Understanding basic accounting helps you make better business decisions. Learn fundamental concepts that every business owner should know without being an accountant.
Cash vs Accrual Accounting
Cash accounting records transactions when money actually moves. Accrual accounting records when sale happens or expense is incurred, regardless of payment timing. GST requires accrual basis for registered businesses.
Most small businesses start with cash accounting for simplicity. However, accrual provides a clearer picture of profitability. Choose based on your business needs and tax requirements.
Key Financial Statements
Balance Sheet shows your business assets, liabilities, and equity at a point in time. Income Statement (Profit & Loss) shows revenue, expenses, and profit over a period. Cash Flow Statement tracks money movement.
Review these statements monthly to understand business health. Compare with previous periods to spot trends. Rising expenses without corresponding revenue growth need investigation.
Understanding Debits and Credits
Every transaction affects at least two accounts. Debits increase asset and expense accounts. Credits increase liability, equity, and revenue accounts. The accounting equation must always balance: Assets = Liabilities + Equity.
Track invoices issued but not yet paid as accounts receivable. Record amounts owed to suppliers as accounts payable. This helps manage working capital effectively.
Managing GST in Accounts
Maintain separate ledgers for CGST, SGST, and IGST collected and paid. Claim input tax credit only when you have valid tax invoices. File returns before due dates to avoid penalties and maintain compliance history.
