Accounting/Bookkeeping for Beginners
Good accounting/bookkeeping is very important to the success of any new cleaning business. If you don’t have an accounting system in place your business will suffer. It’s important to understand in accounting the math is simple. You don’t need any special computer. It requires a low-grade calculator. The main thing is that Assets = Liabilities + Equity. It should always balance. This is why we call it a balance sheet. The balance sheet was first invented by a monk by the name of Luca Pacioli. He discovered the balance theory during the renaissance. He is commonly referred to as the father of accounting. Basically, the value of assets you own minus the liabilities you have equals your equity.
Accounting is the managing of debts and credits. Debt is equal to credits and there are 2 debt categories: assets and liabilities (expenses). An asset is anything that brings revenue to you whether you work or not. It also includes any accounts receivable, inventory, property, or equipment. Rentals managed businesses, and royalties are all examples of assets. Liabilities are anything that takes money away. Loans and orders placed to suppliers are liabilities. This is called accounts payable. If you’re investing with other people’s money into your business this is also a liability. Car payments, cell phone bills, and travel costs are all forms of expenses. They would also go in liabilities. Equity is the value of your investment in your company. If it’s your personal money it is equity. They must always balance. Your assets can never be larger than liabilities plus equity.
Asset accounts always have a debit balance. Equity and liability accounts have credits. Sometimes something can be an asset and then become a liability. For example, you may have a rental property that you still have a mortgage on. If the property is rented out and producing income it is an asset. Alternatively, if it becomes vacant and requires you to pay the mortgage out of your personal funds, it is now a liability.
There are three categories of credit.
Revenue is income earned and expenses are bills that are paid out. It is important that all accounts have catalog numbers and descriptions. Below are the 7 laws of accounting.
The 7 Laws of Accounting
1. All journal entry is never one sided
2. Liabilities must have credit balances
3. The change in equity is figured out by calculating net income and adjusting for owner contributions and drawings.
4. Assets must equal Liabilities plus equity
5. Total debits must always equal total credits
6. Every transaction must adjust at least two accounts
7. Assets must have debit balances
There are five things every accounting system must have.
1. Accounting Systems – A chart of accounts listing all accounts including assets, liabilities, and equity. Your chart is where you set up subsections to manage and view various transaction types. You can break your data down in any way needed.
2. Journals – Where you record business activities such as buying orders from suppliers. A journal entry is composed of equal amounts of debits and credits. Journal entries have a description as well as amounts, day and time.
3. General Ledgers – provide the details of all transactions that have posted to a particular account. You should keep all of your accounts in a general ledger.
4. Trial Balance – a listing of all the balances in all the general ledger accounts. The totals have to match.
5. Balance Sheet – The trial balance is used to sort the data into assets, liabilities, and equities.
“Changes in equity” is a way of tracking the changes in your equity over a period of time. This is done by considering two items: transactions on accounts of income and transactions on the business activity that produce revenue and expenses. These are called income statements. An income statement tells us how much money your business has made over a certain time period. It is usually categorized in months, quarters, and years. Revenue is always a positive credit to equity. Revenues are always credits.
Expenses are bills. Expenses should show as a cash credit in your balance sheet with the offsetting debit recorded in your expense account. Expenses are always negative equity and shown as a debit balance.
A good cleaning business that makes money will have a positive net credit to its equity balance. Your net income is the difference between revenue and expenses. Contributions can also alter equity. For example, if you add $50 to your business. The journal entry will show a debit of $50 and your equity will show a credit of $50. Now, if you received $200 for services rendered your equity will show a debit of $200 and your cash will show a credit of $200. You’ll want to analyze the transaction. When it is an increase in cash, your cash balance should show an increase of $200. Cash is always an asset. All asset accounts are also debit balances. This means to increase your cash you have to debit your equity by $200. Thus, an example of an income transaction. The $200 also has to record as a credit to your sales account. Once you have these figured out and in order, you are ready to put the data in your journal.
Make sure to work out a system that works for you and remain consistent. Using an online package like QuickBooks, or Simply Accounting, is better because it guarantees that records will be neat and complete. Organize these into two logs, yearly and monthly. Keep your receipts in order. Use a folder to keep track of your receipt dates. Always number your invoices and receipts and try to use a template. These are easily downloaded. They work out totals for you and they can save a lot of time.
Accounting / bookkeeping is an age old practice and is critical to the success of your cleaning business. Know yourself, if you can’t do it, get it done professionally. You don’t want to waste time. An excellent accountant can be a great specialist to add to your team.