If you want to start a business but have never been to financial school, terms like debits, credits, assets, and liabilities can feel like a foreign language. And just like you can’t survive in a foreign country without the local language — you definitely cannot run a business without understanding how accounting works.
This article breaks those concepts down into understandable ideas, with advice you can apply right away.
1. Learn to understand financial reality
At its simplest, accounting is a system for recording and communicating financial information. Fundamental terms like assets, liabilities, revenues, and expenses are the basic building blocks. Once you understand them, it becomes much easier to read financial results and make decisions.
A simple example shows how this works. Imagine you run a small bakery. At the end of the month, your records show:
- Cash: €5,000
- Loan payment due: €2,000
- Revenue earned: €6,000
- Ingredients and supplies: €3,000
First, look at profit. You earned €6,000 and spent €3,000 on ingredients, so your profit is €3,000.
Profit, however, is not the same as cash. To understand your cash, start with the €5,000 you already have. After paying the €2,000 loan instalment, you are left with €3,000.
If the €6,000 revenue has not been paid yet (for example, you issued invoices), your cash stays €3,000. If the revenue was paid in cash, then your cash would increase before expenses, but in this snapshot we assume it has not yet been received.
This small example shows why understanding assets, liabilities, revenues, and expenses matters. With these basics, you can answer practical questions:
- Are you actually profitable?
- Can you afford new equipment?
- How much cash do you truly have available for upcoming expenses?
2. The double‑entry system keeps everything balanced
A core feature of accounting is double‑entry bookkeeping. In this system, every financial transaction affects two accounts: one with a debit and the other with a credit.
This ensures that the accounting equation — Assets = Liabilities + Equity — always stays in balance.
- Assets: Things a business owns that have value, like cash, inventory, or equipment.
- Liabilities: Money the business owes to others, such as loans or bills.
- Equity: The owner’s share of the business — what’s left after paying all debts.
In short: Everything a business owns comes from either borrowing money (liabilities) or the owner’s investment (equity).
For example:
- If you receive €500 from a customer, you debit your cash account (an asset increases) and credit sales revenue (income increases).
- If you pay a bill for €200, you debit the expense and credit cash (an asset decreases).
This method, while seemingly technical, serves a practical purpose: it acts as a check that transactions have been recorded correctly, and it provides a complete picture of both sides of every financial event.
3. What “debits” and “credits” really mean
The words debit and credit can be confusing because they don’t always match everyday intuition. In accounting:
- Debits increase asset and expense accounts.
- Credits increase liability, revenue, and equity accounts.
When debits and credits are recorded properly for every transaction, the overall records stay balanced.
To see how this works in practice, imagine you buy €200 worth of flour for your bakery and pay in cash. Flour is an expense, and cash is an asset.
- The expense increases, so you record a debit of €200 to the Ingredients Expense account.
- Your cash decreases, so you record a credit of €200 to the Cash account.
Debits increase assets and expenses; credits increase liabilities, revenue, and equity. In this case, the debit shows the cost you incurred, and the credit shows the cash going out.
4. Key financial statements everyone must know
Once transactions are recorded correctly, accounting information is summarized in standardized financial statements:
- Balance Sheet — This report shows what a person or business owns (assets) and owes (liabilities and equity) at a specific point in time. It helps you see whether you have more resources than obligations.
- Income Statement — This shows revenues and expenses over a period of time and indicates whether the result is a profit or loss.
- Cash Flow Statement — Unlike profit figures, this statement shows actual cash inflows and outflows. It’s useful for understanding liquidity and whether you have enough cash to meet obligations.
These statements follow consistent rules so that results are comparable and understandable across periods and different entities.
5. Practical tips
Here are actionable pieces of advice drawn from accounting practice sources:
1. Create a single source of truth for financial documents.
Store invoices, receipts, contracts and payment confirmations in one well-structured system with consistent naming. When you can trace any transaction in minutes instead of hours, errors and losses surface much faster.
2. Record every transaction, not just the big ones.
Small payments, refunds and fees are usually where discrepancies hide. Capturing everything ensures your balances, inventory and profitability figures actually reflect reality, not assumptions.
3. Use accounting software that connects directly to your money.
When choosing a system, ensure it integrates with your bank accounts, payment processors and wallets so transactions and documents flow in automatically. Automation helps to reduce human error and prevent gaps that inevitably appear with manual tracking. You can start small — even simple accounting software makes a big difference at the start.
For example, you can enable automatic invoice recognition and data export to make your life easier and easily track every transaction.
4. Take advantage of free accounting courses online.
Learning the basics from good sources can make managing your finances much easier. There are free online courses on accounting offered by Site.pro.
Site.pro course consists of short video lessons on essentials like what a chart of accounts is, why it matters, and how accounts are organised into categories such as assets, liabilities, equity, income, and expenses. It also breaks down how financial statements work and how transactions are recorded so you can see how the pieces fit together in practice.
These lessons are created by professional accountants and help you understand the basics before you move on to more advanced topics.
6. Turning understanding into confidence
Start by applying these basics to a simple real‑world situation: track your monthly income and expenses or record a few transactions for a small side business. Watching the numbers flow through debits and credits and end up on a balance sheet or income statement makes the concepts tangible.
Accounting isn’t meant to be mysterious — it’s a system that gives you insight. With a structured approach and consistent practice, what once felt confusing becomes logical and practical.
