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Even if you hire a part time or full time help for managing your bookkeeping and accounting requirements, it is essential to understand certain basic terminologies to communicate with clarity with your accountant or bookkeeper.
Below are list of few basic terms explained in simplified manner to help you get your ABCs right with regards to bookkeeping and accounting task.
(A) INCOME -
This can be broken down into 2 groups,
Sales - This is the money generated from the sale of goods or services before taking anything off for costs or discounts etc.
Other Income - This is any other money received into the business by way of interest, discounts or anything not directly related to the product or service of the enterprise.
(B) EXPENDITURE (Expenses) -
Again this can be broken down into 2 groups,
Cost of Sales - anything directly purchased, including labor (wages), to produce the stuff you sell.
Expenses - everything else you have to pay for to run the business.
Example: Say the business makes home furnishings, the materials you buy and the carpenters wages are direct costs but the electricity used and the paper used for invoices are not. They are more like support services and therefore expenses.
(C) PROFIT & LOSS -
Gross profit (or Loss) is the difference between the sales and cost of sales.
Net profit (or Loss) is what's left after taking the expenses off the Gross profit and adding any Other Income.
Profit does not necessarily equal money in the bank, your profit is a number on a page that could be represented by stock on the shelf, material in the factory, half completed projects or fixed assets. It is ironic but the business could be in heavy overdraft but still be profitable - this is called a cash flow problem.
(D)ASSETS -
The properties used in the operation or investment activities of a business.
All those stuff which holds value and bring you return if sold. Can be categorized basis those which are tangible (i.e. can be seen and touched like vehicles, machinery, equipments, land, building etc) and intangibles like goodwill, sales invoices, receivables etc.
Types of Assets
Cash- Monetary items that are available to meet current obligations of the business. It includes bank deposits, currency & coins, checks, money orders, and traveler's checks.
Accounts Receivable- Business claims against the property of a customer arising from the sale of goods and/or services on account.
Notes Receivable- Formal written promises given by customers or others to pay definite sums of money to the business at specified times.
Inventory- Expenditures for items held for resale in the normal course of a business's operations.
Office Supplies- Expenditures for maintaining a supply of on hand supplies such as typewriter, copier, and computer paper, pens, pencils, and special forms.
Land- Expenditures for parcels of the earth. It includes building sites, yards, and parking areas.
Buildings- Expenditures for structures erected on land and used for the conduct of business.
Equipment- Expenditures for physical goods used in a business, such as machinery or furniture.
Equipment is used in a business during the production of income. Furniture includes items needed in a business office such as tables, desks, chairs, and cabinets.
(E) LIABILITIES -
They are claims by creditors to the property (assets) of a business until they are paid. Simply put: what your business owes to others. This would include your business suppliers to whom you owe for goods and services brought from them. Any mortgage, loans, and payables you owe to bank, lenders or any other third parties.
Types Of Liabilities
Accounts Payable- Creditor's claims against the business's property arising from the business's purchase of goods and/or services on account.
Notes Payable- Formal written promises to pay definite sums of money owed at specified times.
Mortgage Payable- Notes payable which are secured by a lien on land, buildings, equipment, or other property of the borrower (your company).
(F) OWNER'S EQUITY ALSO CALLED OWNER'S CAPITAL -
Both terms may be used interchangeably. The first thing to get our head around is that the owner of the business and the business itself must be seen as two separate individual entities, so even if you are the sole owner of your business - you are not the business itself.
Owner's Equity (Capital) represents the owner's claim to the good stuff (assets).
Once this is understood it is easy to see that Owners Equity is the difference between the Assets and Liabilities and depending which way it swings could either be owed TO the owner or owed BY the owner to the business.
(G) DEBTORS –
They are those people who owe your business money
(H) CREDITORS –
They are those people to whom your business owes money.
(I) INCOME STATEMENT –
This statement records day to day income and expenses of business during the financial year. At the end of each financial year the values of the income statement are brought to zero for the start of the New Year and only the profit or loss are carried over to the balance sheet.
(J) BALANCE SHEET -
A snapshot of the status of a business at any point in time made up of the Assets, Liabilities and Owners Equity. These values which change according to movements in the business are carried forward from year to year.
(K) DEBITS & CREDITS -
Not the same as Debtors and Creditors (see above)
When recording your transactions you would divide your page into two columns - Debits on the left and Credits on the right (just remember Dogs first, Cats second). Now comes the 'which goes where'
Costs & Expenses - Debit
Income - Credit
Assets - Debit
Liabilities - Credit
(L) TRIAL BALANCE -
Once you have sorted everything into your two columns, add each one up and they should balance with each other (if not you have goofed up somewhere) - this is your trial balance and it is from here that all information is gathered to make up the Financial Statements of the business.
It will take a bit of time and practice to familiarize with terminologies which are common with the accounting and bookkeeping professionals. But as a business owner from a non accounting background it is a must that few basics are absolutely clear to communicate your requirements with clarity.
Mostafa Elsayed
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