Accounting Basics

Debits and Credits provide insight into where something of value flows in and out of the business.

Debits- represent the money coming into a business account, typically showing increased assets or expenses.

Credits- represent the money coming out of a business account, typically showing an increase in revenue, liabilities, or equity.

An accounting method for cash-based business that records transactions when cash is received or paid out.

• Record cash when you receive it
• Record expenses when you pay them
• Easy to see cash inflow vs cash outflow

Small business owners can use Cash-Basis Accounting, which provides an easy-to-view cash flow statement. However, cash-basis accounting doesn’t comply with U.S. Generally Accepted Accounting Principles (GAAP), and using this method may make it difficult to receive a loan or find investors.

An accounting method where you record revenue and expenses as they occur (when the transaction(s) take place). Using this method, you record income and expenses before they are paid or received.

• Revenue is recorded once the product or service is received, even if the business has not received payment.
• Expenses are recorded when an order with a vendor is placed or when prepaid expenses, such as business insurance, are incurred.

A variance is the difference between the budgeted and the actual amount. It is calculated by subtracting the budgeted amount from the actual amount. A variance can be favorable or unfavorable, and the business can investigate both to determine the reason for the variance and what caused revenue or expenses to be higher or lower than budgeted.