Basic Accounting Terms For Small Business
When I started my first business, I thought accounting was something only accountants should worry about. My mindset was simple: “As long as sales are bigger than expenses, the business is fine.”
But reality taught me otherwise.
Once I had to deal with taxes, government filings, insurance requirements, and even a loan application, I quickly realized that not knowing basic accounting was slowing me down. Eventually, I worked with an accountant — and from there, I discovered how helpful it is to understand the fundamentals myself.
If you’re a small business owner (or planning to be one soon), understanding these accounting basics can help you avoid mistakes, make smarter financial decisions, and grow your business with confidence.
1. Debits and Credits
Every transaction in your business is recorded as either a debit or a credit.
- Debit → adds value to an account.
- Credit → reduces value from an account.
Think of it like your personal wallet:
- Deposit money into your bank account = debit.
- Withdraw money = credit.
This is the building block of accounting. Once you understand debits and credits, you can trace how money flows in and out of your business.
2. Accounts
An account is simply a category where money comes in and out. It’s like a container that holds specific financial activity.
Examples of accounts:
- Cash on han
- Bank account
- Inventory
- Sales income
- Utilities expense
By separating money into different accounts, you avoid confusion and always know where your money is and where it’s going.
3. Assets, Liabilities, Equity, Revenue, and Expenses
These five terms are often called the pillars of accounting.
- Assets → what the business owns (cash, equipment, inventory, receivables).
- Liabilities → what the business owes (loans, supplier credits, unpaid bills).
- Equity → the owner’s share or net worth of the business (Assets – Liabilities).
- Revenue → income generated (sales, service fees, commissions).
- Expenses → costs of running the business (salaries, rent, utilities, supplies).
👉 Together, these five categories summarize your entire financial story.
4. General Ledger and Accounting System
Your general ledger is where all your accounts are tracked. It’s basically your business’s financial diary — every peso that comes in or goes out has a record here.
In the past, business owners kept physical ledgers. Today, you can use accounting software like QuickBooks, Xero, or even Excel spreadsheets to record transactions, track invoices, and monitor expenses.
Digital accounting tools also make tax filing and loan applications easier since your records are organized.
5. The Accounting Equation
The golden rule of accounting is:
Assets + Expenses = Liabilities + Equity + Revenue
This equation must always balance. If it doesn’t, there’s an error in your records.
This formula may look intimidating at first, but once you practice it with examples, it becomes second nature.
6. A Simple Example
Let’s say you’re starting a small buy-and-sell business.
- You borrow ₱10,000 from a friend.
- You add ₱2,000 of your own money.
- You buy 100 items at ₱120 each (₱12,000 total).
- You sell 30 items at ₱180 each = ₱5,400 revenue.
- You pay ₱200 for stall rent.
Here’s how it looks step by step:
Step 1: Starting Capital
Transaction | Assets (Cash) | Liabilities (Loan) | Equity (Your money) | Revenue | Expenses |
Borrow ₱10,000 + Add ₱2,000 | ₱12,000 | ₱10,000 | ₱2,000 | ₱0 | ₱0 |
✅ Balanced: ₱12,000 = ₱10,000 + ₱2,000
Step 2: Buy Inventory (₱12,000)
Transaction | Assets (Inventory) | Liabilities | Equity | Revenue | Expenses |
Purchase stock | ₱12,000 (Inventory) | ₱10,000 | ₱2,000 | ₱0 | ₱0 |
✅ Still balanced. Cash converted into inventory.
Step 3: Sell 30 Items at ₱180 = ₱5,400 Revenue
Transaction | Assets (Cash + Inventory) | Liabilities | Equity | Revenue | Expenses |
Sell 30 items | ₱5,400 (Cash) + ₱8,400 (Inventory) = ₱13,800 | ₱10,000 | ₱2,000 | ₱5,400 | ₱0 |
✅ Balanced: ₱13,800 = ₱10,000 + ₱2,000 + ₱5,400
Step 4: Pay Rent ₱200
Transaction | Assets (Cash + Inventory) | Liabilities | Equity | Revenue | Expenses |
Pay rent | ₱5,200 (Cash) + ₱8,400 (Inventory) = ₱13,600 | ₱10,000 | ₱2,000 | ₱5,400 | ₱200 |
✅ Equation still balances.
Final Snapshot
- Assets: ₱13,600 (Cash + Inventory)
- Liabilities: ₱10,000
- Equity: ₱2,000
- Revenue: ₱5,400
- Expenses: ₱200
This example shows how accounting tracks every peso in your business. Without recording these properly, you might think you’re earning, but you could actually be losing money.
Why Small Business Owners Must Learn Accounting Basics
Many entrepreneurs ignore accounting until tax season or until they apply for a loan. That’s a big mistake. Understanding accounting helps you:
- Make better financial decisions
- Should you expand or wait?
- Can you afford to hire more staff?
- Is your pricing sustainable?
- Should you expand or wait?
- Avoid costly mistakes
- Missing tax deadlines
- Underreporting or overreporting income
- Mismanaging loans
- Missing tax deadlines
- Gain investor or lender trust
Banks, investors, and even suppliers look at your financial statements before extending credit or investment. If your records are messy, they may walk away. - Understand your true business health
Sales may look good, but profit tells the real story. Accounting gives you clarity about whether your business is actually growing.
Practical Tips for Small Business Owners
- Separate personal and business accounts. This makes bookkeeping cleaner.
- Track every expense. Even small costs like delivery fees or packaging add up.
- Use software or apps. Tools like Wave, QuickBooks, or even GCash transaction reports help simplify accounting.
- Review monthly. Sit down once a month to check your profit, expenses, and debts.
Consult a professional. Even if you handle day-to-day bookkeeping, having an accountant check your numbers once or twice a year is worth it.
Final Thoughts
Understanding accounting doesn’t mean you need to become a CPA. But as a business owner, mastering the basics gives you power:
- You’ll make smarter choices.
- You’ll avoid costly mistakes.
- You’ll truly understand how healthy your business is.
Start with the basics — debits, credits, assets, liabilities, equity, revenue, and expenses. Practice applying them to your own transactions. Over time, accounting becomes less intimidating and more empowering.
Remember: Accounting isn’t just about numbers — it’s about telling the financial story of your business. And as the owner, you’re the storyteller.
