Bookkeeping is an essential part of keeping a business organized. With proper bookkeeping practices, small business owners can efficiently manage cash flow and keep things running smoothly. Comparatively, bad practices can stunt a business from reaching its full potential. Here are three basic principles that small business owners and bookkeepers should understand.
The first principle of bookkeeping involves debits and credits. When accounts are debited and credited, they are affected differently based on the account type. Liabilities, equity and revenue are increased by credit whereas assets and expenses are decreased. On the other hand, debit increases assets and expenses while decreasing liabilities, equity and revenue. Knowing which account to credit and debit can help your bookkeeping practices by keeping everything neat and tidy. Where double entry accounting methods are used, debits are found on the left side and credits on the right. A good example of debits and credits can be demonstrated by a company which just bought $12,000 worth of inventory. The inventory asset account would be credited, increasing the amount, while the cash or bank account would be debited, or decreased. Understanding debits and credits will help keep the books in line and make sure everything is on track for tax season.
Secondly, the principle of assets and liabilities are important to keep in mind. According to an article by Adam Barone from Investopedia, “An asset is a resource with economic value that…[a] corporation…owns with the expectation that it will provide a future benefit.” In a real world scenario, a couple of assets in a construction company would be a dump truck or backhoe. Both the dump truck and backhoe offer benefits to the company that help complete specific tasks in the process of construction.
On the other hand, liabilities are defined by AccountingCoach as “Amounts owed to lenders and suppliers.” Credit cards, bank loans and mortgages are all examples of liabilities. The money owed in and of itself is not inherently good nor bad, yet is determined by how well the company uses the line of credit or bank loan and whether or not the debt can be repaid. Assets and liabilities are important to the bottom line of a business and should be reviewed frequently for accuracy and consistency.
Third but not least to remember, revenue is the lifeblood of an expanding enterprise. This kind of money comes to the company as payment for a product or service rendered to clients and customers. Proper cash flow management relies on keeping a close eye on revenue and making sure that liabilities can be repaid with the current revenue on hand. In order to keep a business afloat, a proper understanding should be kept on hand of revenue and its relation to overall expenses, fixed and variable.
In conclusion, these basics of bookkeeping can help build a sturdy financial foundation. The business owner or bookkeeper who better understands each of these tenets as it relates to an organization’s well being will be more effective at fulfilling their role, whether to make decisions or to ensure the accuracy of a monthly report on earnings/losses in a profit and loss statement. It is vital to know and understand just how important these principles are in order to best make use of resources within the business. If you have any questions about your bookkeeping, please feel free to call our team today and schedule a time when your questions can be answered and mind set at ease!
Disclaimer: This article is not intended to be a substitute for professional advice. This is purely informational and any questions should be directed to an experienced professional.