A well-organized Bookkeeping System helps people who don’t even have a degree in accounting handle most accounting tasks. However, you’ll be more productive and have more accurate books if you understand the following concepts and terms:

Double-entry accounting

A double-entry accounting is the standard method for tracking where your money comes from and where it goes. Following the old saying that money doesn’t grow on trees, money always comes from somewhere when you use double-entry accounting.

For example, when you sell something to a customer, the money on your invoice comes in as “Income” and goes into your “Accounts Receivable” account. Then, when you deposit the payment, the money comes out of the Accounts Receivable account and goes into your checking account.

Each side of a double-entry transaction is either a debit or a credit. When you sell products or services, you credit your “Income account” (because your income increases when you sell something), but debit the “Accounts Receivable” account (because selling something also increases how much customers owe you).

See the following examples throughout the book of how transactions translate to account debits and credits:

Chart of Accounts

In bookkeeping, an account is a place to store money, just like your real-world checking account is a place to store your ready cash. The difference is that you need an account for each kind of income, expense, asset, and liability you have.  

The chart of accounts is simply a list of all the accounts you use to keep track of your company’s money.

Cash vs. Accrual Accounting

Cash and accrual are the two different ways companies can document how much they make and spend. Cash accounting is the choice of many small businesses because it’s easy: You don’t show income until you’ve received a payment (regardless of when that happens), and you don’t show expenses until you’ve paid your bills. The accrual method, on the other hand, follows something known as the matching principle, which matches revenue with the corresponding expenses.

This approach keeps income and expenses linked to the period in which they happened, no matter when cash comes in or goes out.

The advantage of this method is that it provides a better picture of profitability because income and its corresponding expenses appear in the same period. With accrual accounting, you recognize income as soon as you record an invoice, even if you don’t receive payment until the next fiscal year. And you recognize expenses as soon as you record a bill, even if you don’t pay the bill until the next year.

Financial Reports

You need three reports to evaluate the health of your company:

Income statement:

The income statement, which is also called a Profit & Loss report, shows how much income you’ve brought in and how much you’ve spent over a period of time. This report gets its name from the difference between income and expenses, which results in your profit (or loss) for that period.

Balance sheet:

The balance sheet is a snapshot of how much you own and how much you owe. Assets are things you own that have value, such as buildings, equipment, brand names… Liabilities are the money you owe to others (like money you borrowed to buy one of your assets). The difference between your assets and liabilities is the equity in the company.

Statement of cash flows:

The statement of cash flows tells you how much hard cash you have. You might think that a profit and loss report would tell you that, but non cash transactions—such as depreciation—prevent it from doing so. The statement of cash flows doesn’t include non cash transactions; it shows only the money generated or spent operating the company, investing in the company, or financing.

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#Eliel RUGWIZANGOGA, B.D. & M Consultant.