Bookkeeping 101: Accounting Basics for Solopreneurs

Does bookkeeping for your online business stress you out? Totally confuse you? Completely overwhelm you?

I was an accounting student when I first started learning to do bookkeeping at my internship... and it stressed, confused, and overwhelmed me. So I completely understand the solopreneur with no background in accounting having a nightmare of a time learning how to DIY their books!

That’s why I’m putting together a Bookkeeping 101 series for you! It’s basically a totally free, ungated mini-course in bookkeeping fundamentals!

To kick off this series, we’re starting with some accounting basics, because what even are debits and credits?

 
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In all seriousness, having an understanding of a few accounting concepts can make a world of a difference in how you approach your record-keeping! But I’ll also be honest; this post may be a bit of an information overload! Which is why you should bookmark it. Print it. Take notes on it. Or even hit me up for a coaching call so we can dive deeper into it!

If you’re still here, you’re determined to learn something today, and I applaud you! So with that, I’ll leave you with just a quick quote before you start digging through the rest of this post:

If you are not willing to learn, no one can help you. If you are determined to learn, no one can stop you.
— Zig Ziglar


Accounting concept 1: Accounts

In the accounting world, money is recorded within different “accounts.” While you may immediately think of something like a bank account, in accounting, it’s more along the lines of a categorization.

But, more than that, an account is like a place for recording balances and changes to that balance. While this was more physical back in the paper bookkeeping days, the digital format for accounts is more conceptual. Confused? Not to worry! We’ll get there!

Think of accounts like separate pieces of paper that you use to track different types of spending.

 
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Except, it doesn’t just have to be spending. It can be any way that your money is used or stored. The five main categories for accounts are Assets, Liabilities, Equity, Income, and Expense. Put simply:

  • ASSET accounts represent what the business owns.

    • E.g. Your bank accounts, any cash on hand, furniture, equipment, etc.

  • LIABILITY accounts represent what the business owes.

    • E.g. Credit card balances, loans, unpaid bills, etc.

  • EQUITY accounts represent the business’ worth to the owner - YOU! (and any investors, but that’s beyond our scope here.)

    • E.g. The business’ total profits (or losses), the owner contributions or withdrawals, etc.

  • REVENUE accounts represent what the business earns.

  • EXPENSE accounts represent what the business spends.

All of the money that moves throughout your business can be categorized in these ways. Or, using the example above, every element of your financial activity can - and should - be recorded on at least one of these pieces of paper. (We’ll go over the HOW for that in the following sections!)

- What does this look like in your bookkeeping software?

Your software will have what’s called a Chart of Accounts. This is the full list of every account that you use to record transactions within your business. Then, when you record (or import) transactions within the software, you’ll select which account applies to that transaction.

The account names can vary from person to person. Some may use Office Expense, others may split that into Office Supplies and Office Furniture. It depends on what level of detail you want for your own records!

As a starting point, I usually tell my U.S. clients to look at Form Schedule C for the different accounts that the IRS uses for income and expenses (you can Google the current year’s PDF!). These are very broad, but again, you can drill down as detailed as you’d like! As long as your accounts are clear and can easily be translated into the IRS’ terms for your tax return.


accounting concept 2: Double-entry accounting

Now comes the concept that could absolutely transform your understanding of bookkeeping (and accounting in general). Double-entry accounting.

Traditionally, you may think of “tracking your finances” as a simple excel sheet recording the dollar amounts. You spent $30 on office supplies, so you write the date, location, description and amount and call it a day.

The problem with this system is that you’re only working with Plus and Minus. You’ll see what it all nets out to in the end, but this doesn’t really tell you anything about your business’ performance or health. This is, at best, going to show your cash inflows and outflows, which is only one SMALL part of financial reporting.

Instead, some really smart guy from a long time ago invented double-entry accounting. This system utilizes those various accounts we talked about before (remember, not just income and expense, but also assets, liabilities, and equity!).

Simply put, the theory behind this idea is that there are TWO sides to every transaction. When you think about it, it makes sense!

In our example above, you’re only going to record the $30 in office supplies expense. But if you think about it, money going TO something has to come FROM something else, doesn’t it?

In this example, let’s say you swiped your business debit card at the store. The money that went TO office supplies came FROM your bank account.

So you’re ADDING to your expenses and SUBTRACTING from your bank balance, an asset account!

 
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This might sound like common sense, but this is one of the most foundational elements of the entire modern-day accounting field. When you start recording transactions in your bookkeeping software, you should always be aware of what TWO accounts you’re hitting.

Side note: It isn’t always an Increase/Decrease relationship. Sometimes you can Increase two accounts, or Decrease two accounts! See some of the examples below!


- Examples of double-entry accounting:

Ex 1: You use your debit card to pay for an online course.

  • This INCREASED your education expenses and

  • DECREASED your bank (asset) account.

