Accounting 101: The Ultimate Guide to Accounting Basics

Greetings from Accounting 101! This manual aims to give a fundamental overview of accounting concepts. This manual will provide you with a strong foundation in accounting, regardless of your level of experience in the corporate sector or your need to brush up on your knowledge.

We'll talk about financial ratios, income statements, and balance sheets. You'll have a better understanding of how firms manage their finances at the end of this guide.

It's common to think of accounting as a difficult process, but it doesn't have to be! You will learn the fundamentals of accounting from this manual so that you can manage your money with assurance. From bookkeeping to financial statements, we'll go through all the fundamentals to get you started on your accounting adventure.

Are you new to the accounting and finance industries? If so, you should read this tutorial! We'll start by introducing you to the fundamentals of accounting, such as bookkeeping, financial statements, and income taxes. You will have a solid foundation in accounting principles at the end of this manual, which you can expand upon as your career develops.

Like most individuals, you probably find the thought of accounting to be boring. However, things don't have to be that way! Contrary to popular belief, accounting is quite simple. To help you understand what's going on with your company's finances, we'll walk you through the fundamentals of accounting in this guide.

Everything from constructing a balance sheet to logging revenue and expenses will be covered. By the conclusion, you'll be equipped to handle your company's books like a pro!

Accounting intimidates a lot of individuals. It may appear to be a challenging and uninteresting topic. But it's not necessary to be! We'll debunk all the jargon and demonstrate how simple it is to comprehend the fundamentals of this crucial area in this comprehensive guide to accounting basics.

This manual will provide you with the resources to get going whether you're trying to manage your money or run your own business. Are you prepared to learn accounting?

This manual is for you if you are new to accounting. All of the fundamental ideas and terminologies you require to get started will be covered. Everything, from balance sheets and ledgers to debits and credits, will be explained in plain, understandable terms. This manual will provide you with a firm foundation in accounting, whether you're just getting started or looking to refresh your skills.

Understanding the fundamentals of accounting is essential whether you're a small business owner, a freelancer, or just attempting to manage your finances. This manual will go over all the fundamental ideas you need understand, from assets and bookkeeping to liabilities and equity. You'll have the information necessary to make wise financial decisions for your company or for yourself at the end of this Accounting 101 tutorial.

Do you wish to discover the fundamentals of accounting? Do you want to learn about financial statements? If so, you should read this manual! The fundamentals of accounting will be covered in this article, along with a rudimentary explanation of financial statements.

Important ideas including revenue and expenses, balance sheets, and income statements will also be covered. By the time you finish reading this article, you'll be well-versed in the fundamentals of accounting and able to easily understand financial statements.

The word "accounting" certainly doesn't sound all that fascinating to you if you're like most people. But believe me when I say that accounting is a fascinating subject that is also absolutely essential to anyone seeking to start a successful business.

You will receive a fundamental introduction to accounting terms and ideas through this manual. You'll have a clearer idea of what accounting is all about after reading this article, and you'll be able to use some of these concepts in your own company. Therefore, keep reading if you want to learn more about this crucial component of owning a business.

Do you have a slight feeling of overwhelm? Do you have inquiries about accounting's definition and scope? You're in luck if so! We'll go through the fundamentals of accounting in this article, including what it is, how it's used, and how to get started.

We'll also cover some of the most frequently asked inquiries concerning accounting. Read on to learn everything you need to know about accounting fundamentals, whether you're just getting started or looking for a refresher course!

Are you prepared to begin? Let's start now!

What is Accounting in Business?

Accounting is the methodical gathering, evaluation, and interpretation of financial data for your company. Accounting is a tool used by business owners to keep track of their financial activities, fulfil legal requirements, and produce better business decisions.

Running a business requires knowledge of accounting. You'll have to be an expert at it or get someone else to do it. Let's ease into the subject by first going over accounting jargon.

Accounting Basics

No matter who manages the accounting for your firm, it is still a good idea for you to have a fundamental understanding of accounting. If you are able to read and create these key documents, you will have a far greater grasp of the operation of your firm as well as its financial health. As a direct result of this, you will have a greater impact over the choices pertaining to your company and its finances.

Even if you engage with a reputable consulting firm or have employed a qualified public accountant, these are the documents and computations we advise studying. They give you useful measurements and pictures of your company's performance.

1. Revenue Statement

An income statement details your company's profitability and the amount of profit or loss it has experienced.

2. Account Statement

A balance sheet offers a snapshot of your company's current financial standing at a given point in time. On a balance sheet, the retained earnings of your company, also known as the amount of profit you've invested, will also be indicated (rather than being distributed to shareholders).

3. A statement of profit and loss (P&L)

The income and costs for your company over a specific time period are summarised in a profit and loss (P&L) statement (e.g. quarterly, monthly, or yearly).

4. A statement of cash flows

In order to describe how and where money is received and spent, a cash flow statement analyses the operational, financial, and investing activities of your organisation.

