Running a business is a bit more than having a good product or service. You need to be able to understand and manage your business's finances. Now, I am not saying you need to become an accounting guru overnight, but there are a few things you can’t afford to ignore. So we’re here to give you a little breakdown on a few things we think are important (in a way the everyday human can understand).

What is business accounting?

Business accounting is the process of tracking, recording, and analysing your business’s financial transactions (money coming in and going out of your business).

Why is this important?

Understanding where your business stands financially gives you the information you need to make decisions about pricing, spending, investments, and growth for your business.

It can seem like a massive topic, but for small businesses, it essentially boils down to:

• Tracking your money (recording your income and expenses)
• Understanding and generating financial reports
• Submitting tax returns

Accounting software, like stub, changes the way you as a business owner can take control of your business’s finances and do your basic accounting. And we know you can do it!

Accounting basics

To track and organise your business’s transactions so you know where your money is coming from and going to, each transaction needs to be categorised into one of your business's primary accounts within your Chart of Accounts.

Your business account categories

Your business's finances are made up of the 5 main account categories. These categories basically split up your finances so you can easily see how much you’ve made, how much you’ve spent, how much you owe, how much is owed to you, and what's left over. This is also known in the accounty world as your Chart of Accounts.

Let’s break down the categories:

What you have made (Income): also known as revenue is the amount you make from selling goods or services to customers or from other forms of income like investments

What you have spent (Expenses): is the money your business spends on items, goods or services to keep your business running

What you own (Assets): are things that your business buys and owns that add value to your business. They can help you make money and keep you running. Everything from your office furniture, computers and cars to things such as patents and trademarks are considered assets.

What you owe (Liabilities): if your business owes money, you have liabilities. Any money you owe to suppliers, loans or VAT is a liability to your business.

What you have left over (Equity): is what your business has after you subtract your liabilities from your assets. Basically, it's what's left over for you if you sell all your assets and pay off all your debts.

Basic accounting terms

Here are a few terms you may have come across, or haven't heard of at all. Either way, we hope these explanations can help give you the information you need to feel a bit more confident about accounting.

General accounting terms

Accounting period: A period of time that you track your business's financial transactions. These accounting periods can be yearly, quarterly or monthly.

Accrual-based accounting: looks at money that will be coming in or going out of the business before money has actually been paid. It accounts for income as soon as an invoice is generated for a customer even if it has not been paid yet.

Cash-based accounting: accounts for income that has been received and expenses that have been paid.

Capital: This is your business’s financial assets. For example, capital could mean the money you have in the bank or the money you have received from financing.

Cashflow: The money that comes in and goes out of your business. Cashflow refers to the sum of money a business generates from operations, financing, and investments.

Financial year: This is the time period that your finances are tracked over one year. In South Africa, the fiscal year normally runs from the 1st of March to the 29th of February

General ledger: General ledgers are where all your information comes together from inventory, sales, cash in, and cash out. General ledgers are used mostly by accountants to record financial transactions and have information that helps businesses prepare financial reports and analyse their financial health over time.

Gross profit: The profit a business makes after considering all the costs of supplying services or creating and selling goods. You calculate gross profit by subtracting the costs of goods from your income.

Journals: A business transaction can be recorded as a journal entry in your business’s general ledger. A journal entry could include the date of entry, account information, debit, and credit, and a description of the transaction. This is used mostly by accountants.

Net profit: is the selling price of your goods/services minus ALL the costs of running your business

Opening Balance: the amount of money a business has at the beginning of a specific accounting period

Closing Balance: the amount of money a business has at the end of a specific accounting period

Credits & Debits: Credit is money going out of your business and these transactions are recorded on the right side of the general ledger. Debit is money coming into your business and these transactions are recorded on the left side of the general ledger. Credits and Debits are key to double-entry accounting

Income terms

Gain on foreign exchange: The profit you have made on a foreign currency sale due to changing interest rates

Gain on sale of an asset: The profit you have made on the sale of a business asset

Revenue: is the money the business generates by selling its products and/or delivering services

Owner Contributions: Any money that you, the owner, pay into the business

Expense terms

Fixed expenses: are predictable. These expenses are consistent ‌ — ‌ you tend to know exactly what you’ll pay and when. These are typically expenses like Rent and Utilities

Variable expenses: change frequently, because they depend on factors such as sales, supplier costs and production rates. These are typically expenses like Deliveries & Shipping, Packaging, Advertising & Marketing etc

Loss on foreign exchange: Any loss you have made on a foreign currency sale due to changing interest rates

Loss on sale of an asset: Any loss you have made on the sale of a business asset

Asset terms

Accounts receivable This is the money customers owe you. The moment you send an invoice, it becomes a part of your receivables, until it's paid.

Cost of goods sold: Cost of goods sold, or COGS, is the total cost your business has paid out of pocket to sell a product or service. It represents the amount that the business must recover when selling an item to break even before bringing in a profit.

Depreciation: Over time your assets lose value due to use and wear and tear. The amount your asset devalues by each year is called depreciation

Accumulated depreciation: Accumulated depreciation is the total of this depreciation to date.

Current assets: Assets that the business owns and expects to use or sell within a year. They may also be called short-term assets.

Non-current or Fixed assets: Assets and property the business owns that will not be sold or converted to cash within a year. They may also be called long-term assets.

Inventory: Refers to both the goods and products a business sells, as well as any raw materials that the business uses to make those products.

Liquidity: Simply how liquid your business is, how quickly a business would be able to convert assets into cash. Cash, the most liquid asset, can be converted easily into other assets

Liability terms

Accounts payable (Money owed to suppliers): As simple as it sounds… This is the money the business owes to suppliers for goods that have been invoiced for or received

Dividends payable (Business profits Owed to Shareholders): Any profits made by the business that are owed to the business shareholders

Shareholder loans (Money the Business Owes to Directors & Shareholders): Money is taken out of the business and loaned to directors and shareholders, which isn't a salary or dividends

Equity terms

Drawings (Dividends paid): Any money or assets that have been taken out of the business by its owners

Business owner contributions: Money or assets business owners have put into the business, either to start the business or keep it running

Retained earnings: are net profits that a business holds onto (retains), to help fund the business's future. It is effectively a chunk of money you hold in your business bank account

Share capital: The value of the shares in your business you have on issue to its owner/s