5 Bookkeeping ‘Code Words’ and What They Mean for Your Business
When it comes to accounting, understanding the language and principles behind financial transactions is crucial for any small business owner. Many small business owners benefit greatly from outsourcing their bookkeeping to a trusted partner, though there are a few terms you’ll want to know whether you’re doing your own accounting, or have someone else doing it.
Debit: The Left Side of the Equation
In accounting, a debit refers to an entry made on the left side of an account. It represents an increase in assets or expenses and a decrease in liabilities, equity, or revenue. Essentially, debits are used to record the inflow of assets or the outflow of expenses from a business's perspective. For example, when a small business purchases office supplies for $500, it would debit the office supplies account, reflecting an increase in assets (office supplies) and a decrease in cash.
Victoria E. Stanton, Advisor
Credit: The Right Side of the Equation
On the other side of the accounting equation, we have credits. A credit is an entry made on the right side of an account and indicates an increase in liabilities, equity, or revenue, while decreasing assets or expenses. In simpler terms, credits are used to record the outflow of assets or the inflow of revenue from a business's viewpoint. For instance, if a small business sells products worth $1,000 on credit, it would credit the accounts receivable account, representing an increase in assets (accounts receivable) and revenue.
The Relationship: Debits and Credits in Balance
In accounting, every transaction must maintain a balance between debits and credits. This is based on the fundamental accounting equation: Assets = Liabilities + Equity. Whenever a debit is recorded, an equal and opposite credit must be recorded to maintain the equation's balance. This concept is known as double-entry bookkeeping and ensures accurate financial records. By properly utilizing debits and credits, small business owners can accurately track the flow of funds and maintain the integrity of their financial statements.
Write-off: Managing Business Expenses
Write-offs are an essential aspect of accounting for small businesses. They represent business expenses that are recognized as incurred but are unlikely to be recovered. When a business determines that an asset has become impaired or worthless, it can "write-off" the asset by recording a debit to an expense account. This reduces the value of the asset and reflects the expense incurred. Write-offs help small businesses account for losses and accurately assess their financial position.
Bottom Line: Net Profit and Beyond
The term "bottom line" refers to a company's net profit after deducting all expenses from its revenues. Net profit represents the final figure that determines the success or failure of a small business's operations. By accurately recording debits and credits, small business owners can monitor their bottom line effectively. Understanding how financial transactions impact the bottom line allows owners to make informed decisions, identify areas for improvement, and measure their business's overall performance.
If you’re struggling to keep track of your business transactions yourself–or just don’t like doing it!--partnering with a fractional bookkeeper or CFO through Breakaway may give you added peace of mind and more time to spend on other aspects of your business. Contact info@breakawayba.com to learn more.