Accounting Basics

There are a few (and only a few) things you need to understand in order to make setting up your accounting system easier.

Debits and Credits

These are the backbone of any accounting system. Understand how debits and credits work and you’ll understand the whole system. Every accounting entry in the general ledger contains both a debit and a credit. Further, all debits must equal all credits. If they don’t, the entry is out of balance.

Accounting Basics – 5 Basic Accounting Types:

  • Assets
  • Liabilities
  • Equity
  • Income and
  • Expenses

Balance Sheet Accounts

The three so-called Balance Sheet Accounts are Assets, Liabilities, and Equity. Balance Sheet Accounts are used to track the changes in the value of things you own or owe.

Assets are the group of things that you own. Your assets could include a car, cash, a house, stocks, or anything else that has convertible value. Convertible value means that theoretically, you could sell the item for cash.

Liabilities are the group of things on which you owe money. Your liabilities could include a car loan, a student loan, a mortgage, your investment margin account, or anything else which you must pay back at some time.

Equity is the same as “net worth.” It represents what is left over after you subtract your liabilities from your assets. It can be thought of as the portion of your assets that you own outright, without any debt.

Income and Expenses Accounts

The two Income and Expense Accounts are used to increase or decrease the value of your accounts.

Income is the payment you receive for your time, services you provide, or the use of your money.

Expenses refer to money you spend to purchase goods or services provided by someone else.

Online Accounting Revolution

Online technology has revolutionized over the past ten years in which each and every business sector are gaining their potential benefits of the internet certainly where accountancy has no exception. The accounting profession is going through a revolution to make the business to track in a faster and hassle free manner. Technology has laid its impact on accounting with the advent of certain features to keep your business track to run in a smooth way. Online accounting would highly be a preferable way of managing the finances of your business either for freelance or work on short term contracts.

Online accounting is known for its simplicity, as the complexity in financial management can be overcome. With the online accounting program, business owners can track their financial position in an easier and quicker way. Computerized accounting systems have now replaced manual accounting systems in most organizations. Many online accounting services allow the users to record their transactions, view their current assets, and also renders in creating their own invoices and payslips.

Accounting application has in fact allowed maintaining the proper tracking of the information, based on a regular interval basis resulting in better efficiency and accountability. Users are able to access their financial information wherever they are without waiting for the accountant’s report looking into the current cash flow. Also, it would be highly securable as the data are encrypted and stored online. Both the time and expense are saved with the accountancy programs leading to significant tax reductions.

Online accounting would be ideal for the business owners in managing the finance on daily basis in an easily accessible way with more accuracy and security rather than moving with the services of an accountant. A new era of forensic accounting helps to keep track of frauds during the sabotage of the electronic information which engaged in the accounting improvement as well as it allows in maintaining a track on their personal money. Now it would be much easier for business owners to stay connected with their financial information in an easy way with the help of this online accounting technology.

Account Types

There are a total of 13 basic account types. They are:

Seven Asset Accounts

Cash

Use this account to track the money you have on hand, in your wallet, in your piggy bank, under your mattress, or wherever you choose to keep it handy. This is the most liquid, or easily traded, type of asset.

Bank

This account is used to track the cash balance that you keep in institutions such as banks, credit unions, savings and loans, or brokerage firms – wherever someone else safeguards your money. This is the second most liquid type of account because you can easily convert it to cash on hand.

Stock

Track your individual stocks and bonds using this type of account. With these types of assets, you may not be able to easily convert them to cash unless you can find a buyer, and you are not guaranteed to get the same amount of cash you paid for them.

Mutual Fund

This is similar to the stock account, except that it is used to track funds.

Currency

If you trade other currencies as investments, you can use this type of account to keep track of them.

Accounts Receivable

This is typically a business use only account in which you place outstanding debts owed to you.

Asset

For personal finances, use this type of account to track “big-ticket” item purchases that significantly impact your net worth.

Three Liability Accounts

Credit Card

Use this to track your credit card receipts and reconcile your credit card statements. Credit cards represent a short-term loan that you are obligated to repay to the credit card company.

Accounts Payable

This is typically a business use only account in which you place bills you have yet to pay.

Software Liability

Use this type of account for all other loans, generally larger long-term loans such as a mortgage or vehicle loan. This account can help you keep track of how much you owe and how much you have already repaid.

One Equity Account

Equity

It represents what is left over after you subtract your liabilities from your assets, so it is the portion of your assets that you own outright, without any debt.

Income Account

Income

Income is the payment you receive for your time, services you provide, or the use of your money.

One Expense Account

Expense

Expenses refer to money you spend to purchase goods or services provided by someone else.

How to measure productivity of a business

When dealing with business scenario, irrespective of its success measuring the productivity is a major factor. Strangely some business people are left with no answer when they are asked about the methodology to measure the productivity of a business. In few cases, business might yield unexpectedly a high profit that might satisfy the organization. But the businessmen will not be aware of the fact that the same business would do three times better while measuring the productivity.

Earlier there was a myth that business can either be improved or cannot be improved, but now it is not so. Productivity can be measured with certain business aspects in such a way that the business operations get reviewed at all the stages with the evaluation of their improvements. Under the pricing options see what could be measured to enable tracking of costs. Are the customers satisfied with the business pricing of the company.

In the conventional business, quality for the products was not given importance as it was considered to be an expensive one. Now the steps have to be taken to track the two critical indicators of quality, say the defects and variance. Next is the performance of the company’s employees . This plays a very important role in determining the productivity. So their performance should be tracked in order to predict the future productivity and if any improvements needed should be indicated.

Desired business outcomes are determined along with any other outcome that would leverage the further business activities. Risks are not anticipated in a business but it is obvious for it to occur. Try to measure the risks at an early stage that your customer cares about. Evaluate the feedback system from the employees and customers too. To improve the business henceforth, the above factors are to be followed and measured accordingly.