Basic Bookkeeping for Non-Accountants - Part 1 Understanding the Basics

Before we discuss how to use the kinds of books of accounts, let us first understand the basics of accounting. 

Accounting Equation

In accounting, there's the equation Assets + Liabilities = Equity (A+L=E). The equation is also useful in personal finance when preparing your net worth or net equity, just deduct liability instead of adding it. Assets refer to things or resources that the business owns and which are acquired either through debt (liabilities) or your own money (equity/capital). Example of assets are cash, properties, investments etc.

Chart of Accounts

This is a listing of all accounts to be used by the company. This is more specific like cash, building, loans, capital etc.Chart of accounts usually consists of the following:

Assets - current & non-current
Current assets - includes cash, accounts receivables, inventory and other assets which are readily convertible into cash within one year.
  • Cash - can be classified as on hand and in bank. 
  • Accounts receivable - these are sales to customers on credit.
  • Inventory - goods that are for sale
  • Prepaid expenses - future expenses paid in advance

Non-current assets - these are long-term assets like property and equipment, furnitures etc. 

Liabilities - current & non-current
Current liabilities - these are payables that are due within one year.
  • Accounts payable - pertains to liabilities to suppliers. It can be classified as trade or non-trade payments.
  • Short term loans - loans that are due within one year
  • Accrued expenses - these are expenses incurred but not yet paid. Account is used if the company is on an accrual basis of accounting. Usual accruals are electricity, water, telephone, tax expense etc.
  • Deferred revenue - refers to unearned revenue meaning the customer paid in advance but no service or goods is delivered yet.
Non-current liabilities - liabilities which are due more than one year. Example: Long term loans which are payable in three years. The portion that is payable within one year is to be classified as current while the portion that is due after one year is classified as non-current.

Equity - classified as
  • Owner's Capital - these are capital contributions made by the owner
  • Owner's Drawings - these are withdrawals made by the owner
  • Net Income/Net Loss - forms part of equity since this is the return on the investment made by the owner.
Income - revenues realized by the business. Can be broken down as sales, sales discounts and returns, cost of goods sold (if applicable) and other income (interest income from banks etc. Those that are indirectly related to the business)

Expenses - expenses incurred by the business such as rental if any, office supplies, depreciation, taxes and licenses, repairs and maintenance, advertisements, courier and postage, freight, travel etc.

Double Entry Accounting

This is also called as the debit and credit principle. This means that in every transaction made, there should be two accounts (or more) involved. Debit means add or + while credit means deduct or -. Now, you have to remember this: Assets normal balance is (+) while liabilities and equity is (-). Hence, any increase in assets is added (+) while any increase in liabilities and equity is deducted (-). 

Example: Borrowed from the bank P20,000 for capital. Accounting entry would be: debit to Cash (+) P20,000 and credit to Bank loan payable (-) P20,000. Any payments made would be: debit to Bank loan payable (+) P10,000 and credit to Cash (-) P10,000.

 

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