Want to grow your business?
You better know your numbers.
Top Resources
Christian Startups
12th MAY 2008
Join other Christian business owners for a discussion of biblical principles in the marketplace.
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QuickBooks for Windows or Mac
12th MAY 2008
Not sure what software to use for your business? Try QuickBooks today!
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Accounting Basics
General Ledger
12th MAY 2008
The central listing of all activities posted on the sub-ledgers is the General Ledger. This covers all financial transactions and may be used to audit activities that may have been incorrectly posted. A trial balance will show whether the ledgers are in balance or not.
Chart of Accounts
12th MAY 2008
The Chart of Accounts is the numerical list of all assets, liabilities, sources of revenue, and expenses in the company's operating business that is used to organize and track all financial transactions. In the company's accounting system, most common transactions (sales or purchases) will automatically default to an account in the chart. The expenditure of any cash will default to an expense account.
Accounting Terminology
12th MAY 2008
Any entrepreneur will be able to make better financial decisions for their business by knowing and understanding basic accounting terminology. We've listed the most essential terms here!
Assets
This is the total value of any tangible property and property rights, less any reserves set aside for depreciation. Hard assets will not reflect any appreciation in value that are not strictly quantifiable under current accounting principles.
Book Value
This is the value of an asset shown on the Balance Sheet, listed at cost and then reduced by total accumulated depreciation. Accelerated depreciation schedules may reduce value to less than current market value. Tangible assets may be fully depreciated while still having usable life.
Capital
The worth of a company as determined by the total amount of all assets minus all outstanding liabilities.
Cash Basis Accounting
This method recognizes revenue when the money is received and expense at the time that payment for them is made. There is no match of revenue against expense in a fixed period, so comparison on a period-to-period basis is not possible. This system provides less financial control because unpaid expenses are not recognized.
Cash Flow
The difference between the cash at the beginning of a period with the cash at the end of a period is cash flow. Cash flow may be increased by the sale of assets or the acquisition of new debt. It may be decreased by large purchases, but not for current use or principal debt payments.
Credits
Credits always appear on the right-hand side of the General Ledger. A credit will increase items on the revenue side as well as on the liability side.
Debit
Debits always appear on the left side of the General Ledger. A debit will increase the asset account and the expense account.
Depreciation
The conversion of the cost of an asset into an expense, expressing the useable life of the item covered. Set up over a fixed period in a depreciation schedule according to current tax regulations. Once an item has been fully depreciated, it no longer is carried on the books of the company as having any asset value.
The depreciation can be made in equal amounts over the useful life, known as straight line depreciation, or taken more in the early years, known as accelerated depreciation.
The Balance Sheet will show the asset at its original cost, and then the reserve for depreciation, resulting in the net asset value. This number reflects book value, not necessarily actual value.
Equity
Also referred to as net worth, this is the difference between the total assets of an entity and the total liabilities. Shown on the liability side of the ledger, it may be thought of as the amount owed to owners, since theoretically, this would be disbursed to them if assets were sold and liabilities paid.
Gross Profit
This number is derived from the gross (total) sales revenue less any direct costs, such as labor, material, and subcontracting that is directly attributable to that sale.
Also referred to as operating profits, the gross profit represents the money available to pay overhead expense and taxes, and to generate a net profit for the company to retain as working capital.
Journal Entry
These include transactions entered on a sub-ledger and into the General Ledger. Entries include the date of transaction, account number, and which accounts were debited and credited as a result of the transaction.
Retained Earnings
Profits that are not distributed through dividends, but are left in the business are carried on the books as retained earnings. This can be reduced over time by losses or increased over time by net profits.
Sub-ledger
A sub-ledger is used to record accounting transactions of revenue and expense items to accounts payable and accounts receivable journals. Sub-ledgers are also posted to the General Ledger to track all financial transactions.
Working Capital
This is the difference between current assets and current liabilities, and is an indication of liquidity and the ability of the company to meet current obligations. The assumption is that current assets will turn into cash concurrently with obligations such as payables and loans.
The variable here is the ability to collect current receivables and sell inventory. This may mean that a company is less liquid in reality than it appears to be on paper.
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