If you have your own business, then you need to analyze your finances. If you are someone who has no clue of how to do so, let’s have a look at the basics of bookkeeping needed for handling business finances.
What is bookkeeping, and why is it important?
Bookkeeping is the process of recording and organizing all the transactions of a business on a day-to-day basis. It helps to know whether the business is generating profit or loss and to what extent. Hence it becomes important for a businessman to know about the financial position of his business.
Types of accounts
There Are Three Types Of Accounts.
- Personal Accounts- They are natural persons, organizations or representative people.
- Real Accounts- They are the properties, things or assets owned by an organization. They can be tangible or intangible.
- Nominal accounts- They are related to expenses, losses, incomes and gains.
Golden rules of accounting with examples
For accounting, you need to understand certain rules laid out that are generally adopted worldwide; they are known as the golden accounting rules. Let us have a look at the golden rules of accounting with examples to get a clear idea.
Rule 1: Debit The Receiver, Credit The Giver
This rule is for personal accounts. When a person gives something to the business, the business is liable to pay; therefore, the person becomes the creditor. And when the person takes something from the business, then he has to pay to the business, so he becomes a debtor. So, the debtor is the person who owes the business, and the creditor is the person to whom the business owes.
Example- Mr. A has bought a pen from the shop, then he is the debtor as he has to pay money.
Mr. B has sold a pen, and then he is the creditor as he has to receive money.
Rule 2: Debit What Comes In, Credit What Goes Out
This rule is true for real accounts. They have a debit balance if they are bought, and when they are sold, it gets reduced from the account.
Example: A shopkeeper buys a machine for his business, then he debits that machine as it comes in. Similarly, when he sells that machine, he credits the machine account.
Rule 3: Debit All Expenses and Losses, Credit All Incomes and Gains
This rule is applied in the case of nominal accounts. When incomes are credited, they increase the capital, and when expenses are debited, they reduce the capital.
Example: When sales or interest is received, it is credited in books that are an inflow, so the capital increases. Similarly, when repairs and maintenance expenses are incurred, they are an outflow for the business and hence reduce the capital.
Basic documents are invoice, debit note and credit note. They are explained as follows:
1. Invoice- When an organization sells or provides service, it issues an invoice.
2. Debit note and credit note-
Debit note- When the organization receives back the goods he had sold, he issues a debit note.
Credit note- When he returns the goods to the seller, then he issues a credit note.
Understanding the basic concepts helps in better evaluating the performance of your business and making informed decisions in the future.