Episode 8: Basic Bookkeeping Terms

We hope this episode will give studio owners the tools to build a stronger financial foundation, like a Bookkeeping 101 course.

Please don’t be offended in any way if some of what we discuss is obvious to you. From my perspective, I never assume that creative entrepreneurs, like so many studio owners are, enjoy spreadsheets and numbers the way that we do at HarQuin. That’s why, whenever we do training or even work one on one with a client, we present material in a way that is bite sized and easy to digest.

We’re going to start by touching on three main reports that every business owner should be familiar with.

The first is a balance sheet - which is what you would present to your financial institution if they were to ask for your financial reports. Your balance sheet shows 3 types of accounts: assets, liabilities, and equity. Assets include the things that you own. Your bank accounts, any equipment worth over $500, cash in your register. Liabilities is who you owe money to. Who are you liable to make a payment to? This would include credit cards, capital loans, sales tax.

And then equity which is what you, as the owner, have put in or taken out of the business. This is also called an owner’s draw, or contribution.

Balance sheet would be what you would present to your financial institution if they asked for your financial report - If you were looking to take out a loan, they would want to see that you are able to make payments and that you make them on time. Also, a potential investor, or buyer, would also want to see this report so they can assess the financial health of your studio.

The second is your P&L, Profit and Loss, or income statement. Those terms are interchangeable.

Your P&L report also represents three accounts. Your income, COGS (cost of goods sold) and your general expenses.

Your sales are the revenue that you have made from tuition, events, merchandise etc.

Your cost of goods sold is your expense account. This is the money that you spent on the items that you sell, such as costumes. It is also your merchant accounts, stripe for example, and any job materials, things that you had to buy in order to run your business.

Then under your income and COGS, you will see your gross profit, which is your sales, minus your cost of goods sold. That’s the second account that is represented.

Next, you will see that third account, which is general expenses. This is where you will see items such as advertising costs, bank service charges, utilities, rent, phone, internet, etc.

Then under that general expense account is your net income. This is your sales, minus your cost of goods sold, and your expenses.

The third is your trial balance. This is a report that combines your P&L, and your balance sheet. The Trial balance is like the period at the end of the sentence. This is the clear picture of the ending balance of every account in one place. This report is what you will use to check the accuracy of your credit and debit transactions. If you’ve not reconciled your transactions properly in your accounting software, your trial balance will be inaccurate. And this is the report that you want to hand over to your CPA for tax filing purposes.

We say this often, whether you do your own books, or outsource, as the business owner, you are ultimately responsible. So take the time to understand your numbers.

We want you to succeed and we want you to know that asking questions, in order to find the help and answers you need, does not make you any less of a business professional.

One of the worst things is feeling as though you have to pretend that you know something because you’re concerned about looking unintelligent. Highly creative people, which most studio owners are, ask questions that may seem naive or silly. It’s not a lack of intelligence, it’s an abundance of wonder. What in the world does that have to do with bookkeeping? Hear me out. You know what it takes to fully understand something because as a dance teacher, which the majority of studio owners were or are, you break things down in order to teach them. You understand the tiny details that make the whole thing work. So, fully understanding things becomes a character trait for many of us.

Now, enter bookkeeping and the language of numbers. You can simply know the surface information to get by, but you will likely be missing a lot of important things that would fundamentally change the inner workings of your business. The alternative may be an exhausting thought, which is to learn it so that you fully understand.

Knowing your numbers and how they work may require big effort, but it produces a big payoff!

If you have questions, please reach out to us.