Is your business making a profit? Are you sure? How much of a profit?
How do you track your business's profits?
There's only one way: bookkeeping / accounting.
Bookkeeping and accounting, simple yet complicated.
They are not the same thing although they are often used interchangeably.
Both use the same methods, but accounting goes further and includes reporting for tax preparation.
I'll only be using the term bookkeeping just to keep things simple.
As with many specialties, understanding the jargon is a first step.
Chart of accounts, assets, equity, balance sheet ~ they all have specific meanings.
Understanding the meanings will assist you in running your business or your home finances.
That understanding will also be beneficial during discussions with your accountant for tax purposes.
Let's start:
The Chart of Accounts is just a listing of the 5 categories of accounts.
There are only 5, but each category may have sub-types.
The 5 categories are asset, liability, equity, income, and expense.
Four of these categories are familiar terms in everyday use; equity's meaning is a bit more fluid.
You may not know the exact definition, but you may think it has something to do with net worth.
You're correct; it does.
Assets: checking and savings accounts, vehicles, money owed to you by customers (Accounts Receivable), buildings, land, machinery
Liabilities: money the company owes to others (credit cards, loans, mortgages), money owed to vendors/suppliers (Accounts Payable)
Income: customers' received payments, interest/dividends on financial accounts
Expenses: operating expenditures such as rent, supplies, insurance, salaries/wages
And, then there is Equity: capital/cash used to start the company, additional capital, this year's net income, retained earnings (which may require a complete blog post later)
