Accounting Basics Introduction
ZipBooks’ Accounting Basics is built to provide you all the basic accounting knowledge you’ll need to know to use ZipBooks with confidence.
Not many business owners get into business revving and ready to go with a deep understanding of accounting principles, but accounting is a discipline that you just can’t escape if you want to successfully run your own business.
Whether you have zero experience or you’re looking for a quick review, our accounting basics is the place for you!
Accounting basics by non-accountants
Our goal is to introduce the accounting basics in a way that’s as intuitive and inviting as our accounting app. We figure the best way to do that is to have someone explain accounting to you who themselves is fresh off their own accounting learning journey.
As the marketing guy surrounded by a bunch of accounting nerds (even the engineers know a ton more about accounting than me), I have to admit that I’ve spent essentially my whole life knowing little to nothing about accounting.
I’ve always loved learning and the best way to learn a subject is to learn from someone who knows more than you (anyone else on the ZipBooks team) and teach someone else that knows less than you (you, maybe?).
I’ve spent countless hours reading accounting blogs, taking online courses so that I can talk intelligently about our product. Also, you can rest easy knowing that everything I put out here has been vetted by the top accounting minds here at ZipBooks!
Accounting principles and practical applications
I’ll be laying out high-level accounting concepts, but I’ll also be digging into the nitty gritty of how these accounting principles are applied in a practical setting. After all, an introduction to accounting basics is a lot more useful if it includes details about how to run your business.
Where it makes sense, I’ll be pulling in ZipBooks to show you how accounting principles play out in accounting software.
I’ll be avoiding accounting jargon where I can. We’re constantly thinking about the best way to build solid accounting for non-accountants and some of that can inform the topics covered here.
I’m going to use our friend, Earl, and his consulting business, Grasscreek Enterprises, to illustrate basic accounting principles. We’ll learn along with Earl as his accounting knowledge grows with the needs of a thriving business.
Earl’s created a company and is eager to get started, but he’s not familiar with any kind of accounting. He’s evaluating accounting software solutions and looking for something that’s going to meet his needs while he’s getting up to speed with how accounting works.
Spoiler alert: Earl becomes an accounting genius and a ZipBooks super fan.
Meet Matt the CPA
Earl decides that the next step is to meet with an accountant to figure out what his next steps should be. Lucky for Earl, he’s got a buddy who’s a CPA, Matt the CPA. Earl calls up Matt the CPA:
Earl: Hey Matt! Just give me you know, the overall view based on my business plan. I’m going to be a consultant. Between income and expense, You know, let’s say I have 1,000 transactions each year.’
Matt the CPA advises Earl to have his LLC taxed as a S corporation because he thinks he’s going to make enough to benefit from the savings in reduced self-employment taxes. He doesn’t have any other employees, and it’s his side hustle so doesn’t need to worry about payroll right now. He anticipates that he might have a couple contractors so he’ll plan on issuing a couple 1099s at the end of the year but no w2s, for now.
Matt helps Earl evaluate possible accounting software setups
Matt advises Earl to keep things simple but to get into the practice of double entry bookkeeping now with the idea that Grasscreek Enterprises might grow into something more complicated in the future. Matt knows that if Earl gets into the practice of doing double entry accounting when things are less complicated, Earl’s accounting software will be able to keep up as his accounting needs get more complicated.
Matt the CPA: Earl, you’ll want an accounting software program that’s going to store everything electronically and retrieve them whenever you need to reconcile your bank statements, store receipts, etc.
and so I’m thinking to myself okay I have to record a bunch of transactions.
Earl: Anytime I invoice someone I’m going to need to have a record of that and I have lots of expenses to record, too.
You know that’s probably a bad example but let’s say I have a software that I’m buying that sends the people emails and reminds them like past clients saying like ‘hey, I’m still around do you want…you know, do you want me to help you?’
‘Hey you should have a business account so it’s a separate than your personal expenses,’ and so you’re going to want to make sure that whenever you have an expense show up in your business account that you know, it would be ideal to have a bank fee connection where it automatically shows up in your accounting software, and you know, you’re going to need some way to kind of summarize what exactly is happening with all of this income generated expenses.
Accrual accounting or cash basis accounting?
You want to know you know, how am I doing? Am I making money? Am I losing money? You know, how am I going to be able to know how things are going?
So Matt’s basically going to say to me ‘Hey! You know well there’s a couple of different like standard accounting reports that you can use so the first one’s called income statement,’ and
Matt’s going to ask me ‘Hey do you want to have… do you want to do an accrual accounting or do you want to do you want to do cash based accounting?’ and
so he’s going to explain to me the difference between those two things.
So accrual accounting I’m going to book income as soon as I send the invoice, and cash based accounting I’m going to book the income as soon as I get paid, so you know if I send an invoice in February and I get paid in March, accrual accounting basically says
‘hey, I got that revenue in February and cash based accounting is not going to show that revenue being there until I actually get paid in March.’
We’ll answer these in the next sections: Financial report basics.