5. Bank Reconciliation

Bank reconciliation helps maintain consistency in your business records by comparing your cash outlays with your overall bank statements. (This is how your book balance and bank cash balance are reconciled.)

Basic Terms in Accounting

You can construct your understanding of business accounting on the basis of these 15 terms. Even though some of these phrases might not now apply to your firm, it's crucial to gain a comprehensive understanding of the topic in case you expand or enter a different industry.

1. Credits and Debits

Debits and credits are fundamental accounting terminology to understand, not to be confused with your debit and credit cards.

All funds anticipated to enter an account are recorded as debits. A credit is a list of all funds anticipated to leave an account. Debits and credits essentially keep track of where the money in your company is coming from and departing.

Many companies run their operations out of a cash account, or a corporate bank account that contains their liquid assets. The cash account is credited when a business pays an expense out of its own pocket since funds are being transferred from the account to do so. In other words, the expense is debited since the money credited from the cash account pays for it.

2. Accounts Payable and Receivable

Accounts receivable is the term given to the sum of money that a customer owes you for goods and services provided to them. It is counted as an asset on the balance sheet that you maintain. If a customer pays their invoice in full, for example, your firm will owe less money overall, and as a result, the total amount that your company has in accounts receivable will go down.

Accounts payable are considered to be a liability on a balance sheet since they represent money that is owed to other parties. For instance purposes, assume that the monthly rent for your company is $5,000. Your financial records should reflect this information before you disburse that amount of money.

3. Accruals

Credits and obligations that you have accrued but not yet paid off are referred to as accruals. These can include purchases you've made but haven't yet received payment for or expenses you've incurred but haven't yet paid for.

(Why not hold off till the payment is finished before recording the activity? When we discuss the accrual accounting approach later, we'll provide the answer to this query.)

4. Assets

Everything that your business has, both tangible and immaterial, is called an asset. Your assets may consist of money, equipment, real estate, copyrights, patents, and trademarks, for instance.

5. Burn Rate

The phrase "burn rate" refers to the rate at which a firm goes through its cash reserves. When determining and maintaining management of your cash flow, it is essential to take into consideration.

Pick a time period to use in the calculation of your burn rate (such as a quarter or a year). Divide the total amount of cash you had at the end of the period by the total amount you had at the beginning, then multiply the result by the total number of months in the time frame (or by your chosen cadence).

6. Capital

The term "capital" refers to the funds that you own and can use to either invest in or spend on the growth of your company. The term "working capital" is commonly used to refer to capital, which refers to money that can be accessible but does not entail assets or liabilities (i.e., cash in the bank).

7. Cost of Goods Sold

The price you pay to produce your good or provide your service is known as the cost of goods sold (COGS) or cost of sales (COS).

The first item on your profit and loss (P&L) statement and a key factor in determining your company's gross margin is COGS or COS. You can enhance profit without growing sales by lowering your COGS.

8. Depreciation

Depreciation is the term used to describe the gradual decline in the value of your assets. For tax purposes, it's crucial since larger assets that have an influence on your company's capacity to turn a profit might be written down based on their depreciation. (We'll talk about deductions for costs and taxes later.)

9. Equity

The total amount of money that has been committed to a business by its owners is referred to as the equity. The phrase "owner's equity" can also refer to intangible assets such as time, effort, and other resources in addition to monetary assets. Are you familiar with the term "sweat equity"?

Another approach to characterise equity is as the difference between the assets (what you own) of your firm and the liabilities of that company (what you owe).

Potential investors, lenders, and buyers are drawn to businesses with strong (positive) equity. Earnings before interest, taxes, depreciation, and amortisation, or EBITDA, is another factor investors and analysts consider.

10. Expenses

Considered to be expenses are any and all cash outlays and purchases made in the pursuit of financial gain. Another term for costs is "the cost of doing business," which literally translates to "the price of conducting business."

There are four primary categories of expenditures, despite the fact that some costs are applicable to more than one category.

• Like rent or salaries, fixed expenses are ongoing costs. Normally, neither firm sales nor market movements have an impact on these costs.
• Utility and raw material costs are examples of variable expenses that change according to business success and production.
• Single expenses that have been reported or documented but not yet paid are considered accrued expenses. (As we discussed earlier, these would fall under accounts payable.)
• Rent, utilities, payroll, and other operating costs, such as these, are necessary for a firm to operate and create income.

11. Fiscal Year

The accounting period used by a corporation is referred to as its fiscal year. The beginning and ending dates of your company's fiscal year are decided by your organisation. Some fiscal years begin and end on the same day as the calendar year, while others begin and end at different times according to when accountants are able to compile financial statements.

12. Liabilities

Everything that your business owes, both long- and short-term, is classified as a liability. Your obligations could be a loan, payroll, taxes, or a credit card amount.

13. Profit

The total of your revenue, your cost of products sold, and your costs is the definition of profit in accounting. Profit is sometimes referred to as the "bottom line" (including operating, interest, and depreciation expenses).

