Chapter 5: Basic Accounting
We’ve mentioned how important it is to keep your business and personal finances separate. One of the major reasons for this is that business expenses are tax deductible (personal finances are not). As a business owner, you only pay taxes on profit your business makes, ie. revenue - expenses. You won’t pay any taxes on revenue that is used in furtherance of your business goals, whether that’s for payroll/contractors, job supplies, business dinners, or any other business expense. This is why keeping track of all of these expenses is super important, since you don’t want to end up paying taxes on revenue you didn’t actually keep as profit.
Since we’re going to be talking about accounting in this section, it’s probably good to get a couple definitions out of the way:
Revenue: Income your company makes from selling goods or services
Cost of Goods Sold (COGS): The cost to produce your product. Specifically, material costs. For example, if selling clothing, the cost of fabric or blanks would be COGS.
Expenses: Other business expenses not necessarily relating to producing the product. For example, payroll/labor, office supplies & software, etc.
Profit: The amount of money leftover when you subtract all COGS and other Expenses from your topline Revenue (this is what you pay taxes on).
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