Accounting Module
Welcome to the Accounting Module!
This is your interactive guide to understanding accounting. We're skipping the boring textbook stuff to focus on what you *actually* need to know.
This module is built for creators, freelancers, side-hustlers, and anyone who wants to know if they're *actually* making money. You'll find:
- Interactive Tables: Click buttons to see simple definitions for Assets, Liabilities, and Equity.
- Dynamic Charts: Visualize your profit and loss in real-time.
- Practice Terminals: Test your knowledge with scenarios about coffee shops, sneaker hustles, and freelance gigs.
- Pro Tips: The "gotchas" of accounting, like "Cash vs. Accrual" and the #1 rule for any business.
Use the menu to navigate between topics. Let's get started!
1. Why Bother? (The Basics)
Accounting is just the "language of business." It's a system to track *everything* so you can answer the most important question: "Am I making or losing money?"
Why Bother With Accounting?
If you don't do accounting, you are flying blind. It's the only way to:
- Actually know your profit. (Feelings don't count!)
- Make smart decisions. (e.g., "Can I afford this new laptop?" or "Is this product even profitable?")
- Get a loan. (Banks want to see your "books.")
- Stay out of trouble. (Taxes are a legal requirement.)
Bookkeeping vs. Accounting
People use these terms interchangeably, but they're different.
Bookkeeping (The "What")
This is the *day-to-day recording* of transactions. It's the grunt work.
- Entering sales receipts.
- Tracking bills.
- Noting a credit card purchase.
Accounting (The "So What?")
This is the *high-level analysis* of the bookkeeping data. It's the strategy.
- Creating financial statements.
- Analyzing profit trends.
- Giving advice on how to save money.
Analogy: Bookkeeping is writing the words. Accounting is telling the story.
Who Cares About Your Numbers?
It's not just you. Different people want to see your financials for different reasons.
Internal Users (You & Your Team)
People *inside* the business who make decisions.
- You (The Owner): "Are we profitable? Should we hire someone?"
- Managers: "Is my department under budget?"
External Users (The Outsiders)
People *outside* the business who have a stake in it.
- Investors: "Should I give you my money? Will I get it back?"
- Banks (Creditors): "If we lend you $50k, can you pay it back?"
- The Government (e.g., IRS): "How much tax do you owe us?"
Practice Time
Q1: You start a side hustle selling custom sneakers. You write down every sale in a spreadsheet. Is this 'bookkeeping' or 'accounting'?
> Terminal ready. Awaiting answer...
2. The Core Equation
All accounting, from a corner-store coffee shop to Apple, runs on one single formula. If you get this, you get 90% of the theory.
(Stuff You Own = Stuff You Owe + Stuff That's Left Over)
| Account Type | Simple Definition | Examples |
|---|
Practice Time
Q1: You buy a $2,000 laptop for your freelance business. Is this laptop an 'Asset', 'Liability', or 'Equity'?
> Terminal ready. Awaiting answer...
3. Debits & Credits
This is the most confusing part, but it's just a system. Forget your bank account. In accounting, "Debit" and "Credit" do *not* mean "plus" or "minus."
They just mean Left (Debit) and Right (Credit). That's it.
The T-Account
Every account (Cash, Loans, etc.) is a "T-Account." The left side is for Debits, the right is for Credits.
Account Name
---------------------
Debit (Dr) | Credit (Cr)
|
Double-Entry Accounting
Every single transaction *must* have two entries: a debit and a credit. They must always be equal. This is the "balance" in a Balance Sheet.
Example: You borrow $100 from the bank.
- Your 'Cash' (Asset) account goes UP.
- Your 'Bank Loan' (Liability) account goes UP.
How do we record this? See the rules on the right!
The Rules of "Normal Balances"
Asset Accounts
Asset accounts (like Cash, Laptops, Buildings) live on the *left* side of the main equation.
Therefore...
- To INCREASE an Asset, you DEBIT it (add to the left).
- To DECREASE an Asset, you CREDIT it (add to the right).
Example: You get $100 cash.
You Debit the 'Cash' account for $100.
Liability & Equity Accounts
These accounts (like Loans, Credit Cards, Owner's Equity) live on the *right* side of the main equation.
Therefore (it's the exact opposite!)...
- To INCREASE a Liability/Equity, you CREDIT it (add to the right).
- To DECREASE a Liability/Equity, you DEBIT it (add to the left).
Example: You take out a $100 loan.
You Credit the 'Loans' account for $100.
