These foundational accounting principles form the building blocks of effective financial management:

1. Assets, Liabilities, and Equity

The accounting equation is the foundation of all financial reporting: Assets = Liabilities + Equity

Assets are what your business owns (cash, inventory, equipment, accounts receivable).

Liabilities are what your business owes (loans, accounts payable, credit card debt).

Equity represents the owner’s stake in the business after subtracting liabilities from assets.

Understanding this relationship helps you evaluate your business’s financial position at any given moment.

2. Revenue vs. Profit

Many new business owners confuse revenue with profit, but they’re fundamentally different.

Revenue is the total income generated from sales before any expenses are deducted.

Profit (or net income) is what remains after subtracting all business expenses from revenue.

A business can have high revenue but low or negative profit if expenses aren’t properly controlled. Focus on profitability, not just top-line sales.

3. Cash Basis vs. Accrual Accounting

There are two primary methods for recording financial transactions:

Cash basis accounting records income when money is received and expenses when paid. It’s simpler and shows actual cash availability.

Accrual accounting records income when earned and expenses when incurred, regardless of when cash changes hands. It provides a more accurate picture of financial performance.

Most small businesses start with cash basis but may need to switch to accrual as they grow or if required by lenders or investors.

4. Chart of Accounts

A chart of accounts is an organized list of all accounts used to categorize business transactions.

It typically includes categories like revenue, cost of goods sold, operating expenses, assets, liabilities, and equity.

Creating a well-structured chart of accounts from the beginning makes bookkeeping easier and financial reporting more accurate.

5. Double-Entry Bookkeeping

This fundamental accounting principle states that every transaction affects at least two accounts.

For example, when you make a sale, you increase both revenue (income statement) and either cash or accounts receivable (balance sheet).

This system creates built-in error checking—your books should always balance.

6. Financial Statements

Three primary financial statements provide essential insights into business performance:

Income Statement (Profit & Loss): Shows revenue, expenses, and profit over a specific period.

Balance Sheet: Displays assets, liabilities, and equity at a specific point in time.

Cash Flow Statement: Tracks how cash moves in and out of the business.

Learning to read and interpret these statements is crucial for understanding your business’s financial health.

7. Accounts Receivable and Accounts Payable

Accounts Receivable (AR): Money customers owe you for products or services already delivered.

Accounts Payable (AP): Money you owe to suppliers, vendors, or service providers.

Managing both effectively ensures healthy cash flow and maintains good business relationships.