It is crucial for every business owner to know basic accounting and bookkeeping principles. Financials define a business’ success or failure, so as an owner, you must understand the proper way to manage and account for your money.
You may think that it is the job of your accountant to do this for you. Well, it is true that your accountant does your tax and business books, but how do you do check and balance if you do not know even the basics? If you allow your accountant (visit tempCFO) to do everything for you, you are simply running your company with a blind eye. Every owner would want to take control of their business, so you must be prepared for the financial area of your company, first and foremost.
But if you are not an accounting major and you haven’t had the chance to experience bookkeeping first-hand, how do you get started? The good news is, you don’t have to enroll in a class to learn this. The first step is to learn the terminologies that you are going to come across with, so you don’t struggle with making sense of the terms you will encounter. You must know accounting terms beyond “debit” and “credit” because in truth, managing your financials is way more than that.
Here are basic accounting terminologies you need to know as a business owner:
It is essentially every single thing that you are earning in your company, may it be with sales and sponsorships. If something makes your company’s assets grow, then it is considered “debit.”
If you have debit, then you also have credit. Credit is anything that decreases your company’s assets and can be in the form of expenses or capital investment.
Note: On your accounting books, every time you write down a “debit” entry, you must also write its “credit” counterpart. It is because by doing this, you get to balance your books, which is a must for every business to achieve.
3. Accounts receivable
Abbreviated as AR, accounts receivable refers to money or goods owed to your company. It may be in the form of suppliers failing to deliver your products, or your clients having a balance left for payment.
4. Accounts payable
Abbreviated as AP, accounts payable refers to money or goods that your company owes to clients or partners. It can be in the form of services or goods that you are yet to deliver but have already been paid for.
On accounting books, capital is abbreviated as CAP. It refers to any investment that you put in your business, whether in the form of cash or goods, such as office furnishings. Even machinery, company car, and computer equipment, among others. Capital is not considered a liability for without it; your company cannot function. If you want to compute this, minus your annual liability to your yearly assets. From there, you will get your working capital.
These are some of the basic accounting terms that you must remember as a business owner. Do not make it as an excuse to fail to understand accounting just because you didn’t receive training for it. Finances define any business’ success or failure. So understand even this basic know-how and strive to learn as you go along with running the company.