This accounting cheat sheet will give you foundational knowledge of some of the key terms, elements, and ideas of financial management.
Basic Accounting Terms Every Small Business Owner Should Know
Assets, Liabilities, and Equity
- Assets – anything a business owns that has value now or in the future
- Liabilities – anything that your business is obligated to pay to another individual or entity
- Equity – the book value of a company or the amount of money left to be distributed to owners and shareholders. When you subtract liabilities from assets, what you’re left with is equity.
Revenue vs. Expenses
Revenue refers to income or sales generated through regular business operations. Operating revenue is revenue that comes from the sale of goods and services. Any revenue earned from non-regular business activities is called non-operating revenue.
Expenses refer to the costs associated with operating a business.
There are four types of business expenses.
- Operating (COGS, rent)
- Non-operating (Taxes, interest)
- Variable (Utilities, raw materials)
- Fixed (Rent, Insurance payments)
Profit
- Gross profit – refers to revenue left after subtracting the cost of goods sold but before subtracting other expenses.
- Operating profit – also referred to as earning before interest and taxes, is the profit or capital left over after deducting all operating expenses.
- Net profit – refers to your bottom line or your earning after deducting all expenses including taxes and income
Debits vs. Credits
Double-entry accounting requires you to make journal entries for your transactions in at least two accounts. One entry is a debit, and the other is a credit. On a balance sheet, all debits and credits should equate to 0.
Debits increase the value of an asset or expense account and decrease the values in a liability or equity account.
Credits reduce the value of an asset or expense and increase the value of liabilities, equity and revenue accounts.
A debit in one account will always correspond to a credit in another related account.
We will show examples later in the article.
Essential Financial Statements for Small Businesses
The Balance Sheet
The Balance Sheet includes your assets, liabilities and equity in that order. It provides a view of your financial health at a certain point in time. This helps you determine your financial performance by laying out what you own, what you owe to other entities, and what you have left over to give to shareholders.
Investors and lenders can look at this statement to help decide whether they should give you money, or not.
The Income Statement
The Income or Profit and Loss (P&L) statement is a picture of a company’s profitability in a period. It accounts for operating and non-operating revenue, operating and other expenses, gains, and losses, and more.
This statement shows a company’s creditworthiness and future growth potential. Through this, analysts and investors can see a company’s performance across quarters or years.
The Cash Flow Statement
The cash flow statement shows the money that goes in and out of your business through three different types of activities. These are operating activities, investing activities, and financing activities. It shows you your cash at the beginning of the period (normally a year) and the net cash from each activity.
This statement provides insights into your operational efficiency, liquidity, and solvency.
The Statement of Retained Earnings
This statement tracks retained earnings or earnings that a company keeps instead of paying them out to shareholders as dividends. It includes your retained earnings at the beginning of the period, net income, dividends paid, and end of period retained earnings.
This statement is important because it shows how a business distributes its profits and its potential for and dedication to future growth. It can also provide insights into your dividend payout practices.
Key Accounting Formulas Every Business Owner Should Memorize
It wouldn’t be an accounting cheat sheet if we didn’t give you some key formulas would it?
The Accounting Equation
Assets = Liabilities + Equity
Also known as the golden rule of accounting, this shows the relationship of all three of these accounts to each other.
From this, you can also get the formulas for equity (Assets – Liabilities = Equity) and liabilities (Assets – Shareholder’s Equity = Liabilities).
Gross Profit Formula
Gross Profit = Revenue – COGS
While easily confused, gross profit and gross revenue are different. In this equation, you must subtract COGS from gross revenue to find gross profit.
Operating Profit Formula
Gross Profit – Operating Expenses = Operating Profit
Operating income is different from EBITDA, which excludes amortization, depreciation, taxes, and interest from calculations.
Net Profit Formula
Total Revenue – Total Expenses = Net Profit
Net profit is operating profit minus tax.
You can also calculate net profit using this formula: Gross Profit – Total Expenses = Net Profit
Break-Even Point Formula
Break-Even Point = Fixed Costs / (Sales Price per Unit – Variable Cost per Unit)
Breaking even basically means total revenue and total costs level out to zero.
