by Niki Tudge
Numbers! Numbers! Numbers! Wherever you go, you are bound to see numbers. Addresses, license plates, phones, prices and of course, money! Numbers connect us all to each other in many more ways than we might imagine. Our world revolves around numbers. Some of us enjoy dealing with numbers while others have a fear of them. I know some people who have a math or number phobia and this greatly impacts the performance of their business. If you own or operate a small business it will really help you make your business profitable if you understand some bookkeeping basics. For me the most valid reasons for understanding and managing your own book keeping include:
- You can look at your financial statements and make business or personal decisions in real-time. There is nothing more frustrating than having to wait for a bookkeeper to tell you that this month you lost money when if you had changed a few things it could have been avoided!
- You can make decisions about when to implement discount practices, sales events and marketing promotions based on the financial trends in your industry reflected in your financial reports and data.
- You can manage your expenses in relation to your income. If you are experiencing a short term down trend in your income then you can temper your spending to reduce your expense burden and thus impact your profitability.
- Understanding how to manage your business financially will empower you to make more sound operational decisions. Every decision you make in your business, whether it is a marketing decision or an operational decision, has an effect on your businesses financial performance.
- Even if you do not plan to do your own bookkeeping a basic understanding of the process allows you to talk intelligently to your hired accounting professional.
- Yes, we all love what we do, we are passionate about helping pets and their families, but we also have to provide for ourselves and our families and profit is a healthy word,
- I recommend that small businesses generating less than $150,000 per year do their own monthly bookkeeping and do it accurately. It saves you a monthly bookkeeping expense, puts you at the helm of your financial situation and if you do your books accurately it greatly reduces your accounting service expense when your taxes are completed by an accountant.
- In general keeping accurate books can prevent;
- Forgetting to invoice a client or collecting the money owed you.
- Incorrectly invoicing a client.
- Being remiss about inputting expenses into your bookkeeping system and thus being late paying your bills.
- Payroll expenses being out of sync with your income levels.
- Operating expenses being out of sync with your income levels.
- Business vehicle mileage not being correctly accounted for.
- The stress of not knowing how your business is doing therefore not being able to strategically improve it.
Like any new subject, when learning bookkeeping or basic accounting you really have to start at the beginning or you will get lost. So let’s start there and look at some basic terminology. Some of this stuff may ring a bell for those of you who took accounting previously, were hired to keep the books at the corner Mom & Pop’s shop, or never hired a “real Accountant” and tried to do your own books. Either way, when we are done here, you should be familiar with a lot of these basic bookkeeping and accounting terms.
The Balance Sheet
A balance sheet is a financial statement that shows the assets, liabilities and owner’s equity at a specific point in time. It is a snapshot, like a photograph of your business at a specific time. It is only valid for the time it is taken as within minutes if a financial transaction takes place the balance sheet will change. Assets and liabilities are usually listed first, followed by the equity which is the difference between the assets and the liabilities. The balance sheet will ultimately provide a snapshot of the company’s current financial condition. To learn how a balance sheet works for a company you can develop a balance sheet for your personal finances. List everything you own and its value and then everything you owe. The difference is your equity.
Assets are anything you can sell that would generate income or a probable future economic benefit to the company. Anything that has an economic value and can be owned or controlled to produce value has the potential to produce such future economic benefits. Whether tangible or intangible, ownership of any form of value such as cash money or stock is considered to be an asset. Short term assets can be stock or inventory that can be sold today or tomorrow to generate cash. Long-term assets are those held on a company’s balance sheet for more than one year. Property, plant and equipment are typical examples of long-term assets.
A liability is a duty or responsibility to another in return for some form of debt such as a business loan which would entail the settlement of that loan. Liabilities are what the business owes and like assets they can be long term or short term. So a credit arrangement with a vendor maybe a short term liability if you have 60 days to pay the invoice versus a bank loan on a ten year payment term that would be a long term liability. If liabilities are settled they may become transferred assets or provide services to other entities in the future as a result of past transactions or events.
Equity is the ownership in assets after all debts owed for that asset has been paid off. Assets such as stock and home ownership can be considered equity if no associated debts remain on them. Once a house or automobile is paid off the asset is now the owner’s equity. Equity is any asset that can be sold for monetary gain without any attached debts being owed. The owner should gain 100% of the revenue from the sale of an asset if that asset is his or her own equity.
The Income Statement
A financial income statement is used to summarize the amounts of revenues earned, and the expenses incurred by a business or entity over a period of time. In most situations we look at the income statement monthly, quarterly and then annually. It is used to measure a business’s financial performance. The income statement includes a summary of how a business typically incurs its revenues and expenses over a fiscal quarter or year through income categories.
Revenue is the income from products and services sold and the use of investments. Revenue can also be a transaction and the resulting income for which monies are received, however, loan funds and equity deposits are not considered revenue.
Cost of Goods Sold
The cost of producing products that are delivered to customers to create revenue or the cost of inventory sold during an accounting period. This includes the cost of purchases made during an inventory period minus the ending inventory for that period. This term is often abbreviated as COGS.
Expenses are the cost of producing revenue through the sale of goods or services. They can come in many forms such as salaries or wages, operating expenses, professional fees, utilities etc. This also includes depreciation of assets which is normally put into the expenses at tax return time. Your accountant once they depreciate any assets your business owns will expense them.
The Accounting period is the period over which income statements and other financial statements are utilized to track and report operating results. They usually run for twelve months between January to December, but can begin and end anytime depending on the business’s needs or wants. This is normally set up when you first start your business and when you begin using a software system to do your bookkeeping it will ask you for your annual accounting period.
So in summary you should now be familiar with a few general accounting terms most often used for businesses. Remember:
- A balance sheet is a financial statement that shows the assets, liabilities and owner’s equity at a specific point in time.
- Whether tangible or intangible, ownership of any form of value such as cash or stock is considered an asset.
- Liabilities are probable future sacrifices of income or assets, arising from present obligation to a particular entity.
- Equity can be ownership in assets after all debts owed for that asset have been paid off.
- An income statement includes a summary of how a business typically incurs its revenues and expenses over a fiscal quarter or year.
- Revenue can be a transaction and the resulting income for which monies are received.
- Cost of Goods Sold is the cost of purchases made during an inventory period minus the ending inventory for that period.
- Expenses are the cost of producing revenue through the sale of goods or services.
- An accounting period is a period of time in which income statements and other financial statements are utilized to track and report operating results.
Want to learn more. Join me for a fun look at Basic Bookkeeping click here