Finance 101: The Fundamentals of Accounting Explained
Updated: May 24, 2021
Accounting is one of the many things in business that you cannot escape from—every business deals with money. You need money to run your services, pay your employees, and support your livelihood. Without proper accounting, you run the risk of not knowing what you’ve spent, how much you can profit, and where you can save without compromising quality or integrity.
Not knowing a single thing about accounting doesn’t mean that you have to take up a year-long online course on it or pursue a degree. To run a business, all you have to know is how to interpret your own accounting data and use it to your business’s advantage. Here are a few things you can start with.
Understanding the Basics of Accounting
The Chart of Accounts
The accounting system looks at the many financial facets of a business. Groups of accounts are combined to make proper financial statements. There are six main accounts that most statements look into, which are as follows.
The Main Accounts: What do these terms mean?
Income in business accounting is almost the same as the most common definition for it. This is the account that tells how much money you make in a given amount of time. The only twist is the money is coming from you, not an employer. This differs from profit, which is the money left over after expenses have been determined. Income is also known as gross revenue, while profit is known as net revenue.
Expenses refer to how much money you spend to make the product or provide the service. This includes the cost of the materials, rent space, website hosting for eCommerce businesses, and other related purchases to run the business.
Cost of Sales
Cost of sales is the total amount of money it takes to create one unit of the product. Here are examples to give you an idea:
For example, one product is worth $30 on the market. The materials to make one item total $10. Your cost of sales is $10.
A more example: one product is $100. The materials for each item cost $30. A worker takes an hour to construct the item and is paid $20 hourly. Shipping one item is $30 for 30 items. For one item, the cost of sales is $51 each after considering materials, labour, and shipping.
Equity is the money left over after paying loans or bills. Profits increase equity, while losses decrease over time.
Assets are the things of value that keep your business running. These include inventory, equipment, vehicles, workspaces, and also include intangible items such as trademarks and patents.
This is everything that the business owes, which include bank loans, wages, and taxes. In business, it is important to secure enough funds to control these liabilities.
Understanding your financial reports is crucial to your business’s survival. No matter why you’re doing this, it is undeniable that you have to be critical about the numbers. They not only allow you to operate the business, but they also help you thrive as an entrepreneur. Even if it’s not your forte, it helps to know the basics.
Do you want to focus more on other aspects of your business outside finance? Then leave accounting statements up to a small business accountant along the Gold Coast. New Wave Accounting is an accounting firm that has helped businesses from every industry with their bookkeeping and accounting needs. Get in touch with us today to get started today!