Keeping Your Bookkeeping REAL (part one)
In accounting, it’s all about balance. Think of the brain – there’s a left side and a right side.
If you know one side of a transaction, you need to pair it with the other side.
This is called “double-entry accounting”.
The left side of a transaction is called the “debit”. The right side of a transaction is called the “credit”.
Every transaction in your business needs a category. These are also known as accounts. A list of accounts/categories is known as a “chart of accounts”.
Let’s take a look at an example.
You e-mail a customer an invoice for $100. A few days later, your customer sends you a check for the invoice.
What you have are two transactions.
Wait, what? Two?
You have 1) the invoice and 2) the payment.
We learned earlier that every transaction needs to balance and every transaction needs categories.
The invoice transaction has a left side and a right side.
When you created the invoice, it was because you made a sale. Sales belong in the category of revenue. Revenue is a right-side category typically.
But, remember, we need balance in our transaction. We need a left side and a right side. We know the right side – it’s the sale in the revenue category. Now, we need the left side.
When you create an invoice, you are waiting to receive payment from a customer. This is known as a receivable.
Get it? Receivable – a payment to receive.
Receivables belong to the category “assets”. Assets are left-side categories typically.
The left side of the invoice transaction = the right side of the invoice transaction.
Now that you understand there must be categories and balance, I want to show you how to keep it REAL in your bookkeeping.
REAL stands for Revenue, Expenses, Assets and Liabilities.
In our example with the invoice, you learned about two categories – sales (Revenue) and receivables (Assets).
To keep the balance in your bookkeeping, each transaction needs at least two REAL categories.
Do you remember why?
That’s right! Because each transaction has a left side to balance the right side.
You’re doing great! You are well on your way to keeping it REAL with your bookkeeping.
In my next post, I’ll explain what happened with the payment you received from your customer in the example above.
Until then, here are some accounting words to keep in mind:
Revenue – money you earn in your business
Expenses – money you spend in your business
Assets – what you own in your business
Liabilities – what you owe in your business
Debit – the left side of a transaction
Credit – the right side of a transaction
Accounts – same as categories; a type of transaction
Chart of accounts – a list of categories (accounts)
Receivable – a customer payment you’re waiting to receive
Transaction – a business activity
Bookkeeping – the day-to-day or regular management process of financial transactions, may include account reconciliations and management reports
Accounting – the periodic management process of financial transactions, may include the bookkeeping, reporting and taxes