| The following article is an excerpt from the free | | | | gasoline and truck used to deliver the chair? Did |
| online course "Using Finance & Accounting in | | | | you have any left over nails or did you use them |
| Your Small Business". | | | | all? Maybe there is a little life left in the sand paper |
| When you learn something new like accounting | | | | but it is not new anymore, is it? If we do not |
| concepts and terms, it helps to create links | | | | account for those costs we are missing a piece |
| between what you know and what you are | | | | of the picture-an important piece-that could affect |
| trying to learn. In some ways, it is like learning a | | | | how much money you have at the end of the |
| second language and decoding the new word is | | | | year. |
| part of the learning process. For example, trying | | | | In all your business activities, try to think in terms |
| to translate the Spanish word necesario you | | | | of transactions because once you can identify |
| might brainstorm with necessary – and | | | | what transactions occur in your business, you will |
| you would be right. How about blanco? Blanco is | | | | be able to organize them into a meaningful |
| like blank which is like white. So, blanco is Spanish | | | | manner. Right now, take a minute to list what |
| for the color white. | | | | transactions occur in your business each day, |
| Try to make some logical connections about the | | | | week and year. Always thinking in terms of |
| accounting vocabulary. Take the word – | | | | transactions might seem miserly, but it is |
| accounting – and think about it. Really, the | | | | important to be cost-conscious and honest with |
| accounting system is a basic counting of what | | | | yourself about all your transactions. Your success |
| goes on in your business. | | | | in business depends upon it. |
| Let's move on to transactions. Transactions are | | | | Some transactions are initiated by customers and |
| the business activities, or actions, that build day | | | | suppliers. Other transactions can take place inside |
| by day and become your expenses and income. | | | | your business or back office. The bookkeeping |
| Try to think about the term – transactions. | | | | department creates transactions when they |
| Actions are business activities, and trans means | | | | adjust your books for year-end considerations like |
| across or thru. These are the basic building blocks | | | | machinery depreciation or inventory shrinkage. |
| of an accounting system. Transactions are to | | | | What is depreciation? Let's say you bought a |
| accounting like what raw materials are to a | | | | brand new car, a 2006 Professor Now Coupe, |
| factory, or gasoline is to your engine – the | | | | and you spend $27,500 on this new car. Next |
| transactions are real and how your accounting | | | | year the car has some dings on the doors, wear |
| system handles them impacts your business. | | | | on the tires, stains on the seats and 20,000 miles |
| You must keep a record of your transactions to | | | | on the engine. You know your car is not worth |
| know how much money your business earned | | | | $27,500 anymore. This means your car has lost |
| and how much money your business spent. | | | | value or depreciated. |
| Sounds obvious, right? Ask your bookkeeper or | | | | When it comes to business owned equipment, |
| accountant how obvious some transactions are. It | | | | you can deduct this lost value as a business |
| can get tricky quickly if you are not clear about | | | | expense. Sure, you did not spend cash on the lost |
| what happened in the transaction and how you | | | | value but with depreciation, this is a transaction |
| want it recorded. | | | | your bookkeeper or accountant will force through |
| For example, if you were a carpenter you might | | | | at the end of the year. On your taxes, it helps |
| pay cash for a bucket of nails to assemble hand | | | | you by increasing your expenses like all other |
| made wooden deck chairs. The nail purchase is a | | | | cash transactions. Of course, the other side of |
| transaction and will have to be counted as a | | | | depreciation means your equipment is not worth |
| business expense. In your workshop, you then | | | | as much anymore. |
| assemble the chair using a pneumatic nail gun, | | | | In order for you to get a really clear picture of |
| sand paper, stain and varnish. The next day you | | | | how your business is operating, you need to be |
| deliver the chair to a customer in a neighboring | | | | diligent and thoughtful about what your real |
| town. You hand the customer a sales slip and | | | | expenses are. Depreciation is a real expense even |
| they then write you a check. That, too, is a | | | | though it is not a cash transaction. |
| transaction. It is easy to see the transactions | | | | Learning to see transactions for what they are |
| when money is spent or received. Did you, | | | | takes practice and contemplation. Transactions |
| however, see the other transactions? | | | | affect so many areas of your business that you |
| The stain and varnish, nail gun use and chair parts | | | | must analyze the daily details so you can piece |
| were also part of the transaction. What about the | | | | together the big picture. |