Accounting is the process of systematically recording and interpreting your financial
information. That includes summarizing spend, seeing where revenue comes from, and reporting
transactions.
I like to think of accounting as the backbone of any successful business, providing the essential
data and insights needed to drive informed decision-making.
It’s not just about crunching numbers; it’s about understanding the story behind those numbers
and how they impact the organization’s overall health and direction. Through careful analysis
and reporting, accounting turns raw financial data into actionable intelligence, guiding
everything from day-to-day operations to long-term strategic planning.
Business owners use accounting to track their financial operations, meet legal obligations, and
make strong business decisions. In essence, business accounting is the foundation for sound
financial management and long-term business success
Accounting helps you keep track of three important things:
Tracking income and expenses.
Ensuring compliance with tax laws.
Making informed decisions that drive growth.
The idea behind grasping accounting principles is to become better equipped at budgeting wisely,
forecasting future financial needs, and maintaining the overall health of your business.
1. Debits & Credits
A debit is a record of the money expected to come into my account, while a credit is a record of
all money expected to go out of my account. Essentially, debits and credits track where the
money in your business is coming from and where it’s going.
Many businesses operate out of a cash account – or a business bank account that holds liquid
assets for the business.
When a company pays for an expense out of pocket, the cash account is credited because money
is moving from the account to cover the expense. This means the expense is debited because the
funds credited from the cash account are covering the cost of that expense.
2. Accounts Receivable & Accounts Payable
Accounts receivable is money that people owe you for goods and services. It’s considered an
asset on your balance sheet. For example, if a customer fulfills their invoice, my company’s
accounts receivable amount is reduced because less money is now owed.
Accounts payable is money that I owe other people and is considered a liability on my balance
sheet. For example, let’s say my company pays $5,000 in rent each month. Here’s how that
would be recorded in the financial records before that amount is paid out.
3. Accruals
Accruals are credits and debts that I’ve recorded but not yet fulfilled. These could be sales
completed but not yet collected payment on or expenses made but not yet paid for.
4. Assets
Assets are everything that your company owns — tangible and intangible. My assets could
include cash, tools, property, copyrights, patents, and trademarks.
5. Balance Sheet
A balance sheet is a key financial statement that shows where my company stands in terms of
assets, liabilities, and owners’ equity at a specific point in time. When I look at my balance sheet,
I see a clear picture of what my business owns (assets), what it owes (liabilities), and the net
value left over for the owners (equity).
6. Burn Rate
Burn rate is how quickly the business spends money. It’s a critical component when calculating
and managing cash flow.
7. Capital
Capital refers to the money I have to invest or spend on growing my business. Commonly
referred to as “working capital,” capital refers to funds that can be accessed (like cash in the
bank) and don’t include assets or liabilities.
8. Cash Flow
Cash flow refers to the balance of cash that comes into and goes out of my business during a
specific period. I keep track of this on a cash flow statement, which helps me see how well my
company is managing its cash.
For example, if my business receives $10,000 from sales in a month but spends $8,000 on
expenses like rent, salaries, and supplies, my cash flow for that month would show a positive
balance of $2,000. Monitoring cash flow is crucial because it lets me know if I have enough cash
on hand to cover my obligations and invest in future growth.
9. Chart of Accounts
The chart of accounts is something that can be used as a master list of all the accounts in my
organization‘s general ledger. It’s like a roadmap that helps me organize and categorize every
financial transaction, making it easier to track and manage the company’s finances.
The COA includes five main types of accounts: assets, equity, expenses, liabilities, and revenues.
If I need to record a purchase of office supplies, I would look to the COA to find the appropriate
expense account where this transaction should be logged. This system keeps everything in order
and ensures that all financial activities are properly documented.
10. Cost of Goods Sold
The cost of goods sold (COGS) or cost of sales (COS) is the cost of producing the product or
delivering the service.
COGS or COS is the first expense you’ll see on your profit and loss (P&L) statement and is a
critical component when calculating your business’s gross margin. In my opinion, reducing your
COGS is the best way to increase your profit. This way you can stay net positive even if your
sales aren’t increasing.
11. Depreciation
Depreciation refers to the decrease in assets’ values over time. It’s important for tax purposes, as
larger assets that impact the business’s ability to make money can be written off based on their
depreciation.
12. Diversification
Diversification is a risk-management strategy that helps avoid putting all my financial eggs in
one basket. By spreading my investments across different industries or asset classes, I can reduce
the risk of losing a significant portion of my capital if one area underperforms.
