ARCH591

BUSINESS MANAGEMENT
APPLICATION FOR
ARCHITECTURE 1
Ar. Francisco P. Epe, mba
Accounting Basics
Learn about accounting basics how
developing an understanding of your
business's accounting will allow you to grow
better.
You're smart, but starting a small business
doesn't make you a finance expert.
Accounting is crucial because of the time and
money it can save you in the future.
It doesn't matter if you love crunching
numbers or consider yourself the more
creative type. Entrepreneurs have to be
aware of the financial health of their
businesses and good grasp of accounting
basics.
What is business accounting?
Accounting is the process of systematically
recording, analyzing, and interpreting your
business’s financial information. Business owners
use accounting to track their financial operations,
meet legal obligations, and make stronger
business decisions.
Accounting is a necessary part of running a
business. It’s a task you’ll either need to
grasp or outsource — or both. Let’s ease into
the topic with Accounting.
Accounting is something that most people
have heard about at work, on TV, or online.
But that doesn't mean you really get the
basics of accounting.
Like many careers, accounting is a mix of
tactical and analytical tasks.
And it's not just recording transactions or
doing taxes.
Accounting is thinking about what your
financial records will mean to regulators,
agencies, and tax collectors.
If you're in charge of accounting, it's not just
numbers and receipts. It's a process of
gathering and reporting financial
information. You'll use those reports to
communicate the cash flows, financial
position, and performance of your business.
Understanding accounting often begins with
learning basic terms and principles. These can
help you learn the foundation of accounting.
Then, it's about learning how you can apply these
practices.
But before we dig into those ideas, let's talk about
what day-to-day work looks like for an
accountant.
What do accountants do every day?
Accountants oversee the financial records for a
business and make sure the data is correct. Then,
they use this data to create budgets, financial
documents, and reports.
Examples of this might include a cash flow
statement for operations or an income statement
for an upcoming board meeting.
They also attend meetings to offer advice or look
into legal issues. Other common activities include:
Collecting new financial data
Reviewing or updating past records
Collecting evidence for audits and other legal
proceedings
Computing taxes
Checking on compliance with relevant laws
Making sure tax payments are on time
Forecasting and risk-assessment
Accounting Skills
Accountants can't just be good with numbers. There
are many other technical and soft skills that this role
uses on a daily basis to make sure a business is
financially healthy.
Important skills include:
Listening
Time management
Organization
Critical thinking
These help accountants gather information from
stakeholders and communicate their findings.
Knowledge of how the business works is also
essential to contextualize financial data.
While math skills are helpful, data and systems
analysis are keys to success in this role. An
accountant often plays the role of investigator.
This means that curiosity and deductive reasoning
skills are also useful.
If you don't feel like these skills are your
strongest areas and you run a business, you
may want to seek out help to manage your
accounting.
Accounting vs. Bookkeeping

These two might sound the same if you're

new to business finance, but they're very
different.
To keep it simple, bookkeeping is a tactical
role, while accounting is more strategic.
Bookkeepers record and organize financial data for a
business.

Accountants analyze and advise business leaders about

what to do with that data.
They offer insights on taxes, legal concerns, and
growth.
They prepare reports and audits to communicate
and present financial data.
These insights help businesses prepare for
unexpected shifts that happen as a business
grows.
So, an accountant can be a bookkeeper, but not
all bookkeepers are accountants.
Basic Accounting For Your Business:
What You Need to Know

Many small business owners do a combination of bookkeeping

and accounting.
If you run a business on your own, you may do some or all of
the following tasks:
Opening a bank account
Tracking income, expenses, assets, liabilities, and equity
Preparing financial statements
Developing a system for bookkeeping
Creating a payroll system
Figuring out tax regulations and payments

Sometimes a business will do this research and

work as part of an initial business plan.
Other times they learn about these requirements
a little bit at a time as the business grows.
Accounting Automation
According to Statista, 64% of small businesses use
accounting software for their finances.
Another 43% use software for their taxes.
Automated accounting software includes tools
like QuickBooks, Xero, and other popular
accounting applications.
These tools are how most small businesses manage their
accounting. Automation tools save businesses and
accountants time by limiting the amount of time they spend
on data entry. This gives them more time to analyze data to
improve the business.
Most accounting software is so quick and
simple to use that it can be tempting to skip
learning accounting terms and principles. But
this know-how makes it easier to understand
a complex audit or to find errors in
automated data.
Regardless of how you manage your business
accounting, it's wise to understand accounting
basics.
If you can read and prepare these basic
documents, you'll understand your business’s
performance and financial health — as a result,
you'll have greater control of your company and
financial decisions.
Here are the documents and calculations
recommended, even if you work with a
professional, consulting agency, or have hired
a certified public accountant (CPA).
They provide valuable snapshots and
measures of your business performance.
1. Income Statement
An income statement shows your company’s
profitability and tells you how much money
your business has made or lost
2. Balance Sheet
A balance sheet is a snapshot of your business's
financial standing at a single point in time.
A balance sheet will also show your
business’s retained earnings, which is the amount
of profit that you’ve reinvested in your business
(rather than being distributed to shareholders).
3. Profit and Loss (P&L) Statement
A profit and loss (P&L) statement is a snapshot of
your business’s income and expenses during a
given time period (like quarterly, monthly, or
yearly).
This calculation will also be reflected on your
business’s tax document.
4. Cash Flow Statement
5. Bank Reconciliation
A bank reconciliation compares your cash
expenditures with your overall bank statements
and helps keep your business records consistent.
(This is the process of reconciling your book
balance to your bank balance of cash.)
Basic Accounting Terms

