Learning to be a businessman as well as a trucker is a task that many new owner/operators are not able to master and it is, I believe, the number one cause of the high failure rate for new trucking companies. There’s a lot more to being a successful business owner than just being willing to work hard. That is not to say that working hard is not part of the formula for success, it plays a major role in success, but you also need to understand the basics of accounting and the fundamentals of building a business to succeed over the long haul.
To cover this in depth we’d need a book, but we can cover a few of the highlights here and perhaps the things we touch on will strike a chord and help you make the switch from running on the edge to running in the green. I think that the biggest lack I’ve seen over the years is a complete lack of understanding of the fundamentals of accounting. If you don’t understand at least the basics you cannot hope to create a profitable and sustainable business. So over the course of the next few articles I’d like to talk about the fundamentals that you really need to be able to understand.
So let’s start with what accounting actually is and what it isn’t. Accounting is not a mysterious science, it is a really simple way of keeping track of things. The name really explains the whole idea – Accounting – it means tracking and ‘accounting’ for what comes in and what goes out. So you enter your income in one column and you enter your expenses in another and at the end of theday, week, month or year you total up the columns and the difference is your profit or loss. It does get a little more complicated with the idea of Assets & Liabilities, so we’ll leave that concept for the next issue. For now let’s just talk about those two columns and how they work.
The whole idea behind accounting is balancing your accounts. Before accounting this was all done in journals. A journal is a book with two (or more) columns. Generally there’s a column for the date, a description and then the actual accounting portion which are called the Debit and Credit columns. Debits and credits are just an accounting term that tells you whether something adds to an account, a Credit, or deducts from an account, a Debit. When you make entries in a double ledger (two column) book one entry will debit (deduct) from one account and the other entry will credit a second account. So the first thing you need to understand is what the account types are.
All accounts fit into the basic accounting formula which is simply Assets = Liabilities + Owners Equity. All of your accounts are therefore either Asset accounts or Liability accounts and the difference between them is the Equity. So let’s take a simple example, you have a checking account and you have a debit card on that account that you use pay for things that you purchase for the business. Let’s purchase $200 worth of fuel and make the appropriate entries for that transaction. So you would put down the Checking Account as the payment account and you would enter it in the left column as a debit and then you’d enter FUEL as an credit in the right column.
This simple table shows you the way this would look in a ‘double entry’ ledger. One you get this ‘double entry’ idea everything else becomes simple, so be sure you understand this idea. Every entry must balance, that is the key to accounting. If you are using a computer program to keep your books, then the computer does this for you, but the data for which account to debit and which to credit is in the entry you are making. For our example you would have an entry that showed:
|ACCOUNT TYPE||ACCOUNT NAME||DEBIT AMOUNT
So as a minimum you would need to enter the account that the value came from, in our example the checking account, the account the value went to, Fuel and the amount you are transferring. All accounting is simply transferring values from one account to another. Once you learn what the different accounts are; Asset, Liability or Equity it becomes relatively simple to figure out what entries you need to make to transfer the required values. Just remember that each entry must balance and for a single entry system the information on which account to debit (reduce) and which account to credit (increate) must be contained in the entry.
Next time we’ll look at the logic involved in this system and how to understand the entries you need to make.
Till next time, be safe.
This article first appeared in my Owning The Wheel column, published in the May 2016 issue of Owner Operator. Reprinted here under license from Target Media Corporation.