Business owners, whether they do their own small business accounting or use outsourced bookkeeping, should have a basic understanding of bookkeeping basics. To state it in very simple terms, bookkeeping is the recording of your company’s income (receipts) and expenses (payments) into a set of account books.
Organized and updated financial records are the basic elements of bookkeeping and accounting. Bookkeepers and accountants rely on your books to prepare your taxes (among other things).
The job of a bookkeeper is different from that of an accountant but the two do intersect in some aspects, especially during tax preparation and filing season. Bookkeeping focuses more recording of a person’s or a company’s financial transactions such as sales, payroll, invoices, and deductibles.
What is an income statement?
The income statement, also known as the profit and loss statement (P&L), is basically a statement that shows how well a company buys and sells inventory (or services) to make a profit. You calculate your gross profit by how much sales you have made, and then subtract your purchases and other expenses which are directly connected with your sales. After determining your gross profit, you would then deduct it from your administrative and other expenses to calculate your net profit or net loss for the year.
What is a balance sheet?
The balance sheet for your small business accounting system is used to get a snapshot of your company’s current financial position by listing all the current and fixed assets, the current and long-term liabilities, the shareholdings and capital, and the profit or loss for the year. This essential bookkeeping tool will reflect what is known as your company’s net worth. A positive net worth means that your company has more assets than liabilities, and a negative net worth means that your company has more liabilities than assets.
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