accounting basics

To do your own bookkeeping, you need to know some accounting basics.  Not too much, just enough to give you an overview of what accounting is.  So, if you're a new small business owner, or just trying to keep the books for one, you've come to the right place.

There are lots of websites teaching textbook accounting, but not many that teach accounting for small business.  I've been in the accounting field for over 20 years, and have worked with many small businesses.  Thru this website, I'm going to help you keep your own books.

You don't need theory or complex issues.  You just want to know how to invoice your customers, know if you're making money or not, or how to track inventory and products.  You don't have much time either, so it has to be easy and straightforward.

So come with me, and I'll show you.  It's not rocket science, I promise. 

First of all, you need a brief overview of accounting.

The accounting basics can be summed up for you in two words.  Accounting Cycle.  The following illustration shows the cycle.  

  1. Source Documents.  Business transactions occur - a sale, a purchase, etc.
  2. Journals.  You enter transactions into a Journal (book/spreadsheet)
  3. General Ledger. You summarize the transactions by type (at month end usually). For example, you add up all your Sales for the month.
  4. Financial Statements.  The summarized transaction amounts are used to prepare reports - like an Income Statement (also called a Profit & Loss Statement, or P&L for short)

That wasn't too bad, was it?  That's really all you need to know at this point.

On my website, I have various pages explaining the process of accounting and I'm going to list them for you here.

accounting basics articles

To start a simple bookkeeping system for your small business, you need a way to track your business transactions (accounting journals), and keep all your information neat and easily retrieved (filing system).

You can click the links below to access the page on my website for these topics.  These will open in a new window, so you can come back to this page and go to the next topic.

Accounting Terms Definitions

The first thing to do when trying to learn accounting basics is to understand the common accounting terms and their definitions.  Take a look and make sure you're comfortable with most of the accounting terms.  I'm sure you've heard of a lot of them.  I try to use common language in my accounting tutorials, so even someone with limited accounting knowledge can understand what I'm talking about.  Before you head to the other articles below, go to this page.  Read thru the list, and get more familiar with the terms used in accounting.

To get started, click here.

Set up your filing system

If you're just starting in accounting for small business, then you probably aren't sure what information you should be keeping.  And when you start selling and paying bills, the paperwork is going to pile up pretty quickly.  So this article shows you a simple way to set up a filing system for all your important papers, and keeping track of what needs done.

To get started on your filing system, click here.

Start your Chart of Accounts

Another accounting basic is the Chart of Accounts.  This is the list of accounts (like Cash, Accounts Receivable, Sales, Materials, Auto Expense, etc) that you will be using in your basic accounting system.  I'll show you the 5 categories of accounts.  And I'll show you the most common accounts used in each category to get you started.  You can use this to start you own Chart of Accounts.

To get started, click here.

Set up your first Accounting Journals

Using journals to record business transactions is a part of accounting basics and a step in the accounting cycle we talked about above.  I'll discuss the accounting journals I think you should use.  And I'll give more details about each.  Journals are most important in manual accounting systems.  If you use a computer system (like QuickBooks) you should still know how journals work.  In a computer system, the software keeps the journals for you from the transactions you enter.  In a manual system, you enter the transactions into a journal yourself.  It's not hard, really.

For help setting up your journals, click here.

The importance of a good Small Business Accounting System

By now you should be well on your way to having the accounting basics for your company.  You should have set up a simple filing system, a rough Chart of Accounts, and a set of Accounting Journals to start using.  Now you need to know how to use them.  In this article, I will discuss the parts of a good accounting system.  I'll also tell you how long you need to keep certain accounting paperwork.  Then I discuss each part of the accounting cycle again - Journals, Ledger, and Financial Statements.

To get started, click here.

Now that you know the accounting basics, let's go into more detail about the options - manual accounting and computer accounting systems.

manual accounting systems

In this type of system, you would be creating invoices to your customers in a word processing system, probably Microsoft Word (or the free version).  You can get invoice templates off the internet, or make your own.  You can also use pre-printed invoice forms you buy at any office supply store.  These are mostly for repair/service businesses. 

You will be using a business checkbook to pay your bills.  And you'll need a filing sytem to track invoices and expenses.  I suggest using a Sales/Cash Receipts Journal and a Cash Disbursements Journal. I will show you how to make your own journals from accounting paper (available at office supply stores) or using Misrosoft Excel.  Whatever you're most comfortable with.

This system works well for most small businesses.  You need to stay organized, though, so you don't have things fall thru the cracks.  For more detailed help on this type of system, click here.

computer accounting systems

In a computer system, like QuickBooks, Xero, or Sage 50 (previously Peachtree), you would be entering the details of the transactions into the software, and the system would post the info into journals.  You can then easily prepare reports based on the transactions you've entered.  But remember, you can only prepare a report based on the info you enter into the system.  So you need to be diligent about entering your transactions.

You can prepare invoices using the software's templates.  You can prepare checks to print as well.  You can enter bills in the system for your expenses, and pay them when due.  You would print out a report showing which bills are due by a certain date.

Computer systems are a good fit for larger small businesses that have a large volume of invoice to send and bills to pay.  The also are helpful for businesses trying to track a lot of inventory items.

I have experience using QuickBooks and Sage 50.  I have played around with Xero, but not used it extensively.  I have prepared a few reviews, if you'd like more information on these systems.  I want you to know that if you click on one of the links that takes you to the website for one of these software companies, and buy something, I do earn a small commission that helps offset the costs of this website.  However, I'm only doing that for software that I have personally used, and have knowledge of.  I've used QuickBooks for about 15 years, and Sage products about 5 years.

If you've decided to use QuickBooks, check out my ebook on getting started using that software here.

The accounting basics that we discussed all center around the Accounting Cycle.  As we talked about at the beginning of this article, this involves business transactions recorded into journals, then the amounts in the journals being summarized into a ledger, and then those figures used to create financial statements. ( we'll talk about that in the next section)

So, if you haven't already, go thru each of the steps lined out above ( accounting terms, filing system, chart of accounts, journals, systems ).  Then decide on a manual or computer system.

The next step, then, is to start using your chosen accounting system.  We'll cover that in the next section.

Go back to my Home Page to get to the next section.