We have seen it too many times in our accountancy practice: Successful entrepreneurs, solopreneurs, freelancers, and small businesses who shiver and shake at the thought of looking into their accounting.
It’s definitely recommended to have an accountant look through your books and make sure you haven’t made any grave errors, especially if your income is in a higher range. But it’s equally important to understand what is happening with your money. It is, after all, your money.
The basics of accounting are relatively easy to learn if you go about it the right way. Too many books and courses promising to teach basic accounting principles quickly dive into the deep end and miss explaining the fundamental aspects of accounting.
In this blog post, we hope to offer an “Accounting Made Simple” explanation of core concepts related to basic bookkeeping and accounting principles. You won’t be a professional accountant after reading this. But you will know enough to ensure the pros are doing a good job on your books.
What is accounting?
“Accounting” derives from the word “account” which has several definitions, including:
- “to furnish a justifying analysis or explanation”
- “a statement explaining one’s conduct”
The word derives from Old French, meaning “counting, reckoning of money to be paid”.
Accounting relates to financial responsibility and reporting, while bookkeeping focuses on recording transactions.
You don’t need to know everything as a small business
Small businesses don’t need to master complex accounting rules meant for large corporations. Modern accounting software already builds compliance into the system.
Why are accounting and bookkeeping important?
Accurate bookkeeping helps you track profitability, cash flow, and financial health. It also protects you if HMRC investigates your business.
What are debits and credits?
Debits and credits describe the dual nature of every transaction. If value leaves one account, it must enter another.
What is double-entry bookkeeping?
Every transaction is recorded twice: once as a debit and once as a credit. Modern accounting software handles this automatically.
What is a journal?
A journal is a chronological record of every transaction. These entries are later grouped into ledgers.
What is an account?
In accounting, an account is a record of assets, liabilities, equity, revenue, or expenses.
What is the accounting equation?
Assets = Liabilities + Equity
Understanding equity
Equity = Contributed Capital + Revenue − Expenses − Dividends
The three most important financial statements
- Balance Sheet
- Income Statement (Profit & Loss)
- Cash Flow Statement
Balance Sheet
A balance sheet shows your financial position at a specific point in time.
Income Statement
The income statement summarizes revenue and expenses over a period, showing profit or loss.
Cash Flow Statement
This statement tracks cash moving in and out of the business.
Simplifying the basics of accounting
Accounting can be complex, but understanding the basics empowers you to manage your finances confidently.
If you have questions, contact us.