Whether you handle your own bookkeeping, hire a bookkeeper or outsource it, you need to be able to understand your books to keep your finances under control and to make good business decisions. One of the first things you need to achieve this is basic understanding of business transactions and how they are categorized.
For small business bookkeeping, all business transactions have to be recorded. Noting the type of transaction is important to identify where your business stands- are you making money, are you losing money, where are you losing money, how much cash do you have in your account- all of this can only be determined by analyzing your business transactions. So let us take a look at the most commonly used terms in categorizing business transactions.
Credit– Any cash that comes into your business from somewhere, it could be a sale or fees, is technically a credit.
Debit– The opposite of credit, debit is any cash that your business has to give someone else, like rent or fees.
Journal– The record of all your credits and debits is referred to as the bookkeeping journal and the entries made in the journal are your journal entries in small business bookkeeping.
Account and Account Types– Pretty sure you know what an account is- it is where your money comes into and goes from. There are 5 different types of accounts from where the money flows. Understanding these accounts can help you understand your books better and categorizing business transactions.
- Assets- Anything that your business owns is an asset. Asset can be physical- equipment, property, inventory, cash or intellectual property. It can also be anything that promises returns in the future like a loan or an agreement.
- Liabilities- Any loan that your small business takes out or money that has to be paid is a liability.
- Equity- This refers to money that comes from the owners and is usually never expected back. There are different types of equities as well.
- Revenue- Revenue refers to income that is collected from customers. Revenue means increased equity.
- Expense- An expense refers to all cash payments made out for the purpose of keeping the business afloat like payroll, infrastructure costs etc.
Categorizing business transactions can sometimes be confusing and can take some time to get a hang off, but once you begin understanding the purpose behind each transaction it will be easy.