For example, instead of investing solely in tech stocks, I might diversify by also investing in real
estate, bonds, and healthcare stocks. This way, if the tech sector experiences a downturn, the
impact on my overall portfolio is minimized because my investments are spread across different
areas.
13. Equity
Equity refers to the amount of money invested in a business by its owners. It’s also known as
“owner’s equity” and can include things of non-monetary value, such as time, energy, and other
resources.
I like to remember equity as the difference between my business’s assets (what I own) and
liabilities (what I owe)
A business with healthy (positive) equity is attractive to potential investors, lenders, and buyers.
Investors and analysts also look at your business’s EBITDA, which stands for earnings before
interest, taxes, depreciation, and amortization.
14. Expenses
Expenses include any purchases you make or money you spend in an effort to generate revenue.
Expenses are also referred to as “the cost of doing business.”
There are four main types of expenses, although some expenses fall into more than one category.
Fixed expenses are consistent expenses, like rent or salaries. These expenses aren’t typically
affected by company sales or market trends.
Variable expenses fluctuate with company performance and production, like utilities and raw
materials.
Accrued expenses are single expenses that have been recorded or reported but not yet paid.
(These would fall under accounts payable, as I discussed above.)
Operating expenses are necessary for a company to do business and generate revenue, like rent,
utilities and payroll.
15. Fiscal Year Fixed Costs
A fiscal year is the time period a company uses for accounting. The start and end dates of your
fiscal year are determined by your company; some coincide with the calendar year, while others
vary based on when accountants can prepare financial statements.
16. Gross Margin– The portion of a company’s revenue left over after direct costs are
subtracted.
Your gross margin (or gross income) is your total sales minus your COGS — this number
indicates your business’s sustainability.
17. Income Statement
An income statement, also referred to as a profit and loss statement, is a financial document I use
to see how much my business has earned and spent during a specific accounting period. It shows
me the total revenue my company brought in, subtracts all the expenses incurred, and helps me
determine whether I made a profit or a loss during that time.
For example, if my business earned $50,000 in revenue over a quarter but had $30,000 in
expenses, my income statement would show a net profit of $20,000. This document is essential
for understanding my company’s financial performance and making decisions about future
operations.
18. Inventory
Inventory refers to the assets my company holds with the intention of selling them through our
operations. This includes not only the finished goods ready for sale but also items currently being
produced and the raw materials or components used in the production process. Essentially,
inventory encompasses everything from the materials we start with to the final products we aim
to sell to customers.
19. Liabilities
Liabilities are everything that your company owes in the long or short term. Your liabilities could
include a credit card balance, payroll, taxes, or a loan.
20. Profit
In accounting terms, profit — or the “bottom line” — is the difference between the income,
COGS, and expenses (including operating, interest, and depreciation expenses).
You (or your business) are taxed on your net profit, so I believe it’s important to plan for your tax
liability proactively. Do this by staying on top of your net profit amount, setting aside some of
your revenue in a separate savings account, or paying your estimated taxes every quarter (like
employer withholding).
21. Return on Investment
Return on investment, or ROI, is a metric used to measure the profitability of an investment,
usually expressed as a percentage. To calculate ROI, divide the net profit from the investment by
its initial cost and then multiply the result by 100 to get a percentage.
22. Revenue
Your revenue is the total amount of money collected in exchange for goods or services before
any expenses are taken out.
23. Trial Balance
A trial balance is a report used to check the balances of all the accounts in my general ledger at a
specific point in time. I usually prepare a trial balance at the end of a reporting period to make
sure that everything adds up correctly before finalizing my financial statements.
For example, if I’ve recorded various transactions throughout the month, I’ll generate a trial
balance to see if the total debits match the total credits. If they do, it confirms that my accounts
are balanced. If not, I know I need to investigate and correct any discrepancies before moving
forward.
24. Variable Costs
Variable costs are expenses that fluctuate based on the amount of goods my business produces or
sells. Let’s assume I’m running a manufacturing company and decide to double my production
— my costs for materials and labor would increase accordingly. These are variable costs because
they rise and fall with the level of production.
Accountants oversee the financial records of a business and make sure the data is correct. Then,
they use this data to create budgets, financial documents, and reports. They can make sure the
money coming into the business works with the expenses required to operate.
Beyond that, they ensure compliance with the regulatory side of finances.
Accountants review ca
For example, if I produce 1,000 units of a product and the cost of raw materials is $5,000,
producing 2,000 units might raise that cost to $10,000. This change in expense directly ties to the
increase in production, making it a variable cost.
