{"id":219994,"date":"2021-06-14T09:02:04","date_gmt":"2021-06-14T08:02:04","guid":{"rendered":"https:\/\/www.pearlaccountants.com\/?p=218450"},"modified":"2023-05-22T14:25:58","modified_gmt":"2023-05-22T14:25:58","slug":"accounting-essentials-small-businesses","status":"publish","type":"post","link":"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/","title":{"rendered":"Accounting and Bookkeeping Essentials for Small Businesses and Freelancers"},"content":{"rendered":"<style>\n.featured-image {\n    display:none\n}\n.et_pb_post .entry-content {\n    padding-top: 0px;\n}\n<\/style>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"2481\" height=\"12461\" src=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/Accounting-and-Bookkeeping-Essentials-for-Small-Businesses-and-Freelancers-01.png\" alt=\"Accounting and Bookkeeping Essentials for Small Businesses and Freelancers Infographic\" class=\"wp-image-218671\" srcset=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/Accounting-and-Bookkeeping-Essentials-for-Small-Businesses-and-Freelancers-01.png 2481w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/Accounting-and-Bookkeeping-Essentials-for-Small-Businesses-and-Freelancers-01-60x300.png 60w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/Accounting-and-Bookkeeping-Essentials-for-Small-Businesses-and-Freelancers-01-204x1024.png 204w\" sizes=\"(max-width: 2481px) 100vw, 2481px\" \/><\/figure>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p>We have seen it too many times in our accountancy practice: Successful entrepreneurs, solopreneurs, <a href=\"https:\/\/www.pearlaccountants.com\/who-we-help\/accountants-for-freelancers\/\">freelancers<\/a>, and small businesses who shiver and shake at the thought of looking into their accounting.<\/p>\n\n\n\n<p>It\u2019s definitely recommended to have an accountant look through your books and make sure you haven\u2019t made any grave errors, especially if your income is in a higher range. But it\u2019s equally important to <em>understand<\/em> what is happening with your money. It is, after all, <em>your money<\/em>.<\/p>\n\n\n\n<p>The basics of accounting are relatively easy to learn <em>if<\/em> you go about it the right way. Too many books and courses promising to teach basic accounting principles, or basic accounting for small businesses, quickly dive into the deep end and miss explaining the <em>fundamental<\/em> aspects of accounting.<\/p>\n\n\n\n<p>In this blog post, we hope to offer an \u201cAccounting Made Simple\u201d explanation of core concepts related to basic bookkeeping and accounting principles. You won\u2019t be a <a href=\"https:\/\/www.pearlaccountants.com\/\">professional accountant<\/a> after reading this. But you <em>will<\/em> know enough about accounting to ensure that the pros are doing a good job on your books!<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#What_is_accounting\" title=\"What is accounting?\">What is accounting?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#You_dont_need_to_know_everything_as_a_small_business\" title=\"You don\u2019t need to know everything as a small business\">You don\u2019t need to know everything as a small business<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#Why_are_accounting_and_bookkeeping_important\" title=\"Why are accounting and bookkeeping important?\">Why are accounting and bookkeeping important?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#What_are_debits_and_credits\" title=\"What are debits and credits?\">What are debits and credits?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#What_is_double-entry_bookkeeping\" title=\"What is double-entry bookkeeping?\">What is double-entry bookkeeping?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#What_is_a_journal\" title=\"What is a journal?\">What is a journal?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#What_is_an_account\" title=\"What is an account?\">What is an account?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#What_is_the_accounting_equation\" title=\"What is the accounting equation?\">What is the accounting equation?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#Assets_Debits_and_Liabilities_Credits\" title=\"Assets = Debits and Liabilities = Credits\">Assets = Debits and Liabilities = Credits<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#Understanding_equity\" title=\"Understanding equity\">Understanding equity<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#The_relation_of_equity_to_debits_and_credits\" title=\"The relation of equity to debits and credits\">The relation of equity to debits and credits<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#The_three_most_important_financial_statements\" title=\"The three most important financial statements\">The three most important financial statements<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#Balance_Sheet\" title=\"Balance Sheet\">Balance Sheet<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-14\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#Income_Statement\" title=\"Income Statement\">Income Statement<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-15\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#Cash_Flow_Statement\" title=\"Cash Flow Statement\">Cash Flow Statement<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-16\" href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/#Simplifying_the_basics_of_accounting\" title=\"Simplifying the basics of accounting\">Simplifying the basics of accounting<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_accounting\"><\/span>What <em>is<\/em> accounting?