These 15 terms will create the foundation on

which you’ll build your knowledge of business
accounting.
While some of these terms might not apply to
your business right now, it’s important to develop
a holistic understanding of the subject in case you
expand or move into another type of business.
1. Debits & Credits
Not to be confused with your personal debit and
credit cards, debits and credits are foundational
accounting terms to know.
A debit is a record of all money expected to come
into an account.
A credit is a record of all money expected to come
out of an account.
Essentially, debits and credits track where the
money in your business is coming from, and
where it’s going.
Many businesses operate out of a cash account –
or a business bank account that holds liquid
assets for the business.
When a company pays for an expense out of
pocket, the cash account is credited, because
money is moving from the account to cover the
expense.
This means the expense is debited because the
funds credited from the cash account are covering
the cost of that expense.
Here’s a simple visual to help you understand
the difference between debits and credits:
DEBITS CREDITS
Increase assets Decrease assets
Decrease liabilities Increase liabilities
Decrease revenue Increase revenue
Increase the balance of Decrease the balance of
expense accounts expense accounts
Decrease the balance of Increase the balance of
equity accounts equity accounts
2. Accounts Receivable & Accounts Payable
Accounts receivable is money that people owe
you for goods and services. It’s considered an
asset on your balance sheet.
For example, if a customer fulfills their invoice
your company’s accounts receivable amount is
reduced because less money is now owed.
Accounts payable is money that you owe other
people and is considered a liability on your
balance sheet. For example, let’s say your
company pays p5,000 in rent each month.
Here’s how that would be recorded in your
financial records before that amount is paid out.
3. Accruals
Accruals are credits and debts that you’ve
recorded but not yet fulfilled. These could be
sales you’ve completed but not yet collected
payment on or expenses you’ve made but not yet
paid for.
4. Assets
Assets are everything that your company owns —
tangible and intangible. Your assets could include
cash, tools, property, copyrights, patents, and
trademarks.
5. Burn Rate
Your burn rate is how quickly your business
spends money. It’s a critical component
when calculating and managing your cash
flow.
To calculate your burn rate, simply pick a time
period (such as a quarter or a year). Subtract your
on-hand cash amount at the end of that period
from your on-hand cash at the beginning, then
divide that number by the number of months in
the period.
6. Capital
Capital refers to the money you have to invest or
spend on growing your business. Commonly
referred to as "working capital," capital refers to
funds that can be accessed (like cash in the bank)
and don’t include assets or liabilities.
7. Cost of Goods Sold
The cost of goods sold (COGS) or cost of sales
(COS) is the cost of producing your product or
delivering your service.
COGS or COS is the first expense you’ll see on
your profit and loss (P&L) statement and is a
critical component when calculating your
business’s gross margin. Reducing your COGS
can help you increase profit without
increasing sales.
8. Depreciation
Depreciation refers to the decrease in your assets’
values over time. It’s important for tax purposes,
as larger assets that impact your business’s ability
to make money can be written off based on their
depreciation.
9. Equity
Equity refers to the amount of money invested in
a business by its owners. It’s also known as
"owner’s equity" and can include things of non-
monetary value such as time, energy, and other
resources.
Equity can also be defined as the difference
between your business’s assets (what you own)
and liabilities (what you owe).
A business with healthy (positive) equity is
attractive to potential investors, lenders, and
buyers. Investors and analysts also look at your
business’s EBITDA, which stands for earnings
before interest, taxes, depreciation, and
amortization.
10. Expenses
Expenses include any purchases you make or
money you spend in an effort to generate
revenue.
Expenses are also referred to as "the cost of doing
business".
There are four main types of expenses, although
some expenses fall into more than one category.
Fixed expenses are consistent expenses, like rent
or salaries. These expenses aren’t typically
affected by company sales or market trends.
Variable expenses fluctuate with company
performance and production, like utilities and raw
materials.
Accrued expenses are single expenses that have
been recorded or reported but not yet paid.
(These would fall under accounts payable, as we
discussed.)
Operating expenses are necessary for a company
to do business and generate revenue, like rent,
utilities, payroll, and utilities.
11. Fiscal Year
A fiscal year is the time period a company
uses for accounting. The start and end dates
of your fiscal year are determined by your
company; some coincide with the calendar
year,
while others vary based on when accountants can
prepare financial statements.
For example, Fiscal Year 2023 runs from
July 1, 2022 – June 30, 2023
12. Liabilities
Liabilities are everything that your company owes
in the long or short term.
Your liabilities could include a credit card balance,
payroll, taxes, or a loan.
13. Profit
In accounting terms, profit — or the "bottom line"
— is the difference between your income, COGS,
and expenses (including operating, interest, and
depreciation expenses).
14. Revenue
Your revenue is the total amount of money you
collect in exchange for your goods or services
before any expenses are taken out.
14. Revenue
Your revenue is the total amount of money
you collect in exchange for your goods or
services before any expenses are taken out.
15. Gross Margin
Your gross margin (or gross income), which is your
total sales minus your COGS (cost of goods sold)
— this number indicates your business’s
sustainability.
Again, these terms are merely an introduction to
business accounting. However, they will help you
better understand accounting principles — which
we review next.