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Basic Accounting Concepts Explained

Taking over your business’ accounting system can be confusing. So, let’s start by going over basic accounting concepts, principles & terms.

If you’re getting ready to set up your own in-house accounting system for your business, the best place to start is with some basic accounting concepts.

First of all, can you answer the question: Why is accounting an essential building block in my business?

Most people just understand this to be true and leave it at that. But in more concrete terms, accounting is a critical segment of your business because a well-managed financial system is a critical stepping stone to a successful business.

Basic Accounting Concepts & Principles

Why, and how, do you use the information that you can achieve when you implement a good management accounting system?

  • Minimizing Financial Risk & Maximizing Profit – A thoughtfully designed accounting system, accurate summary (as well as detail-level) reports, timely reviews, and immediate action are essential if you have a large investment to protect or potential risk to minimize. Loss of financial control usually equates to loss of money through errors, mishaps, or cost overruns – even if the loss is not immediately apparent. Thus, it’s important to have a financial system that is robust and detailed enough to provide you with warning signs in time to avert losses before they occur.  Plus this kind of financial information can help you decide where to focus your time most profitably.
  • Job Costing – Basically, this is the process of assigning job-related costs to specific jobs.  The ‘financial management’ aspect of accounting shows up when you then compare the financial details of a specific job to its estimated costs and estimated income, and take action to ensure that you keep costs and profits in line with your estimate. The better you become at job costing – and taking corrective action based on your knowledge – the more profitable each job will become, and in turn, the more profitable your business will become.
  • Managing Employees – The basic concept here is that each employee should be making your business more money than he or she is costing it (more on this in a minute).

These are just a few of the most basic accounting principles. The more you learn about implementing and maintaining an efficient accounting system, the more in control of your business and its success you’ll be.

Basic Accounting Terms

Lots of times I find that clients get intimidated with the terminology.  Even though you don’t typically need to know these terms in order to operate efficiently in QuickBooks, or to use and understand the reports, let’s just take a quick look at some of the terms that bookkeepers and accountants use ‘in the background’:

  • Double-entry Bookkeeping – Every transaction has two parts. In accounting, each transaction is the equivalent of a two-sided coin. For example:
  • When you receive a payment from a customer you invoiced, your cash account increases and your accounts receivable (a list of money you are waiting to receive) decreases. Income is not affected because you already recognized the income when you entered the invoice as a ‘receivable’.
  • Ledger – The main listing of accounts, and entries into those accounts, is referred to as the “general ledger.”
  • Debit – This term does not necessarily mean a reduction. It simply means left, as in the left side of the account ledger in a double-entry bookkeeping system. In certain accounts, a debit can mean an increase.
  • Credit – This term, also, does not necessarily mean an increase. It only means the right,or the right column of the account ledger. In some accounts, a credit can mean a decrease.
  • Labor Burden – This term essentially translates to how much your employees are really costing you. This includes factors, such as:
    • Employee compensation
    • Payroll taxes
    • Workers’ compensation insurance
    • Health insurance
    • Retirement benefits
    • Phone, Internet, and other communication costs
    • Company vehicle usage (including gas, oil, maintenance, license, insurance)
    • Tools and equipment usage
    • Estimated annual bonuses
    • Employer-paid snacks, meals, parties, entertainment
    • Training fees, seminars, etc.

Continuing To Learn How To Manage Your Accounting System

Now that you know just a few (of the many) basic accounting concepts, principles, and terms, are you ready to learn how to take over your own business accounting system?

Through BuildYourNumbers.com, my team and I teach business owners just how to do this.  You can learn more about this topic, or check out our affordable QuickBooks desktop subscription training series. Or, if you’d like individual coaching, or have any questions, please give me a call or send me an e-mail today.  I am here to help…

From the Intuit Find a ProAdvisor website…

“We were a small build to inventory manufacturing company struggling with an inappropriate bookkeeping software program when we decided to convert to Quickbooks. Diane Gilson did an excellent job during installation and in the follow-up – at a reasonable cost. Diane’s input was timely, not overwhelming, and urged us forward when we needed a push. We continue to be very pleased with the results.”