Fundamentals of Accounting/Bookkeeping (Balance Sheet)

Accounting is the language of business.

Accounting translates business activities into financial reports that provide a picture of how the business is doing.

Financial reports provide information to aid in business decision making, such as: potential investments and/or loans, companies credit worthiness to vendors/suppliers, taxes owing, or, is the business profitable, can you meet your expenses owing, which products or services are the most or least profitable. Is the debt load too high or is there room for more, is it time to grow the business, what are your Fixed costs (costs paid regardless of sales or activity, such as utilities) vs Variable costs (costs that change based on sales and activity), will the business continue to be profitable, grow, and pay the owner and reasonable wage.

Balance Sheet Accounts:

Assets: items owned by the business, bank accounts, cash, investments, equipment, buildings, products it’s selling

Liabilities: monies owed by the business, to employees, to bank, to vendors/suppliers

Equity: owners investment in the business plus revenues, minus expenses (what’s left over from initial investment after revenues and expenses are accounted for.

The Balance Sheet seems undiscernible to many but its foundation is The Accounting Equation (Assets = Liabilities + Equity). No matter how many accounts there are the Assets must always = Liabilities + Equity.

(What you own (Assets) minus what you owe (Liabilities) = your investment/equity in the business (Equity)).

Examples:

Loretta invests $2,000 in her business.

$2,000.00 (Asset, money in the bank) - $0 (Liability) = $2,000.00 (Equity, owners claim against the assets)

Next Loretta pays $3,000 cash for business equipment from her personal funds.

$2,000.00 (Existing Asset) + $3,000.00 (New Equipment/Asset) - $0 (Liability) = $5,000.00 (Equity)

Next Loretta purchase $1,000.00 is supplies on credit.

$5,000.00 (Existing Assets) + $1,000.00 (Supplies/Asset) - $1,000.00 (Accounts Payable/Liability) = $5,000.00 (Equity)

STAY TUNED FOR INFORMATION ON THE INCOME STATEMENT AND THE STATEMENT OF CASH FLOW.