This article was originally published in 2016. Some rules, rates or tools mentioned may have changed since — contact us for current guidance.
For a lot of people, accounting looks like a big ball of confusion. A maze of spreadsheets and receipts can overwhelm even the most number savvy business owner. We hope that explaining some of the key terms of accounting will help to calm your fears.
Here are some definitions of accounting terms for non-accountants:Debits and Credits - A debit is money coming out of an account and a credit is money coming in. When you subtract debits from credits you get the balance of your account. If you have more debits than credits, well, you’re in the red.
The Profit and Loss Statement (aka Income Statement) - A summary of all operating transactions that occurred within a specific period of time – usually a calendar month. In other words: sales minus expenses. This report lets you know if your business is profitable during that period of time.
Costs of Goods Sold - For business with inventory The Costs of Goods Sold, or COGS, is subtracted from revenue and appears as a line item in the Profit and Loss Statement and is usually this type of business’ largest cost. Once you calculate the Costs of Goods Sold you can calculate your margins.
Accrual vs. Cash Accounting – There are two main ways to track your accounts. Either accrual or cash accounting. Here is how they differ:
- Cash accounting recognizes transactions when there are inflows or outflows of cash – when customers pay or when you pay your bills.
- Accrual accounting recognizes revenue when it is invoiced and expenses when they are due. Here are some benefits: See the variability of income and expenses over a period of several months. When invoices or bills are paid late, they may fall into the next period on a cash basis which may give a false impression of volatility Seeing revenue and expenses when they occur, regardless of when they are paid, allows you to more accurately forecast the future of your business.
Accounting Software, particularly cloud accounting software, has made using professional software for bookkeeping attainable to everyone. These systems make bookkeeping easier, but non-accountants should be warned: errors can and do still occur if the user does not have a grasp of basic accounting principles, so just because you can do your own bookkeeping, doesn't mean that you should.
Contact us for all of your bookkeeping needs. We’ll not only keep your books in good order, we’ll also demystify your numbers so that they make sense to you.
