As an entrepreneur, you know that if you receive more money than you spend means you have a successful business. On the other hand, you know that you must spend money to generate more money. How can you keep track of all your expenses and income? The answer is accounting. The word accounting may sound frightening and confusing, but once you realize it's just a record of what you spend and what you get, it becomes a little easier.
Accounting is important because it gives you an idea of the amount of money earned and spent on your business. This allows you to see where improvements can be made and makes you become responsible for the decisions you make. It is important for your bank accounts and paying taxes . You must be able to understand and discuss the general principles of accounting, even if you hire an accountant or if you use a computer program, because accounting and money are the language of business.
The most important part is understanding accounting vocabulary that accompanies it. Here we show some key terms you need to know to help you understand your ledgers.
- Accounts payable is the money that your company owes to external suppliers for goods or services you purchased using credit instead of cash.
- Accounts receivable: the money owed to your business customers who have paid using credit instead of cash.
- Balance: is the financial state of your company at a moment in time. Your assets are on one side and your liabilities and equity are your other, and the two sides should be the same or be balanced.
- Cash: the potential costs of your company and could be in a checking account.
- Cash flow is a measure of the amount of money coming in and out of your company, which may be different from the profitability of your business. A cash flow statement determines the current amount of your cash.
- Cost of sales: the amount of money needed to produce and sell your goods or products.
- Credit is an accounting entry that represents an increase.
- Current assets: are assets, such as cash and inventory, which could be converted into cash within a year.
- Debit is an accounting entry that represents a decrease.
- Depreciation is the amount by which a large piece of equipment or a building reduce its value per year on account of its total cost over a period of time.
- Dividend is the portion of gains obtained after paying taxes to the owners of the company.
- Double Entry: is an accounting system where for every transaction that takes place two entries are generated in the spreadsheet that usually are a credit and a debit.
- Equity (equity owner) is the part that corresponds to the owner of the company.
- Fixed assets: are assets, such as equipment and buildings, which can not be converted into cash quickly.
- Fixed costs: they are the costs that do not change in proportion to the volume of your business, for example rent, interest and wages.
- General Accounting: the score, moment by moment, of all your business transactions. Today, it is generally administered by computer programs.
- Gross margin: they are your revenue less cost of sales.
- Income (profits, tickets): the money you earn selling something, is not always effective.
- Income Statement: the financial state of your company for a period of time, it determines your net income.
- Interest: is an amount paid regularly by the use of borrowed money, until the debt is settled.
- Inventory supplies are, or stocks of products that your company intends to sell.
- Liabilities: the amount of money your business owes to others, including accounts payable.
- Net profit: gross margin is less fixed costs. In other words, it is the total of your assets minus your total liabilities.
- Variable costs: are the costs that change with the volume of your sales, such as the amount of materials you need for your products.
However, most people need to see examples to really understand the accounting income and expenses. There are many excellent resources to learn basic accounting.
If you started your business to bring a product or service to your customers, you must generate revenue to run your business and to take care of your personal needs. The best way to make your business thrive and help your investments is to understand how you spend your money and what your customers are buying. Having a good accounting system is not only essential for tax purposes, but that gives you an image of your company so you can study it and improve it.
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