-salvage value/useful life.

 

 

Profit and Loss Statement

Also known as an income statement, this summarizes the business’ income, expenses and total cost during a specific time frame. This basic bookkeeping principle demonstrates accounts payable, income taxes, wages and other accounts owed.

These are some of the most basic accounting and basic bookkeeping principles and should help you communicate with your bookkeeper. If you rather have someone else keep track of your books, records and reports, reach out to Your Miami Beach Bookkeeping Department for expert handling at an affordable price.

Manal Oliver is both a certified accountant and bookkeeper, so you get the best of both worlds.

Related Posts

Share
Comments are closed.