The following information was prepared for owners of small businesses, that need a basic understanding of bookkeeping. There are 14 key topics:

Double-entry accounting

Double-entry accounting means that every transaction entered into the accounting system will affect at least two accounts. For every debit entry made, there will be a corresponding credit entry.

Likewise, if there is a credit entry, there will be a corresponding debit entry. This ensures that the accounts remain in balance. Utilizing a double-entry system of accounting is the only reliable way of achieving accurate books, and records.

Debit and credits

Debits and credits are used to record all accounting transactions. The effect that a debit or credit has on a particular account is dependent on the type of account being affected.

 

 

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Type of Account	Increases Balance	Decreases Balance
Assets	Debit	Credit
Liabilities	Credit	Debit
Revenue	Credit	Debit
Expenses	Debit	Credit
Equity	Credit	Debit

 

 

For example, if you post a debit transaction to an asset account, it will increase the balance of the account, whereas if you post a debit to a liability account, the balance of that account will be decreased.

A debit is always on the left side of any accounting transaction, while a credit is always on the right side of the transaction.

Chart of accounts

A chart of accounts is the heart of any accounting system and lists all of the accounts found in the general ledger, which is where all of the accounting entries are located.

A chart of accounts should be created prior to recording any financial transactions.

Cash accounting method

After establishing a chart of accounts, you will need to decide what type of accounting method you will use. Many sole proprietors use the cash accounting method, which records cash when it is received and expenses when they are paid. It does not keep track of accounts payable or account receivable.

Accrual accounting method

If you have a business, employees, or you sell products, you should use the accrual accounting method. This method records all revenue or income and expenses as they occur, not when the customer or client pays or when you write a check to pay a expense.

Accrual accounting provides a better picture of both income and expenses for a specific period of time, but it can make it more difficult to manage the cash flow of the business

Assets

An asset is anything of value that the business owns. Assets include cash in your bank account, your accounts receivable, any building you own, inventory, supplies, office equipment and furniture. Assets can also be intangible, such as intellectual property.

Liabilities

Liabilities are anything the business owes to another. Accounts payable are liabilities because they reflect what is currently owed to others. Loans payable are also a liability.

Revenue and income

Revenue or income consists of any money received during the course of conducting the business, which includes, the sale of products and/or services.

Operating expenses

Everything paid out except for investments. For instance, when an electric bill to be paid next month is entered, it is that's recorded as an expense. An expense report helps track business expenses.

Equity or Net Worth

Equity represents the current net ownership interest in the business and is derived from subtracting total liabilities from total assets.

Accounts payable (AlP)

Account payable is a record of bills or invoices that have not yet been paid. Once a vendor has been paid, the AlP balance is reduced by that amount.

Accounts receivable (AIR)

Accounts receivable is where all of the funds currently owed to the business are recorded until paid by customers or clients. Once customers or clients pay their invoice, the AIR balance is reduced.

Aging

Both AlP and AIR accounts include aging, which is simply a way to manage funds coming in or funds going out. AlP aging displays a list of invoices currently owed vendors and suppliers, tracking due dates, and advises management when a payment is due or when it is late.

AIR provides the same information for outstanding customer or client payments.

Journal entries

While accounting software will likely handle the majority of the entries needed for a business, there may be situation when the bookkeeper will need to make a journal entry.

This can happen for things such as bank charges incurred when the bank accounts are reconciled at the end of the month. or, it can be for depreciation entries if the business is recording depreciation for items (such as building purchases, expensive computer systems, or the purchase of a company vehicle).

All of these transactions will need to be entered into the accounting software by making a journal entry.