Ex 2: You took a $1,000 loan from the bank. (P.S. Do not recommend.)

  • This INCREASED your bank (asset) account balance and

  • INCREASED your note payable to the bank (liability).

Ex 3: You transferred $1,000 of your business’ money into your personal bank account.

  • This DECREASED your bank (asset) account and

  • DECREASED your owner’s equity (because you reduced your contributions to your business.)

Ex 4: Your payment processor deducted fees from your last client payment received (and you had recorded the full invoice amount as income already).

  • This INCREASED your processing fee expense account and

  • DECREASED your service revenue account (assuming you had already booked the gross invoice into revenue.)


- What does this look like in your bookkeeping software?

Your accounting software likely has this concept built-in to their systems! Typically, you only have to enter one transaction, and they’ll take care of the other side based on how you input the transaction.

The key is to understand that this is happening. If you recorded a transaction and something went wrong somewhere else, it’s important to be able to think through both sides of what you put into the system so you can troubleshoot!

Maybe you had the wrong bank account selected, or you inadvertently recorded an expense as a revenue transaction (it happens!). Or you could have counted an income item twice when it should have just been a transfer between bank accounts. A lot can go wrong, so understanding how these numbers go into your system will be a tremendous help for problem-solving later!

accounting concept 3: Debits and credits

Debits and credits are common terms used in accounting (and they’re not the same as what you see in your bank account). They can be very confusing for someone still new to accounting, so for now, we’re keeping it very basic!

Understand that debits and credits are essentially the increases and decreases of different accounts. Where things get confusing is in understanding when a debit or credit is an increase or a decrease; it changes based on the type of account, which is all a part of the double-entry system. (Which may seem like an unnecessary pain, but trust me, it has a certain level of genius to it.)

Here’s a quick cheat sheet with the basic rules:

 
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Fun fact: Notice that ‘T’ shaped diagram? This is a visual tool that accountants use for debits and credits! Debits are always on the left, credits are on the right. But notice that what changes is whether or not those debits/credits are increasing or decreasing (+/-)!

Another important note about debits and credits is that they have to balance out! As in, the total debits in a transaction must equal the total credits in that transaction. So if you debited $50 to an expense account, you have to credit $50 from your bank (asset) account.

This seems simple enough when you only have one debit and one credit in a transaction.

But let’s say that you bought a new $100 office chair with a mixture of cash and a debit card. Technically, you should have two asset accounts here: your bank account, and your cash-on-hand. In this example, you would debit the office expense account for $100, then credit, say, $40 from your cash-on-hand and $60 from your bank account. The credits total $100, which matches your debit, so you know you’ve captured the full transaction!

 
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Why does this matter? Think about it! If you said that full transaction was a $100 credit to the bank account, your records would show that you had $40 less in your bank than you actually did. Or, maybe you imported your bank’s data into your software and saw the $60 debit card purchase. If you were looking at a $100 receipt for the chair, you’d have to wonder, where did the extra $40 come from?

This double-entry accounting system with debits and credits is designed to help you capture the ENTIRE financial picture!


- What does this look like in your bookkeeping software?

Because of their non-accountant user-friendly interfaces, most bookkeeping programs don’t immediately use debit and credit terminology. Instead, they hide it behind easier to understand names!

Typically, the type of transaction you’re recording tells the software whether it’s a debit or a credit to the bank account you’ve selected.

For example, if you’re recording an expense transaction and you select your checking account in the appropriate menu (it differs by the program!), you’re telling it that you’re crediting (decreasing) your checking account and debiting whatever expense category you select.

But if you were recording an income transaction, you’re telling the program that it’s an addition (debit) to that checking account, and the income category you select at the bottom of the input screen will be the credit.

Again, having an understanding of what’s happening beneath the interface is huge in understanding your bookkeeping systems (and troubleshooting) overall!


accounting concept 4: Cash vs accrual basis

Another important element of financial reporting is timing. (The easiest way to demonstrate this concept is with revenue, but know that it applies to expenses as well!)

If you send out a $500 invoice to a client in August for work completed, but they pay you in September, when do you record the revenue from that service? August or September?

If you received an email that you’d earned a $50 affiliate commission in November, then received the final payout in December, when do you record the revenue from that affiliate sale? November or December?

In accrual-basis accounting, you recognize revenue when it’s earned, as in, when the work was performed. In this case, you’d record the service income in August and the affiliate sale in November.


(If your inner-accountant-genius wanted to know how that would be recorded in your books since there’s no cash hitting the bank, you’re awesome! The short answer is that your debit is an asset account called “Accounts Receivable,” as in money you’re owed and are expecting to receive soon, and your credit will be the revenue account! Then, when the money comes in, you debit (increase) the bank (asset) account and credit (decrease) the receivable account, thereby moving it from the “expected” category to the “received.”)


