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A Short Introduction to Accounting


Learn the Lingo
Like medicine, business has its own language and it helps to speak it a little. There are lots of basic accounting books, such as Accounting for Dummies. The following is a brief introduction to accounting you might find useful.

Money In and Money Out
The simplest accounting system just keeps track of the cash that comes into the business and the cash that goes out. As soon as you start thinking about opening a business, it is probably a good idea to go to an office supply store and buy a two column, hard-cover accounting book. The good news is this is a business expense for tax purposes. So you should keep a record of it, and save your receipt. Your first entry in your new accounting book will look something like this:
Date Description Cash out Cash in
January 1, 20x1 Invested personal money in the business 20.00
January 1, 20x1 Purchased a 2 column accounting book 20.00
Note that we made two entries for the one transaction. If you think about the company being a separate entity from yourself (and you should always think this way) there were really two things that happened. The Company had to get the money first (from you) and then the Company spent the money on the asset (the accounting book.)

Debits and Credits
The terms debits and credits are really simple to understand if you remember that Credits are where you get the money from and Debits are what you do with the money. Let’s take the example above and write the proper “accounting journal entry” for it:
Date Description Debit Credit
January 1, 20x1 Office expense 20.00
Owner’s investment 20.00
Purchased a 2 column accounting book using the Owner’s Visa card
It’s accounting convention to show the debit first, and then the credit. It doesn’t make much sense because you generally have to get the money (Credit) first, before you can spend it (Debit), but accountants like to make things complicated! By the way, don’t think of Credits as “good” and Debits as “bad”. They are just a way of showing both sides of the transaction. Many people get confused because the bank will often say, when you put money in the bank, that the amount has been credited to your account. This makes sense from the bank’s point of view because where did they get the money? (They borrowed it from you, so it is a credit.) And what did they do with the money? (They kept it in cash in their safe, or loaned it out. Either way, it is a debit.)

Assets and Expenses
In your personal life, some things that you buy last a short period, like lunch in a restaurant, while other purchases like a car, last for a number of years. In a business, purchases that last for more than a year are called assets, while any purchase that lasts less than a year is called an expense. To keep things simple, any purchase of less than $500 is usually shown as an expense, even though it may last for more than a year. That is why we were able to record our accounting book as an expense even though it will probably last for more than a year.
Some examples of expenses (all debits by the way) are salaries, rent, and office supplies. Some examples of assets (also debits) are leasehold improvements, vehicles, and office equipment.