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>\u201cAccounting\u201d derives from the word \u201caccount\u201d which <a href=\"https:\/\/www.merriam-webster.com\/dictionary\/account\">has<\/a> several definitions, including:<\/p>\n\n\n\n<ul>\n<li>\u201cto furnish a justifying analysis or explanation\u201d and<\/li>\n\n\n\n<li>\u201ca statement explaining one&#8217;s conduct\u201d<\/li>\n<\/ul>\n\n\n\n<p>As you can see, the word is closely tied with <em>responsibility<\/em> and the <em>explanation<\/em> of one\u2019s actions.<\/p>\n\n\n\n<p>The word <a href=\"https:\/\/www.etymonline.com\/word\/account\">derives<\/a> from an Old French word which meant \u201ccounting, reckoning of money to be paid\u201d.<\/p>\n\n\n\n<p>As you can see, accounting has to do with <em>explanation<\/em> and <em>accountability<\/em> for one\u2019s finances. Whereas bookkeeping is simply about keeping a record of transactions, accounting is more closely tied to one\u2019s <a href=\"https:\/\/www.pearlaccountants.com\/services\/business-legal-support\/\">legal<\/a> responsibilities. Whereas a bookkeeper puts all the numbers into a ledger, the accountant is responsible for reporting those numbers (and their significance) to the tax authorities through the filing of yearly, quarterly or monthly documents.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"You_dont_need_to_know_everything_as_a_small_business\"><\/span>You don\u2019t need to know everything as a small business<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The first thing to understand is that, as a small business, you don\u2019t need to know everything about accounting. A lot of the more complicated accounting principles and practices apply only to larger businesses, to ensure that investors and the public understand the financial standing of large corporations and city councils.<\/p>\n\n\n\n<p>Larger businesses need to comply with a lot more rules and provide their financial statements in a way that makes it clear to investors what the company\u2019s financial position is.<\/p>\n\n\n\n<p>A lot of the accounting software available today takes care of financial reports to such a degree that the rules are built <em>into<\/em> the software already. You just need to follow the instructions and, voila, you\u2019re in compliance.<\/p>\n\n\n\n<p>Still, the world of accounting can get complicated. And our suggestion is to use whatever software you feel most comfortable with and then to have an accountant to field any questions or take a final look to ensure that you haven\u2019t mistakenly entered in any erroneous information.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Why_are_accounting_and_bookkeeping_important\"><\/span>Why are accounting and bookkeeping important?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"wp-block-columns is-layout-flex wp-container-core-columns-is-layout-1 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"872\" height=\"579\" src=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/Why-are-accounting-and-bookkeeping-important.png\" alt=\"Why are accounting and bookkeeping important?\" class=\"wp-image-218673\" srcset=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/Why-are-accounting-and-bookkeeping-important.png 872w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/Why-are-accounting-and-bookkeeping-important-300x199.png 300w\" sizes=\"(max-width: 872px) 100vw, 872px\" \/><\/figure>\n<\/div>\n\n\n\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<p>Only through properly recorded transactions can you know at a glance if your business is operating at a profit or not. Correct bookkeeping, accounting, and the resultant financial reports also allow you to create detailed cash-flow and P&amp;L (profit &amp; loss) reports, as well as a balance statement that lets you know the financial standing of your company.<\/p>\n\n\n\n<p>Also, if HMRC ever wanted to <a href=\"https:\/\/www.pearlaccountants.com\/services\/tax-investigation-cover\/\">investigate your business<\/a> to ensure that you are in compliance with all the applicable tax laws, you need to have your books in order.<\/p>\n\n\n\n<p>Running a business without proper accounting and bookkeeping is like driving a car with your eyes closed.<\/p>\n<\/div>\n<\/div>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_debits_and_credits\"><\/span>What are debits and credits?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Perhaps you\u2019ve grown up hearing the word \u201ccredit\u201d every time one of your parents got a refund (\u201cOh, they credited my account!\u201d) and debit every time a company took money from their account (\u201cGoodness, why did this debit go through today?