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.
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.
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.
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.