The Basics of Bookkeeping : Terminology Defined

Accounts Payable;

The accounts payable serves as a ledger that keeps track of all the obligations your organisation has to pay to parties. These can include suppliers, banks, government entities or any other entities from whom you have borrowed money. For example if you have a mortgage, with a bank you will make payments over time as agreed upon.

Accounts Receivable;

On the hand accounts acts as a record keeper for all the outstanding debts owed to your organisation by external parties. This includes customers, banks, corporations or any other entities that have made purchases from your business or borrowed money from it.

Assets;

Assets encompass everything owned by you or your company that contributes to the operation of your business. This can include cash, real estate and land holdings, tools and equipment, vehicles and furniture.

Balance Sheet;

A balance sheet is a report that provides an overview of your businesss status. It highlights aspects such as assets, liabilities and equity. The main purpose of a balance sheet is to give insight into what your business owns and owes.

Bookkeeping; Undoubtedly essential, in management is bookkeeping. It involves recording financial transactions to ensure accurate and timely records of each transaction.

Capital;

Capital refers to the assets and resources that you, as a business owner, possess. It is separate from the profit that your business or self employment generates.

Costs of Goods Sold;

This term refers to all the expenses associated with purchasing products or services intended for resale to customers.

Depreciation;

Depreciation is when assets lose value over time due to factors like wear and tear. The reduction in value is quantified as depreciation.

Equity;

Equity includes all the capital you have invested in your company as the owner along, with any accumulated profits. For business owners equity is reflected in a capital account.

Expenses;

Expenses cover all the funds allocated for operating your business excluding those directly related to selling goods or services.

General Ledger;

A general ledger account is used to store, categorize and summarize all your transactions. These accounts are organised within the ledger, which also includes the balance sheet and income statement.

Income Statement;

An income statement provides a condensed overview of your activity during a period. It calculates profit or loss by considering revenue costs of goods sold and expenses.

Journals;

Journals are where bookkeepers record their transactions. Different journals are kept for each account such, as cash, accounts payable and accounts receivable.

Liabilities;

Liabilities cover any debts, including loans you’ve taken out and unpaid bills that still need to be settled. Liabilities Simplified. Liabilities refer to the obligations of your business, which can include both term and long term debts. Some examples are; Accounts This represents the amounts your business owes to suppliers. Making payments or settling early might make you eligible for discounts. Loans This account tracks any non current loans taken on by your business often used for purchasing property, equipment or vehicles necessary for operations. Liabilities are also a part of the Balance Sheet.

Payroll;

Payroll is the process by which employee compensation is distributed for businesses with employees. It involves reporting payroll aspects to government authorities, including taxes, on behalf of employees.

Revenue;

Revenue refers to all the income generated from selling your products and services. Some businesses may also earn revenue through means like selling surplus assets.

The trial balance;

The trial balance; is a tool to ensure that your financial records are balanced before compiling information, for financial reports and closing the accounting period. In this guide we aim to demystify the world of business bookkeeping and provide you with essential insights. These insights range from establishing an account structure to understanding the importance of recording transactions. Here are the fundamental principles of bookkeeping that you should familiarise yourself with;

• Get acquainted with your Chart of Accounts. Set it up. Start recording all transactions.
• Reconcile your bank accounts regularly. Wrap up each month. Generate statements.

Accountant vs Bookkeeper;

Accountants are different to bookkeepers. Although accountants and bookkeepers may appear similar at glance their roles differ significantly in practice. A bookkeeper is responsible, for recording all transactions within a business while an accountant carefully interprets and analyses the data recorded by the bookkeeper.

Understanding the basics of bookkeeping is essential as you begin your journey. One crucial aspect is mastering the five accounts that form the foundation;

1. Assets; These are resources, for your business, such as cash, accounts receivable, inventory, real estate and equipment.
2. Liabilities; Representing obligations like accounts and loans that your business has.
3. Revenue/Income; This includes the earnings generated from selling products or services.
4. Expenses; Covering the costs incurred in running your business, including utility bills and employee salaries.
5. Equity; Reflects your financial stake in the business after deducting liabilities from assets.

Understanding the Essence of Bookkeeping. In essence bookkeeping involves recording all transactions in a business. A bookkeeper has the responsibility of documenting any transaction that has implications. While this may seem straightforward there are terminologies and rules in the realm of bookkeeping that can be daunting for newcomers. Learn more about bookkeeping with our training sessions. Contact us for more information.