Bookeeping vs. Accounting vs. Finance
To me you cannot separate operations and finance​. For a person to successfully operate any type of business, they must understand the basic principles of the bookkeeping, accounting,vand finance as well as the relationship these numbers have to operations in the past present and future. One skill set without out the other is pretty much useless and the business will pretty much be doomed. While I have never met a single person that is the whole package, a complete understanding of what needs to be done is what is most important. The place that started self-evaluation, understand what your skill sets are and what skill sets you do not have. Next Step would be to surround yourself with people that have the skill sets you are missing. That does not mean that you do not have to understanding of the other people's roles. For example, 25 Years ago we decided to build our first website. I found myself in financial meetings trying to make decisions at presentations when I had no idea what these people were even talking about. The first thing I did was went out and learned to build websites. I had no desire to be a web designer. My desire was to be able to understand what was being presented to me and make an educated decision on what to do and how much to spend. That was my fiduciary duty to my company. See as we continue through this page, the numerous skill sets needed to run a business cannot be held by one individual. A deep understanding respect for others roles are what is needed. The ability to translate these ideas into financial plans is what's most important. Also, the ability to monitor the financial history of the company, its past performances, and the results of past decisions will guide you to future successful decisions.
The 7 Basic Accounting Principles
The seven basic accounting principles—Economic Entity, Monetary Unit, Going Concern, Time Period, Cost, Revenue Recognition, and Matching—provide the framework for recording financial data accurately. These rules ensure consistency, objectivity, and transparency in financial reporting for businesses.
The 7 Basic Accounting Principles
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Economic Entity Assumption: The business is treated as a distinct entity, separate from its owner's personal financial affairs.
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Monetary Unit Assumption: Only transactions that can be expressed in monetary terms (e.g., dollars) are recorded in the accounting records.
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Going Concern Principle: Financial statements assume the business will continue to operate indefinitely and not liquidate in the near future.
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Time Period Assumption: The life of a business is divided into artificial, regular time periods (e.g., monthly, quarterly, annually) to report performance.
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Cost Principle (Historical Cost): Assets are recorded at their original purchase price rather than their current market value.
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Revenue Recognition Principle: Revenue is recognized and recorded when earned, not necessarily when cash is received.
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Matching Principle (Expense Recognition): Expenses must be matched and reported in the same period as the revenues they helped generate. Other key principles often included are Consistency (using the same methods over time), Materiality (focusing on items that matter), and Full Disclosure (reporting all relevant information).
Three Basic Financial Statements
The three basic financial statements are the Income Statement, Balance Sheet, and Statement of Cash Flows. These documents measure a company's financial health, performance, and cash movement over time. They are interconnected, with net income flowing from the income statement to the balance sheet and cash flow statement.
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Income Statement (Profit & Loss): Reports revenue, expenses, and net income/loss over a specific period, showing profitability.
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Balance Sheet: Provides a snapshot of assets, liabilities, and shareholders' equity at a specific point in time.
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Statement of Cash Flows: Details the cash inflows and outflows from operating, investing, and financing activities.
Balancing the Books
Debit-Left | Credit Right
"Balancing the books" originated from 15th-century accounting, specifically the double-entry bookkeeping system popularized by Luca Pacioli, where every transaction required a debit and credit entry to match. It refers to the manual process of ensuring that total expenses (debits) equal total income (credits) in a ledger, creating a balanced, accurate financial record.
Key Historical and Functional Origins:
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The Ledger System: Traditionally, accountants maintained large physical books (ledgers) for recording financial transactions. At the end of a period, they would sum the left (debit) and right (credit) columns to ensure they matched.
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Double-Entry Necessity: The phrase is rooted in the accounting equation: Assets = Liabilities + Equity. If the sides did not "balance," an error had occurred that needed correction.
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Checkbook Reconciliation: The term also stems from checking personal accounts, where individuals compared their own record of transactions against bank statements to ensure they matched.
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Modern Usage: While largely automated by software today, the term remains to mean verifying financial records for accuracy.
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Balance Sheet
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Asssts = Debits
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Liability = Credits
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Equity =Credits
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Profit and Loss Statements
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Sales = Credit
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Expenses = Debits
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Sales - Debits = Net Profit or Loss​
The Net Profit or Loss on the P&L also appears in the equity section of the Balance Sheet. This is the key element that ties the two reports to each other.