In cash-basis accounting, which is much more simplified, you wouldn’t even worry about it until the cash is received! As in, September and December, per the earlier example.

You can do your accounting however you’d like (accrual is more complex but technically more accurate and provides more information), but know that the majority of you will only have to worry about cash-basis records for tax purposes! Though, I believe some countries make accrual accounting a requirement; a quick Google search for your area should give you the answer!

To learn more about how cash vs. accrual accounting affects bloggers and online business owners, check out this related post:

RELATED POST: 3 Mistakes Bloggers Make on Their Income Reports

- What does this look like in your bookkeeping software?

Usually, there is an option somewhere in your company settings to select your preferred accounting method. Otherwise, the use of “Accounts Receivable” or “Accounts Payable” account titles indicates an accrual system!

Unless you deal a lot with chasing down clients for payments, I typically find it easier to stick to cash-basis accounting. But that could be the lazy talking! It’s really a preference (except when it comes down to tax reporting)!


accounting concept 5: Reconciliations

Bank reconciliations are less of an accounting concept and more of a bookkeeping one, but I wanted to give this important record-keeping step its space in this post!

Reconciling the bank account is going to make sure that every debit and credit you recorded that supposedly touched the bank account adds up to the ending balance reported by your banking institution. This is an incredibly important step in keeping accurate records!

Learn more about reconciliations in this introductory post!

RELATED POST: How to Know Your Bookkeeping is Right: An Introduction to Reconciliations

- What does this look like in your bookkeeping software?

Your bookkeeping software will have a function somewhere to reconcile the bank accounts for the end of the month. They make it SUPER easy because they do all the math for you! The work comes in when they do the math and the numbers don’t line up - that’s when it’s time to troubleshoot.

Check out this post for common errors that lead to unreconciled accounts!

RELATED POST: Can’t Reconcile? Troubleshooting Tips for Bloggers Who Hate Bookkeeping

accounting concept 6: Financial statements

The final accounting concept I wanted to touch on in this post was the financial statements themselves!

Now, there are a lot of different types of statements used to report the financial information. The key is to understand that each report has a different purpose. Understanding financial statements can take a bit of practice (and maybe some additional help from a pro!), so today, we’ll just go over two basic ones!

- The Balance Sheet

The first statement you should get familiar with is called the Balance Sheet. This is a snapshot of your business’ financial position at a single point in time. As in, you’d likely pull a month-end balance sheet for the last day of a certain month, or a year-end report for December 31st! But really, it could be for any date. The key is to know that this isn’t showing performance over time. This report says, “As of today, this is where we stand.”

The balance sheet shows the BALANCES for your different Asset, Liability, and Equity accounts. (Note that it does not show Revenues or Expenses, specifically; only the Net Profit/Loss. We’ll go over this in a minute.)

One easy example would be the bank asset accounts. In a perfect world, the January 31st balance sheet would show a balance for your business checking account that matches your January 31st ending balance according to your bank statement!

The balance sheet is often overlooked by micro-businesses like ours, but it can actually be incredibly useful for assessing the accuracy of your financial records. The balance sheet has several underlying complexities to it, so don’t stress if you look at yours and it still doesn’t make much sense! That comes with practice (and potentially, help from a coach!).

- Profit & Loss (aka Income Statement)

The Profit & Loss (P&L) statement, also known as an Income Statement, is that report that shows your business’ performance over time. The P&L is a report showing the income and expense activity between two specified dates. Common time frames for a P&L are the first and last day of a single month, quarter, or year.

The P&L statement is quite simple! It’s all of your reported income for that time period minus your expenses for the same period! The result will be your Net Profit or Loss (this number is then reported in the Equity section of your balance sheet - reflecting an element of your business’ overall value).

To learn more about the P&L statement, check out this related introductory post!

RELATED POST: Mastering Your Blog’s First DIY Income Statement

Take the time to learn it.

If you read straight through this post, you deserve an award! If you’ve been digesting it slowly over time (or are still working on that), you still deserve an award.

This stuff isn’t easy to digest at first - I just summed up the first few chapters out of my Fundamental Financial Accounting Concepts textbook, which took us several weeks of class time to get through back in college!

But it can be learned, and it can make the world of a difference in your ability to understand bookkeeping! So, as I advised in the introduction to this post, bookmark it. Print it. Take notes on it. Come back to this post and open up your bookkeeping software (I recommend either Wave, which is a free and simple option, or Quickbooks Online!) alongside it. Try and see how it all fits together!

Then, check out the next installments in the Bookkeeping 101 Series!

Plus, I have a few more posts centered around DIY bookkeeping tips coming up after that!

Feeling stuck? Need a money mentor?

It’s worth mentioning that helping you set up your bookkeeping and manage your money moving forward is my entire goal here! Sign up for a free Coffee Chat to get your questions answered and see how I can help you make progress, or head straight to my services page for your perfect solution!

Until next time!

- Katie Scott