Practice Time
Q1: You buy a $500 camera (an Asset) for your business. To show this *increase* in your 'Camera' account, do you 'debit' or 'credit' it?
> Terminal ready. Awaiting answer...
4. The Big 3 Financial Statements
All those debits and credits get summarized into three simple reports. This is what investors and banks *actually* read.
1. Income Statement
The Question: "Did I win or lose?" (over a *period of time*)
This is your "Profit & Loss." It's your side hustle's report card.
Revenue (from Sales) ..... $1,000 - Expenses (Rent, Ads) ... $ 400 --------------------------------- = Net Income (Profit) .... $ 600
2. Balance Sheet
The Question: "What's my net worth?" (at a *single point in time*)
This is a snapshot of the Core Equation.
ASSETS Cash .............. $1,500 Laptop ............ $ 500 Total Assets: ....... $2,000 --------------------------------- LIABILITIES & EQUITY Loan .............. $ 500 Owner's Equity .... $1,500 Total L + E: ........ $2,000
3. Cash Flow Statement
The Question: "Where did my cash *actually* go?"
This is the most important one for new businesses. Profit is an opinion, cash is a fact. You can have $1M in "profit" but if no one *paid you*, you're broke.
This statement fixes that by only tracking cash.
Cash from Operations (Sales, paying bills)..... $ 500 Cash from Investing (Buying/selling laptop)... $-1000 Cash from Financing (Getting a loan).......... $1000 --------------------------------- = Net Change in Cash ....... $ 500
Practice Time
Q1: You want to know if your coffee shop was profitable *last year*. Which statement do you look at?
> Terminal ready. Awaiting answer...
5. Visualizing Your Hustle
Looking at raw numbers is hard. Visualizing them on a chart is the fastest way to understand your business performance.
Let's look at the first 3 months of a new freelance web design business. We'll plot their Revenue (money in) vs. their Expenses (money out).
Practice Time
Q1: Look at the "Revenue vs. Expenses" chart. In which month did this business have the highest *revenue*? (e.g., 'Jan', 'Feb', 'Mar')
> Terminal ready. Awaiting answer...
6. Pro Tips & Big Ideas
If you remember these three concepts, you'll avoid 90% of the mistakes new business owners make.
The Big "Gotcha": Cash vs. Accrual
This is the most important concept in all of accounting.
Cash-Basis Accounting
You record transactions only when cash changes hands.
- You get $500 cash? You record $500 in revenue.
- You pay a $100 bill? You record $100 in expenses.
Who it's for: Very small side-hustles, freelancers. It's simple, but it's *inaccurate*. (See Q3 from the Statements section).
Accrual-Basis Accounting
You record transactions when the *event happens*, regardless of when cash moves. This is what all "real" businesses use.
- You send an invoice for $500 to a client in Jan. You record $500 revenue in *Jan*, even if they don't pay you until March.
- You get an electric bill for $100 in Feb. You record $100 expense in *Feb*, even if you don't pay it until April.
Who it's for: Any business that wants a *true* picture of its financial health.
Business Structures (The Legal Bit)
How you set up your business legally affects your accounting, taxes, and *risk*.
Sole Proprietorship
What it is: The default. If you start selling stuff, you're one of these. You and the business are *the same legal entity*.
Pro: Easy. No paperwork.
Con: Unlimited Liability. If your business gets sued, they can take your *personal* car, house, and savings. (This is bad).
LLC (Limited Liability Company)
What it is: You file paperwork with the state to create a *separate legal entity*. You are now an *owner*, not the business itself.
Pro: Limited Liability. If the business gets sued, they can only take the *business's* assets (like its bank account). Your personal stuff is safe.
Con: Costs money to file and has more rules.
The #1 Rule: SEPARATE. YOUR. ACCOUNTS.
If you learn nothing else, learn this.
The *moment* you decide to start a side hustle or business, even if it's just selling stickers online, go to your bank and open a new, dedicated business checking account.
Why this is CRITICAL:
- It makes taxes 1000x easier. Your accountant (or you) won't have to spend 20 hours trying to figure out if that $40 gas station purchase was for your personal car or a business trip.
- It's a legal requirement. If you have an LLC but you buy your personal groceries with the business card, you have "pierced the corporate veil." A judge can rule that you and the business are the same, and your limited liability is *gone*.
- It shows you your *real* profit. You will know *exactly* how much cash your business has, not "whatever is left in my personal account."
Do not pay for your Netflix with your business card. Do not pay for your business software with your personal card. Keep them separate. Always.