\u201d).<\/p>\n\n\n\n<p>This might give you the idea that \u201ccredits\u201d are good and \u201cdebits\u201d are bad.<\/p>\n\n\n\n<p>Well, in the case of your mum and dad\u2019s savings accounts, yes, that might be true. But <strong>that is only one type of account<\/strong> and, in the world of accounting, the meaning of credit and debit gets a little more complicated.<\/p>\n\n\n\n<p>Let me explain: In accounting, the terms Debit (dr) and Credit (cr) are used simply to explain the <strong>dual nature<\/strong> of transactions. If value <strong>leaves<\/strong> one account then the value <strong>increases<\/strong> in another account. For example, if you took a loan out for \u00a3500, your <strong>Bank Loans<\/strong> account would be <strong>credited<\/strong> by \u00a3500 while your <strong>Cash Account<\/strong> would be <strong>debited<\/strong> by \u00a3500.<\/p>\n\n\n\n<p>We\u2019ll explain how this works a little further down.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_double-entry_bookkeeping\"><\/span>What is double-entry bookkeeping?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Because <em>every single transaction<\/em> in accounting has a <em>debit<\/em> and a <em>credit<\/em> side, it is important to keep a note of <em>both<\/em> transactions.<\/p>\n\n\n\n<p>Double-entry bookkeeping is exactly what it sounds like: You enter the value <em>twice<\/em>, once in the debit column and once in the credit column.<\/p>\n\n\n\n<p>Modern accounting software makes this <em>unbelievably<\/em> simple. You simply enter what you purchased, and the software takes care of the rest. Using <a href=\"https:\/\/www.pearlaccountants.com\/services\/specialist-accounts-software\/\">accounting software<\/a> makes it easier for your accountant to focus on the <em>important<\/em> aspects of your accounting because they have a lot more time to look into the details, rather than getting stuck on the technicalities.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_a_journal\"><\/span>What is a journal?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>If you\u2019ve ever tried to learn anything about accounting, no doubt you\u2019ve come across this ambiguous word <em>Journal<\/em>. What makes this word even more difficult to understand is that the journal has been relegated to the backstage with the appearance of online and automated accounting systems.<\/p>\n\n\n\n<p>Simply stated, a journal is a <em>detailed<\/em> record of <em>every single transaction<\/em> that occurs in a business, <strong>ordered by date<\/strong>.<\/p>\n\n\n\n<p>Whereas in the various ledgers in your company, you would have transactions recorded based on the <em>subject<\/em> (e.g. Sales Ledger, Purchases Ledger, Liabilities Ledger, etc.), the journal simply lists <em>every single transaction<\/em> by date.<\/p>\n\n\n\n<p>It is then up to a bookkeeper to take those transactions and make sense of them, by grouping them up into the appropriate ledger (\u201cbook\u201d), hence the term \u201cbookkeeper\u201d, or \u201ca person who keeps\/maintains the books\u201d.<\/p>\n\n\n\n<p>Using online accounting systems, much of this process is automated, and the system automatically takes care of the journal entries and respective ledger entries every time you input some information into the system.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_an_account\"><\/span>What is an account?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Oh, that\u2019s easy: An account is a place where you keep your money!<\/p>\n\n\n\n<p>Well, yes, but not in accounting. In <em>accounting<\/em>, an \u201caccount\u201d is defined as a <strong>record<\/strong> of a particular asset, liability, equity, revenue, or expense. Each account is stored in the general ledger to provide a business with an overview of its financial standing and activities.<\/p>\n\n\n\n<p>A general ledger is the system a company uses to keep its records up to date and furnishes all the required information to prepare a company\u2019s financial statements.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_the_accounting_equation\"><\/span>What is the accounting equation?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"wp-block-columns is-layout-flex wp-container-core-columns-is-layout-2 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<p>Remember the debits and credits section above? Let\u2019s dig into that more deeply.<\/p>\n\n\n\n<p>The basic \u201caccounting equation\u201d is <strong>Assets = Liabilities + Equity<\/strong>.<\/p>\n\n\n\n<p>Well, accounting is, essentially, a method of <em>simplifying<\/em> the myriad transactions that can take place in a business.<\/p>\n\n\n\n<p>But there is also the <a href=\"https:\/\/www.investopedia.com\/terms\/e\/expanded-accounting-equation.asp\"><strong>expanded accounting equation<\/strong><\/a> where equity is divided into subcategories.<\/p>\n<\/div>\n\n\n\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"872\" height=\"579\" src=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/What-is-the-accounting-equation.png\" alt=\"What is the accounting equation?