Financial basics

"If you want to start a business but have never been to financial school, terms like debits, credits, assets, and liabilities can feel like a foreign language. And just like you can't survive in a foreign country without the local language you definitely cannot run a business without understanding how accounting works. This article breaks those concepts down into understandable ideas, with advice you can apply right away."

"Imagine you run a small bakery. At the end of the month, your records show: Cash: 5,000 Loan payment due: 2,000 Revenue earned: 6,000 Ingredients and supplies: 3,000 First, look at profit. You earned 6,000 and spent 3,000 on ingredients, so your profit is 3,000. Profit, however, is not the same as cash. To understand your cash, start with the 5,000 you already have. After paying the 2,000 loan instalment, you are left with 3,000."

Accounting records and communicates financial information using fundamental terms: assets, liabilities, revenues, and expenses. Knowing these basics enables clear assessment of profitability and cash availability. A simple bakery example shows profit equals revenue minus expenses, while cash depends on receipts and obligations like loan payments. Profit can exist without immediate cash if sales are invoiced rather than paid. Practical questions such as affordability of equipment or true cash available for upcoming expenses rely on distinguishing profit from cash. The double-entry bookkeeping system records each transaction as corresponding debits and credits to keep accounts balanced.

Read at londonlovesbusiness.com