Accounting Cheat Sheet: Common Types of Business Transactions and How to Record Them
You would record business transactions in special financial record-keeping books known as journals. A journal entry includes dates, affected accounts, credit and debit amounts, and sometimes a transaction summary.
Sales Transactions
You would record a sales transaction when a customer pays for your goods and services. This can be through cash or through credit if you’re doing accrual accounting.
Possible affected accounts include your Cash,Sales Revenue, Service Revenue, and Accounts Receivable (for credit transactions).
Example:
| Date | Account Name/Title | Debit | Credit |
| Oct 6 | Cash | $100 | |
| Service Revenue | $100 |
Expense Transactions
You would record these as costs, purchases or payments made to vendors, suppliers, or other entities. Businesses can pay upfront in cash or set up credit payment terms.
Common types of purchase transactions involve purchasing supplies, inventory, and more.
Common payment transactions include rent, utilities, and insurance.
Possible affected accounts include, Inventory, Rent and Utilities, and Accounts Payable.
Example:
| Date | Account Name/Title | Debit | Credit |
| Aug 7 | Rent and Utilities | $22,000 | |
| Rent and Utilities Payable | $22,000 |
Asset Purchases
Also known as capital expenditures, these are investment in fixed assets such as equipment and property.
You would record these as debits and credits to the affected asset accounts (Cash, Fixed Assets, etc.). You would debit your Accounts Payable account purchased the asset on credit.
Example:
| Date | Account Name/Title | Debit | Credit |
| April 1 | Fixed Assets – Bookshelves | $500 | |
| Cash | $500 |
Loan Payments
You would split loan payments into two parts, namely interest and principal payments.
These are both liabilities, and the affected accounts include Interest Expense, Interest Payable, Notes/Loan Payable, and Cash.
Example:
| Date | Account Name/Title | Debit | Credit |
| March 30 | Cash | $7,000 | |
| Notes Payable | $7,000 | ||
| March 30 | Interest Expense | $47.24 | |
| Interest Payable | $47.24 |
Payroll Transactions
These transactions would likely affect accounts such as Wage and Salary Expenses, Wages Payable, and Employee FICA Tax Payable.
Example:
| Date | Account Name/Title | Debit | Credit |
| April 13 | Wage and Salary Expenses | $200 | |
| Wages Payable | $200 |
Chart of Accounts: The Backbone of Your Accounting System
A Chart of Accounts is basically an index of all your company’s main and sub accounts. It’s an important tool that helps with organizing, categorizing, and locating transactions.
Setting Up a Chart of Accounts
You’ll want to structure your COA in a way that considers your industry requirements, business complexity, and flexibility for growth.
You can start by understanding the main and sub-account categories you’ll need for your business.
Common Account Categories
Here are the 5 main account categories and their common sub-categories:
- Assets – Cash, Bank, Accounts Receivable, Fixed Assets
- Liabilities – Accounts Payable, Loan Payable, Income Taxes Payable
- Equity – Common Stock, Retained Earnings, Dividends
- Revenue – Sales, Service Revenue, Investment Income
- Expenses – Cost of sales, Utilities and Rent, Maintenance and Repair Expenses
Organizing Your Chart of Accounts
Make sure to use a clear numbering system and concise account names and descriptions.
Organize and categorize based on how they appear on your financial statements, starting with your assets, liabilities and equity (balance sheet) then revenue and expenses (income statement).
How to Keep Accurate Financial Records
Regular Bookkeeping
Regular bookkeeping helps you stay accurate, organized, up-to-date, and hassle-free during tax season.
Weekly tasks include bank reconciliation and recording daily transactions. Monthly tasks include closing books, paying bills and taxes, and preparing financial reports. Annual tasks include the year end close and tax preparation.
Using Accounting Software
When doing online bookkeeping, accounting software helps you automate several processes, saving you time and effort.