\" class=\"wp-image-218675\" srcset=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/What-is-the-accounting-equation.png 872w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/What-is-the-accounting-equation-300x199.png 300w\" sizes=\"(max-width: 872px) 100vw, 872px\" \/><\/figure>\n<\/div>\n<\/div>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Assets_Debits_and_Liabilities_Credits\"><\/span>Assets = Debits and Liabilities = Credits<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Accountants operate on the principle that every transaction provides <em>benefit<\/em> to something. More specifically, <em>economic<\/em> benefit.<\/p>\n\n\n\n<p>That benefit flows from a <em>source<\/em> to a <em>destination<\/em>.<\/p>\n\n\n\n<p>The <em>destination<\/em> (recipient) of the benefit is always recorded as a <em>debit<\/em> (dr). And the <em>source<\/em> of the benefit is always recorded as a credit (cr).<\/p>\n\n\n\n<p>Going back to our first section where we discussed credits and debits, we saw that a bank loan was recorded as a <em>credit<\/em> in the general ledger, and the resultant cash in our business\u2019s pockets was recorded as a <em>debit<\/em>.<\/p>\n\n\n\n<p>That\u2019s because the source of the transaction was the bank, and the recipient was our business. Our business received financial benefit (debit) from a loan (credit) obtained from the bank.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Understanding_equity\"><\/span>Understanding equity<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The reason for the expanded accounting equation is that equity is a tricky item, never entirely a credit or a debit entry.<\/p>\n\n\n\n<p>For this reason, the expanded accounting formula attempts to break down equity into its debit\/credit relationships so that it is easier to understand.<\/p>\n\n\n\n<p>Here\u2019s a formula that explains equity:<\/p>\n\n\n\n<p><strong>Equity = Contributed Capital (Owner\u2019s Equity) + Revenue \u2212 Expenses \u2212 Dividends<\/strong><\/p>\n\n\n\n<p>Wow. That\u2019s a lot.<\/p>\n\n\n\n<p>Basically, equity is the original capital invested (also known as owner\u2019s equity), plus the current revenue, minus the costs of running the business, minus any earnings paid to stockholders (dividends).<\/p>\n\n\n\n<p>As you can see, freelancers and solopreneurs have it a lot easier\u2014no need to add the capital investment and dividend payments to the equation!<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"The_relation_of_equity_to_debits_and_credits\"><\/span>The relation of equity to debits and credits<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>So, let\u2019s add the above into the accounting equation:<\/p>\n\n\n\n<p><strong>Assets = Liabilities + Contributed Capital + Revenue \u2212 Expenses \u2212 Dividends<\/strong><\/p>\n\n\n\n<p>If we move the items around, we get:<\/p>\n\n\n\n<p><strong>Assets + Expenses + Dividends = Liabilities + Contributed Capital + Revenue<\/strong><\/p>\n\n\n\n<p>The rule is that everything on the <em>left-hand side<\/em> of the equation above <em>increases<\/em> when debited and decreases when credited.<\/p>\n\n\n\n<p>And the opposite is true of transactions on the right-hand side. If Items on the right <em>increase<\/em> when <em>credited<\/em> and <em>decrease<\/em> when debited.<\/p>\n\n\n\n<div style=\"height:25px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"The_three_most_important_financial_statements\"><\/span>The three most important financial statements<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The three most important financial statements in your company are:<\/p>\n\n\n\n<ul>\n<li>The balance sheet (also known as the \u201cStatement of Financial Position\u201d)<\/li>\n\n\n\n<li>Income Statement (or P&amp;L Statement, Profit and Loss Statement, Statement of Income, or even Statement of Operations)<\/li>\n\n\n\n<li>Cash Flow Statement<\/li>\n<\/ul>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Balance_Sheet\"><\/span>Balance Sheet<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>A balance sheet is imperative for startups who have any hopes of getting funding. Or, if your company has grown to the point where it wants to invest in other startups, it is crucial that you know how to read a balance sheet.<\/p>\n\n\n\n<div class=\"wp-block-columns is-layout-flex wp-container-core-columns-is-layout-3 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"624\" height=\"365\" src=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/Balance-Sheet.png\" alt=\"Balance Sheet\" class=\"wp-image-218677\" srcset=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/Balance-Sheet.png 624w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/Balance-Sheet-300x175.png 300w\" sizes=\"(max-width: 624px) 100vw, 624px\" \/><\/figure>\n<\/div>\n\n\n\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\">\n<p>The balance sheet essentially gives an overview of the business\u2019s financial health.<\/p>\n\n\n\n<p>The general presentation of the sheet can vary, but the essential aspect of a balance sheet is that it <strong>visualizes<\/strong> and <strong>gives detail<\/strong> about the basic accounting equation: Assets = Liabilities + Equity.