Bookkeeping is an essential part of keeping a business organized. With proper bookkeeping practices, small business owners can efficiently manage cash flow and keep things running smoothly. Comparatively, bad practices can stunt a business from reaching its full potential. Here are three basic principles that small business owners and bookkeepers should understand.
The first principle of bookkeeping involves debits and credits. When accounts are debited and credited, they are affected differently based on the account type. Liabilities, equity and revenue are increased by credit whereas assets and expenses are decreased. On the other hand, debit increases assets and expenses while decreasing liabilities, equity and revenue. Knowing which account to credit and debit can help your bookkeeping practices by keeping everything neat and tidy. Where double entry accounting methods are used, debits are found on the left side and credits on the right. A good example of debits and credits can be demonstrated by a company which just bought $12,000 worth of inventory. The inventory asset account would be credited, increasing the amount, while the cash or bank account would be debited, or decreased. Understanding debits and credits will help keep the books in line and make sure everything is on track for tax season.
Secondly, the principle of assets and liabilities are important to keep in mind. According to an article by Adam Barone from Investopedia, “An asset