This includes tasks like:
- Receipt capture and management
- Bank reconciliation
- Categorizing transactions
- Invoice creation and management
- Inventory management
- Reporting
Correct Categorization
Errors can sometimes occur because of poor categorization practices related to expense and income.
Make sure that you are consistent with the categories you use. They should be as specific as possible without overcomplicating things.
For income, specify the revenue stream. For expenses, understand the 4 main categories: COGS, operational expenses, interest, and taxes.
Staying Organized
Another benefit of using an accounting software is the organization it helps provide. You can import all your sheets and receipts into the software and access them from there. If you choose storage outside of the software, make sure you have a system that allows for easy retrieval. Don’t delete anything unless you’re sure you don’t need it anymore. Consult your accountant to be safe.
Common Accounting Mistakes Small Business Owners Should Avoid
We also want this accounting cheat sheet to serve in helping you avoid trouble.
Mixing Personal and Business Finances
Using one bank and/or card account for both personal and business transactions is unwise. You could end up wasting time and money trying to sort through both statements to separate your expenses accurately. There’s also a high risk of confusion and errors in recording or reporting.
Failing to Track Expenses Properly
You need to monitor, record, and classify your expenses into their proper categories. Failure to do so can lead to overspending, penalties, audits, and more.
The first crucial step is proper documentation and storage. Ask for and keep all of your receipts to ensure proper expense tracking and management.
Not Reconciling Bank Accounts Regularly
Daily reconciliation is important because it ensures that your books align with your bank and card statements. Failure to do so could lead to discrepancies, cash flow issues, and even an increased risk of fraud.
Ignoring Tax Deadlines or Misreporting Income
Doing this can lead to serious tax penalties and even legal ramifications. This includes several unnecessary payments and surcharges, loss of tax benefits, audits, and difficulty applying for loans.
Forgetting to Track Inventory or COGS (Cost of Goods Sold)
Improper inventory tracking can lead to several consequences, such as
- Incorrect revenue recognition
- Poor inventory management leading to overstocking or stockouts
- Risk of overspending/going over budget
- Gaps in transaction records leading to penalties
When to Hire an Accountant or Bookkeeper
The Role of a Bookkeeper
A bookkeeper records transactions of a business, creates journal entries, creates financial reports, and uses bookkeeping software to ensure accuracy and compliance.
The Role of an Accountant
While they can do bookkeeping duties, an accountant is usually in charge of all tax-related duties and compliance. They also do the interpretation and analysis of financial reports. They can oversee a team of bookkeepers.
When to Hire Both
You would hire both if
- Your finances are more complex
- You need tax help and compliance
- You’re seeing business growth and a need for a bigger team
- You need specialized financial guidance
Frequently Asked Questions
Can I handle my small business accounting without hiring a professional?
Certainly! We recommend small business owners learn do-it-yourself bookkeeping and accounting at least in the beginning. This can not only cut costs but also give you a better perspective on your finances.
How can I track cash flow effectively if I don’t have an accounting background?
You can track cash flow easily using a spreadsheet. There are accounting software that are very beginner friendly and lots of resources online to help you understand the basics. Seek professional help if needed.
What is the difference between bookkeeping and accounting?
Bookkeeping deals with the financial record keeping side. Accounting focuses more on taxes and the interpretation and analysis of financial statements.
What should I do if I realize I’ve made a mistake in my financial statements?
Identify and assess the impact of the error. Then, correct the error on the statements themselves and create adjusting entries. Finally, restate or reissue financial statements if necessary.
Make sure to consult your accountant or financial advisor if needed.
How do I ensure my accounting records are audit-proof?
- Ensure that you have accurate and updated records according to GAAP standards
- Use accounting software
- Keep organized documents
- Set up internal controls
What Is AccountsBalance?
AccountsBalance is a monthly bookkeeping service specialized for agencies & SAAS companies.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
In Summary
Understanding the intricacies of financial tracking and management can make anyone’s head spin.
We hope this accounting cheat sheet made it easier to understand the basics on your journey to fin-man literacy.