<\/p>\n\n\n\n<p>As the name suggests, the balance sheet <strong>must balance<\/strong> and the assets minus the liabilities and equity should result in zero.<\/p>\n\n\n\n<p>The balance sheet is a <strong>snapshot <\/strong>of a business\u2019s standing at a specific point in time.<\/p>\n<\/div>\n<\/div>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Income_Statement\"><\/span>Income Statement<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Whereas the balance sheet gives you a <strong>snapshot<\/strong> of a company\u2019s financial position, the Income Statement (in the UK, more commonly known as the P&amp;L) gives an overview of a company\u2019s financial position <strong>over a period of time<\/strong>. More specifically, it is a summary of a company\u2019s revenue and expenses over a period of time.<\/p>\n\n\n\n<p>By subtracting your expenses from your profit, you are left with either a positive or a negative number. If the number is positive, the company has made a <strong>profit<\/strong> for that time period. If it is negative, it has made a <strong>loss<\/strong>. This is why it is called a <strong>Profit and Loss Statement<\/strong>.<\/p>\n\n\n\n<p>The Profit and Loss Statement is typically run over a month, quarter or full year.<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Cash_Flow_Statement\"><\/span>Cash Flow Statement<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The last of a company\u2019s <strong>three most important financial statements<\/strong> is its Cash Flow Statement.<\/p>\n\n\n\n<p>In essence, a Cash Flow Statement provides a summary of the company\u2019s cash inflows and outflows, recorded over time.<\/p>\n\n\n\n<p>Cash is different to revenue. Cash is liquid; it is money you have to hand and which you can access immediately and use. A company can be profitable on paper, and yet have no <em>cash<\/em> to spend on an immediate basis, forcing it to buy things on credit.<\/p>\n\n\n\n<p>To understand this statement, you must know that there are two types of accounting practices you can follow:<\/p>\n\n\n\n<ul>\n<li>The cash method<\/li>\n\n\n\n<li>The accrual method<\/li>\n<\/ul>\n\n\n\n<p>The cash method of accounting records revenue and expenditures <em>when cash enters or exits<\/em> the business. This is the simple method. In this case, your income statement would be exactly the same as your cash flow statement.<\/p>\n\n\n\n<p>In the accrual method, you count income and expenses by the date of the invoice. That means that your <em>cash on hand<\/em> will rarely match your income statement.<\/p>\n\n\n\n<p>Now, you\u2019re probably thinking, \u201cHey, let me just use the cash method of accounting. It\u2019s so much easier!\u201d<\/p>\n\n\n\n<p>Yes, well, if you\u2019re a limited company in the UK, you are <a href=\"https:\/\/www.gov.uk\/simpler-income-tax-cash-basis\/who-can-use-cash-basis\">not allowed to use the cash method<\/a> and <strong>must<\/strong> use the accrual method instead.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"540\" src=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/image1-1-1024x540.png\" alt=\"accrual method\" class=\"wp-image-219529\" srcset=\"https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/image1-1-1024x540.png 1024w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/image1-1-300x158.png 300w, https:\/\/www.pearlaccountants.com\/wp-content\/uploads\/2021\/06\/image1-1.png 1698w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Simplifying_the_basics_of_accounting\"><\/span>Simplifying the basics of accounting<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There is, of course, a <em>lot more<\/em> to know about accounting. But, just as you would probably invest in a top-level web developer to create your web page for you, so would you probably use a high-quality accountant to help you with more advanced matters.<\/p>\n\n\n\n<p>But we hope this post has given you some guidance on some of the basic principles of accounting and made the subject less confusing for you.<\/p>\n\n\n\n<p>And, if you have specific questions, you can of course always <a href=\"https:\/\/www.pearlaccountants.com\/contact\/\">contact us<\/a> to help you.<\/p>\n\n\n\n<p><strong>\u200b&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>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\u2019s definitely recommended to have an accountant look through your books and make sure you haven\u2019t made any grave errors, especially if your income is <a href=\"https:\/\/www.pearlaccountants.com\/blogs\/accounting-essentials-small-businesses\/\" class=\"more-link\">&#8230;<span class=\"screen-reader-text\">  Accounting and Bookkeeping Essentials for Small Businesses and Freelancers<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":219527,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[2198,4352],"tags":[],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Accounting - Bookkeeping: Small Businesses and Freelancers Essentials<\/title>\n<meta name=\"description\" content=\"Modern software has made accounting and bookkeeping much simpler for small businesses. 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