Basic Bookkeeping Terms You Need to Know (Part I)
02. Accounting Period
This simply refers to the period of time it takes for you to record your accounts and formulate your annual financial statements, which is information that you can then provide for things like paying tax. An accounting period is typically 12 months long and known as a fiscal year.
03. Accounts Payable
Your accounts payable document money that you owe so that you can ensure you pay any suppliers or other workers on time. You will need to record exactly how much you owe because it counts as a debt for your business until you have paid out.
04. Accounts Receivable
This is essentially the opposite of your accounts payable because it is money that you are due to receive from other parties. Typically, it will be payments from customers that you have not yet received, so you can initiate the process of getting that money by crediting your accounts with it and then moving it to your cash accounts once it comes through.
Accruals are technically what comes before you have a solid record of your accounts payable and accounts receivable. A financial accrue is the build-up towards money either being paid out by you or paid to you. When keeping your books, use accruals to keep track of these sales and expenses so that you can make provision for them and ensure your accounts are properly settled.
Assets are the main financial holdings of your business because they are the things that you own and can financially profit from. You must also record assets when completing your accounts because they count towards your business' income and, subsequently, the amount of tax you can be charged.
07. Balance Sheet
Balance sheets require a lot of information to achieve this accuracy. You need to record your assets, debts, equity capital, and liabilities as a start. And everything needs to be perfectly recorded so that external parties can get an accurate insight into how your business performs financially.
08. Bank Reconciliation
This is a statement that documents all of your transactions so that you can see exactly when money has been deposited into your bank account or withdrawn from it. Having a bank reconciliation statement for your business is the best way to prevent fraud because if you keep record of every penny going in or out, you'll notice any suspicious transactions straight away.
09. Cash Flow
This is exactly what it sounds like: the cash that flows' in and out of your business. Every financial insight that you can record on your balance sheets will be demonstrated by regularly tracking your cash flow. Positive cash flow is indicative of flourishing finances and means that you can comfortably settle any accounts payable, record an increase in assets, and plan for the future.
10. Chart Of Accounts
This is an integral organizational tool that helps a business index all of its accounts in one place for easy reviewing. You can use the financial breakdown displayed in your chart of accounts to create a profit and loss statement and keep an eye on all your transactions. The chart of accounts exists to make keeping the books simpler for you because every single transaction is broken down and recorded.
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