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Basic ABC's of Bookkeeping

There are five basic accounting classifications:  Assets, Liabilities, Capital, Expenses and Revenues. All transactions will fall into one of these categories.

ASSETS: This refers to what the business owns. It can include buildings, office equipment (such as computers, printers, credit card machines, etc.), furniture, accounts receivable, checking accounts, inventory, etc. Asset accounts are part of the Balance Sheet.

LIABILITIES: This refers to what the business owes and has not paid. It can include accounts payable for amounts owed to supplier/vendors, bank loans, company vehicle loans, etc. It refers to whatever the business has to repay. Liabilities are part of the Balance Sheet.

CAPITAL: This is what the owner contributes to or invests in the business and will be part of the Equity section of the Balance Sheet. Equity is the value of the business that belongs to the owner. For example, each year's earnings become equity.

REVENUES: This is money that comes into the business, usually from sales of products or services. Revenues, which can also be known as sales income, are shown on the Income Statement, also called the Profit and Loss Statement (P&L).

EXPENSES: This is money that goes out of the business, usually on a regular basis. It can include wages, rent, utilities, postage, office supplies, etc. Expenses are what it costs to keep the business operating on a continual basis. Expenses are part of the Income Statement.

Deducting expenses from revenues results in the profit or loss of the business. 

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Balance Sheet
The Balance Sheet is a summary of the business's financial condition. It will show the value of the company's Assets, Liabilities, and equity at a given date. The Assets must always equal (or balance to) Liabilities plus Equity. That is Assets = Liabilities + Equity.
A Balance Sheet sample report might look like this, depending upon your type of business.

Balance Sheet
Cash $200,000
Accounts Receivable $600,000
Inventory $125,000
Prepaid Expenses   $25,000
     Total Assets $950,000
Liabilities and Equity
Accounts Payable $350,000
Equipment Note Payable $125,000
Credit Card Payable     $6,000
Retained Earnings $375,000
Current Earnings   $94,000
    Total Liabilities and Equity $950,000

Accounts Receivable
The first time you write an invoice, it will go to Accounts Receivable until it is paid. You can track what customers owe you by reviewing this account balance. Each time you invoice a customer, this account will increase, and it will decrease each time you receive payments for invoices.

If your business sells merchandise/products, you will probably have to have that product on-hand. The value of those items are booked as Inventory in the Asset section.

Accounts Payable
This type of account is used to record what the business owes. If you use some type of accounting software such as QuickBooks, to enter your bills and make payments to suppliers, your Accounts Payable will automatically keep a running balance of the business's outstanding unpaid bills.

There are different types of Capital accounts depending upon which type of entity you chose for your company. Sole proprietors will have Owner's Draw Accounts.

Partnerships will have Capital and Drawing accounts for each partner.

Corporations will have Stock accounts.

Your CPA or attorney can provide advice on which type of business entity is best for your personal situation.

Profit and Loss Statement
Most new business owners don't know much about financial statements including Profit and Loss Statements, also known as Income Statements.

However, this report will tell you how much revenue is coming in and how much your expenses are each month.  It will enable you to see if your sales are growing and allow you to monitor your expenses.

Profit and Loss Statements will vary depending upon your type of business. A Profit and Loss Statement sample report might look like this.

Profit and Loss Statement
Sales $125,000
    Total Income $125,000
Operating Expenses
Supplies       $200
Utilities    $1,200
Wages   $10,000
Rent     $3,200
     Total Expenses   $14,600
Net Income $110,400

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