Because you (or your firm) are subject to taxation based on your nett earnings, it is of the utmost importance to make preemptive plans for your tax burden. In order to accomplish this, you need keep track of the amount of your "nett profit," put aside some of your profits in a separate account, or make on-time payments of your expected taxes every three months (like employer withholding).

14. Revenue

Your revenue is the total amount of money you receive in exchange for the goods or services you provide, before any expenses are subtracted from that total.

15. Gross Margin

Your business's viability is indicated by your gross margin, also known as gross income, which is equal to your total sales less your COGS.

Again, these are simply a few terms that are used in business accounting. They will, however, aid in your understanding of how to conduct accounting for your small business, which we shall discuss next.

Accounting basics for small businesses

1. Open a bank account

You'll need a place to store your business income once you've officially established and launched your enterprise. Separate bank accounts keep data different and make life simpler throughout tax season.

In the unfortunate event of bankruptcy, litigation, or audits, it also safeguards your assets. Strong business financial records might also raise your chances of getting funding in the future from creditors or investors.

A separate bank account for business purposes must be maintained by corporations, partnerships, and LLCs by law. Legally, sole owners are not required to have a separate account, but doing so is advised.

Open a company checking account first, then any savings accounts that will aid in money management and tax preparation. Create a savings account, for instance, and set aside a portion of each payment for your self-employment tax withholding. A conservative estimate for high incomes might be one third, but as a general rule of thumb, you should set aside 25% of your income.

To begin building credit, you should next think about getting a business credit card. For the purpose of obtaining future funding, credit is crucial. To prevent combining personal and business assets, corporations and LLCs must use separate credit cards.

Before approaching a bank about opening an account, do your research. Compare fee schedules and shop around for business accounts. Pay special attention to the fees you'll incur because most corporate checking accounts have greater fees than personal banking.

You'll need a business name and possibly need to be registered with your state or province in order to get a business bank account. To find out which documents to bring to the appointment, contact the specific bank.

2. Track your expenses

Effective and precise expense monitoring is the cornerstone of sound business bookkeeping. It's an essential stage that enables you to file tax returns, verify your filings, generate financial statements, keep track of deductible spending, and monitor the development of your company.

Create an accounting system from the beginning to organise receipts and other significant records. You can utilise a service or keep it simple and traditional by using a Filofax.

There are five different receipt categories that require further attention:

• Meals and entertainment. It's a fantastic idea to conduct a business meeting in a café or restaurant, but make sure to thoroughly record it. Write down who attended and the reason for the lunch or outing on the reverse of the receipt.
• Vehicle-related expenses. When calculating car-related expenses, add the use percentage to the location, timing, and purposes for which the vehicle was used for business.
• Receipts for gifts. When giving presents like concert tickets, it counts if the giver attends the occasion alongside the recipient. If they do, the cost would be considered entertainment as opposed to a gift. Take note of these specifics on the receipt.
• Home office receipts. You must determine the percentage of your home that is used for business usage before applying that percentage to home-related expenses, much like with car expenses.

Starting your business from home will help you keep costs down and qualify you for some specific tax incentives. For instance, you can write off the area of your house utilised for business purposes, as well as your home internet, cellphone, and travel to and from work locations and company-related errands.

Any expense that was split between personal and professional use must show this split. So, for instance, if you only have one cellphone, you can write off the portion of time you spend using it for work. Similarly, gas expenses are fully deductible; make sure to save all receipts and keep track of your business miles (including where you're going and why you're travelling).

3. Develop a bookkeeping system

Understanding exactly what bookkeeping is and how it differs from accounting would be beneficial before we start into setting up a system. The routine accounting process of documenting business transactions, classifying them, and comparing bank statements is known as bookkeeping.

Building financial statements allows accounting, a high-level process that examines corporate development, to make sense of the data gathered by the book-keeper. You must choose how you wish to handle your books as a new business owner:

• You have the option to use Wave or QuickBooks and go with the do-it-yourself method. An easy Excel spreadsheet would be an alternative.
• You can choose a local or cloud-based, freelance or part-time bookkeeper.
• You can engage an internal bookkeeper and accountant once your company is large enough.

With so many choices, you can select a bookkeeping system that works for your company.

• Cash method. When money is received or paid, revenues and expenses are recorded.
• Accrual method. When money is received or paid, revenues and expenses are recorded.

4. Set up a payroll system

Many online businesses begin as one-person operations. When the time comes to engage outside assistance, you must decide whether to treat the person as an employee or an independent contractor.

Establish a payroll plan and check that the right taxes are being withheld from employee paychecks. Many services are available to assist with this, and many options for accounting software include payroll as a function.

Keep track of the compensation you give to independent contractors. At year's end, business owners might be needed to file for each contractor; for this, you'll also need to keep track of their name and address.

5. Investigate import tax

You might intend to buy and import goods from other nations to sell in your store, depending on your company model. If you operate a dropshipping business, you'll probably have to pay taxes and duties while importing goods. These are the taxes that your nation levies on imported items.

A duty calculator can also assist you in estimating fees for your own company and budgeting expenses if you are importing items.