Basic Bookkeeping Terminology

When you’re first getting your business up and running, keeping track of expenses, income, and financial documents can easily feel overwhelming. Today’s guest post from Fran McCully of Your Administrative Solutions will help you to keep things straight. Want some more tips to help manage the money end? Be sure to tune into this episode of our “From Corporate to Creative” radio show where we’re talking with Fran about Finances for Small Business Start-Ups.

 

By Fran McCully

If you are planning on or already doing your own business bookkeeping, or even if you have a bookkeeper, there are a few terms it helps to be familiar with. Understanding these terms will help you better grasp the foundations of business bookkeeping.

First, let’s start with the definition of bookkeeping which is simply: the recording of financial transactions including sales, purchases, income, receipts and payments. Sounds simple right? And it can be if you stay consistent, organized, and understand what you are doing. Learning some basic terminology of the bookkeeping world can help. Listed below are some basic terms defined.

Income: Income can be defined two ways: sales and other income. Sales is the money
generated from the sale of goods or services before taking anything out for costs or discounts. Other income is any money received into the business by way of interest, discounts, or anything not directly related to the product or service of the business.

Expenses: An expense is anything directly paid for by the business that is needed to run the business including wages and supplies.

Assets: Fixed assets and current assets are the two important categories to consider. Fixed assets are owned by the business such as buildings, equipment, vehicles etc. These are items that are going to be a part of the business for a long time, are necessary to generate income and run the business, and cannot be easily converted into cash. Current Assets are easily converted into cash and are considered short term (under 12 months). Things like cash, bank accounts, short term investments, and debtors are considered current assets.

Gross and Net Profit (or Loss): Gross is the difference between the sales and the cost of sales, while net is what is left after taking the expenses out of the gross profit and adding any other income.

Liabilities: Debts and money owed to people or businesses. Liabilities can be long term, such as loans or bonds that will be paid off over a period longer than 12 months, or current such as anything that needs to be paid off within 12 months.

Equity: Investment and capital as an owner.

Income Statement: A record of the day to day income and expenses of the business during the financial year. The values are brought to zero at the end of each year and only the profit or loss is carried over to the balance sheet.

Balance Sheet: Made up of the assets, liabilities and owners’ equity. A balance sheet is a snapshot of the status of a business at any point in time. These values, which change according to what is going on in the business, are carried forward from year to year.

Debits and Credits: Debits are costs, expenses and assets. Credits are income and liabilities. When you record daily transactions, divide the page into two columns. Debits on the left and credits on the right. (Debits and credits should not be confused with debtors. Debtors owe the business money. Creditors are owed money by the business.)

* Double Entry: A bookkeeping system that splits transactions between two or more accounts. In a double entry system there are two columns, one for debit and one for credit (see above), and they should always balance. Double entry is far more accurate than single entry because it forces the bookkeeping to balance. Example: you purchase a calculator for $50.00 to be used in your business. An entry to record this would consist of a credit to cash for $50.00 and a debit to office expense for $50.00.

Trial Balance: Once everything is sorted into two columns (debits and credits) add each column up and they should balance. The purpose of producing a trial balance is to ensure the entries in a company’s bookkeeping system are mathematically correct. The trial balance provides the information to make up the financial statements for your business.

Understanding these terms will provide better communication with your accountant, banker, and business associates. If you do decide to hire the expertise of a professional bookkeeper these terms will help you understand and communicate with them as well.

About the Author

Fran McCully has over 30 years of combined experience as an administrative and executive assistant, in finance and    budgeting, and in general business. This includes experience gained as a long-term 20 year employee at Washington State University, in Pullman, Washington.

In 2004, she decided to consolidate her work skills and life experiences and launch Your Administrative Solutions, a virtual bookkeeping company.

Your Administrative Solutions specializes in bookkeeping / accounting, database and business-plan development, and human resource services. Fran partners with small business, micro companies, solo-preneurs, and individuals.

She holds a degree in Business Administration from the University of Idaho and is a graduate of the Virtual Assistant Training Program (VATP), a comprehensive program learning how to produce virtual work for clients using the latest technology.

Her personal affiliations include International Virtual Assistant Association (IVAA), SCORE counselor for the Small Business Development Center on the Palouse in Idaho.

Currently Fran is the Vice President of the local Palouse Networking Alliance group located in Moscow, Idaho. She is also a founding member of the Inland Virtual Assistants Alliance.

About the author, Kelly

Kelly Galea is a creative, multi-passionate entrepreneur and luminary blessed with a unique combination of wit, grit, intellect and intuition. She helps you navigate the work-life maze of ever-shifting priorities and transform your life through holistic self-discovery techniques and immersive, fun and magical mini-quests. Working with Kelly will inspire you to unveil, express and celebrate your vital personality and lifestyle preferences to create a more harmonious life.

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