A huge percentage of individuals today are not saving enough and are also too far into debt. Many people don’t have an emergency fund – not even $1000 – and even worse, on top of that, have multiple car payments, school debt, and maxed-out credit cards. The biggest reason for this is just not being educated on simple finance basics. To help those who may need to know, or just may need a refresher, we’ve put together 7 Simple Accounting Basics for Beginners, including you.
1. What is Accounting?
In general terms, accounting is the collecting, recording, and analyzing of financial transactions. There is the process of accounting for businesses, sure, as it’s one of the most important parts of a business. Businesses need to make sure their cash flow is high and their overhead is low to keep and grow a business. But there are also basic accounting concepts for individuals and couples as well. After all, without accounting, keeping organized and prioritizing healthy finances wouldn’t be possible and leads to overspending, debt, and worse.
Why are Accounting Basics Important?
Whether it’s for personal finance or business, accounting basics are key for financial wellness and for good money management. But it’s also required for things like taxes, whether done alone or by an accountant. Keeping track of transactions and knowing where your money is going to save time, make the reports more reliable, and will also help save money.
When not keeping track of the comings and goings of money – like groceries, bills, etc. – spending can get out of hand, and if you’re not at least breaking even, that means you’re going into debt. Both are bad because even breaking even means reaching goals – like buying a house, paying for college, or even more travel – is out of the question. That’s why is so important to learn at least the general accounting basics.
A debit is simply a payment. Debits are a line recording of an amount that was paid for services are goods. If you use a “debit card” that means the money is deducted from an account you have that already has money in it. For personal finances, and in general accounting basics, debits are things like groceries, generally spending, and even taking cash out of your checking account. For businesses, they may also be things like buying office supplies, rent, and payroll.
Credits are where people get into trouble a lot of the time. With credit, purchases are made with money that is borrowed when the person who is borrowing, typically a credit card holder in personal finance, does not have the financial means to do so. The service or goods are given in exchange for an agreement to pay back the amount over time, usually with interest.
The problem with this type of spending is that the purchase is made BEFORE having the money to pay it off. So a buyer will spend more in interest buying the purchase, than if they had just saved up and purchased it with cash (or debit).
Let’s say someone buys a new car on credit for $30,000 and drive off the lot. A mile down the road they get into a car accident. Even with insurance, the car is worth less than what it was 5 minutes prior. So they still owe $30,000, but now have a car worth $25,000. If they need to sell the car – they get sick, or can’t make payments and sell it for the $25,000 it’s worth, they still owe the bank company $5,000 of their own money on top of it. And that’s before interest.
If the same person paid for the car in cash at $30,000 they owe no one anything. And there’s no interest to be had. They’re only left with whatever money they get for the car – $25,000 – which could still get another great car. It’s also less stress not owing anyone anything.
Assets are fun because it’s anything you own that adds financial value. Besides money, these help decide how much value you have or how much someone is “worth”. Assets examples many people may have could have would be a paid-off home or homes (which typically go up in value), other properties such as a rental house, or commercial properties, investments and retirement plans, paid-for vehicles, furniture, and for businesses can include inventory, accounts receivable, and machinery.
Liability on the other hand is the opposite of assets. In accounting basics that means anything owed or debts. Liabilities are something that needs to be paid off. The goal is to have very little or ideally NONE of these. Some liability examples would be personal loans, credit card balances, student loans, unpaid taxes, mortgages, auto loans, etc. In business, it could also mean accounts payable and unpaid payrolls.
Read More: Banking For Kids: 3 Simple Steps For Success
Income is money that comes in or is received, especially on a regular basis, for work or through investments. So the amount that one gets via paycheck would be the income. But income can also come in via rental properties (after any mortgage and fees are paid), or even unregular amounts and random times like investments or side hustles. Bonuses and monetary gifts can also be labeled as income.
7. Profit & Loss Statement
A Profit and Loss Statement for a business, or a budget for personal use, summarizes the revenues/income, and expenses incurred during a specified period. Personally creating a profit and loss statement gives a visual to monthly spending. Let’s say you make $3000 a month in income, but spending and expenses add up to around $3000 each month – that’s living paycheck to paycheck, and is not successful long term. Seeing all those expenses laid out, both expected and unexpected spending really gives one insight into their good and bad spending habits.
7 Simple Accounting Basics may not seem like a lot, but if anything, learning the fundamentals will get anyone off on the right foot. Finances are such an important and integral part of living successfully, so learning how to handle them correctly can only be a positive thing. Get these basics down, teach your kids, and everyone will be more successful and saving money in no time.
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