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Commonly referred to as “working capital,” capital refers to funds that can be accessed (i.e. CapitalĬapital refers to the money you have to invest or spend on growing your business. Subtract your on-hand cash amount at the end of that period from your on-hand cash at the beginning, then divide that number by the number of months in the period (or by your chosen cadence). To calculate your burn rate, simply pick a time period (such as a quarter or a year). It’s a critical component when calculating and managing your cash flow. Your burn rate is how quickly your business spends money. Your assets could include cash, tools, property, copyrights, patents, and trademarks. AssetsĪssets are everything that your company owns - tangible and intangible. (Why not wait to record the activity until the payment is complete? We’ll answer this question when we explain the accrual accounting method later.) 4. These could be sales you’ve completed but not yet collected payment on or expenses you’ve made but not yet paid for. Once that value is paid, here’s how that would be recorded in your company’s financial records: dateĪccruals are credits and debts that you’ve recorded but not yet fulfilled. Here’s a simple visual to help you understand the difference between debits and credits: This means the expense is debited because the funds credited from the cash account are covering the cost of that expense. When a company pays for an expense out of pocket, the cash account is credited, because money is moving from the account to cover the expense. Many businesses operate out of a cash account – or a business bank account that holds liquid assets for the business.
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Essentially, debits and credits track where the money in your business is coming from, and where it’s going. A credit is a record of all money expected to come out of an account. Not to be confused with your personal debit and credit cards, debits and credits are foundational accounting terms to know.Ī debit is a record of all money expected to come into an account. While some of these terms might not apply to your business right now, it’s important to develop a holistic understanding of the subject in case you expand or move into another type of business. These 15 terms will create the foundation on which you’ll build your knowledge of business accounting. (This is the process of reconciling your book balance to your bank balance of cash.) Bank ReconciliationĪ bank reconciliation compares your cash expenditures with your overall bank statements and helps keep your business records consistent. Cash Flow StatementĪ cash flow statement analyzes your business’s operating, financing, and investing activities to show how and where you’re receiving and spending money. This calculation will also be reflected on your business’s Schedule C tax document. Profit and Loss (P&L) StatementĪ profit and loss (P&L) statement is a snapshot of your business’s income and expenses during a given time period (e.g. A balance sheet will also show you your business’s retained earnings, which is the amount of profit that you’ve reinvested in your business (rather than being distributed to shareholders). Balance SheetĪ balance sheet is a snapshot of your business' financial standing at a single point in time. Income StatementĪn income statement shows your company’s profitability and tells you how much money your business has made or lost 2. They provide valuable snapshots and measures of your business performance. Here are the documents and calculations we recommend mastering, even if you work with a professional, consulting agency, or have hired a certified public accountant (CPA). If you can read and prepare these basic documents, you'll understand your business’s performance and financial health - as a result, you'll have greater control of your company and financial decisions. Regardless of who manages your business accounting, it's wise to understand accounting basics. Let’s ease into the topic by first reviewing accounting terminology. It’s a task you’ll either need to master or outsource - or both. Business owners use accounting to track their financial operations, meet legal obligations, and make stronger business decisions.Īccounting is a necessary part of running a business. Accounting is the process of systematically recording, analyzing, and interpreting your business’s financial information.