Learning how to record and report business transactions is an essential skill when running a business. With accurate financial information, you can better assess the financial health of your company to make smarter financial decisions, take calculated risks, identify unnecessary costs, and even save your company money. The following terms and tips will give you insight into the basics of accounting.
Create a System of Record Keeping
Set up accounts in which information can be stored. Accounts can be categorized as the following:
- Assets – these are the resources or items of value that are owned by your business, such as accounts receivable and inventory.
- Liabilities – these are debts or transactions to be paid by your business, such as accounts payable and loans payable.
- Equity – this is the difference between assets and liabilities
- Revenue – this is your company’s earnings in the form of billed amounts to customers in exchange for your goods or services.
- Expenses – this is your company’s costs or money spent to generate revenues, such as rent expenses and employee wages.
Individual transactions are recorded within the accounts you set up. Here are the key transactions:
- Sales – transactions that include goods or services transferred from your business to a customer or client. This includes documents such as invoices.
- Purchases – transactions made by your business to obtain goods and services to accomplish the goals of your company. This includes documents such as purchase orders.
- Receipts – transactions that refer to your business getting paid for your goods or services to a customer or client.
- Paying employees – requires information of your employees’ hours to gauge gross wage and tax deductions to find the net pay.
The process of reporting comes after the transactions have been completed within an accounting period. The information gathered in the accounts are processed and reformatted into multiple documents called financial statements. Three key financial statements include:
- Income Statement – this document subtracts expenses from revenues to show the net profit or loss for the reporting period.
- Balance Sheet – this document shows the assets, liabilities, and equity for the reporting period and indicates the company’s financial position.
- Statement of Cash Flows – this document shows how and where cash was used during the reporting period.
These basic points and terms apply to the functions performed by an accountant. For more information regarding accounting services, get in touch with our team at Bakersmith Bookkeeping Group.